Scottish & York Insurance Co. v. Canada, docket T-2384-86

Date: 19980115

Docket: T-2384-86

BETWEEN:

SCOTTISH & YORK INSURANCE CO. LIMITED and

VICTORIA INSURANCE COMPANY OF CANADA

Plaintiffs

-and-

HER MAJESTY THE QUEEN IN RIGHT OF CANADA

Defendant

     REASONS FOR ORDER

TEITELBAUM J.

[1]      In this case, the defendant, Her Majesty the Queen in Right of Canada, (Crown) filed, on November 5, 1997, into the Federal Court Registry at Toronto, a Notice of Motion for an order granting leave to the defendant to amend the statement of defence by adding four paragraphs.

[2]      The four paragraphs read as follows:

20.      He states that Co-operators General Insurance Company ("Co-operators"), formerly known as Co-operative Fire and Casualty Company, gave notice to the plaintiffs by letter dated June 18, 1982, that the business which Co-operators had assumed from the former Canadian branch of Security Mutual Casualty Company did not include reinsurance treaties. He further states that the plaintiffs received this notice on June 21, 1982.

21.      He states that on or before July 2, 1982, the plaintiffs knew that the Superintendent of Insurance had released to Co-operators the securities formerly held on deposit for Security Mutual Casualty Company.

22.      He pleads and relies on the Public Authorities Protection Act, R.S.O. 1990, c. P.38 and in particular section 7 thereof.

23.      He further states, in the alternative, that if the plaintiffs were owed the duty of care pleaded herein and if that duty were breached, which duty and breach are not admitted but expressly denied, then the plaintiffs had knowledge of that breach on or before July 2, 1982, with the result that any cause of action against the defendant in respect of that breach arose more than six months prior to the date on which this action was commenced. Accordingly, this action is barred by section 7 of the Public Authorities Protection Act.

[3]      As grounds for the said Notice of Motion, the defendant states, in the Notice of Motion:

(a)      Federal Court Rules 319 and 420;

(b)      Public Authorities Protection Act, R.S.O. 1990, c. P. 38, s. 7(1);

(c)      the amendment serves the interests of justice by enabling the court to determine fully the matters in question in this proceeding, including the issue of whether the plaintiffs' claim is statute-barred;

(d)      the amendment is based on documents produced by the plaintiffs and cannot prejudice or surprise the plaintiffs;

(e)      trial of this action will not proceed until the issues in a related proceeding in the Ontario Court (General Division) have been disposed of at a trial scheduled to begin on January 19, 1998.

[4]      From a reading of the four paragraphs, it is apparent that what the defendant now wishes to plead is that the plaintiffs allegedly knew of their cause of action on or about June 21, 1982 or at the latest on July 2, 1982, and because of this, pursuant to the Public Authorities Protection Act, and in particular section 7 thereof, the plaintiffs claim is prescribed.

[5]      Section 7(1) of the Public Authorities Protection Act states:

7. (1) No action, prosecution or other proceeding lies or shall be instituted against any person for an act done in pursuance or execution or intended execution of any statutory or other public duty or authority, or in respect of any alleged neglect or default in the execution of any such duty or authority, unless it is commenced within six months next after the cause of action arose, or, in case of continuance of injury or damage, within six months after the ceasing thereof.

[6]      On November 7, 1997, the defendant filed an Amended Notice of Motion wherein the defendant is asking for the same conclusions as in the original Notice of Motion but is also requesting leave to examine for discovery the plaintiffs' with respect to the matters alleged in the proposed amendment.

[7]      The parties appeared before the Associate Chief Justice on November 10, 1997 who adjourned the motion to amend to November 24, 1997. He, as well, ordered "that the plaintiffs file an additional affidavit on or before the 13th of November 1997, and the affiant, as well as John S. McNeil, the affiant of an affidavit, sworn the 7th day of November, 1997, filed be available for cross-examination on or before the 19th day of November, 1997."

[8]      The defendant did not cross-examine any person pursuant to the leave granted on November 10, 1997 by the Associate Chief Justice.

[9]      In addition, the defendant, on November 19, 1997, filed a Notice of Motion asking for summary judgment on the grounds of:

(a)      Federal Court Rules 431.1(2) and 432.3(3);

(b)      Public Authorities Protection Act, R.S.O. 1990, c. P-38, s. 7.

(c)      the plaintiff commenced the action more than six months after the cause of action arose.

[10]      When this matter came up for hearing, counsel for the defendant suggested that the defendant's motion for summary judgment proceed before the defendant's motion to amend. I failed to understand the submission of defendant's counsel. He asks for summary judgment because of the fact that the plaintiffs commenced their action outside the legal delays but the defendant failed to plead this fact.

