25 May 2014

Supreme Court of Canada Issues Important Judgment on Mediation, Settlements and Confidentiality

A few weeks ago, the Supreme Court of Canada released its decision in Union Carbide Canada Inc. v Bombardier Inc. I normally don't spend a lot of time on cases other than family law cases, but this decision has important implications for mediation and collaborative settlement processes that need to be talked about.

Settlement Discussions and Confidentiality Agreements

Negotiations toward settlement happen fairly frequently in family law matters, in informal circumstances such as:
  • the parties or their lawyers talking on the phone or writing letters to each other and 
  • in-person meetings between the parties and their lawyers, called "four-way meetings,"
and in more formal settings where the parties sign a participation agreement like:
  • mediation and
  • collaborative settlement processes.
Most of the time, it is understood — and often expressly stated — that the content of the discussions is "off the record" and can't be used if the parties return to court. The point of this is to allow people to propose compromises to their position without being stuck with those compromises at trial. Here's an example:
Sally hires a lawyer and sues Amar for $100,000 as her share of the family property. Amar hires a lawyer, whose opinion is that Sally is entitled to a share of the family property, but that a fair amount would be $50,000. 
Sally and Amar could go to trial over the $50,000 difference, or they could try to negotiate a settlement. Most rational people try to negotiate a settlement, which is what Sally and Amar do. However, if settlement discussions fail, $50,000 might just be enough to fight over in court. 
Sally is convinced that the court will make an award of at least $90,000, but if she spends $30,000 on lawyer's fees and expenses for the trial, she's only going to net $60,000...  a mere $10,000 improvement over what Amar has proposed. (Even if she gets the full $100,000, which is unlikely since people usually handle lawsuits strategically and ask for more than they think they're likely to get, she'll still only gain $20,000 over Amar's offer after she's paid the cost of the trial.) However, if she can settle and avoid trial, she'll get to keep all the money she was going to have to spend on her lawyer.  
Sally, Amar and their lawyers agree to use a mediator to discuss settlement. Their lawyers confirm that all of the settlement discussions will be confidential and they sign a mediation agreement which contains a term to the same effect. Confidentiality is important, because Sally needs to be able to say "I'll settle for $80,000" in the discussions, but still claim $100,000 if she and Amar have to go to a trial, and she certainly doesn't want Amar telling the court that she was prepared to settle for $80,000. Likewise, Amar needs to be able to say "I'll settle for $70,000" but still argue that $50,000 is fair at trial.
With an agreement or understanding of confidentiality in place, each party is able to bargain toward settlement without worrying that the other side will use their settlement proposals or the information disclosed during mediation against them. In the example of Sally and Amar, their starting positions are $100,000 and $50,000, but Sally knows that really her claim is probably worth $90,000. Considering that the cost of trial is going to be $30,000, this means that her real range of settlement options is between $60,000 (the likely award minus trial costs) to $90,000 (the likely award), and so she has a lot of room to move if trial can be avoided — in fact, if Amar offers her $70,000, that might be a bit of a win! Without that confidentiality agreement, Sally and Amar won't be able to budge from their starting positions. As a result, confidentiality agreements can be terribly important. 

However, even without a specific agreement, there's still the common law principle of "settlement privilege." This principle is the idea behind letters marked "without prejudice," and operates to protect communications between parties as they try to settle their dispute from being shown to the court. ("Common law," in this context, means legal principles that are developed by the courts rather than being written down in a statute or regulation made by government.) I've written about the meaning of "without prejudice" in a previous post, "What's 'Without Prejudice' and What's Not."

Proving the Terms of Settlement

What the Union Carbide cases raises is this tricky question... what do you do if you reach a settlement during negotiations that one party later tries to back out of? Can you tell the court about a settlement was reached despite a confidentiality agreement and despite the principle of settlement privilege?

It is probably surprising to no one that problems like this happen all the time. In fact, family law lawyers have a name for it: buyer's remorse.

I have had cases where the other lawyer and I have reached a settlement through an exchange of correspondence, and the other lawyer has tried to back out of the deal and argue that a settlement was not reached. In those cases, I've proved the terms of our settlement through the letters we sent back and forth, and had the court make an order wrapping up the case on the terms of our deal.

