Judgments

[1996] 1 F.C. 756

A-194-95

T. Geoffrey Bertram (Appellant)

v.

Her Majesty the Queen (Respondent)

A-292-95

J. Arthur Carson (Appellant)

v.

Her Majesty the Queen (Respondent)

Indexed as: Bertram v. Canada (C.A.)

Court of Appeal, Hugessen, Linden and McDonald JJ.A.—Toronto, November 27; Ottawa, December 18, 1995.

Practice — Privilege — Appeals from TCC decisions ordering taxpayers to answer examination for discovery questions concerning document produced during meeting with Revenue Canada officials — Document omitting relevant information contained in similar document in Crown’s possession — Whether meeting held without prejudice, protected from disclosure by settlement privilege — Purpose of meeting must be honest mutual attempt to negotiate settlement — Meeting not qualified as settlement negotiation — Exclusionary rule not protecting misrepresentation, dishonest dealing — Privilege lost where party attempts to use settlement negotiation to mislead other party — Questions designed to elicit information, admissions about such attempt must be answered.

These were appeals from Tax Court of Canada decisions ordering taxpayers to answer certain questions which had been refused on their examinations for discovery. In 1986, the taxpayers sold at a profit their interest in an apartment complex located in the Niagara peninsula and declared such profit as a capital gain. The Minister reassessed on the basis that this was a trading profit and should be taxed as income. A meeting was held on October 9, 1991 with officials of the Department of National Revenue in an attempt to settle the dispute. At that meeting, one of the appellants produced a document, probably a promotional brochure, which differed in an important aspect from a copy of a similar brochure obtained by those officials from other sources. Section x of that document, which was missing in the copy produced by the appellant, dealt with a proposal to convert the apartment complex to condominium units. A number of questions directed to the version of the brochure produced by the appellant were objected to by his counsel and not answered. The Tax Court Judge ordered him to answer the questions. The issue was whether the taxpayers could invoke the “settlement privilege” to refuse to answer.

Held, the appeals should be dismissed.

An exclusionary rule or privilege applies to protect evidence being given of negotiations leading to settlement. Where, as in this case, a meeting is not expressly held on a without prejudice basis, the Court should hesitate before concluding that the discussion was a settlement negotiation and drawing a veil of privilege over it so as to exclude what would otherwise be relevant evidence. Before excluding relevant evidence and preventing either party from invoking it, a court must be entirely satisfied that the purpose of the meeting was in fact an honest mutual attempt to negotiate a settlement and not something else. So far as it related to the production of apparently relevant documents, the meeting of October 9, 1991 was not a settlement negotiation. Moreover, the public policy which underlies the exclusionary rule requires that that rule not operate to shield evidence of misrepresentation or of dishonest dealing. The underlying purpose of the “without prejudice” rule is to protect a litigant from being embarrassed by any admission made purely in an attempt to achieve a settlement. What parties say against their interest during negotiation is without prejudice in the sense that it cannot subsequently be used against them. There is no policy reason for excluding what one party puts forward in its own interest and to the prejudice of the other. Where, as in the present case, a party perverts the purpose of a settlement negotiation and attempts to use it to mislead the other party into changing its position, the privilege is lost. Questions designed to elicit information and admissions about such attempt and the circumstances surrounding it are admissible. Any loss of privilege attaches only to the alleged attempt to mislead and the circumstances surrounding it.

STATUTES AND REGULATIONS JUDICIALLY CONSIDERED

Tax Court of Canada Rules (General Procedure), SOR/90-688, s. 95(1)(b).

