On June 21, 2013, in Sable Offshore Energy Inc. v. Ameron International Corp. (Sable), the Supreme Court of Canada unanimously affirmed the critical importance of settlement privilege and confirmed that the scope of this privilege applies to “settlement negotiations and their fruits.” Most notably, the Court has confirmed that settlement privilege extends to the content of both successful and unsuccessful negotiations and that it protects not just the subject of negotiations, but also the ultimate settlement amount in the case of a successful negotiation. There was mixed authority on these points prior to the Sable decision. The case also provides guidance on how such agreements might be drafted so as to protect the amount of a concluded settlement from being disclosed in later proceedings.

Facts

In Sable, the plaintiff sued a number of defendants for negligence, negligent misrepresentation and breach of collateral warranty in connection with the defendants’ supplying of paint intended to prevent corrosion of the plaintiff’s offshore and onshore gas-processing facilities in Nova Scotia. The paint allegedly failed to prevent corrosion.

The plaintiff settled with some of the defendants by entering into what are called Pierringer Agreements. These types of agreements allow one or more defendants in a multi-party case to settle with the plaintiff and withdraw from the litigation, leaving the remaining (non-settling) defendants responsible for only the loss that they actually caused. There is no joint liability with the settling defendants, though non-settling defendants may be jointly liable with each other. The settling defendants are also assured that they will not be subject to a contribution claim from the non-settling defendants, since the non-settling defendants are only accountable for their own share of liability at trial. This aspect of Pierringer Agreements is designed to allay concerns that non-settling defendants will be required to pay more than their share of damages or that the plaintiff will be overcompensated (e.g., double recovery). More generally, courts maintain a supervisory function with respect to Pierringer Agreements and will, for instance, typically agree to impose a bar order preventing a non-settling defendant from making third-party claims (such as for contribution and indemnity) against a settling defendant.

In Sable, all of the terms of the Pierringer Agreements that had been entered into were disclosed to the non-settling defendants, except the agreed-to settlement amounts. The non-settling defendants sought disclosure of these amounts. The question before the Supreme Court of Canada was whether those negotiated settlement amounts should be disclosed or were protected by settlement privilege. The motion judge dismissed the defendants’ request for disclosure, but the Nova Scotia Court of Appeal overturned that decision and ordered the amounts be released.

Broad Scope of Settlement Privilege Confirmed

The Court allowed the appeal, finding that the settlement amounts were protected by settlement privilege and should not be disclosed.

Justice Abella, for the Court, confirmed that settlement privilege is a class privilege that gives rise to a prima facie presumption of inadmissibility, subject to certain limited exceptions. The purpose of this class of privilege is to promote settlement, and it “wraps a protective veil around the efforts of parties to settle their disputes by ensuring that communications made in the course of these negotiations are inadmissible.” 

The Court did not mention the traditional requirement that settlement privilege cover “bona fide attempts to compromise claims/disputes,” though presumably this requirement still stands. This would, for instance, mean that—as is the case now—settlement privilege would not extend to contractual negotiations (even those involving documents marked “without prejudice”) in the absence of a dispute.

In its discussion on settlement privilege, the Court in Sable endorsed the following important principles from lower courts in Canada and the House of Lords in the U.K.:

  • Settlement privilege extends beyond documents and communications that are expressly designated as being “without prejudice” to any negotiations undertaken with the purpose of settlement.
  • Using the words “without prejudice” is not required to invoke settlement privilege. Rather, what matters is that the parties intend to settle the action.
  • Settlement privilege covers settlement negotiations, whether or not a settlement is reached. This means that successful negotiations are entitled to “no less protection” than ones that yield no settlement.
  • A negotiated settlement amount is a “key component” of the “content of successful negotiations” and is protected by settlement privilege. In this portion of the ruling, the Court disapproved of earlier case law from Alberta and Manitoba that declined to extend the privilege to a concluded agreement, with Justice Abella concluding that “it is better to adopt an approach that more robustly promotes settlement by including its content.”

Narrow Public Interest Exception to Settlement Privilege Explained

As with other class privileges, settlement privilege is not absolute and can be pierced when a defendant shows that, on balance, “a competing public interest outweighs the public interest in encouraging settlement.” The Court listed several such interests (without much elaboration), including allegations of misrepresentation, fraud or undue influence, and preventing a plaintiff from being overcompensated. Such interests, implicitly, must transcend the interests of the litigants.

In analyzing a claim for an exception to settlement privilege, Justice Abella stated that a court must ask itself whether the reason for disclosure outweighs the policy in favour of promoting settlement and not simply whether the non-settling defendants derive some tactical advantage from disclosure. 

In Sable, the Court rejected the non-settling defendants’ argument that there should be an exception to settlement privilege for the amounts of the settlements on the grounds that they needed such information to conduct their litigation. Justice Abella saw “no tangible prejudice created by withholding the amounts of the settlements which can be said to outweigh the public interest in promoting settlements.” Knowledge of the settlement amounts did not materially affect the ability of the non-settling defendants to know and present their case, she stated.

The Court specifically rejected the argument that allowing the defendants to revise their estimate of “how much they want to invest in the case” rose to a sufficient level of importance to displace the public interest in promoting settlements. Similarly, the Court rejected the argument that a refusal to disclose the settlement amounts impeded the non-settling defendants’ own settlement initiative since they may be more likely to settle if they know the settlement amounts that have already been negotiated. Justice Abella remarked that there were advantages to settling first and that such advantages should be safeguarded by the courts: “Someone has to go first, and encouraging that first settlement in multi-party litigation is palpably worthy of more protection than the speculative assumption that others will only follow if they know the amount.”

Guidance Provided on Pierringer Agreements

Justice Abella analyzed the Pierringer Agreements entered into by the plaintiff and the settling defendants, emphasizing the value of such agreements in complex multi-party litigation. In so doing, she noted that the Pierringer Agreements had been approved by court order and that they provided specific protections for the non-settling defendants. The following factors were singled out:

  • The plaintiff received production of all relevant evidence from the settling defendants and made this evidence available to the non-settling defendants during discovery.
  • Regarding factual matters, there were no restrictions on the non-settling defendants’ access to experts retained by the settling defendants.
  • The agreements specified that their non-financial terms would be disclosed to the court and the non-settling defendants to the extent required by law.

These factors provide guidance on what courts will look to in examining Pierringer Agreements and should be considered by counsel in the drafting of these agreements in order to insulate them from any challenge.

Implications

Subject to the narrow public interest exception noted above, Sable makes clear that settlement privilege is a robust type of class privilege that will be generously interpreted by the courts in a manner that favours the promotion of settlements. The privilege is wide in scope, covering both settlement negotiations and the content of any concluded settlement agreement, including amounts negotiated by the parties.

Sable also recognizes that Pierringer Agreements are important and useful tools that may be used to address the many obstacles to settlement in multi-party litigation. Such agreements must be drafted with care so as to (among other things) protect against the possibility of double recovery for the plaintiff. Absent such a clause, it is possible that, based on the Court’s reasoning in Sable, settlement privilege may be more easily waived over such an agreement.