I have also had cases where the other lawyer and I have reached a settlement at an examination for discovery which the other lawyer has tried to escape. In those cases, I've proved the terms of our settlement through affidavit evidence and, better yet, the transcript of the settlement if the court reporter was asked to record the settlement.

Interestingly, I never had opposing counsel raise the issue of settlement privilege. This is probably because of an exception to the principle — there's always an exception to every legal principle, and often one or more exceptions to the exception — which says that privilege will not apply to discussions and correspondence leading to settlement when it's necessary to prove the existence or terms of the settlement.

In formal processes like mediation and collaborative work, however, there is always a written agreement that everyone signs which, among other things, says that the content of the discussions will remain private and confidential, and cannot be used in court, regardless of settlement privilege. This is what happened in Union Carbide, and the issue the Supreme Court of Canada had to decide was whether the confidentiality agreement could prevent the settlement discussions from being raised in court. 

Union Carbide v Bombardier 

In fairness, though, the circumstances in this case were bit more complicated. The parties had reached a settlement through mediation, which one party said, a little while later, was a settlement of all of the court cases between them; the other party replied that the settlement was a settlement of just one of their court cases. When the first party applied to court to get an order on the terms of the settlement, the other party objected on the basis that some of the facts on which the first party was relying arose during the mediation process. There are, of course, other important facts at play that I won't get into.

This is how the court described the case (important bits in bold, as usual):
"[27] ... there are two questions to answer in this appeal. The first is whether a confidentiality clause in a private mediation contract can override the exception to the common law settlement privilege that enables parties to produce evidence of confidential communications in order to prove the existence or the scope of a settlement. The second question, which arises only if the answer to the first is yes, is whether the confidentiality clause at issue in the case at bar displaces that exception. If it does, the information referred to in the impugned paragraphs cannot be disclosed. If it does not, that information may be disclosed if it meets the criteria of the exception."
The court first looked at the issue of settlement privilege, which it defined this way (case references omitted):
"[31] Settlement privilege is a common law rule of evidence that protects communications exchanged by parties as they try to settle a dispute. Sometimes called the 'without prejudice' rule, it enables parties to participate in settlement negotiations without fear that information they disclose will be used against them in litigation. This promotes honest and frank discussions between the parties, which can make it easier to reach a settlement ...
"[32] Encouraging settlements has been recognized as a priority in our overcrowded justice system, and settlement privilege has been adopted for that purpose. ...
"[34] Settlement privilege applies even in the absence of statutory provisions or contract clauses with respect to confidentiality, and parties do not have to use the words 'without prejudice' to invoke the privilege: 'What matters instead is the intent of the parties to settle the action ... Any negotiations undertaken with this purpose are inadmissible'. Furthermore, the privilege applies even after a settlement is reached. The 'content of successful negotiations' is therefore protected ..."
Next, the court looked at the exception to the principle of settlement privilege. After quoting from Sopinka's The Law of Evidence in Canada,
"If the negotiations are successful and result in a consensual agreement, then the communications may be tendered in proof of the settlement where the existence or interpretation of the agreement is itself in issue. Such communications form the offer and acceptance of a binding contract, and thus may be given in evidence to establish the existence of a settlement agreement."
the court summarized the principle thusly:
"[35] ... A communication that has led to a settlement will cease to be privileged if disclosing it is necessary in order to prove the existence or the scope of the settlement. Once the parties have agreed on a settlement, the general interest of promoting settlements requires that they be able to prove the terms of their agreement. Far from outweighing the policy in favour of promoting settlements, the reason for the disclosure — to prove the terms of a settlement — tends to further it. The rule makes sense because it serves the same purpose as the privilege itself: to promote settlements."
Having established that the concept of settlement privilege, which also applies to discussions made in the course of mediation, and its exception are bookends framing the overarching policy goal of promoting the settlement of legal disputes, the court then addressed whether the mediation agreement in the case operated to abridge the exception.

