In today’s litigation landscape 95% to 97% of all civil cases are settled without a trial.1 Settlement negotiations increasingly happen informally, over email, through a back-and-forth dialogue between counsel. What happens when one party steadfastly believes a settlement was reached and moves to enforce that settlement and the other party disagrees? This was the situation before the Federal Court of Appeal in Apotex Inc v Allergan Inc, where a collection of “without prejudice” letters and emails formed the basis for Allergan Inc (“Allergan”) to argue that Apotex Inc (“Apotex”) had agreed to settle a patent infringement case. It was against this backdrop the Federal Court of Appeal clarified the objective test for when a settlement agreement is reached, cautioning:2
The requirement of an objective, mutual intention to create legal relations does not mean that there must be formality. Settlements need not be reached through counsel or in pre-planned, formal negotiations….Sometimes much to the surprise of clients and lawyers alike—seemingly idle conversations can have binding, legal consequences. Binding settlements can arise from impromptu, informal communications in relaxed, non-business settings.
To Prove a Settlement Agreement, Without Prejudice Communications Become Evidence
In general, settlement privilege prevents communications made in the course of negotiations from being admitted as evidence. The public policy underlying settlement privilege is compelling – to promote settlements and improve access to justice – but not absolute. A well-established exception to settlement privilege is to prove a settlement has been reached.3 It was within this exception that Allergan and Apotex found themselves before the Federal Court and the Federal Court of Appeal.
Counsel for Allergan and Apotex had an initial exchange of three letters and an email in April 2012 regarding settlement. A further 23 months of emails between counsel followed, including draft minutes of settlement, however no formal agreement was ever executed. Six months later, in October 2014, Allergan moved for an order enforcing the settlement agreement which it said had been reached. The Federal Court agreed with Allergan; the Federal Court of Appeal did not and provided a useful primer on when settlement agreements are reached.4
The Test: A Reasonable Bystander Would Conclude that Both Parties Intended to Enter Legal Relations
Fundamentally, the test for whether a settlement agreement is reached is whether a reasonable bystander would conclude that both parties, in making a settlement offer and in accepting it, intended to enter into legal relations.5 In other words, the subjective intentions of one party do not matter unless objectively expressed. To meet the test, a court must consider the whole of the parties’ negotiations in light of the following five criteria.
As with any contract, settlement agreements require consideration. Because all settlements are compromises between parties in some respect, there is consideration flowing in return for a promise. As Justice Stratas commented, consideration is almost certainly never a problem.6
- Sufficiently Certain Terms
A court must be satisfied that the parties were objectively of a common mind—there must be sufficiently certain terms. Courts will strive to give effect to reasonable expectations that can be discerned; however, courts will not make a “new agreement” for the parties in the absence of certainty. Words that have a range of meaning are acceptable (e.g., “scientific”, “material”) and not necessarily lacking in certainty. A lack of certainty of terms means a lack of settlement agreement.7
- Matching Offer and Acceptance
A settlement agreement crystallizes when there is matching offer and acceptance on essential terms. Disagreement on an essential term means no agreement at all. In this regard, a court is to look through the eyes of a reasonable businessperson (not a lawyer!) in the parties’ shoes and ask have the parties agreed on all the essential terms.8
Provided there is an agreement on essential terms, courts may imply non-essential terms such as the granting of a release, manner of payment, or timing of payment.9
- Authority to Conclude the Agreement
When parties to litigation are represented by counsel, a matching offer and acceptance by counsel binds their clients and concludes the settlement agreement. However, if counsel has qualified their authority, for example, by saying “subject to my client’s approval” or “subject to instructions” then no settlement agreement can legally arise regardless of counsel’s view of the proposed settlement.10
- Legislative Requirements
Legislation may import additional requirements to certain types of settlement agreements. For example, if the settlement offer involves the sale of land, then the sale of land will be need to be in writing. Legislation may also incorporate certain mandatory terms, notwithstanding the parties’ actual agreement.11
A Settlement Agreement Was Not Reached in Apotex
In Apotex, the Federal Court of Appeal held no settlement agreement was reached for two reasons:
- no offer and acceptance occurred with respect to an essential term – the scope of the restrictions on Apotex with respect to Allergan’s patent and,
- because counsel for Apotex did not have the authority to bind Apotex and Apotex never confirmed its acceptance of the draft settlement agreement.
With respect to the scope of restrictions on Apotex, the Federal Court of Appeal reasoned that Allergan had sued over patent infringement, for Apotex manufacturing, selling and exporting products containing gatifloxacin. The reasonable businessperson, viewing the matter objectively, would appreciate that Allergan would need to know how Apotex would abide by the patent in the future in order to settle the lawsuit. As there was no offer and acceptance with respect to the scope of restrictions, no settlement agreement could arise.12
With respect to counsel’s authority, the Federal Court of Appeal held that this was not a minor matter to be glossed over. Although counsel for Apotex expressed optimism that progress towards a deal was being made, Apotex never confirmed its agreement to Allergan’s settlement proposal. In these circumstances, there could be no legally-effective acceptance of the settlement proposal based only on the words of counsel for Apotex.13
When engaging in without prejudice settlement discussions, both clients and counsel should be aware that such discussions can be entered as evidence if there is a dispute as to whether a settlement has been reached. Counsel should be careful to qualify their authority to conclude a settlement. Importantly, subjective intentions do not matter unless they are outwardly, objectively expressed. While the Supreme Court of Canada has made clear that settlements should be promoted, this public policy does not reach so far as to compel settlement agreements contrary to the established principles of contract formation.
Apotex Inc v Allergan Inc, 2016 FCA 155 per Nadon, Trudel, Stratas JJA on appeal from Hughes J.
Date of Decision: May 18, 2016