a litigator’s guide to enduring terms of complete... · welcome and opening remarks greg...

Greg TemeliniWright Temelini LLP

April 20, 2017

A LITIGATOR’S GUIDE TO Enduring Terms of

Settlement and Releases

*CLE17-0040401-A-PUB*

DISCLAIMER: This work appears as part of The Law Society of Upper Canada’s initiatives in Continuing Professional Development (CPD). It provides information and various opinions to help legal professionals maintain and enhance their competence. It does not, however, represent or embody any official position of, or statement by, the Society, except where specifically indicated; nor does it attempt to set forth definitive practice standards or to provide legal advice. Precedents and other material contained herein should be used prudently, as nothing in the work relieves readers of their responsibility to assess the material in light of their own professional experience. No warranty is made with regards to this work. The Society can accept no responsibility for any errors or omissions, and expressly disclaims any such responsibility.

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Library and Archives Canada Cataloguing in Publication

A Litigator’s Guide to Enduring Terms of Settlement and Releases

ISBN 978-1-77094-785-6 (Hardcopy)ISBN 978-1-77094-786-3 (PDF)

Chair: Greg Temelini, Wright Temelini LLP

April 20, 2017

9:00 a.m. to 12:00 p.m. CPD Hours = 2 h 30 m Substantive + 30 m Professionalism

The Law Society of Upper Canada

130 Queen Street West Toronto, ON

SKU CLE17-00404

Agenda

9:00 a.m.- 9:15 a.m. Welcome and Opening Remarks

Greg Temelini, Wright Temelini LLP

9:15 a.m.- 9:25 a.m. The Relevant Legal Framework –When has a Settlement been reached

A LITIGATOR’S GUIDE TO ENDURING TERMS

OF SETTLEMENT AND RELEASES

9:25 a.m.-9:55 a.m. Interactive Review of a Poorly Drafted Sample Settlement and Release (key provisions, potential traps)

Alexandria Little, Laidlaw, Paciocco, Dumanski, Spadafora,

Johnson LLP

9:55 a.m.- 10:30 a.m. Key Considerations-A Panel Discussion

Moderator: Greg Temelini, Wright Temelini LLP

Panellists:

Brian Radnoff, Lerners LLP

Neena Gupta, Gowling WLG (Canada) LLP

10:30 a.m.- 10:50 a.m. Coffee and Networking Break

10:50 a.m. – 11:15 a.m. The Economic Implications of Settlement for your

Client – Tax and Related Considerations

Alan Mak, Ferguson Mak LLP 11:15 a.m.-11:45 a.m. Professionalism Panel Moderator:

Panellists: Nadia Campion, Polley Faith LLP

Geoff Hall, McCarthy Tétrault LLP

11:45 a.m.- 12:00 pm. Go Ahead and Ask Us-Panel Q&A

12:00 pm. Program Ends

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How do I qualify for the LAWPRO Risk Management Credit? Attendance at a qualifying CPD program will NOT automatically generate the LAWPRO Risk Management Credit. To receive the credit on your 2018 invoice, you must complete the online Declaration Form.

STEP 1: STEP 2:

Attend an approved program in person or via webcast; and/or

Self-study a past approved program; and/or

Complete 3 new modules on the Online COACHING Centre* and/or

Completing a Homewood Health e-Course*

Complete the online Declaration form at www.lawpro.ca/RMdec by Sept. 15, 2017. The credit will automatically appear on your 2018 invoice.

You are eligible for the Risk Management Credit if you chair or speak at a qualifying program provided you attend the entire program. You can claim credit for an approved program on an archived webcast, CD-ROM, audio tape or video replay, provided you watch or listen to the entire program and have a copy of the program materials. In this case, you should claim credit for a self-study review on the CPD declaration form.

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Whom do I contact for more information? Contact practicePRO by e-mail: practicepro@lawpro.ca or call 416-598-5899 or 1-800-410-1013. *Three modules of the Online Coaching Centre courses can be redeemed for one $50 credit once per year. In addition, one Homewood Health e-Course is eligible for the credit on a yearly basis.

