Accounting for Law
Civil Litigation

Appeal court favours virtuous plaintiff in setting aside settlement

An Ontario Court of Appeal case shows that judges are prepared to take a party's behaviour into account when reaching decisions, Toronto civil litigator Patricia Virc tells AdvocateDaily.com

The unanimous three-judge panel’s ruling upheld a trial judge’s decision to set aside a settlement agreement between a university and its former executive who misappropriated more than $1 million from the facility.

Virc, a lawyer with Steinberg Title Hope & Israel LLP, says the university overcame long odds to convince judges at both levels that it was induced to enter the severance agreement by the executive’s misrepresentations, as well as his apparently strong limitations defence.

“Every time I read one of these cases that has such an unusual result, I go back to the principle that the law usually tries to encourage people to behave well,” she says. “The university got absolutely the most favourable treatment one could possibly imagine.

“If the court had no concern for equities, it could have decided differently, but when a court forms an impression that one party has a virtuous case, they may try to give effect to them,” Virc adds.

According to the decision, the defendant devised a scheme with co-conspirators to falsely invoice his employer for work that was not actually done, allowing his accomplices to pocket the cash.

The decision says he was fired in February 2010, before the extent of his misconduct was known. The executive vehemently denied any wrongdoing during negotiations, which eventually ended with a $700,000 settlement, representing 36 months' worth of his pay.

However, the university’s full investigation revealed more details of the executive’s scheme, and a trial judge rescinded the severance agreement after finding that he had a positive obligation to disclose his fraudulent activity as a fiduciary and that the settlement was obtained by fraudulent misrepresentation.

“The trial judge’s finding that [the university] was induced to enter into the severance agreement by the appellant’s fraudulent misrepresentation that he was innocent of any financial dishonesty is supported by the evidence and no palpable or overriding error has been shown,” the appeal court panel concluded. “It is difficult to imagine circumstances in which an employer acting responsibly would pay three years' severance pay to an employee it knew had misappropriated large sums of money from it.”

Virc says some of the strongest evidence for the court’s generous approach to the university comes on the issue of limitations.

The appeal court upheld the trial judge’s ruling that the university could not have discovered its claim before Jan. 29, 2010, which meant it had beaten the two-year limitation deadline by just three days when it filed its lawsuit.  

That was despite evidence the university was informed of allegations against him months earlier.  

“I can see people using the reasoning in this case to try to extend the limitations period,” Virc says. “The plaintiffs certainly got a big break.”

In fact, she says the decision is out of step with a Divisional Court case involving similar facts. Virc’s client was the unsuccessful plaintiff in that case, when the Divisional Court agreed with a motions court judge who dismissed the claim as statute-barred, finding he should have launched his claim earlier, despite not knowing the full details of the alleged wrong done to him.

“The court in my case said that the limitation period can’t be postponed just because the plaintiff doesn’t know the full extent or type of damages,” she says. “I don’t know how those findings could be reconciled with this case.”

Still, Virc says there are aspects of the university's case that allowed both the trial judge and the appeal courtroom to side with the school, despite the weight of case law against them.

“It wasn’t just a case of someone silently keeping information to themselves. According to the decision, he was actively trying to influence the person he was bargaining with not only by providing them with misinformation but also by threatening them with a libel lawsuit,” she says. “Those points may distinguish this one from other settlements or contracts that have been enforced.”

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