While many tenets concerning the protections afforded by privilege are similar in both Canada and the United States, there are key differences and treatment when it comes to settlement and common interest privilege, as some recent cases highlight.
COMMON INTEREST PRIVILEGE IN CANADA
Common interest privilege has been interpreted in Canada to apply to many communications providing the parties share a “common interest” in the underlying subject matter. Typically, a common interest has been applied to enable parties to communicate frankly between themselves without waiving privilege where generally the parties have the same self-interest, share a common goal or are seeking same or similar remedies.
While common interest privilege is most commonly thought to apply to litigation, arbitration or dispute resolution proceedings, some Canadian cases have entrenched that protection in the commercial context in order to allow parties to pursue similar common interest in commercial transactions. For example, the British Columbia Court of Appeal in Maximum Ventures Inc. v. De Graaf, accepted that common interest privilege could be claimed where legal opinions are shared amongst and between parties who share a common interest in a transaction as part of due diligence. The court held that where there is a sufficient interest in common to extend the common interest privilege to disclosure of opinions, even in circumstances where no litigation is in existence or contemplated, that protection is afforded. Other Canadian cases have echoed that view.
New York Court of Appeals’ Ruling
Recently, the New York Court of Appeals held that the common interest doctrine applies only where a reasonably anticipated litigation is involved.
In Ambac Assurance Corp. v. Countrywide Home Loans, Inc., Bank of America and Countrywide claimed privilege over documents involving pre-closing matters of common interest between the parties during a period in which parties signed a merger agreement. The merger agreement in question contained both a confidentiality clause as well as a common interest agreement that was intended to protect communications between the companies regarding matters relating to the merger, including employee benefit plans, legal advice on tax issues, etc.
While the lower courts allowed the common interest exception to apply, the court of appeals reversed the broader application of the common interest doctrine. The end result is that where New York law applies (as choice of law or otherwise), the common interest doctrine does not extend to non-litigation disputes.
SETTLEMENT PRIVILEGE IN CANADA
Both Canada and the United States recognize a strong public interest in favour of maintaining secrecy of matters during settlement negotiations to foster compromise on dispute settlement. This serves to ensure parties feel uninhibited in their communications; however, key differences exist as to the scope and nature of those protections.
In Sable Offshore Energy Inc. v. Ameron International Corp. (Sable), the Supreme Court of Canada (SCC) unanimously affirmed the critical importance of settlement privilege and confirmed that the privilege’s scope applies to “settlement negotiations and their fruits.” The SCC clarified previously mixed authority in Canada and confirmed that settlement privilege extends to the content of both successful and unsuccessful negotiations and also protects not just the subject of negotiations, but also the ultimate settlement amount in the case of a successful negotiation.
The SCC indicated that 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.” Those circumstances may include allegations of misrepresentation, fraud or undue influence and serving as a settlement agreement. Those exceptions are generally rare and limited in applications with the court favouring a more broad level of protection from disclosure in Canada.
For more information on the Sable case, please see our June 2013 Blakes Bulletin: Supreme Court of Canada Affirms Wide Scope of Settlement Privilege.
U.S. FEDERAL RULE OF EVIDENCE 408
U.S. Federal Rule of Evidence 408 governs the admissibility of offers to compromise or other settlement-related evidence and provides as follows:
- Prohibited Uses. Evidence of the following is not admissible — on behalf of any party — either to prove or disprove the validity or amount of a disputed claim or to impeach by a prior inconsistent statement or a contradiction:
- Furnishing, promising, or offering — accepting, or promising to accept — a valuable consideration in compromising or attempting to compromise the claim.
- Conduct or a statement made during compromise negotiations about the claim — except when offered in a criminal case and when the negotiations related to a claim by a public office in the exercise of its regulatory, investigative, or enforcement authority.
- The court may admit this evidence for another purpose, such as proving a witness’ bias or prejudice, negating a contention of undue delay, or proving an effort to obstruct a criminal investigation or prosecution.
Simply put, Rule 408 provides a much narrower range of protection than without prejudice settlement privilege in Canada. Assuming that the evidence fits within the parameters of Rule 408 (i.e. there must exist a disputed claim plus the communications and records must have been created and intended to be a part of negotiations towards compromise), Rule 408 prohibits the use of settlement evidence in circumstances to impeach a prior inconsistent statement or to prove or disprove the validity or amount of a disputed claim. That said, Rule 408 allows the court to admit settlement-related evidence “for another purpose.” Imaginative U.S. attorneys have shown a high degree of creativity in finding “other purposes” to admit settlement evidence.
Examples exist where settlement-related evidence has been deemed to be relevant and admissible, including in determining when limitation periods began (see the United States Court of Appeals for the Eighth Circuit’s 2005 decision, Kraft v. St. John Lutheran Church of Seward), and in determining the reasonableness of an award of legal fees (see for example the United States Court of Appeals for the Third Circuit’s 2009 decision, Lohman v. Duryea Borough). In addition, many U.S. courts have rejected a discovery privilege for settlement-related materials. As a result, it is prudent to assume that settlement-related evidence may be discoverable.
There are also a paucity of reported decisions where U.S. courts have considered whether documents otherwise protected by settlement privilege in Canada are discoverable in a U.S. proceeding (see for example, the United States District Court for the District of Columbia’s 2002 decision, In re Vitamins Antitrust Litigation). The latter decision recognized settlement privilege based upon Canadian principles; however, its precedential value is uncertain as that case was decided in the context of a Canadian government investigation where principles of international comity and other factors specific to that case may have had a factor.
In short, there are far more instances in the U.S. where settlement documents and information are discoverable in circumstances where the same material would be protected by settlement privilege in Canada.
Counsel engaging in settlement discussions involving cross-border issues with the U.S. should therefore enter into appropriate protocols to ensure that the intended scope of settlement privilege in Canada is properly extended by including, for example, agreeing in advance that all communications and records exchanged shall be deemed confidential and privileged and shall not be used, relied upon, referenced nor adduced as evidence for any purpose, nor shall be discoverable, or admissible, in any dispute resolution process and other legal safeguards are undertaken.
Given the material differences between Canada and the United States as it relates to settlement and common interest privilege, it is critical for legal counsel to keep those important distinctions in mind.