Gary Yott, Arcade Du Vieux Montréal Ltd. And Rideau Arcades Ltd. v. Minister of National Revenue, [1991] 2 CTC 2001, 91 DTC 611

Lamarre Proulx, T.CJ.:—This is a motion by the respondent asking the Court to dismiss the appeals by Rideau Arcades Ltd. and Arcade du Vieux Montréal Ltd. and to allow the appeal by Gary Yott, in accordance with the terms of an agreement which was supposedly made by the parties.

The respondent argued that an agreement was made, that it is a transaction within the meaning of Articles 1918 et seq. of the Civil Code of Lower Canada, that under Article 1920 of the Civil Code of Lower Canada it has the authority of a final judgment (res judicata) between the parties, and that I should issue judgment in accordance with the agreement made.

The appellants opposed the motion and raised the preliminary argument that I- should dismiss the motion because I should not hear evidence of telephone conversations between lawyers. As counsel for the appellants could not provide me with either the jurisprudence or the doctrine on which they were relying, I decided to continue the hearing of the motion, while taking his preliminary argument under reserve.

The facts are as follows: the joint hearing of the three appeals in question had been set for four days commencing on October 16, 1990. On the Thursday of the week preceding the hearing, counsel for the appellants made a proposal to counsel for the respondent by telephone. The latter consulted with officials of the respondent and then telephoned counsel for the appellants, who was at that moment with his client, to advise him of his acceptance. Counsel repeated out loud to his client the settlements proposed for the three cases under appeal. The client then indicated that he disagreed with the settlements for two cases. Counsel for the appellants immediately stated this fact to counsel for the respondent and confirmed to him in the minutes that followed that his client did not agree with the settlement proposed.

I shall deal immediately with the preliminary argument, which concerns the admissibility of negotiations with a view to the settlement of cases.

A review of the doctrine and the jurisprudence indicates to me that communications for the purpose of settling a case enjoy a privilege of non-disclosure without the parties' consent. However, there are limits to the privilege, and it ceases to exist when it is sought to establish that an offer was accepted, or in other words that an agreement was made. This is the case here. The respondent wishes to prove that an oral agreement was made.

With respect to the confidentiality of negotiations for the purpose of settling a case:

[Translation]

Frequently, negotiations which were intended to lead to a transaction fail, and in this process the parties exchange documents in which they acknowledge or admit certain facts. The jurisprudence, correctly, does not permit them subsequently to rely on these discussions as amounting to admissions, at a later stage in the case. To permit them to be put in evidence would be to encourage the use of this process in order to obtain an admission and would make it dangerous to open any negotiations with a view to concluding a transaction. Similarly, and for the same reasons, an identical approach is taken with respect to letters between lawyers. [1]

Such communications may be oral:

Communications made in this context will be protected whether they are oral or in writing. [2]

Limits of the privilege:

If the negotiations are successful and result in a consensual agreement, then the communications may be tendered in proof of the settlement. Such communications form the offer and acceptance of a binding contract, and thus may be given in evidence to establish the existence of a settlement agreement. [3]

Limits of the rule. The contents of a communication made “without prejudice” are admissible when there has been a binding agreement between the parties arising out of it, or for the purpose of deciding whether such an agreement has been reached, and the fact that such communications have been made (though not their contents) is admissible to show that negotiations have taken place, but they are not otherwise admissible. [4]

In the law of evidence of Québec:

[Translation]

Basis of this privilege—The proper administration of Justice requires that the parties themselves settle their disputes before instituting legal proceedings or before trial. This public interest is more obvious today, given the high number of cases brought before the courts and the congestion of the rolls. People would not be greatly inclined to propose a compromise, if it could be used against them in a trial. Thus the common law has made communications with a view to settle a case privileged. An offer to settle made by one party should not prejudice it and be considered to be either an admission or an acknowledgement of the weakness of its case.

Introduction of the privilege into Québec civil law—There is a desire to promote the voluntary settlement of private disputes in civil law as well. As in French law, the Quebec jurisprudence first sought to achieve this objective by limiting the concept of an out of court admission. Influenced by the practice of the English courts, the Quebec courts subsequently formally acknowledged, relying on common law precedents and legal theory, the privileged nature of a communication made in order to settle a case.

Moreover, a communication ceases to be privileged if it leads to a transaction that one of the parties is seeking to establish. [5]

And so in conclusion, the evidence as to the content of the telephone conversations between counsel was admissible since the respondent wanted to prove that there had been an agreement between the parties.

However, the respondent argued that this agreement, if such there were, constituted a transaction within the meaning of the Civil Code. Is this possible?

Transaction is defined as follows in Article 1918 of the Civil Code of Lower Canada:

Transaction is a contract by which the parties terminate a lawsuit already begun, or prevent future litigation by means of concessions or reservations made by one or Doth of them.

With respect to the capacity required in order to enter into a transaction, Article 1919 states:

Those persons only can enter into the contract of transaction who have legal capacity to dispose of the things which are the object of it.

