QUEEN’S BENCH FOR SASKATCHEWAN Citation: 2008 SKQB 301 Date: 2008 07 29 Docket: Q.B.G. No. 375/2007 Judicial Centre: Saskatoon BETWEEN: 101055204 SASKATCHEWAN LTD., and 101055205 SASKATCHEWAN LTD., carrying on business as “DT Consulting” and “FRP Consulting Group”, Plaintiffs (Defendants by Counterclaim) and MARK WOLFF, CLAYTON SPARKS and ADVANCE‑TEK CONSULTING INC., Defendants (Plaintiffs by Counterclaim) and DANIEL BEAULAC and TREVOR HEWISON, Defendants by Counterclaim Counsel: L.P. Barrett for the plaintiffs and defendants by counterclaim J.M. Howe for the defendants (plaintiffs by counterclaim) FIAT ROTHERY J. July 29, 2008 [1] The parties to this action have reached an impasse on the required disclosure and seek various orders. The defendants (plaintiffs by counterclaim) (referred to as the “defendants”) ask that the Court exercise its discretion and sever the plaintiffs’ claim between liability and damages. The defendants also seek an order that certain paragraphs of the plaintiffs’ claim be struck. [2] The plaintiffs and defendants by counterclaim, which includes the two principal individuals of the plaintiff corporations, shall be collectively referred to as the “plaintiffs”. The claims and counterclaims arose as result of one of the defendants, Mark Wolff, leaving the employ of the plaintiffs’ consulting partnership. The statement of claim alleges that Wolff, along with Clayton Sparks, set up competing business through their corporation, Advance‑Tek Consulting Inc. The plaintiffs are consultants to businesses applying for scientific research and experimental development (“SR&ED”) grants from the Canada Revenue Agency. The plaintiffs allege that they have developed unique application process for the SR&ED grants. [3] The plaintiffs state that Wolff is bound by confidentiality and non‑competition agreement with DT Consulting. By sharing this information with the other defendants, Wolff has breached that agreement and his contract of employment. Furthermore, the plaintiffs state Wolff owes the plaintiffs fiduciary duty, and by competing with the plaintiffs, he has breached that duty. The plaintiffs seek injunctions against the defendants, return of property taken by the defendants, and damages for breach of contract and disgorgement of all profits gained through the breaches of fiduciary obligations. [4] Along with issuance of the statement of claim on March 29, 2007, the plaintiffs applied ex parte for an Anton Piller order against the defendants to seize computers, emails and files. The plaintiffs alleged that Wolff removed the plaintiffs’ confidential business information during his employ and was using it in conjunction with Sparks and their corporation, to compete against the plaintiffs in the business of SR&ED consulting. [5] granted the Anton Piller order on March 29, 2007, and the supervising solicitor conducted the search. After execution of the order, counsel for the defendants applied to vary the order. The parties directed draft consent order to the court on June 13, 2007. The consent order provides that the supervising solicitor would retain all documents, materials, computer discs and data until mutually agreed by the parties or further order. The plaintiffs would not, on an interim basis, seek any further order to restrain the defendants from competing with them. The defendants would not solicit any of the plaintiffs’ clients or employees, other than few specified clients. The defendants would not use or disclose any of the plaintiffs’ information or material. [6] The defendants deny that the plaintiffs have unique SR&ED application process and deny that the plaintiffs have proprietary right in that SR&ED application process. Wolff alleges the confidentiality and non‑competition agreement is void, and that there is no contract of employment. The defendants deny that Wolff owes fiduciary duty to the plaintiffs, and deny that the plaintiffs have suffered damages. The defendants launched counterclaim alleging unlawful interference with their business and certain unpaid salaries and commissions owed to Wolff. [7] The parties have been unable to proceed to discoveries because respective counsel have not provided disclosure to the other. The defendants’ counsel have not provided disclosure pertaining to the medical records which would tend to show mental anguish, nervous upset and depression as alleged by the individual defendants. Disclosure of the defendants’ loss of income has not been made. [8] The plaintiffs’ counsel states that it requires disclosure of the defendants’ financial information, and all documents pertaining to its consulting business with its present clients in preparing SR&ED applications. The plaintiffs state they are