Here, by the way, is what the mediation agreement said about confidentiality:
2. Anything which transpires in the Mediation will be confidential. In this regard, and without limitation:
(a) Nothing which transpires in the Mediation will be alleged, referred to or sought to be put into evidence in any proceeding; 
(b) No statement made or document produced in the Mediation will become subject to discovery, compellable as evidence or admissible into evidence in any proceeding, as a result of having been made or produced in the Mediation; however, nothing will prohibit a party from using, in judicial or other proceedings, a document which has been divulged in the course of the Mediation and which it would otherwise be entitled to produce; 
(c) The recollections, documents and work product of the Mediator will be confidential and not subject to disclosure or compellable as evidence in any proceeding.
The court noted that people who engage in mediation seek confidentiality for more reasons that just protecting their position at trial. People may wish to maintain the privacy of their personal lives and business arrangements; protect information, and even the terms of settlement, from use and misuse by third parties; or keep information from discovery by government. As a result, there are additional interests involved in mediation, and, I infer, in other formal means of private settlement negotiation, that are worthy of protection:
"[45] The common law settlement privilege and confidentiality in the mediation context are often conflated. ... But ... confidentiality clauses in mediation agreements can also have different purposes. In most cases involving such clauses, the status of the common law settlement privilege will not arise, because the two protections generally serve the same purpose, namely to foster negotiations by encouraging parties to be honest and forthright in reaching a settlement without fear that the information they disclose will be used against them at a later date. However, ... settlement privilege and a confidentiality clause are not the same, and they may in some circumstances conflict. One is a rule of evidence, while the other is a binding agreement; they do not afford the same protection, nor are the consequences for breaching them necessarily the same."
But can you contract out of the exception to the settlement privilege principle by including a confidentiality clause in a mediation agreement, "thereby preventing parties from producing evidence of communications made in the mediation process in order to prove the terms of a settlement," even though such a result might "frustrate the broader purpose of promoting settlements in that it might prevent parties from enforcing the terms of settlements they have negotiated?"

The answer, in a nutshell, is sometimes.
"[51] ... It is open to contracting parties to create their own rules with respect to confidentiality that entirely displace the common law settlement privilege. This furthers both freedom of contract and the likelihood of settlement, two important public purposes. However, the mere fact of signing a mediation agreement that contains a confidentiality clause does not automatically displace the privilege and the exceptions to it. As I mentioned above, these protections do not have the same scope. For instance, settlement privilege applies to all communications that lead up to a settlement, even after a mediation session has concluded. It cannot be argued that parties who agree to confidentiality in respect of a mediation session thereby deprive themselves of the application of settlement privilege after the conclusion of the mediation session. The protection afforded by the privilege does not evaporate the moment the parties contract for confidentiality with respect to the mediation process, unless that is the contract’s intended effect."
However, if you intend your mediation agreement to suspend the exception to the settlement privilege principle, you need to be pretty blunt about it:
"[54] Where an agreement could have the effect of preventing the application of a recognized exception to settlement privilege, its terms must be clear. It cannot be presumed that parties who have contracted for greater confidentiality in order to foster frank communications and thereby promote a settlement also intended to displace an exception to settlement privilege that serves the same purpose of promoting a settlement. Parties are free to do this, but they must do so clearly. To avoid a dispute over the terms of a settlement, they may also choose to stipulate that, to be valid, any settlement agreed to in the mediation must be immediately put into writing. ... Such a stipulation would underscore the binding nature of any agreement reached in the course of the mediation process. ... 
"[67] I find that it is open to parties, in agreeing to confidentiality for a mediation process, to go so far as to limit their ability to prove the terms of any settlement. When any such limit is placed on the usual rule in this regard, however, it must be clear, on applying the principles of contractual interpretation of the relevant jurisdiction, that that is what the parties intended. ..."
Summary

Here's what the decision in this case boils down to for those involved in family law disputes.
· Settlement privilege normally protects discussions aimed toward settlement from disclosure to the court. 
· You can, however, talk about those discussions in court if it becomes necessary to prove the existence of the settlement you reached or the exact terms of your settlement. 
· Although this exception to the principle of settlement privilege is a good idea, you can contract out of the exception though a mediation agreement, so that the settlement discussions can never be disclosed, even to prove that an agreement was reached. 
· To effectively contract out of the exception, you must intend to do so and the contact needs to say that this is your intention. 
· Without having this express intention and including a statement to that effect in your mediation agreement, a confidentiality clause will not prevent you from talking about settlement discussions if necessary to prove the existence of the settlement or its terms.
Two things come from this.

Firstly, if you really intend that your settlement discussions can never be brought to the court's attention, you can do this through an agreement but you've got to be crystal clear that this is really what you mean to do; a boilerplate participation agreement generally won't do. Frankly, the exception to the settlement privilege principle serves a really important purpose, and I am having trouble imagining when you'd want to preclude it. Remember that the exception only lets you talk about your settlement discussions if necessary to prove the settlement you reached.