[11]      Obviously, counsel for the defendant forgot or was not aware of Rule 409 of the Federal Court Rules which states:

409. A party shall plead specifically any matter (e.g., performance, release, a statute of limitation, prescription, fraud or any fact showing illegality)

(a) that he alleges makes a claim or defence of the opposite party not maintainable;

(b) that, if not specifically pleaded, might take the opposite party by surprise; or

(c) that raises issues of fact not arising out of the preceding pleading.

[12]      In any event, counsel for both parties agreed that the summary judgment application be adjourned but for reasons other than Rule 409.

[13]      The parties proceeded with the defendant's motion to amend the defence. A brief statement of the facts is needed at this point.

[14]      Security Mutual Casualty Company, later called Security Casualty Company ("Security"), was an Illinois insurer licensed to carry on business in Canada. In 1981, Security became insolvent in the United States and the liquidator, Frank Csar, made an agreement to allow Co-operators to buy the Canadian business of Security.

[15]      The plaintiffs were policy holders of Security's Canadian branch who acted as reinsurers for the plaintiffs. The defendant held deposits from Security in reserve pursuant to the reinsurance treaties. The purchase of Security's Canadian branch required the permission of the Minister pursuant to section 108 of the Canadian and British Insurance Companies Act. Following the advice of the Superintendent of Insurance for Canada, permission to make the agreement was granted on December 21, 1981 and the agreement was sanctioned on January 27, 1982. Pursuant to section 35 of the Foreign Insurance Companies Act and on the advice of the Superintendent of Insurance, the Minister released the reserves of Security to Co-operators.

[16]      Co-operators claimed that the reserves released to it did not include the reinsurance reserves and so they claimed that they did not assume liability for the reinsurance treaties with the plaintiffs. The plaintiffs sued the Co-operators and Mr. Csar in an Ontario action and subsequently commenced this action against the defendant for negligence on October 30, 1986. The action against the defendant is grounded on the alleged negligence of the Superintendent of Insurance in advising the Minister to release the reserves and sanction the purchase and sale agreement. Counsel for plaintiffs state that the defendant in this action is also a third party in the action in the Ontario General Court. The Ontario action is scheduled to begin on January 19, 1998. If the plaintiffs succeed in the Ontario action, the Federal Court action will not proceed, according to plaintiffs' counsel.

[17]      The plaintiffs submit that an amendment to the defendant's pleadings would cause them serious prejudice. If the plaintiffs had known of the defendant's attempt to bar these proceedings via the limitation period in the Public Authorities Protection Act, the plaintiffs could attempt to prove that the cause of action arose in Illinois. This would allow the plaintiffs to take advantage of the longer limitation period in section 32 of the Crown Liability and Proceedings Act, R.S., 1985, c. C-50, s. 1; 1990, c. 8, s. 21:

32. Except as otherwise provided in this Act or in any other Act of Parliament, the laws relating to prescription and the limitation of actions in force in a province between subject and subject apply to any proceedings by or against the Crown in respect of any cause of action arising in that province, and proceedings by or against the Crown in respect of a cause of action arising otherwise than in a province shall be taken within six years after the cause of action arose.

[18]      If the plaintiffs can use the six-year time limit under the Crown Liabilities Act, then the plaintiffs' action would not be statute-barred because it would have begun within the limitation period.

[19]      The plaintiffs note that John McNeil, a solicitor for the plaintiffs, deposed that he had discussions with Joseph de Pencier, counsel who had been representing the defendant, about the prospect of cooperation between the parties in order to establish liability against Co-operators in the Ontario Court action to the exclusion of Her Majesty the Queen. The plaintiffs further submit that the material contained in Mr. McNeil's affidavit, as well as the affidavit of William Holbrook, president of the plaintiff companies, were uncontested because the defendant did not take the opportunity to examine those persons.

[20]      Mr. McNeil deposed that, in these discussions, he had disclosed intended trial strategy and the plaintiffs' theory of the case. Mr. McNeil also met with Mr. de Pencier and Brian Corbett, in-house counsel from the Office of the Superintendent of Insurance (OSFI), to interview witnesses from OSFI where Mr. McNeil discussed with those witnesses their evidence as well as his trial strategy and theories of liability.

[21]      The plaintiffs submit that Mr. McNeil would never have taken such actions if the defendant had raised the defence of the limitation period in the Public Authorities Protection Act. The plaintiffs further submit that important productions would have to be sought which likely no longer exist and relevant documents need to be produced for which privilege is claimed. The plaintiffs also note that Clem Brennan, president of Co-operators, and the liquidator, Frank Csar, might have had evidence of where the cause of action arose but they are now deceased.

