On May 8, 2014, in Union Carbide Canada Inc. v. Bombardier Inc., the Supreme Court of Canada rendered an important decision on the confidentiality of settlement negotiations, in the context of private mediations.

BACKGROUND

Having been involved in several lawsuits together, Union Carbide Inc. and Bombardier Inc. agreed to participate in a private mediation process. Their mediation agreement contained a standard confidentiality clause, providing that nothing transpiring during the mediation process could be alleged, referred to or sought to be put in evidence in a subsequent proceeding.

At the end of the process, the parties thought they had reached a settlement, but then disagreed on its terms. As a result, Bombardier filed a motion to homologate the transaction before the Superior Court of Québec, making it public. Union Carbide moved to strike the allegations pertaining to events that occurred during the mediation, claiming that they were covered by the confidentiality clause in the mediation agreement.

THE RULING

The Supreme Court confirms that two regimes may apply to the confidentiality of communications made in the course of a mediation process. First, the common law settlement privilege, which was adopted to promote the out-of-court settlement of disputes, is an evidentiary rule in which communications exchanged between parties attempting to settle a dispute are inadmissible in evidence. As an exception to this privilege, the content of settlement negotiations may be disclosed when a party seeks to prove that a settlement has been reached, as well as its scope. The court confirmed that this common law privilege also applies in Quebec civil law. Second, aside from this common law privilege, the parties may insert a confidentiality clause in their mediation agreement, as is commonly done and as had been done in the case at hand.

At issue before the Supreme Court was whether, as Union Carbide maintained, such a confidentiality clause can displace the common law settlement privilege and/or its exception, thereby barring a party, in a subsequent proceeding, from trying to establish that a settlement was reached. Relying on Quebec principles of contractual interpretation, the court held that the standard confidentiality clause in this case did not clearly preclude the application of the exception to settlement privilege. The confidentiality clause would have had to be clear – “watertight” to use the court’s words – to have that effect. The court dismissed Union Carbide’s appeal and allowed Bombardier’s allegations to be included in its motion for homologation of the settlement agreement.

CONTRACTUAL FREEDOM AND ABSOLUTE CONFIDENTIALITY AGREEMENTS

While reaffirming the importance of the settlement privilege at common law, the Supreme Court recognized that the parties may agree to limit their ability to prove the terms of a settlement, so long as their intention to that effect is clearly expressed in the mediation agreement. Relying on the principle of contractual freedom, the court writes that the inherent protection provided by the settlement privilege can be modulated by contract. Thus, a confidentiality clause inserted in a mediation agreement can extend the protection offered by the common law settlement privilege, for instance by forbidding the parties from proving the terms of a settlement they have negotiated.

While these comments are technically obiter, they raise some concerns. It has always been broadly understood that while settlement negotiations are privileged, the fact that a settlement has occurred is not, such that either party may bring evidence to that effect, including evidence of the exchanges that occurred during the negotiations. If sensitive information needs to be protected in that context, an application could always be made for the court to have it filed under seal. However, the court did not address the fact that sealing orders are becoming increasingly difficult to obtain.

Here, the Supreme Court held that the resulting settlement agreement and even the fact that a settlement occurred could also be privileged, and therefore could not be proved in court, so long as the mediation agreement is clear that this information is privileged. The court recognizes the difficulties that might arise from this rule, which could ultimately prevent a party from enforcing the terms of a settlement it has reached with its opponent. The paradoxical result is that the parties’ freedom to contract to keep their settlement secret would trump their same (and subsequent) freedom to contract to have their dispute settled.

While this decision applied the Quebec law of contract, the court’s analysis was based on both common and civil law authorities and is likely to apply nationally. Interestingly, the court relied in part on legislation in Ontario entitling parties to international mediation agreements, based on Article 9 of the UNCITRAL Model Law on International Commercial Conciliation, to contract out-of-settlement privilege exceptions.

In light of these findings, parties wanting to participate in a private mediation process should exercise caution before agreeing to a confidentiality agreement that could eventually prevent them from enforcing a settlement they have negotiated. In drafting the mediation agreement, a delicate balance must be struck. While a narrow confidentiality clause might prevent the parties from engaging in honest and frank discussions, an absolute (or “watertight”) confidentiality clause could neutralize the benefits associated with the mediation process by rendering the settlement unenforceable.

Patrick Lapierre