2005 BCSC 90 Doman et al v. GMAC

Before: Master Bolton

Reasons for Judgment

Counsel for the Plaintiffs:	J.L. Carpick and K.J. Fischer
Counsel for the Defendant:	I.G. Nathanson, Q.C. and K.D. Loo
Date and Place of Hearing:	December 17, 2004
	Vancouver, B.C.

[1] In form, this is an application by the plaintiff for leave to amend its reply. However, the plaintiffs more or less concede (as they must) that in substance the application is for leave to withdraw an admission.

[2] The action arises from a line of credit facility extended by the defendant, GMAC, to the plaintiffs (whom I will together refer to as “Doman”) in June 2001. The agreement provided for credit of up to $65 million. In September 2001 GMAC asserted a right to, and did in fact, reduce the amount of credit available to $15 million.

[3] Doman denied GMAC’s right to do so. It took the position that the defendant’s conduct was a repudiation of the agreement between the parties. It set out to find another lender, and did so in March 2002. Doman then purported to rescind the agreement, relying on its allegation that GMAC had itself repudiated the contract. GMAC, of course, took a different view, maintaining that the contract was still in force, and demanded a termination fee of US $1 million and sundry other charges, which Doman paid under protest in order to obtain a release of the security it required for the new lender.

[4] Once the issues had been thus defined, Doman commenced this action in April 2001 to recover the monies paid to GMAC under protest.

[5] The writ and statement of claim were filed in April 2002, and a statement of defence in July 2002. The plaintiffs amended their statement of claim in December 2003, and an amended statement of defence was filed later the same month.

[6] The defence, as pleaded in the amended statement of defence, was essentially that Doman’s financial condition deteriorated after the credit agreement was first established, and that this deterioration amounted to a “Material Adverse Effect” as defined in the agreement, which entitled it to limit the amount of the line of credit. The defence did not plead that any misrepresentations had been made by the plaintiffs.

[7] In November 2003, shortly before the pleadings were first amended, the defendant had conducted an examination for discovery of an officer of the plaintiffs. At that examination, counsel for the defendant requested “voluminous” documentation, mostly relating to details of the plaintiffs’ financial condition in 2001 and 2002, which the plaintiffs had not previously considered relevant.

[8] Counsel for Doman asserts that in order to avoid the time and expense that would be required to identify and produce the requested documentation, he decided to deal with the matter by filing a reply to the amended defence which would, in his opinion, render the documents irrelevant to the issues as pleaded. He therefore, on December 19, 2003, filed a reply which contained a “concession”:

10. The Plaintiffs concede that the deteriorating financial condition of the Plaintiffs, as stated in paragraphs 7, 10 and 11 of the Statement of Defence, could have entitled the Defendant to determine that a Material Adverse Effect existed. Had the Defendant made such determination, an Event of Default, as defined in Clause 18, would have occurred. In such event the Defendant could have refused any further advances under the Credit Agreement. The Defendant could also have terminated the Agreement pursuant to Clause 17.

11. However, at no time did the Defendant make a determination that a Material Adverse Effect had occurred. In the absence of any such determination no Event of Default occurred.

[9] Having reviewed the reply, the defendant did not accept that the financial records it had requested were irrelevant. As the plaintiffs took a different view, the defendant filed a motion for production and for an order compelling answers to unanswered questions from the November examination for discovery. At the hearing of the motion, the defendant argued that the admission was “very narrow” and did not foreclose the relevance of the documents on other issues. Brown J. held for the defendant, on the basis that the questions and documents bore on what her ladyship found to be:

[t]he crux of this case...the plaintiffs’ assertion that it was required to seek new financing at considerable expense because the defendant repudiated the agreement.

Her ladyship also concluded that the evidence might be relevant to a defence that a breach, if any, was not fundamental.

[10] In addition to the documents described above, the defendant had also sought production of documents relating to legal advice sought by the plaintiffs bearing on the position they should take as to the defendant’s alleged repudiation of the agreement. The plaintiffs argued privilege for most or all of these documents. Brown J. ruled that the pleadings had put in issue the plaintiffs’ state of mind on this matter, and that the documents must be disclosed.

[11] The ruling on privilege, but not, as I understand it, the ruling on relevance, was appealed to the Court of Appeal. In the plaintiffs’ factum, and in oral argument, counsel for the plaintiffs specifically referred to the admission contained in paragraph 10 of the reply. This admission was also referred to when the Court gave reasons for judgment in favour of the plaintiffs, allowing the appeal. One of the defendant’s main arguments before me was that the plaintiffs, having relied on the admission to their benefit in the Court of Appeal, cannot resile from it now that it no longer suits their purpose.