This program qualifies for the

2018 LAWPRO Risk

Management Credit

Premium Credit

April 20, 2017 SKU CLE17-00404

Table of Contents

TAB 01 When is a Settlement Reached? The Legal Framework and Relevant Considerations ………………………………………………. 1 - 1 to 1 - 9

TAB 02 Common Mistakes & Pitfalls: Negotiating, Drafting

& Accepting Settlement Offers ……………………………………… 2 - 1 to 2 - 5

Alexandria Little Laidlaw, Paciocco, Dumanski, Spadafora, Johnson LLP

TAB 03 Settling Complex Litigation – When ½ a Loaf is

Better than None! Mary Carter and Pierringer Agreements ………………………………………………………………. 3 -1 to 3 - 9

Neena Gupta, Gowling WLG (Canada) LLP TAB 04 Economic Considerations in Legal Settlements …………….. 4 -1 to 4 - 5

Alan Mak, Ferguson Mak LLP

A LITIGATOR’S GUIDE TO ENDURING TERMS

OF SETTLEMENT AND RELEASES

TAB 05 The Ethics of Negotiating Settlements:

What are the Rules? ……………………………………………………... 5 - 1 to 5 - 8

Nadia Campion, Polley Faith LLP Geoff Hall, McCarthy, Tétrault LLP

When is a Settlement Reached?

The Legal Framework and Relevant

Considerations

Greg Temelini

Wright Temelini LLP

April 20, 2017

A LITIGATOR’S GUIDE TO

Enduring Terms of Settlement and

Releases

When is a Settlement Reached?

The Legal Framework and Relevant Considerations

By Greg Temelini

Wright Temelini LLP

Written for: The Law Society of Upper Canada

Program: A Litigator’s Guide to Enduring Terms of Settlement and Releases

Thursday, April 20, 2017

When is a settlement reached? This seems like an elementary question for litigators. And

it is. Anyone who litigates with any frequency settles cases on a regular basis. With that

acknowledged, it is useful to consider such basic questions from time to time and revisit bedrock

principles that can sometimes go overlooked – until something goes wrong and parties disagree

about whether a settlement exists.

This brief paper is not meant to be a treatise about all the controversies that arise when a

settlement is contested. Rather, it aims at the more modest goal of providing a synopsis of the

issues a court generally looks at to determine when parties have actually reached a settlement. In

reviewing the bedrock principles, we just might remind ourselves of some element that will avoid

a controversy altogether. While avoiding controversy may not always be the goal of litigators,

there is not one among us who wants to have a settlement that he/she has participated in to be

challenged.

Apotex Inc. v. Allergan, Inc.

The recent decision of the Federal Court of Appeal in Apotex Inc. v. Allergan, Inc.,

2016 FCA 155 (“Apotex”) is an excellent resource in this area. In Apotex, Stratas J.A., writing for

the Court, distills the legal framework for analyzing whether a settlement exists, explores the type

of evidence required to prove (or disprove) a settlement, and provides important reminders and

warnings surrounding the settlement process.

Apotex involves a patent infringement dispute between pharmaceutical companies.

Allergan brought an action in the Federal Court alleging that Apotex infringed its patent by selling,

manufacturing and exporting products containing an antibiotic named gatifloxacin. The parties

discussed settlement from April 2012 to March 2014. They did not execute a formal agreement,

but Allergan thought that a settlement had been reached. In October 2014, Allergan brought a

motion to enforce the settlement and was successful before the Federal Court.

The Federal Court of Appeal overturned the motion Court’s decision and found that a

settlement had not been reached. The particular dispute between the parties is, of course, less

important than the general principles elucidated by the Court which are discussed below.

The Legal Framework – A Settlement is a Contract

In order to create enforceable legal obligations, a settlement must have all the elements of

a contract. Issues and controversies that can arise in forming any contract, can arise in the context

of a settlement.

While a settlement is a contract like any other, the courts have recognized a policy imperative

to encourage settlements. As Abella J.A. put it in the opening paragraph of the Supreme Court’s

decision in Sable Offshore Energy Inc. v. Ameron International Corp., 2013 SCC 37, [2013] 2

S.C.R. 623 (Sable Offshore Energy):

“The justice system is on a constant quest for ameliorative strategies that reduce

litigation’s stubbornly endemic delays, expense and stress. In this evolving mission

to confront barriers to access to justice, some strategies for resolving disputes have

proven to be more enduringly successful than others. Of these, few can claim the

tradition of success rightfully attributed to settlements.”

The issue in Sable Offshore Energy involved settlement privilege and its robust protection

so as to allow parties to fully and frankly explore the prospect of settlement without fear that

discussions would be revealed. It is certainly true that determining the existence of a settlement is

a different question involving different considerations than determining whether settlement

discussions ought to be protected. The only point here is that courts generally want to encourage

settlement and that policy imperative implicitly, if not explicitly, may find its way into the analysis

of whether a settlement exists.