CASES JUDICIALLY CONSIDERED

APPLIED:

Signature Inns, Inc. v. Carleton Homes Ltd. (1987), 18 C.P.R. (3d) 124 (F.C.T.D.); Canadian Media Corp. v. Canada (1991), 48 F.T.R. 68 (F.C.T.D.); Waxman (I.) & Sons Ltd. v. Texaco Canada Ltd., [1968] 1 O.R. 642; (1968), 67 D.L.R. (2d) 295 (H.C.); affd [1968] 2 O.R. 452; (1968), 69 D.L.R. (2d) 543 (C.A.); Rush & Tompkins Ltd. v. Greater London Council, [1989] A.C. 1280 (H.L.); Miller (Ed) Sales & Rentals Ltd. v. Caterpillar Tractor Co. et al. (1990), 105 A.R. 4; [1990] 4 W.W.R. 39; 72 Alta. L.R. (2d) 330 (Q.B.); affd [1990] 5 W.W.R. 377; (1990), 74 Alta. L.R. (2d) 271 (C.A.); Middelkamp v. Fraser Valley Real Estate Board (1992), 96 D.L.R. (4th) 227; 71 B.C.L.R. (2d) 276; 10 C.P.C. (3d) 109; 45 C.P.R. (3d) 313; 29 W.A.C. 134 (B.C.C.A.).

AUTHORS CITED

Sopinka, John et al. The Law of Evidence in Canada. Toronto: Butterworths, 1992.

APPEALS from Tax Court of Canada decisions ([1995] 2 C.T.C. 2364) ordering the taxpayers to answer certain questions which had been refused on their examinations for discovery. Appeals dismissed.

COUNSEL:

Robb C. Heintzman for appellant Bertram.

Bradley G. Nemetz for appellant Carson.

Harry Erlichman for respondent.

SOLICITORS:

Fraser & Beatty, Toronto, for appellant Bertram.

Bennett Jones Verchere, Calgary, for appellant Carson.

Deputy Attorney General of Canada for respondent.

The following are the reasons for judgment rendered in English by

Hugessen J.A.: These appeals are from decisions of the Tax Court of Canada [Carson (J.A.) v. Canada, [1995] 2 C.T.C. 2364] which ordered each of the appellants to answer certain questions which had been refused on their examinations for discovery. The matters were heard together in the Tax Court and disposed of by a single set of reasons; in this Court, although the two appellants were separately represented, only the appellant Carson filed a memorandum and only his case was pleaded in any detail, the appellant Bertram’s counsel being content to abide by the result of the Carson appeal.

Background

In 1980, the appellants, along with a number of others, invested in an apartment complex in the Niagara peninsula known as Lookout Village. In 1986, they sold that interest at a profit and declared such profit as a capital gain. The Minister, in due course, reassessed on the basis that this was a trading profit and should be taxed as income in the appellants’ hands. The appellants have appealed that reassessment to the Tax Court of Canada and those appeals are currently pending before that Court.

The Facts

Prior to the issuance by the Minister of the notice of reassessment there had been, as is often the case, a number of meetings between officials of the Department of National Revenue and solicitors representing the appellants. The last of those meetings occurred at the taxpayers’ request on October 9, 1991 in Ottawa. Officials of the Department (who were not solicitors) met with the appellant Carson and one of the other investors in Lookout Village, accompanied by two solicitors representing the group of investors. At some point during that meeting the other investor appears to have made an offer of compromise with the purpose of avoiding the Minister’s proposed reassessment. At another point in the meeting, the appellant Carson produced a document which he handed to the Departmental officials. That document appears to be contemporaneous with the appellants’ investment in Lookout Village (it bears date December 8, 1980) and seems to be a sort of promotional or sales brochure. Clearly the purpose of producing it was to attempt to persuade the officials that the purchase had been an investment and not made with a view to resale. The copy produced by Carson is at the heart of the issues in the present appeal for it differs in a very important respect from a copy of an apparently similar brochure obtained by Departmental officials from other sources.

In the copy of the brochure obtained by the Department from other sources, there is an index showing that the document contains eleven sections numbered from i to xi. Sections x and xi in the index are titled respectively:

x Conversion to Condominium Units

—Conversion description and pro forma results of conversion and sale

xi Conclusion

Section x, as its title indicates, deals with a proposal to convert the apartment complex to condominium units. Part of the text reads:

The developer of the project feels the best use of the two building complexes, given the quality of construction and the amenities available, is a luxury condominium development.