And Article 1920 gives the legal effect of a transaction:

Transaction has between the parties to it the authority of a final judgment (res judicata).

I do not believe that either of the parties to an agreement to settle a case involving an assessment has the legal capacity to give such agreement the authority of res judicata. I see nothing in the Income Tax Act, R.S.C. 1952,

c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act") which would give the Minister the authority to enter into an agreement with a taxpayer which would have the authority of res judicata. [6]

I am not saying that the Minister cannot enter into agreements with taxpayers which bind one party or the other, as described in Mark C. Smerchanskiv. M.N.R., [1977] S.C.R. 23; [1977] C.T.C. 283; 77 D.T.C. 5198, cited by counsel for the respondent, but I do not believe that such agreements have the authority of res judicata. Moreover, in our taxation system, tax is owed not by virtue of an agreement, but by virtue of the provisions of the Act. A transaction, as stated in Article 1918 of the Civil Code of Lower Canada, cited above, is a contract. The content of a consent to Judgment is not binding on the Court, which retains its power to determine whether it is in accordance with the Act. This is the substance of Galway v. M.N.R., [1974] C.T.C. 454; 74 D.T.C. 6355, the principles of which were recently adopted by Judge Rip in. Boger Estate v. M.N.R., [1989] 1 C.T.C. 2110; 89 D.T.C. 15. It must also be noted that if it had the authority of res judicata, I would not again have to give the judgment that the respondent is seeking in his motion.

I find that the agreement, if agreement there be, is not in the nature of a transaction within the meaning of the Articles of the Civil Code of Lower Canada cited above.

If it is not a transaction, does the alleged agreement constitute a valid consent to judgment?

I am of the opinion, having regard to the purpose of the motion, which is to dispose of the appeals in accordance with the terms of the consent to Judgment, that an oral out of court agreement is not sufficient and accordingly that I do not have to determine whether the offer was accepted and the agreement perfected.

It has always been the practice of this Court to require a written agreement signed by the parties or counsel before giving effect to a consent to Judgment, except in cases where the motion is made at the hearing. That is, it may happen that two parties who are present in Court indicate orally that they have reached an agreement and wish the Court to render judgment in accordance with the terms of such consent.

This Court does not consider that there is a valid consent to judgment unless a written document, signed by the parties or their counsel, is produced, or the consent is mutually expressed in oral submissions before the Court; otherwise, the Court does not take the consent into consideration. This is the practice of this Court and it is also the practice of other courts, so far as I am aware. No legal theory or precedents were cited to me which would permit me to set aside this requirement. Cases of oral transactions were cited to me. This is different, as we saw earlier.

Thus in Quebec consent to judgment is permitted under strict formal conditions. Article 458 of the Code of Civil Procedure reads as follows:

458. Acquiescence must be in writing and signed by the defendant or by his attorney, who must annex thereto the special power of attorney he holds for that purpose.

If the defendant appears at the office of the court to have his acquiescence taken down in writing, and is unknown to the prothonotary, the latter must require him to produce a copy of the summons, the counter-signature of his attorney, or some other satisfactory proof of his identity.

And I cite a passage from the decision Trans-Canada Musique Service v. Luboviet, [1974] R.P. 24 (Que. C.S.):

[Translation]

Having deliberated, and having read the written argument of counsels for the parties, the Court finds that the plaintiff could not move for judgment upon a consent to judgment, because no consent to judgment was signed by the defend ant personally. The strict provisions of Articles 457 et seq. C.C.P., which govern consent to judgment, were not observed. Particularly, according to Article 458 C.C.P., the consent must be in writing and signed by the defendant himself or by his attorney by special power of attorney annexed thereto. The defence filed does not meet these requirements. The defence is signed by counsel, who did not have a special power of attorney. In the ordinary course of proceedings, counsel cannot consent to judgment. He can take no step which terminates a proceeding without the expréss participation of the client, without risking disavowal.

In Ontario, Rule 49 of the Rules of Civil Procedure also requires formal written proceedings. The same is true of section 170 of the Rules of the Tax Court of Canada:

170. When all parties have consented in writing to a judgment disposing of an appeal, the Court may,

(a) grant the judgment sought without a hearing,

(b) direct a hearing, or

(c) direct that written representations be filed.

These rules do not apply to the cases in question in this appeal, since the cases are under the former system, but I cite section 170 because it sets out what was the unwritten practice and precedent of this Court.

Making mutual concessions of rights and waiving the right to be heard is a significant act, which requires a specific mandate from the clients [7] , and the courts want to be certain that the parties both genuinely consented to what is being put forward as a consent to judgment. This is the reason why the Court, wishing to act with certainty, requires a written document (unless there are submissions by both parties at the hearing) and even if there is a written document may require that the parties be heard in order to perform the duty to review as it may deem appropriate.

Accordingly, the motion is dismissed without costs.