[22]      In addition, the plaintiffs submit that on examinations for discovery of Dennis Grimm and David Thompson, former accountants of Ernst & Whinney who worked on the financial statement for the sale, Mr. de Pencier forwarded questions and suggestions for the examinations to Mr. McNeil because Mr. de Pencier would not be attending the examinations. Mr. McNeil then examined those persons following Mr. de Pencier's instructions. The plaintiffs submit that, had he known that the plaintiffs' position would be compromised by agreeing to represent the defendant's position, he would have examined the aforementioned persons in an attempt to establish that the cause of action against the defendant also arose in Illinois. Now, the plaintiffs contend, they cannot re-examine those witnesses in the Ontario action because the defendant has not moved to amend the Ontario action, only the Federal Court action.

[23]      Finally, the plaintiffs submit that the defendant has known that a defence under the Public Authorities Protection Act might be available since 1983, but did not move to amend their pleadings until November of 1997. The plaintiffs argue that they never had to consider whether they should attempt to prove that the cause of action arose in Illinois because they believed that they were cooperating with the defendant. For these reasons, the plaintiffs submit that an amendment at this time would be highly prejudicial.

[24]      The defendant contends that there is no prejudice in allowing the amendments. First, counsel for the defendant submits that it was not until the Ontario Court of Appeal brought down its decision in Al's Steak House and Tavern Inc. v. Deloitte & Touche (1997), 102 O.A.C. 144 [hereinafter Al's Steak House], that he decided to bring this motion. That decision stated that the Public Authorities Protection Act did apply to the Federal Crown and overruled a prior holding to the contrary (see Sjouwerman v. Canada Post Corp. and Valance (1990), 37 O.A.C. 294 (Ont. C.A.)). The court in Al's Steak House also disputed the decision of Reed J. in Kelly v. Canada (1994), 80 F.T.R. 1 (F.C.T.D.) [hereinafter Kelly] where the Learned Justice held that the Public Authorities Protection Act did not apply to the Federal Crown. Counsel for the defendant submits that it was only when he became aware of the decision in July or August 1997 that he decided to seek this amendment.

[25]      The defendant further submits that the affidavit of John Spencer, counsel for the Department of Justice who currently has carriage of this matter along with Peter Vita, states that he never discussed this case with Mr. de Pencier. The affidavit also states that he was advised by Mr. Vita that Mr. Vita only had a brief discussion with Mr. de Pencier concerning the Ontario court action and the state of preparedness for trial.

[26]      In addition, the defendant submits that all the witnesses that were allegedly interviewed by Mr. McNeil in the presence of Mr. de Pencier and Mr. Corbett can be subpoenaed by Mr. McNeil at the Ontario action. The defendant argues that whatever prejudice there may be is only with respect to the Ontario action, not the Federal Court action.

[27]      With respect to the examination of the former Ernst & Whinney accountants, the defendant notes that the accountants helped prepare a financial statement wherein they decided that the reinsurance treaty was not part of the Canadian business and that it should be allocated to the parent company. The Federal Court action against the defendant was based on the alleged negligence of the Superintendent of Insurance in advising the Minister to release the reserves and sanction the purchase and sale agreement. Thus, the defendant submits that the examinations of the accountants would have no bearing on the Federal Court action.

[28]      Finally, the defendant submits that neither the Ernst & Whinney accountants, nor Mr. Brennan or Mr. Csar, could provide any information on where the cause of action arose.

[29]      The plaintiffs brought an argument that subsection 44(2) of the Ontario Limitations Act, R.S.O. 1980, applies to the Public Authorities Protection Act. Subsection 44(2) reads:

44. (2) No claim with respect to a trust against a trustee for any property held on an express trust in respect of any previous such trust shall be held to be barred by any statute of limitations.

[30]      The plaintiffs submit that the Superintendent of Insurance was acting as a trustee for the reserves of Security's Canadian branch. Therefore, the plaintiffs submit that subsection 44(2) of the Ontario Limitations Act overrides the Public Authorities Protection Act. This is an issue which should be decided by the trial judge or on an summary judgment application. It has no relevance to the present motion.

[31]      The plaintiffs also state that because the grounds for the amendment did not arise after the defence was filed, Federal Court Rule 402(4) will not allow the defendant to amend the statement of defence at this date. Rule 402(4) states the following:

402. (4) Where any ground of defence arises after the defendant has filed a defence, the defendant may, by leave of the Court, file a further defence setting forth the same.