The developer also feels that the optimal time frame for the conversion and sale of the project is five years (1986), by which time some redecorating and refurbishing may be required. [Appeal Book, Vol. I, Tab 6.]

Manifestly, in a trading case relating to a real estate investment, this section of the document would be highly relevant in the determination of the investors’ intentions at the time of purchase.

In the version of the document produced by Mr. Carson at the October 9, 1991 meeting, both the index and sections x and xi are missing. The balance of the document, although no doubt relevant, is relatively anodyne.

The Questions

At Carson’s examination for discovery a number of questions were asked concerning the meeting of October 9, 1991 at which he had been present and directed more particularly to the version of the brochure which he had produced to officers of the Department at that meeting. Those questions were objected to by counsel on behalf of the appellant and were not answered.[1] The respondent applied to the Tax Court for an order to force the appellant to answer the questions and it is the Tax Court Judge’s decision on that application which is now under appeal. The questions themselves are as follows:

232. (R) Did you meet with the Minister’s representatives in October 19, 1991? [sic]

341. (R) It’s my understanding, Mr. Carson, that you attended at a meeting with representatives of the Department of National Revenue in 1991 in order that they might understand your position in respect of this appeal; isn’t that the case?

342. (R) Isn’t the case that during the course of that meeting you produced the document which appears at Tab 14 of the Minister’s production as Exhibit No. 1?

343. (R) Will you advise me, Mr. Carson, as to what was said at that meeting?

347. (R) Will you produce to me the original of the document at Tab 14 of Exhibit No. 1 in these discoveries?

348. (R) Will you explain to me the circumstances under which it was disposed of?

Appellants’ Position

Before the Tax Court Judge, the appellants took the position a) that the questions were not relevant; b) that they went solely to the credibility of the witness, contrary to the provisions of paragraph 95(1)(b) of the Tax Court of Canada Rules (General Procedure)[2] and; c) that the meeting was held without prejudice. Before us, the first two of those positions were abandoned. Indeed, counsel for the appellants frankly admitted that any questions bearing on the brochure, its production, its provenance, and how and why it came to be in its present form, would indeed be relevant. In my view, that concession was entirely proper: if the appellants had any hand in the production or use of a document, relevant portions of which have apparently been altered or suppressed, that fact alone would be relevant to the issues arising in their appeal of the Minister’s reassessment.

With regard to the claim that the meeting of October 9, 1991, was without prejudice the appellants’ position has shifted subtly. Before the Tax Court Judge they appear to have argued that the meeting was held expressly on a without prejudice basis. The Tax Court Judge, in my view quite properly, expressed considerable doubt as to that position. The appellants were represented by solicitors at the meeting; the respondent was not. In none of the correspondence leading up to the meeting, or immediately thereafter, did those solicitors give any indication that the meeting was to be or had been without prejudice. There is also no indication that anything to that effect was said at the meeting itself. I share the Tax Court Judge’s view that solicitors who meet with a party who is not represented by solicitor have a special duty to make plain that the meeting is without prejudice if that is in fact the case.

On appeal, counsel for the appellant did not press the argument that there had been an express stipulation that the meeting would be without prejudice. Rather, he urged that, because the meeting was held with a view to settlement and there had in fact been an offer of settlement, the whole of the meeting was protected from disclosure by the “settlement privilege”. Counsel made it quite plain that his claim, if accepted, does not merely go to preventing the respondent from asking about the sales brochure during discovery. The claim, being one of blanket privilege, goes to admissibility rather than merely discoveribility; the exclusionary rule inherent in the notion of settlement privilege, if applicable, will prevent the respondent, even at trial, and through its own witnesses, from leading any evidence whatever regarding the existence, production or use of the sales brochure in its apparently incomplete or altered form.

