Catch-22: Defending a Breach of Duty of Good Faith Claim and the Potential Waiver of Legal Privilege

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[co-author: Jason Arnason - Articling Student]

A defendant who wishes to rely on legally privileged information in response to a claim alleging breach of a duty of good faith, or alleging bad faith, may face a "Catch-22" scenario.

In particular, if the defendant relies on legally privileged information in its defence, it may waive privilege over that information, making it producible. Conversely, if the defendant does not raise such information in defence, privilege is protected but the defendant may compromise its chances of prevailing against the plaintiff.

The Supreme Court of the Northwest Territories recently addressed this issue and other questions of legal privilege in LTS Infrastructure v Rohl et al, 2021 NWTSC 9 [LTS]. The Court in LTS considered whether communications involving a client, a solicitor and a third party were protected by solicitor-client privilege in the context of defending an alleged breach of a duty of good faith in contract performance obligations, and if so, whether privilege was waived.

Background

LTS Infrastructure Services Limited Partnership (LTS) was the design-builder of a project that involved the design, construction, maintenance and operation of a fibre optic communications system in the Northwest Territories. In December 2014, LTS entered into a written subcontract with Rohl Enterprises Ltd. (Rohl) to provide certain services relating to the project. Travelers Insurance Company of Canada was the Surety under a performance bond, which was issued to Rohl as principal and named LTS as the obligee.

In 2016, LTS commenced an action against Rohl, claiming that Rohl was in default of its obligations under the subcontract, and against the Surety for allegedly breaching its obligations under the bond. As part of the action against the Surety, LTS claimed that the Surety breached a duty of good faith when investigating and responding to the claim on the bond. As part of its defence to the alleged breach of a duty of good faith, the Surety pleaded, relied on, and produced an investigative report from its consultant that was prepared prior to the Surety's denial of the bond claim and which was addressed to the Surety's external legal counsel.

LTS challenged the legal privilege claimed over any documents that the consultant received, authored, or was copied on. LTS argued that the Surety waived any solicitor-client privilege that could attach to such documents by pleading and producing the investigative report, and that any documents linked to the consultant during the investigation were producible. The Surety maintained that the records were solicitor-client privileged and that the pleadings in its Statement of Defence were insufficient to waive the privilege.

LTS' application for production of these documents raised two central issues for the Court: (a) whether solicitor-client privilege attached to documents sent to, received from, or copied to the consultant, even though external counsel may not have been part of such correspondence; and (b) if so, whether the Surety implicitly waived the privilege by relying on the investigative report in its Statement of Defence.

The Decision

On the issue of privilege generally, Justice Smallwood for the Supreme Court of the Northwest Territories found that the correspondence sent to, copied to, or received from the consultant was the subject of solicitor-client privilege. The Court reasoned that such correspondence fell within the continuum of solicitor-client correspondence and the consultant's involvement in this respect was integral to the solicitor-client relationship.

On the issue of waiver, Justice Smallwood held that a simple reference to legal advice in a pleading or disclosed document is not enough to waive privilege. In reaching her decision, she noted that the existence or adequacy of legal advice must form a sufficient part of the defence to constitute a waiver of privilege, and determined that the reference to the investigative report in the Surety's Statement of Defence did not meet this threshold.

The Court found that the Surety did not plead reliance on legal advice it received or put into issue its state of mind as a result of that advice. The Court also determined that the Surety's reliance on the report, which had been addressed to the Surety's external counsel, did not necessarily make the content of any legal advice received in conjunction with the preparation of the report relevant or admissible in circumstances where reliance on such advice was not expressly pleaded.

Takeaways

The LTS decision provides a good overview of two issues of legal privilege with which practitioners often grapple: (i) whether a continuum of correspondence can be subject to solicitor-client privilege even though a lawyer is not part of such correspondence; and (ii) whether the privilege is waived in circumstances where a party relies on potentially privileged information in its defence.

On the first point, the LTS decision confirms that a broad continuum of correspondence can attract solicitor-client privilege in appropriate circumstances. With respect to the second issue, the LTS decision suggests that a party does not implicitly waive solicitor-client privilege by referencing legal advice in a pleading or producing a document unless the legal advice forms an express basis for the defence, or it puts into issue the party's state of mind at the time.

Especially given the recent decisions from the Supreme Court of Canada applying the duty of good faith in contractual performance, litigants may continue to experience the difficult scenario of whether to raise legally privileged information in defence of alleged breaches of the duty of good faith. Decisions such as LTS provide some guidance on how to navigate this challenging issue.

Bennett Jones LLP successfully represented Travelers in the LTS decision.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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