entitled to the defendants’ business records and financial information because they are entitled to the disgorgement of profits resulting from Wolff’s breach of fiduciary duty to the plaintiffs. The plaintiffs allege proprietary right to its SR&ED application process and require disclosure to determine if the defendants continue to wrongfully use their property since the execution of the Anton Piller order. The plaintiffs require disclosure of the names of the defendants’ clients to ensure that the defendants are not soliciting the plaintiffs’ own clients. The Application to Sever [9] Counsel for the defendants applies pursuant to Rule 41(1) and Rule 215(1) of The Queen’s Bench Rules and the Court’s inherent jurisdiction for an order severing the issues of liability and assessment of damages in the plaintiffs’ claim. That is, disclosure, discoveries and the trial ought to proceed to determine whether the defendants are liable to the plaintiffs and to what extent. Then, if liability is found, disclosure, discoveries and the trial should proceed to assess damages. Counsel for the defendants argue that, unless the lawsuit is bifurcated between liability and damages, the disclosure required by the defendants of its present business records and names of clients would seriously prejudice it. [10] In Saskatchewan, authority to sever the issues at trial is founded on the Court of Queen’s Bench inherent jurisdiction. While other provinces, such as Ontario, have specific rules addressing the withholding of disclosure until after an issue has been determined, our The Queen’s Bench Rules are silent on the matter. The case of Prairie Irrigation Development Ltd. v. Derdall (1984), 1984 CanLII 2267 (SK QB), 35 Sask. R. (Q.B.), makes reference to the repealed Kings’ Bench Rule 261 which allowed similar relief as Ontario’s present Rules 30.04(8) and 31.06(5) considered in L.C.D.H. Audio Visual Ltd. v. I.S.T.S. Verbatim Ltd. (1986), 1986 CanLII 2758 (ON SC), 54 O.R. (2d) 425 (Ont. H.C.). Case law has confirmed that such authority now rests with our inherent jurisdiction. [11] The Saskatchewan Court of Appeal in Potash Corp. of Saskatchewan Mining Ltd. v. Allendale Mutual Insurance Co. (1988), 1989 CanLII 5140 (SK CA), 80 Sask. R. 184 (C.A.), clarified that, although there is no specific rule in The Queen’s Bench Rules, such authority lies with the Court to sever an action. Bayda C.J.S. stated at paragraph 26: [26] That is not to say that plaintiff is never entitled to divided discovery and production of documents and never to divided examinations-for-discovery. Other common law provinces have specific rules governing those divided procedures. refer to Ontario’s Rules 31.06(5) and 30.04(8) and to Alberta’s Rule 223, British Columbia’s Rule 26(15), Manitoba’s Rule 316, Newfoundland’s Rule 32.02(c), Nova Scotia’s Rule 20.02(c) and Prince Edward Island’s Rule 20.02(c). Only Saskatchewan and New Brunswick have no similar rules. Despite the absence of specific rule in Saskatchewan, have no doubt that the court is empowered to order divided discovery and production of documents and divided examinations‑for‑discovery, that is to say, the court has the power to order severance for purposes preliminary to trial as well as trial. [12] The principles articulated in Potash Corp., supra, have been applied in such cases as Chieftain Industrial Contractors and Consultants Ltd. v. Man‑Ore Industrial Contractors Ltd. (1990), 1990 CanLII 7438 (SK QB), 81 Sask. R. 223 (Q.B.). At paragraph 24, Wright J. stated: .. The first, and most important issue, has to do with R's application to sever the issue of damages and to postpone it until liability has been determined. Both counsel conceded that the Court has the inherent jurisdiction to sever and postpone. This view has been expressed number of times and some of those expressions have emanated from the Saskatchewan Court of Appeal. The most helpful decision however is perhaps the most recent of the same Court, Potash Corporation of Saskatchewan v. Allendale Mutual Insurance Company (judgment rendered October 15, 1989). In that decision, the Chief Justice reviews, with care, the principles that are applicable to applications of this sort. What he had to say there is, in my respectful view, particularly apt to this application and for the reasons there expressed, would not grant the application for severance and postponement. [13] More recently, Laing C.J.Q.B. reviewed the discretion available to the Court in such situations in the case of Chaban v. Kramer Ltd., 2008 SKQB 27 (CanLII), [2008] S.J. No. 133 (Q.B.) (QL). At paragraphs and 6, Laing C.J.Q.B. outlined the factors to be considered in determining whether severance should be granted: [5] The