The Supreme Court recently released its decision in Union Carbide Canada Inc. v. Bombardier Inc., 2014 SCC 35. In that decision, the Supreme Court dealt with two principles relating to mediations.

The first principle is that settlement discussions are inherently confidential and therefore privileged from disclosure.  This principle is not based on statute law. Rather, it was developed by the courts as part of the law of evidence and is called “settlement privilege.”  There is an exception to that principle. The privilege does not apply when there is a dispute as to whether a settlement was reached. In that case, the parties can lead evidence that is otherwise privileged to prove or disprove the existence of a settlement.

The second principle is that the parties can make an agreement about their mediation and the courts will enforce it.  They can agree that their mediation is entirely confidential. If they do, then neither party can lead evidence about those discussions even when there is a dispute about whether a settlement was reached.

In this important decision, the Supreme Court of Canada dealt with the intersection between those two principles. The court confirmed that the parties can, by agreement, over-ride the common law exception to the settlement privilege and agree that none of the discussions during mediation can be used to prove whether or not there is a settlement.  However, the court held that in the present case the parties had not done so and therefore evidence could be led about what happened at the mediation in order to prove or disprove whether a settlement had been arrived at and if it had, what the settlement was.

Background

Bombardier sued Union Carbide and Dow in Montreal.  Bombardier alleged that Union Carbide and Dow had supplied Bombardier with defective gasoline tanks for the personal watercraft Sea-Doos that Bombardier manufactures and sells. After pleadings were delivered the parties agreed to participate in mediation. The mediation agreement stated that: “Nothing which transpires in the Mediation will be alleged, referred to or sought to be put into evidence in any proceeding.” Both parties alleged that a settlement was reached at the mediation. Dow and Union Carbide said that the settlement was of the world-wide claims of Bombardier, while Bombardier said that the settlement only pertained to the claims in the Montreal action.

Bombardier brought a motion to enforce the settlement and relied upon evidence about what had transpired at the mediation. Dow brought a motion to strike out the evidence about the events during the mediation.  The motion judge struck out that evidence on the ground that it was privilege from disclosure.  The Quebec Court of Appeal allowed the appeal and held that the evidence was admissible to prove whether or not a settlement had been made.  The Supreme Court of Canada upheld that decision.

The SCC decision 

In starting the discussion, the Supreme Court made two important points.

First, the court re-affirmed that there is a common law privilege relating to settlement discussions and that the privilege confers a duty of confidentiality upon those engaged in mediation. This may not be a surprising conclusion but it is an important one. It means that the subsequent discussion about whether events or discussion at a mediation may be proven in evidence starts with the presumption that they cannot. The Supreme Court gave a strong endorsement to the confidentiality of settlement discussions and mediation proceedings. The court said that settlement privilege “promotes honest and frank discussions between the parties, which can make it easier to reach a settlement” and that “encouraging settlements has been recognized as a priority in our overcrowded justice system, and settlement privilege has been adopted for that purpose.”

The exception to settlement privilege is consistent with the privilege. As the court said:  “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….. The rule makes sense because it serves the same purpose as the privilege itself:  to promote settlements.”

Second, the Court affirmed that settlement privilege and its exception applies to mediations. The court noted that “a form of confidentiality is inherent in mediation in that the parties are typically discussing a settlement, which means that their communications are protected by the common law settlement privilege.” But the court also said that mediation agreements are subject to the law of contract, not just the law of evidence. That means “that parties can tailor their confidentiality requirements to exceed the scope of that privilege and, in the case of breach, avail themselves of a remedy in contract” and the reasons that parties may “want to protect information exchanged in the mediation process are not limited to litigation.”  The court noted that “mediation contracts often contain strongly worded confidentiality clauses that place limits on the disclosure of communications exchanged in the course of the mediation process. Such clauses have been upheld by courts, though not in a context in which the parties were trying to prove the existence of a settlement.”

The court then set about to apply these principles to the facts of the present case. The court said that, since there was a mediation agreement between the parties, “in principle, there is relatively little that can displace the intent of the parties once it is clearly established.” The real questions were twofold: had the parties agreed to over-rule the exception to the settlement privilege, and if they had, was such an agreement enforceable in the public interest?