Analysis

There is of course no doubt that an exclusionary rule or privilege applies to protect evidence being given of negotiations leading to settlement:

It has long been recognized as a policy interest worth fostering that parties be encouraged to resolve their private disputes without recourse to litigation, or if an action has been commenced, encouraged to effect a compromise without a resort to trial. In furthering these objectives, the courts have protected from disclosure communications, whether written or oral, made with a view to reconciliation or settlement. In the absence of such protection, few parties would initiate settlement negotiations for fear that any concession that they would be prepared to offer could be used to their detriment if no settlement agreement was forthcoming.[3]

In Signature Inns, Inc. v. Carleton Homes Ltd.,[4] Teitelbaum J., of the Trial Division of this Court, put the matter succinctly as follows:

The mere fact that an offer of settlement, whatever the terms, was made by one of the parties to a possible court action, should not be used to the prejudice of the person making the offer.

Likewise, Cullen J. in Canadian Media Corp. v. Canada:[5]

The privilege is founded upon the compelling public policy goal of encouraging parties to settle their differences before going to trial. If such communications were not privileged, attempts at settlement would be hampered by the fear that statements made in the spirit of compromise would constitute evidence against them in the form of admissions should negotiations fail and a trial ensue.

In my view, however, there are two compelling reasons why the appellants cannot invoke the settlement privilege in the present circumstances.

In the first place, where, as in this case, an exchange between parties is not expressly held on a without prejudice basis, the Court should be hesitant before concluding that such exchange was a settlement negotiation and drawing a veil of privilege over it so as to exclude what would otherwise be relevant evidence. Most litigation is between parties who have a pre-existing relationship (landlord and tenant, vendor and purchaser, employer and employee, etc., to say nothing of domestic litigation) and common sense tells us that they will be in frequent contact with one another before suit is brought. Not all, or even most, of those meetings are aimed at settlement of the impending litigation and many may in fact be the cause of it. Before excluding relevant evidence and preventing either party from invoking it a court must be entirely satisfied that the purpose of the meeting was in fact an honest mutual attempt to negotiate a settlement and not something else. Where the purpose of the meeting is ambiguous or multiple, or where the notion of settlement or compromise only arises incidently or casually, the whole of the meeting is not protected. A party cannot keep to itself its view that the meeting is intended to negotiate a compromise; the intention must be common to both participants. Likewise, a meeting which would otherwise be “with prejudice” does not get converted into a privileged occasion by a party throwing in a (possibly spurious) offer of settlement as an aside or an afterthought. Each case must be judged on its own facts and in the light of the existing relationship and course of dealing between the parties.

In the present case, and bearing in mind that the meeting in question took place in the context of a self-assessing tax system where the taxpayer has an obligation to make full and open disclosure to the taxing authorities and where it is common for taxpayers and their advisers to meet with the latter with a view to attempting to persuade them that no, or no greater, tax is due, I would require much clearer evidence than exists in this record to persuade me that a meeting qualifies as a settlement negotiation so as to shield everything that takes place from subsequent use by either side. One of the solicitors who was present admitted frankly that there was an exchange of information at the meeting which each side hoped the other would accept and act upon.[6] The Tax Court Judge put it well when he said [at pages 2365-2366]:

I use the word “settling” in a broad sense; not in the usual sense of give-and-take because in this kind of proposed assessment, it frequently comes down to an all or nothing situation and it is quite common for taxpayers and their representatives to try and persuade Revenue Canada that their proposal is wrong and that the proposed reassessment should simply be dropped or abandoned. In any event, the object of the meeting was to avoid litigation. So, in that sense, I would refer to it as a settlement meeting.

Accordingly, it is my view that the meeting of October 9, 1991, at least in so far as it related to the production of apparently relevant documents, was not a privileged occasion.