decision to postpone disclosure or discovery with respect to matter that is admittedly relevant to the pleadings is discretion that is available to the Court, but is one which has been judicially circumscribed. In Potash Corporation of Saskatchewan Mining Ltd. v. Allendale Mutual Insurance Co. (1989), 1989 CanLII 5140 (SK CA), 80 Sask. R. 184, (C.A.), Bayda C.J.S., on behalf of the Court, in paragraph 28, noted as follows: [28] In the first place, divided discovery and production of documents and divided examinations‑for‑discovery should be resorted to in only the clearest of cases. The order should be made only in case that is clearly destined to be severed for the purposes of the trial. It should be made in an exceptional case where the plaintiff has established that the failure to make the order would be oppressive to him or her or cause him or her serious prejudice. Ordinary prejudice and inconvenience may or may not be deterrent to the making of an order (for discussion of the difference between the two degrees of prejudice see: L.C.D.H. Audio Visual Ltd. v. I.S.T.S. Verbatim Ltd. (1986), 1986 CanLII 2758 (ON SC), 54 O.R. (2d) 425 (O.H.C.J.) at 436 per Henry J.). [6] In L.C.D.H. Audio Visual Ltd. v. L.S.T.S. Verbatim Ltd. (1986), 1986 CanLII 2758 (ON SC), 54 O.R. (2d) 425 (O.H.C.J.), referred to by Bayda C.J.S. in the foregoing, Henry J. in that decision made the following points: (a)The discretion to postpone discovery or disclosure of documents may only be exercised when there is clear severability between the threshold issue and the consequential issue (damages). (b)In the normal course, the discretion should only be exercised if there is severe prejudice to the moving party as opposed to ordinary prejudice. (c) If severe prejudice is established, there still remains discretion in the court. (d) One of the factors to take into account in exercising the discretion should be that resolution of litigation by settlement is now generally endorsed, and consideration should be given to whether disclosure of the information is desirable for this reason. [14] Upon considering the factors summarized in Chaban, supra, it must be concluded that the defendants’ application has merit. First, there is clear severability between the threshold issue of liability and the consequential issue of damages in the plaintiffs’ action. The entitlement to sue for the disgorgement of profits hinges on whether Wolff, as its former employee, was in position of fiduciary. This is not the case of alleging one of the traditional classes of fiduciary, such as trustee and cestui que trust or solicitor and client. The fiduciary relationship must be found on the specific facts proven in the case. Disclosure pertaining to the defendants’ ongoing business, financial affairs and clientele become relevant only upon finding of liability. [15] Secondly, the Court may exercise its discretion only if the Court can make finding that the defendants will suffer severe prejudice if the issues of liability and damages are not bifurcated. In this application, the defendants assert that they have developed their own SR&ED application process by cultivating relationships with accounting firms, industry associations, post‑secondary learning institutions and various business organizations. Much of the defendants’ client base results from a joint venture with a major accounting firm. This joint venture requires confidentiality. Disclosure of these relationships would jeopardize the defendants’ obligation to maintain this confidence. The defendants could be liable to the accounting firm should it breach that confidence. [16] The defendants’ situation is not unlike that of the defendants in Reichmann v. Vered, [1995] O.J. No. 1662 (Ont. Ct. Gen. Div.) (QL), where Chilcott J. applied the factors articulated in L.C.H.D. Audio Visual, supra, and concluded that immediate disclosure pertaining to an accounting would seriously prejudice the defendants. At paragraphs 15 and 16, the Court states: [15] The Court must also determine that there will be serious prejudice by immediate disclosure. There are two other actions in which the same or related parties are involved. have read the affidavit of Gilad Vered and he has indicated in the affidavit the market for engineering and consulting work in which Ron International and other Vered family corporations are involved is highly competitive. He indicates that to reveal financial statements, operating costs, engineering methods, terms of leases and of financing to Reichmann and his companies would harm Ron International and other Vered family corporation’s competitive position. [16] am persuaded that to have to answer these questions and provide these documents