Second, this business about the effect of confidentiality clauses and the exception to the settlement privilege principle would apply to all formal means of dispute resolution that use participation agreements, including collaborative settlement processes as well as mediation.

My thanks to my friend and colleague Zara Suleman for bringing this interesting case to my attention.

5 comments:

  1. This post is evidence that you and your colleges are not on the same page when it comes to mediation. Funny, that mediation and the like (Parent Coordination, etc) are the corner stone of the CBA`s primary `fix` when it comes to Family Law, and yet you plainly assert that infighting readily exists in the process. Priceless!

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    1. I'm not quite sure what you're talking about, but if by "infighting" you mean that the lawyers for each of the parties in this case had a different view of the facts and the law... well, that's to be expected. It's not infighting, it's advocacy.

      You see, you have two choices when you have a legal problem: you can try your hardest to come to a settlement that both of you can live with, or you can go to court. I think that court is a last resort, particularly in family law matters: it is expensive, it is adversarial, it causes and perpetuates enmity, and it is rarely in the best interests of the children. I think most of my colleagues would agree with me. That leaves mediation, and other kinds of out-of-court dispute resolution, like negotiation, parenting coordination and collaborative settlement processes. These are, by and large, cheaper and faster than litigation and, because they are cooperative, strike me as a much better alternative to court. Sure you can go to court and spend thousands of dollars if you want, but that's never something I encouraged for my clients unless there was an urgent problem like a threat of selling property or abducting a child, or some other genuinely important reason why court was necessary.

      The job of the courts in cases like the one between Bombardier and Union Carbide is to clarify the law, and that's what the Supreme Court of Canada has done. This is important, because the law changes and evolves, just as society changes and evolves. What was cool in the 1500s is not cool now. And as unique cases, with novel twists, turns and complications make their way through the court system, the court expands the law again. Of course, it is these novel twists and turns which take legal disputes to court in the first place. If the law was unchanging and every set of facts the same, no one would have a difference of opinion and no one would need to go to court.

      I can't speak for the CBA, but I do think that mediation and other out-of-court processes are the preferred means of resolving family law disputes. It's best for the adults who need help resolving their dispute, and it's best for their children. A dispute resolution option that can be wrapped up in less than three years, doesn't exhaust the family assets and leaves a couple and their children as whole as possible, well that is priceless.

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  2. "I have also had cases where the other lawyer and I have reached a settlement at an examination for discovery which the other lawyer has tried to escape. In those cases, I've proved the terms of our settlement through affidavit evidence and, better yet, the transcript of the settlement if the court reporter was asked to record the settlement."

    This is clearly a disagreement between you and your friend (and Officer of the Court) regarding without prejudice mediation. If your friend's client simply changed their mind, received an unrelated and uncompromising offer from your client, or the ongoing family situation has changed, then it is absolutely acceptable to take the position that their communications with you were without prejudice.

    If your client felt slighted then, they can mediate in court, on record at your financial benefit.

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    1. Yes, these differences of opinion happen. It has nothing to do with being an officer of the court, however, but with representing our clients to the best of our abilities, within the limits of the law. I would not have done as the lawyers did in the cases I mentioned, but they had the right to their own analyses and conclusions.

      It will not surprise you, I suspect, that lawyers have differences of opinion. If we didn't, none of us would go to court because the resolution of the legal issue would be clear. We commonly have differences of opinion on the credibility of a witness, the state of the law or the interpretation to be placed on certain words spoken at a mediation, for example. And if these differences can't be ironed out or a settlement reached another way, then we go to court, and for most of us that's a last solution not a first.

      Unfortunately, you don't mediate in court, you litigate. And you don't litigate because you feel "slighted." That's to no one's financial benefit.

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  3. I've been a client in one of these "differences of opinions" situations. I was instructed to communicate with an expectation of confidentiality during mediation and my legal adversary used an overture I made to argue that an agreement was struck. Fortunately, the "controversy" didn't go anywhere. I was justified.

    Like I mentioned previously, one of the often heard goals of "fixing" family law affairs is an emphasis on mediation, and yet you have to write a blog reminding lawyers to get the "rules straight" before going into it. It doesn't fill me with confidence.

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