The inquiry begins, the court said, with an interpretation of the contract and a determination of whether the parties agreed to a smaller or larger protection than the settlement privilege and its exception otherwise provides. Absent concerns such a fraud or illegality, the parties’ contract should be upheld. Here, the Supreme Court disagreed with the approach of the Quebec Court of Appeal which had placed greater emphasis on protecting the settlement privilege and its exception than on the agreement of the parties.    The Supreme Court held that “it is open to contracting parties to create their own rules with respect to confidentiality that entirely displace the common law settlement privilege.”

But the mere existence of a confidentiality clause, as in this case, does not displace the common law privilege and its exception because the clause and the privilege have different origins and possibly different purposes.  The court said that “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.” The court noted that Article 9 of the Model Law on International Commercial Conciliation reflects this approach by providing that “Unless otherwise agreed by the parties, all information relating to the conciliation proceedings shall be kept confidential, except where disclosure is required under the law or for the purposes of implementation or enforcement of a settlement agreement.”

The court outlined two mechanisms to resolve the central conflict or tension between the confidentiality clause in the mediation agreement and the exception to the confidentiality privilege.

First, there is a presumption against ousting the exception.  The parties’ agreement must clearly demonstrate an intention to oust the exception before the parties will be precluded from tendering evidence to prove or disprove the existence of a settlement. As the court said:

“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.”

Second, the parties may validly provide in their mediation agreement that a settlement agreement is only enforceable if made in writing, at least under Quebec law. The Court noted that article 14.4 of the Civil Code of Quebec allows for this approach by stipulating that “where a particular or solemn form is required as a necessary condition of formation of a contract, it shall be observed.” Whether in a common law province such an agreement would over-ride a subsequent oral settlement agreement has not yet been determined but it seems unlikely that the Supreme Court would countenance different regimes under the two legal systems.

The court then considered the nature of the mediation agreement in the present case and the circumstances in which it was made, to determine if the parties clearly bargained to remove the exception.  The court pointed to three circumstances indicating that they did not.

 First, the parties did not draft the mediation contract or the confidentiality clause contained in that contract. The draft contract was in a standard form prepared and provided by the mediator who provided the draft to the parties on the eve of the mediation. The parties did not amend that agreement in any way before signing it.

Second, there was no evidence that the parties thought they were deviating from the normal incidents of the settlement privilege, including the exception to that privilege.

Third, the written agreement itself disclosed no intention to exclude the exception to the settlement privilege.

In these circumstances the court concluded that the parties:

“had no reason to assume that they were signing away their ability to prove a settlement if necessary…. Absent an express provision to the contrary, I find it unreasonable to assume that parties who have agreed to mediation for the purpose of reaching a settlement would renounce their right to prove the terms of the settlement. Such a result would be illogical.”

Finally, the court observed that the exception to the settlement privilege was a “narrow one” and that on the final hearing of the motion the presiding judge would be empowered to exclude evidence that was not truly directed toward proving or disproving a settlement. In addition, either party might request a confidentiality order or for an order that the motion be held in camera, so that evidence on the motion would not be publicized, although the test to obtain those types of orders is a high one.

Discussion

There are three important lessons to be learned from this decision.

First, parties are entitled to agree in a mediation agreement that discussions during the mediation are not admissible to prove whether a settlement was made during the mediation. Whether it is wise to so agree is another matter but the Supreme Court of Canada has held that it is legally possible to do so.

Second, however, unless the mediation agreement says so expressly or by implication, a confidentiality clause in the agreement will not be interpreted to exclude the parties’ right to lead evidence about conduct during the mediation to prove whether or not a settlement was made.  Merely saying in the mediation agreement that nothing which occurs during the mediation may be put into evidence, or words to that effect, will not stop the parties from leading evidence about the alleged settlement.

Third, if you want to reduce the possibility of a mediation leading to a contested settlement, then state in the mediation agreement that only a written settlement agreement is enforceable.

Union Carbide Canada Inc. v. Bombardier Inc., 2014 SCC 35.

Mediation – Settlement Agreements –  Settlement Privilege – Confidentiality

Thomas G. Heintzman O.C., Q.C.                                                                                 May 19, 2014

www.heintzmanadr.com

www.constructionlawcanada.com