would severely prejudice the defendants. [17] The presiding judge in Reichmann, supra, in exercising his discretion, considered the great expense and resources required to assemble the information. The Court also considered that the disclosure sought by the plaintiff would reveal information about other of the defendants’ family corporations who were strangers to the litigation. The Court ruled that production and discovery on the consequential issue of damages and profits be withheld until determination of the defendants’ liability. [18] Serious prejudice to the defendants in the instant case has been established. It is appropriate to exercise my discretion in their favour and grant the order to sever the plaintiffs’ claim against them. In exercising my discretion, have considered the effect of disclosure on promoting settlement between the parties. The issues in this litigation are such that delay in full disclosure of material pertaining to damages makes little difference. Both parties know the profitability of the SR&ED consulting business. The risks that must be weighed in considering settlement pertain to liability. Those risks have not changed by granting the defendants their application. [19] Counsel for the plaintiff submits that the case of Anderson Preece Associates Inc. v. Dominion Appraisal Group Inc., 2000 ABQB 254 (CanLII), 264 A.R. 177, is on point. The plaintiffs in that action sought further disclosure of documents taken by the defendants from the plaintiffs’ appraisal company. The defendants in that case argued that they should not disclose the plaintiffs’ documents the defendants later modified. The Court found the modified documents must be disclosed. [20] The Anderson Preece case is not helpful in this application because it does not ask the Court to determine whether the action should be severed. The Alberta Court considered the application under its Alberta Rules of Court pertaining to the contents of the defendants’ affidavit of documents. [21] Counsel for the plaintiffs argues that bifurcation of the liability and damages issues will lead to further motions if the parties cannot agree on the characterization of the documents or the questions in discovery. agree that some debate may occur between counsel on this point. However, that does not outweigh the severe prejudice the defendants would suffer without the order for bifurcation. If objections arise pertaining to what ought to be produced or discovered, either counsel has leave to bring the matter back to court. [22] Counsel for the plaintiffs submits that, without the defendants providing full disclosure at this stage, the plaintiffs have no assurance that the defendants are not pursuing their clients. That is not valid concern because the plaintiffs already have an immediate remedy should the defendants poach their clients. The defendants would be liable for breach of the consent order of June 13, 2007. The plaintiffs can easily discern if the defendants are breaching that order. At this stage, no breach has been alleged. [23] Counsel for the plaintiffs further submits that, without disclosure of the defendants’ work product, it is unable to prove that the defendants are continuing to utilize the SR&ED application process to which the plaintiffs claim proprietary right. However, the documents seized under the Anton Piller order have provided full disclosure to the plaintiffs of the defendants’ work product. Those documents will support the plaintiffs’ claim, if successful, on the threshold issue of liability. The defendants’ ongoing work product becomes relevant to the issue of damages and must be disclosed to the plaintiffs if the litigation reaches that second stage. The plaintiffs are not disadvantaged in their claim by allowing the defendants to withhold their work product at this stage. [24] The application to sever the threshold issue of liability from damages only pertains to the plaintiffs’ claim. The defendants’ counterclaim against the plaintiffs and their two principals shall continue in the normal course. It follows that the defendants must disclose documents relevant to their counterclaim alleging damages suffered as result of the plaintiffs’ tortious actions. In turn, the plaintiffs are required to disclose documents pertaining to Wolff’s salary and commissions. [25] The plaintiffs have specifically sought an order for disclosure of “documents relating to the incorporation and corporate ownership of Advance‑Tek Consulting Inc. and any and all of its predecessors and/or affiliates”. Because these documents are relevant to liability, the defendants are ordered to disclose them. The Application to Strike Portion of the Pleadings [26] The defendants seek an order