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It is often better to enter into an arrangement with a debtor than to continue a legal action with its attendant costs and uncertainties. A good lawyer does his or her best to resolve a dispute, hopefully on terms favourable to the client. Of course, after a deal is struck, the client expects the other party to honour the terms of the deal. Sometimes the other party reneges. Then what? In Royal Bank of Canada v. Matutschovsky, a 2004 decision of the Ontario Court of Appeal, we discover what can happen.

Gone Tomorrow 

The action was the usual action on a debt plus a claim against an individual on a guarantee. The defences of the guarantor were the usual: non est factum and no independent legal advice. The guarantor also complained that, in the application for the loan, her signature was forged. However, she admitted that her signature on the guarantee itself was genuine.

The Bank brought a motion for summary judgment, the guarantor delivered an affidavit in response to the motion, and the Bank’s lawyer attended to cross-examine the guarantor on her affidavit.

Attending at the cross-examination were the guarantor, her interpreter, her former husband, and, the oft scourge of the legal system, her paralegal. The cross-examination turned into a negotiation session. At the end of the session, the parties had resolved the dispute. The Bank reduced from $58,000 to $52,000 its claim for principal, interest, and costs. The Bank’s lawyer hand wrote the minutes of settlement and then left the room to allow the translator to translate the minutes for the guarantor and to allow the rest of her entourage to advise her. The guarantor signed the minutes of settlement and, we assume, the lawyer signed them on behalf of the Bank.

Within hours, the guarantor resiled from the agreement. She claimed that the minutes failed to state that she had been defrauded and later claimed that she had signed the minutes due to economic duress and without independent legal advice. She also accused the translator of improperly translating the minutes of settlement and accused the paralegal of fraud.

The Bank brought a motion to enforce the settlement agreement.

Common Sense 

The motions judge looked at the facts and concluded that the guarantor was aware of the pros and cons of the settlement. He stated that “It is reasonable to assume that many matters were discussed in the course of the settlement discussions, including the Bank’s intent to pursue its claim, the merits of the guarantor’s defences, the cost of defending the claim, and the cost to her if her defences were unsuccessful following a trial … She was clearly aware of these issues before these discussions, based on her prior correspondence with the Bank and its lawyer.” Accordingly, the judge decided that there was no reason why she should not be bound by the settlement.

The guarantor appealed.

Nit Pick 

The majority of the Court of Appeal disagreed that the guarantor discussed the matters that the motions judge had stated were discussed. They felt that these matters would have been discussed had a lawyer represented the guarantor, but not with a paralegal, translator, and former husband. The majority felt that these discussions did not equate to independent legal advice and that it would have been prudent for the Bank’s lawyer to insist that the guarantor receive independent legal advice.

Under the Rules of Civil Procedure, a motions judge has the discretion to refuse to enforce a settlement. The motions judge did not refer to this Rule and enforced the settlement. The majority stated, “It does not satisfy our sense of justice to enforce the settlement in those circumstances.” and directed that the action proceed as if there had been no settlement.

Minority 

The minority noted, we suggest quite correctly, that, in an appellate review, the appeal court’s “sense of justice” is no keener than the motion judge’s sense of justice. There was therefore no reason to disturb the decision.

Further, he held that the court should exercise its discretion to uphold settlement agreements unless the party who is resiling from the agreement can establish duress or non est factum in the execution of the agreement. Neither of those factors were present in this case. The minority would have dismissed the appeal.

Consequence 

The result of this decision is that an agreement with an unrepresented debtor or a debtor who is represented by a paralegal cannot be enforced if the debtor squawks loudly enough afterwards. A decision that has this consequence cannot be a good decision.