In the second place, and even if the settlement privilege were applicable, I am satisfied that the public policy which underlies the exclusionary rule requires that that rule not operate to shield evidence of misrepresentation or of dishonest dealing.

The rationale underlying the exclusionary rule as it relates to without prejudice communications has recently been examined in a number of cases. In Waxman (I.) & Sons Ltd. v. Texaco Canada Ltd.,[7] Fraser J. of the Ontario High Court, said as follows:

In my opinion the privilege as so often stated, is intended to encourage amicable settlements and to protect parties to negotiations for that purpose. [Emphasis added.]

In Rush & Tompkins Ltd. v. Greater London Council,[8] Lord Griffiths, speaking for a unanimous House of Lords, said:

The “without prejudice” rule is a rule governing the admissibility of evidence and is founded upon the public policy of encouraging litigants to settle their differences rather than litigate them to a finish. It is nowhere more clearly expressed than in the judgment of Oliver L.J. in Cutts v. Head [1984] Ch. 290, 306:

“That the rule rests, at least in part, upon public policy is clear from many authorities, and the convenient starting point of the inquiry is the nature of the underlying policy. It is that parties should be encouraged so far as possible to settle their disputes without resort to litigation and should not be discouraged by the knowledge that anything that is said in the course of such negotiations (and that includes, of course, as much the failure to reply to an offer as an actual reply) may be used to their prejudice in the course of the proceedings. They should, as it was expressed by Clauson J. in Scott Paper Co. v. Drayton Paper Works Ltd. (1927), 44 R.P.C. 151, 156, be encouraged fully and frankly to put their cards on the table …. The public policy justification, in truth, essentially rests on the desirability of preventing statements or offers made in the course of negotiations for settlement being brought before the court of trial as admissions on the question of liability.” [Emphasis added.]

And again, at page 1300:

Nearly all the cases in which the scope of the “without prejudice” rule has been considered concern the admissibility of evidence at trial after negotiations have failed. In such circumstances no question of discovery arises because the parties are well aware of what passed between them in the negotiations. These cases show that the rule is not absolute and resort may be had to the “without prejudice” material for a variety of reasons when the justice of the case requires it. It is unnecessary to make any deep examination of these authorities to resolve the present appeal but they all illustrate the underlying purpose of the rule which is to protect a litigant from being embarrassed by any admission made purely in an attempt to achieve a settlement. [Emphasis added.]

In Miller (Ed) Sales & Rentals Ltd. v. Caterpillar Tractor Co. et al.[9] Wachowich J. of the Alberta Queen’s Bench, said:

By contrast, both the Ontario Court of Appeal in Waxman and House of Lords in Rush & Tompkins were unanimous in their conclusions that the rationale underlying the “without prejudice” rule is public policy. In my view, this conclusion properly makes express the process of balancing the policy of fostering the extra-judicial settlement of disputes against the policy of ensuring that, when litigation is not avoided, all facts relevant to determining liability are disclosed. In avoiding the inflexibility inherent to other rationales, the public policy approach is better equipped to rationalize existing principles governing the “without prejudice” rule and produces results which are less artificial than other rationales.

Finally, in Middelkamp v. Fraser Valley Real Estate Board,[10] McEachern C.J.B.C., speaking for four of the five judges of the British Columbia Court of Appeal, said:

Considering the enormous scope of production which is required by our almost slavish adherence to the Peruvian Guano principle, the questionable relevance and value of documents prepared for the settlement of disputes, and the public interest, I find myself in agreement with the House of Lords that the public interest in the settlement of disputes generally requires “without prejudice” documents or communications created for, or communicated in the course of, settlement negotiations to be privileged. I would classify this as a “blanket”, prima facie, common law, or “class” privilege because it arises from settlement negotiations and protects the class of communications exchanged in the course of that worthwhile endeavour.

In my judgment, this privilege protects documents and communications created for such purposes both from production to other parties to the negotiations and to strangers, and extends as well to admissibility, and whether or not a settlement is reached. This is because, as I have said, a party communicating a proposal related to settlement, or responding to one, usually has no control over what the other side may do with such documents. Without such protection, the public interest in encouraging settlements will not be served.