[12] On February 26, 2004, just a few days after Brown J. had ordered production of documents, the parties were back in court on the defendant’s contested application for leave to further amend its statement of defence. Blair J. granted the relief sought, and the further amended statement of defence was filed on March 30, 2004. The amendments are quite substantial; the most important, for the purposes of the present application, being an assertion that monthly and quarterly financial statements furnished to the defendant pursuant to the requirements of the agreement were accompanied by certificates of the plaintiffs’ chief financial officer stating that no event of default or default existed. The statement of defence continues by asserting that these certificates were false or misleading in a material respect and were in themselves further events of default.

[13] Not surprisingly, the plaintiffs are concerned about the inter-relationship of this new pleading and paragraph 10 of their reply, set out above. The new defence pleads that the plaintiffs falsely represented a state of affairs not to exist which the reply concedes was in fact the case, and I am satisfied that the reply, if it remains in its present form, will amount to an admission of significant and potentially damaging allegations which were not in the contemplation of plaintiffs’ counsel when the admission was made.

[14] In turning to the merits of the application to withdraw the admission, the first issue to be addressed is the defendant’s argument that the plaintiffs, having relied on the admission to their benefit in various interlocutory applications, cannot now withdraw it once it no longer suits their purposes. If the defendant were to succeed on this point, it seems to me that all other issues would become moot. It is almost impossible to imagine a situation where a party could reap the benefits of a formal admission and then retract the admission once the harvest had been safely gathered in.

[15] Counsel for the defendant points to several instances where submissions to the court have referred to the admission. I do not propose to refer to most of these in detail. In my view, the plaintiffs were not relying on the admission in order to advance their case or damage the defendant’s, but merely referring to it as part of the background that had to be given to the court to provide context for the application. However, the situation in the application to the Court of Appeal on the privilege issue is less straightforward.

[16] In ruling for the plaintiff on that issue, the Court held at paras. 34 and 35:

[34] In my view, Doman’s plea of reliance on GMAC’s representation that Doman had not committed any Event of Default does not engage the principle of fairness and consistency that requires abrogation of the privilege. Frequently, a plea of estoppel will make the party’s state of mind material in a way that manifests an intention to waive solicitor-client privilege: see, e.g. Allarcom Ltd. v. Canwest Broadcasting Corp. (1987), 19 B.C.L.R. (2d) 167 at 170-71 (S.C.). That is because such a claim usually raises the question of whether the party asserting estoppel received legal advice from its solicitors that would negate the assertion that it relied to its detriment on the representations of the other party.

[35] In this case, however, Doman concedes in its reply that its financial situation was such that GMAC could have determined that a Material Adverse Effect existed, but asserts that because the contract required GMAC to declare such a determination for the Event of Default provisions to become operative, Doman relied upon the absence of such a declaration to conclude that it was not in breach of the contract. Doman’s pleading is essentially that it relied on GMAC’s failure to trigger a contractual provision that it says must have been triggered for a breach to have occurred, not that it relied on GMAC’s representation as to a legal state of affairs upon which Doman might have received advice from its own solicitors. The material issue raised is whether, on a correct interpretation of the contract, GMAC was required to make such a declaration for Doman to be in breach. Doman’s state of mind is not relevant to that interpretative task. This distinguishes the instant case from the type of estoppel claim at issue in Allarcom, supra.

(my emphasis)

In my view the sentences I have underlined above are the crux of the Court’s reasons. I find that the existence of the admission was not a relevant factor leading to the court’s conclusion. If paragraph 10 were completely expunged from the reply, the “material issue” referred to by the Court of Appeal would be wider, encompassing not only the interpretation of the contract but the determination of whether a Material Adverse Effect had occurred, but in my respectful opinion Doman’s state of mind would be no more relevant to the latter issue than the former.

[17] I must conclude, therefore, that the favourable judgment of the Court of Appeal was not secured by reliance on the admission. That being so, the admission cannot be considered to be set, unalterably, in stone by virtue of an advantage derived from it and some principle akin to estoppel. The matter must be decided by a broad consideration of the law relating to withdrawal of admissions.

[18] There are two lines of cases on point, which impose different standards of proof.

[19] The plaintiffs rely on cases where the issue is decided by a simple analysis of the balance of prejudice. Thus, in La v. Le (1993), 78 B.C.L.R. (2d) 322 Taylor J.A. (sitting as a single judge in chambers) held:

...But in the end the matter had to be decided by weighing the prejudice to the plaintiffs in reopening an issue previously closed by admissions, on the one hand, against the injustice which might result, on the other, if the defendant or his insurer were prevented from obtaining a decision of the court on the merits, as they might be established by the evidence.