pursuant to Rule 173 of The Queen’s Bench Rules striking paragraphs 10, 11 and 23 of the plaintiffs’ claim. These paragraphs refer to Wolff being an applied science technologist and holding himself out as person with strong sense of ethics, which was important to the plaintiffs as Wolff would be privy to sensitive information. The plaintiffs plead that the code of ethics for an applied science technologists provides that person with such designation “will not use directly or indirectly an employer’s or client’s confidential information in any way which is competitive, adverse or detrimental to the interests of the client.” The plaintiffs further allege that Wolff has breached the code of ethics. [27] The defendants’ application to strike these portions of the claim is dismissed. While Wolff may be subject to discipline by his governing body, that does not constitute multiplicity of proceedings as defined by s. 29 of The Queen’s Bench Act, 1998, S.S. 1998, c. Q‑1.01. Paragraphs 10, 11 and 23 are material facts, relevant to the plaintiffs’ claim of Wolff’s breach of fiduciary duty and breach of contract. They are properly pled. [28] The defendants are granted their application to have the plaintiffs’ claim severed so that the threshold issue of liability shall be tried prior to requiring the defendants to disclose and be discovered on the issue of damages. [29] The defendants’ application to strike portions of the plaintiffs’ claim is dismissed. [30] Because success has been divided, there will be no order as to costs. [31] Any further applications pertaining to this litigation are to be directed to my attention in the first instance. J. A.R. Rothery
FIAT: The defendant applies pursuant to Rule 41(1) and Rule 215(1) of the Queen's Bench Rules and the inherent jurisdiction of the Court for an order severing the issues of liability and assessment of damages in the plaintiff's claim. They ask that disclosure, discoveries and the trial ought to proceed to determine whether the defendants are liable to the plaintiffs and to what extent. Then, if liability is found, disclosure, discoveries and the trial should proceed to assess damages. The defendant also seeks an order pursuant to Rule 173 of the Queen's Bench Rules striking a paragraph of the plaintiff's claim. HELD: 1) Authority to sever trials in Saskatchewan is founded on the Court's inherent jurisdiction. Laing C.J.Q.B. reviewed the discretion available to the Court in Chaban v. Kramer Ltd., 2008 SKQB 27. Upon considering the factors in Chaban, it must be concluded that the defendants' application has merit. There is clear severability between the threshold issue of liability and the consequential issue of damages in the plaintiffs' action. The entitlement to sue for disgorgement of profits hinges on whether the defendant, as the plaintiff's former employee, was in a position of a fiduciary. Disclosure pertaining to the defendants' ongoing business, financial affairs and clientele become relevant only upon a finding of liability. The Court may exercise its discretion only if the court can make a finding that the defendants will suffer severe prejudice if the issues of liability and damages are not bifurcated. Much of the defendants' client base results from a joint venture with a major accounting firm. This joint venture requires confidentiality. Disclosure of these relationships would jeopardize the defendants' obligation to maintain this confidence. Serious prejudice to the defendants in the instant case has been established. It is appropriate to exercise the Court's discretion in the defendants favour and grant the order severing the plaintiffs' claim against them. The application to sever the threshold issue of liability from damages only pertains to the plaintiffs' claim. The defendants' counterclaim against the plaintiffs and their two principals shall continue in the normal course. 2) The defendants' application to strike portions of the plaintiffs' statement of claim is dismissed. The paragraphs refer to Wolff being an applied science technologist and holding himself out as a person with a strong sense of ethics. The plaintiffs plead that the code of ethics for an applied science technologist provides that a person with such a designation will not 'use directly or indirectly an employer's or client's confidential information' in competition with the client and alleges that Wolff has breached the code of ethics. While Wolff may be subject to discipline by his governing body, that does not constitute a multiplicity of proceedings as defined by s. 29 of The Queen's Bench Act. The facts pled are material facts relevant to the plaintiff's claim of Wolff's breach of fiduciary duty and breach of contract.