I recognize that there must be exceptions to this general rule. An obvious exception would be where the parties to a settlement agree that evidence will be furnished in connection with the litigation in which the application is made. In such cases, the public interest in the proper disposition of litigation assumes paramountcy and opposite parties are entitled to know about any arrangements which are made about evidence. Other exceptions could arise out of such matters as fraud, or where production may be required to meet a defence of laches, want of notice, passage of a limitation period or other similar matters which might displace the privilege. As we did not have argument on these matters I prefer to say nothing further about them. [Emphasis added.]

The reference to fraud in the last paragraph quoted is particularly relevant for our purposes, as is the following quotation, at page 252 from the reasons of Locke J.A., the fifth judge in that case:

(c) As to the future, and always apart from fraud, any production to a third party, be they either a true third party or a stranger, ought not to be ordered if the court is persuaded in the particular circumstances of that future case that the disclosure could fairly be said to inhibit the parties from settling that action or any other actions. [Emphasis added.]

These quotations make it plain in my view that the concern of the Courts is to protect parties from being embarrassed by attempts at concession or compromise or even by confessions of weakness. In short, what parties say against their interest during negotiation is without prejudice in the sense that it cannot subsequently be used against them. The purpose of the rule, however, is not to protect dishonest dealing and there is no policy reason for excluding what one party puts forward in its own interest and to the prejudice of the other. That is the present case.

Counsel for the appellant urged upon us that the exception for fraud mentioned in the above quotations should only apply where such fraud could itself be a cause of action i.e. where the opposite party had believed the misrepresentation and given effect to it, presumably by concluding a settlement. Since the officials of the Department of National Revenue were manifestly not misled by the production of the allegedly altered sales brochure, its introduction into evidence should therefore not be allowed.

I do not agree. As is made clear by the above quotations, the purpose of the privilege is to encourage honest attempts at settlement and to protect parties from having admissions and concessions which they make in the course of an effort to reach settlement from being used against them. Where, as appears to be the case here, a party perverts the purpose of a settlement negotiation and attempts to use it to mislead the other party into changing its position, the privilege is lost. Once there is a prima facie indication of such an attempt to mislead, as there clearly is in the present record, questions designed to elicit information and admissions about such attempt and the circumstances surrounding it are admissible.

Counsel for the appellant also urged a “floodgates" argument upon us and argued that chaos might ensue if we allowed any exception to the absolute exclusionary rule. In particular, he warned of the possibility of frequent and spurious claims of attempts to mislead which might involve solicitors being obliged to become witnesses as to what had taken place at settlement negotiations which they had attended. The short answer to that argument, it seems to me, is that the courts are quite capable of protecting themselves against any such abuse; in any event the threshold requirement of a prima facie showing of an attempt to mislead should be quite sufficient as a barrier to misuse. As to the possibility of solicitors being called as witnesses, that is a risk which is always present when they participate in settlement negotiations, whether such negotiations are successful or not. Clearly, if one party succeeds in misleading the other and a settlement results, the solicitor, if present, may be called as a witness in subsequent litigation; the fact that the same risk exists where the misrepresentation is unsuccessful is unlikely in my view to discourage solicitors from attempting to settle their clients’ cases.

I wish to make it clear, however, that any loss of privilege attaches only to the alleged attempt to mislead and the circumstances immediately surrounding it. As indicated above, there appears to have been an actual offer of compromise made at some point during the meeting of October 9, 1991. There is nothing to indicate that such offer was not genuine or that it formed part of the attempt to deceive. Accordingly, even if the whole of the meeting is not protected, evidence as to the content of that offer would continue to be inadmissible in any event.

Conclusion

I would dismiss the appeals with costs.

Linden J.A.: I agree.

McDonald J.A.: I agree.

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