Sanctions for Secret Settlements

Key Points from Moore v. Bertuzzi

1. Issues:

1. Primary Issue: when can settlement privilege be negated?
2. Secondary Issue: what is the doctrinal nature of settlement privilege?

2. Settlement Agreements which Require Disclosure

a. Mary Carter Agreements:

• The plaintiff receives a specific amount of money, regardless of the outcome of the trial
• The plaintiff places a cap on the liability of the settling defendants at this amount
• The settling defendants remain in the lawsuit
• The plaintiff agrees not to pursue the non-settling defendants for any amount beyond their several liabilities in order to protect the settling defendant from any potential crossclaims for contribution and indemnity from the non-settling defendants
• The plaintiff will agree to decrease the amount to be paid by the settling defendants in direct proportion to any increase in the liability of the non-settling defendants

b. Pierrenger Agreements:

• The settling defendant settles with the plaintiff
• The plaintiff discontinues its claim against the settling defendant
• The plaintiff continues its action against the non-settling defendant but limits its claim to the non-settling defendant’s several liability
• The settling defendant agrees to co-operate with the plaintiff by making documents and witnesses available for the action against the non-settling defendant
• The settling defendant agrees not to seek contribution and indemnity from the non-settling defendant
• The plaintiff agrees to indemnify the settling defendant against any claims over by the non-settling defendants

c. There is substantial case law in regard to these types of agreements to the effect that they must be disclosed, when they must be disclosed and what details must be disclosed

d. The underlying principles requiring disclosure:

1. To ensure the parties, judge and jury all understand the precise nature of the adversarial orientation of the litigation i.e. the true litigation landscape
2. To provide procedural fairness to the non-settling party
3. To ensure the court maintains control over its process in the interests of fairness and justice to all parties

e. In Moore, the agreement reached by the defendants was neither a Mary Carter nor a Pierrenger; therefore the defendants argued that neither the fact of nor the details of their agreement needed to be disclosed

f. Perrell, J. rejected these arguments on the basis that by virtue of the agreement:

1. practically speaking, a strategic alliance had ended and the dynamics of the litigation had changed
2. the common cause and informal alliance that the Moores and Bertuzzi had in showing that Orca Bay was the instigator had ended and a mutual non-aggression pact between Bertuzzi and Orca Bay was created.
3. It did not matter that the Moores are not entitled to rely on Bertuzzi pointing an adversarial sword at Orca Bay, the point is that the court administering and overseeing the adversary system needed to know that the adversarial orientation had changed

3. Principles for Exceptions to Settlement Privilege

1. Perrell, J. cites a number of other cases across the country where settlement agreements have been ordered to be disclosed and which were not Mary Carter or Pierrenger agreements
2. The underlying principle in these cases was that an exception to settlement privilege should be found when the settlement agreement is relevant and disclosure is necessary to avoid an abuse of process or for the proper disposition of the litigation or there is a some other compelling or overriding interest of justice
3. The case law establishes that settlement privilege is not absolute and that it admits of exceptions where the settlement agreement must be disclosed to non-settling parties
4. Furthermore, if an exception applies to the settlement privilege, then the disclosure of the settlement agreement must be immediate
5. Practically speaking, the burden of negating the privilege will be carried by the party seeking to show that the demands of justice require the disclosure of the settlement agreement

4. Potential Sanctions

a. There were no sanctions in the Moore case for the failure to disclose the agreement

b. However, in the Aecon case the consequences of failing to disclose a settlement agreement were significant

c. The Court of Appeal found that the settlement agreement was not illegal but held that the failure to disclose the agreement was an abuse of process and the appropriate remedy was to stay the third and fourth party claims which then prevented Aecon and the City of Brampton from recovering from those other parties

d. The Court of Appeal held:

1. The obligation of immediate disclosure is clear and unequivocal – it is not optional
2. Any failure of compliance amounts to abuse of process and must result in consequences of the most serious nature for the defaulting party
3. Only by imposing consequences of the most serious nature on the defaulting party is the court able to enforce and control its own process and ensure that justice is done between and among the parties

5. Doctrinal Nature of Settlement Agreements

a. This part of the decision is obiter dicta

b. There is uncertainty in the legal profession about communications in furtherance of settlement and uncertainty about the exceptions to the privilege

c. The historical approach would appear to treat settlement privilege as a categorical or class privilege

d. To establish it, a party needs to show:

1. litigation had been commenced or was within contemplation
2. the communication was made with the express or implied intention it would not be disclosed in the event settlement negotiations failed
3. the purpose of the communication was to bring about a settlement

e. However, confusion arose as a result of decision in Magnotta in 2010, in which the Divisional Court held that settlement privilege is not a class privilege but is a case-by-case privilege that is available in accordance with the Wigmore test

f. The principal difference between the two points of view impacts who has the onus of establishing the privilege

g. As a matter of practice, it would be unwise to send a message to litigants and the bar that communications designed to explore settlement are prima facie disclosable unless a judge, applying the Wigmore test, says otherwise. The importance of the doctrine, coupled with the need for relative certainty of application, favours a class approach

h. Perrell, J. provides an admirable summary of the law and concludes that this latter statement is preferable and therefore is of the view that settlement agreements should be treated as a class privilege i.e. prima facie privilege

i. But in this case, the above analysis was immaterial because in his view the agreement was privileged whether by class privilege or Wigmore test