[32]      The plaintiffs submit that Rule 402(4) is specific and therefore it overrules the general rule as to amendments in Rule 420. At the hearing of the present motion, I held that this is an interpretation which could not stand. Surely it is an important factor to consider when a defendant has failed to raise a defence in a timely manner, but that does not mean that Rule 402(4) acts as an absolute bar.

[33]      The plaintiffs also submitted that since the Public Authorities Protection Act states that an action must be commenced within six months after the cause of action arose, then the limitation period does not apply in this case because insurance claims continue to be made and damages are continually occurring and thus the prescription period is always ongoing. I informed counsel at the hearing that this is a matter which cannot be determined without further evidence. I was not prepared to disallow the amendment on this ground at this time.

[34]      Turning to the crux of the argument, I first note that the law concerning the court's discretion to allow a party to amend their pleadings is clear. Federal Court Rule 420(1) states:

420. (1) The court may, on such terms, if any, as seems just, at any stage of an action, allow a party to amend his pleadings, and all such amendments shall be made as may be necessary for the purposes of determining the real question or questions in controversy between the parties.

[35]      In Francoeur et al. v. Minister of National Revenue, [1992] 2 F.C. 333 (Fed. C.A.), the court provided a succinct statement of the rule at page 337:

The general rule is that an amendment should be allowed for the purpose of determining the real questions in controversy between the parties provided that the allowance would not result in an injustice to the other party not capable of being compensated by an award of costs.

[36]      In my opinion, the evidence suggests that the plaintiffs and defendant were acting in concert. Given that neither Mr. McNeil nor Mr. Holbrook were examined pursuant to the Associate Chief Justice's order of November 10th, 1997, the material in those affidavits is largely uncontested. The only evidence to dispute those affidavits is the affidavit of John Spencer mentioned above. I find it odd that the defendant did not provide an affidavit from Mr. de Pencier or Mr. Corbett in order to contradict Mr. McNeil, if in fact he was able to do so.

[37]      Furthermore, Mr. Spencer's affidavit states that he contacted Mr. Corbett who told him that he remembered a meeting with Mr. McNeil and Mr. de Pencier where Mr. McNeil interviewed Richard Maybe, a former employee of OSFI. On cross-examination of Mr. Spencer at questions 39-45, it appears that the plaintiffs and defendant were acting in concert. In particular, at Mr. Spencer's examination, Mr. Spencer discussed the interview of Richard Maybe where Mr. McNeil and Mr. de Pencier were present (at question 45):

... it was an interview in which they were hoping to make, you know, to find out what Dick Maybe could tell and then that it would be the best evidence possible for, for both the third party and the plaintiff in the action.

[38]      I am satisfied that the evidence shows that the plaintiffs and defendant were acting in concert. The parties did interview at least one witness together and met on other occasions. I also believe that it affected the trial strategy of the plaintiffs. This could have a prejudicial effect on the plaintiffs.

[39]      However, I do not believe that the prejudice arises because the plaintiffs cannot re-examine those witnesses in the Ontario action because the defendant has not brought a motion to amend in that court. I would accept the defendant's argument that this court cannot concern itself with whether the plaintiffs may be suffering prejudice in a separate action in the Ontario General Court.

[40]      In my view, the prejudice to the plaintiffs in this action arises because the strategy that the plaintiffs adopted for several years must now change. It is unlikely that the framing of the questions for witnesses on prior examinations for discovery suits the plaintiffs current strategy. It was also to the plaintiffs' detriment to meet with Mr. de Pencier and reveal their strategic options. For almost a decade, the plaintiffs did not attempt to argue that the action occurred in Illinois because that was not an issue until recently. The plaintiffs worked with the defendant without realizing that the issue of where the cause of action arose may become determinative of the outcome of this case.

[41]      The defendant submits that it was only when the Al's Steak House decision appeared that he realized that the Public Authorities Protection Act would apply to the Federal Crown. However, the decisions in Olympia Interiors Ltd. v. Canada (1993), 66 F.T.R. 81 (F.C.T.D.) and Collie Woollen Mills Ltd. v. Canada (1996), 107 F.T.R. 93 (F.C.T.D.) both state that the Public Authorities Protection Act would apply. The Kelly decision was the only holding to the contrary in the Federal Court. In these circumstances, I do not think that it is a reasonable excuse to state that the defendant did not raise the applicability of the Public Authorities Protection Act due to caution. Surely the defendant could have pursued this avenue of defence if the defendant had thought it appropriate.

[42]      I am satisfied that these amendments should not be allowed because the plaintiffs would suffer prejudice which could not be adequately compensated by costs.

     The application to amend and for leave to examine for discovery is denied with costs in favour of the plaintiffs.

                                 "Max M. Teitelbaum"

                                                              J.F.C.C.

OTTAWA

January 15, 1998