The Reach of the Implied Undertaking Rule

During the course of litigation, each party typically has the opportunity to examine the opposing party under oath. This process is known as examination for discovery. Discovery facilitates the exchange of relevant information prior to trial, thereby increasing fairness and efficiency in the litigation process.

To encourage complete and candid discovery while also protecting the privacy interests of the litigants, the common law has limited the use that can be made of information obtained through discovery. Such information can, with some exceptions, be used only for the purpose of the particular proceeding. The use of the information for any other purpose and in any other context may constitute a breach of an implied undertaking to the court.

The nature and scope of the implied undertaking rule are set out in Juman v. Doucette (2008 SCC 8). The rule is broad in its application: all documentary and oral information obtained on discovery is subject to the implied undertaking and cannot be used by the parties except for the purpose of that litigation, with some exceptions.

The implied undertaking rule applies in TCC proceedings in the same way that it does in other jurisdictions (Sherman v. The Queen, 2000 CanLII 226 (TCC)). The rule may be applicable in the tax context when (1) a taxpayer appeals multiple taxation years, (2) appeals by different taxpayers give rise to one or more common or related issues of fact or law, or (3) a judicial review application accompanies an appeal. If a party seeks to use or rely on information that is still subject to the undertaking outside the proceeding, relief must be sought from the court to which the undertaking was made (Welford v. The Queen, 2006 TCC 31).

In Juman, the SCC outlined the circumstances in which a court may exercise its discretion to relieve a party from its undertaking. The test is whether, on a balance of probabilities, the public interest in disclosure outweighs the privacy interest of the discovered party and the goal of efficient conduct of court proceedings. A court should consider several factors in applying this test (see Juman and Sanofi-Aventis Canada Inc. v. Apotex Inc., 2008 FC 320).

One factor that may be particularly relevant in tax matters is whether the parties and issues are the same or similar. In Juman, the SCC held that "where discovery material in one action is sought to be used in another action with the same or similar parties and the same or similar issues, the prejudice to the examinee is virtually non-existent and leave will generally be granted."

Although there appear to be no reported cases dealing with a breach of an implied undertaking to the TCC, the jurisprudence of other courts sets out the consequences of breaching the undertaking. These consequences may include a stay or dismissal of proceedings, the striking of a defence, or contempt proceedings (Juman). Relief may be granted retroactively and, in some circumstances, a breach may not give rise to a remedy at all (see, for example, Lac Minerals Ltd. v. New Cinch Uranium Ltd. et al., (1985), 50 OR 260 (HCJ) and Chonn v. DCFS Canada Corp., 2009 BCSC 1474).

Given the breadth of the implied undertaking rule and the potential remedies for a breach, parties engaging in parallel appeals or applications should be mindful of the rule and its implications.

Author's note: the opinions expressed in this article are those of the author and not of the Department of Justice, the Minister of National Revenue, or the Canada Revenue Agency.

Lindsay Beelen
Department of Justice, Toronto

Canadian Tax Focus
Volume 2, Number 2, May 2012
©2012, Canadian Tax Foundation