[20] The defendant relies on decisions which impose a sterner test. In Halagen v. Reiffel, [1998] B.C.J. No. 984 and Gillies v. Couty, [1994] B.C.J. No. 2379 Satanove J. and Harvey J. respectively, referred to a decision of Legg J. in Phil Wittaker Logging Ltd. v. British Columbia Hydro and Power Authority (1985), 65 B.C.L.R. 384 at p. 390, where his Lordship denied a plaintiff’s application to withdraw an admission, stating:

...Although the prejudice to the defendant is considerable if the admission stands, where the admission is made with full knowledge of the consequences and acted upon by the plaintiff for a period as long as two years, as here, to permit the withdrawal of the admission at this late stage is contrary to all principles of fairness. Justice requires that a party be kept to his agreement unless that agreement has been obtained by fraud, duress or mistake. Justice also requires that the court should encourage certainty in the law and should not lightly grant leave where there has been no misunderstanding of the significance of the admission.

[21] All of these authorities are entirely consistent, being decided on significantly different facts. The distinction turns on the analysis set out at paragraph 19 of what is probably the leading case in this jurisdiction on the withdrawal of judicial admissions, Norlympia Seafoods Ltd. v. Dale & Co. (1982), 41 B.C.L.R. 145 (C.A.) where McFarlane J.A. held:

¶19 It seems to me that the question, whether an admission has been made inadvertently, hastily, without knowledge of the facts, or whether facts come to the attention of the court after the admission has been made are all matters to b (sic) taken into consideration in deciding whether or not the circumstances show that there is a triable issue which ought to be tried in the interests of justice.

[22] From my review of the cases cited by counsel here, it appears that where an applicant can establish one of the conditions referred to by McFarlane J.A. – that the admission was made inadvertently, hastily, without knowledge of the facts, or where the facts came to the attention of the court (the applicant?) only after the admission was made – the issue will be decided on a simple balance of prejudice and consideration of the interests of justice. Where, however, none of those conditions are met, the balance of prejudice must be much more substantially in favour of the applicant before the court will conclude that the interests of justice warrant the withdrawal of the admission.

[23] Applying those principles to the present case, it is quite clear that the admission contained in paragraph 10 of the reply resulted from a careful analysis made by senior counsel, without haste, of all the available facts relevant to the issues. Moreover, no new facts have subsequently arisen, in the sense that new witnesses or documents have been discovered or a witness has changed his evidence.

[24] On this analysis, the situation would appear to be fairly bleak for the plaintiffs, but this overlooks the crucial role played by the pleadings in determining relevance.

[25] In La v. Le (supra) Taylor J.A. distinguished that case from others, where leave had been refused, as follows:

The case is, in my view, clearly distinguishable from those in which leave is sought to withdraw an admission made with full knowledge of the relevant facts.

[26] For the purposes of the present case, the crucial word in that passage is “relevant”. What is a relevant fact is determined by the pleadings. Thus, when the defendant filed its further amended statement of defence, the fresh pleadings put new facts in issue.

[27] The amended pleadings include the allegation of misrepresentation as a separate Material Adverse Effect. In my view this puts in issue new facts which plaintiffs’ counsel, quite properly, would not have considered to be relevant when he drafted the current reply. Granted, these new facts do not relate to the truth or falsity of the allegation that a Material Adverse Effect did exist. But they do change the context of the admission of that allegation, from circumstances where the admission could be made lightly, without concern for its impact on the result of the lawsuit, to a situation where it could be the whole turning point of a decision against the plaintiffs. I am satisfied, therefore, that new relevant facts have come to the attention of the plaintiffs after the admission was made, and as such, the issue of the withdrawal of the admission falls to be determined on a straightforward analysis of the balance of prejudice and the interests of justice.

[28] As to prejudice to the defendant, the admission was not made until December 2003, some two and a half years after the action was commenced. By then, some – although I do not know how much and certainly not all – of the discovery process had been completed. Thus, for at least so long, the admission did not in any respect limit the scope of the defendant’s trial preparation. The admission was made with the express intent of limiting the extent of the plaintiffs’ obligation to produce documents, but that intention was frustrated by the decision of Brown J. that the impugned documents had to be produced notwithstanding the admission. The trial of this matter is only three or four months away, but there is no representation by the defendant that a withdrawal of the admission would compromise the trial date or the ability of the defendant to present a full defence. Nor, indeed, is there any representation at all of actual prejudice.

[29] On the other side of the scales, the prejudice to the plaintiffs would be very significant, if not outright overwhelming, if they were forced to go to trial and face this unwelcome relic from the earlier pleadings.

[30] In my view the balance of prejudice is markedly in favour of the plaintiffs. The application is allowed and the plaintiffs will have leave to amend their pleadings in the form attached as Exhibit “A” to the affidavit of Mr. Kirkham, Q.C. sworn October 28, 2004. Costs to the plaintiffs in the cause.

“Master N. Bolton”

Citation:	*Doman et al v. GMAC ,*
	2005 BCSC 90