The Relevant Test is Objective

Stratas J.A. in Apotex was unequivocal on the point that the test for determining whether a

settlement is reached is an objective one. The subjective intentions of either party are irrelevant

(Apotex, para. 48). Stratas J.A. articulated the test as follows:

“The test is whether a reasonable bystander observing the parties would conclude

that both parties, in making a settlement offer and in accepting it, intended to enter

into legal relations.” (Apotex, para. 22)

Put differently, the evidence must objectively establish that the parties had a mutual intention

to create legal relations (Apotex, para. 22). Stratas J.A. was careful to point out that the requirement

of an objectively verifiable mutual intention to create a settlement does not require formality or

the involvement of legal counsel:

“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 discussions.

Indeed, many cases show that—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. See, e.g., McCabe, above at para. 11; UBS Securities

Canada, Inc. v. Sands Brothers Canada Ltd., 2009 ONCA 328 (CanLII), 95 O.R.

(3d) 93 (C.A.); Ward v. Ward, 2011 ONCA 178 (CanLII), 104 O.R. (3d) 401 at

para. 64; RTS Flexible Systems Limited v. Molkerei Alois Muller Gmbh, 2010

UKSC 14, [2010] 1 W.L.R. 753 at para. 45.” (Apotex, paras. 23-24)

Evidence

Proving (or disproving) a settlement is recognized as one of the instances in which a party

may refer to correspondence that is otherwise protected from disclosure by settlement privilege

(Sable Offshore Energy, para. 17). In assessing whether a settlement was reached, courts will look

at the correspondence between the parties and the “whole course of the parties’ negotiations”

(Apotex, para. 50).

In Apotex, Stratas J.A. indicated that the correct approach is to include correspondence

(letters, emails, draft Minutes of Settlement) without commentary. The documentary evidence

should be allowed to speak for itself. If necessary, parties can also adduce evidence providing

objective information about the circumstances surrounding the negotiations. However, as stated

above, evidence of a party’s subjective thoughts or intentions is not relevant and ought not to be

adduced (Apotex, para. 51).

Consideration

As with any contract, consideration must flow in order to have a settlement (Apotex, para.

25). This is typically not an issue in the context of a settlement as there is an obvious quid pro

quo in ending litigation.

Certainty

Considering the matter objectively, the essential terms of the settlement must be

“sufficiently certain” to allow the court to determine the intention of the parties. There must be a

meeting of the minds on all essential terms of the agreement. A court will not impose essential

terms on the parties and will not amend terms to make them certain (Apotex, paras. 26-30).

In determining what terms are essential, Statas J.A. offers the following guidance:

“The court is to view the specific facts of the case objectively in light of the practical

circumstances of the case and ask whether the parties intended to be legally bound

by what was already agreed or, in other words, whether an “honest, sensible

business[person] when objectively considering the parties’ conduct would

reasonably conclude that the parties intended to be bound or not” by the agreed-to

terms: G Percy Trentham Ltd v Archital Luxfer Ltd (1992), [1993] 1 Lloyd’s Rep

25, 63 B.L.R. 44 (C.A.) at paras. 50 and 86; Ward at para. 61; Hughes v. City of

Moncton, 2006 NBCA 83 (CanLII), 304 N.B.R. (2d) 92 at para. 6. Put another way,

looking not through the eyes of lawyers, but through the eyes of reasonable

businesspeople stepping into the parties’ shoes, was there something essential left

to be worked out? See Investors Compensation v. West Bromwich Building Society,

[1998] 1 All E.R. 98; [1998] 1 W.L.R. 896 (H.L.); Chartbrook v. Persimmon

Homes, [2009] UKHL 38, [2009] A.C. 1101; Re Sigma Finance, [2009] UKSC 2,

[2010] 1 All E.R. 571. Another way of putting it is to ask how “a reasonable

[person], versed in the business, would have understood the exchanges between the

parties”: Bear Stearns Bank plc v. Forum Global Equity Ltd., [2007] EWHC 1576

(Q.B.D. Comm.) at para. 171.” (Apotex, para. 32)

So long as there is agreement on the essential terms, courts may imply non-essential terms

into the settlement. As an example, courts may imply terms respecting payment (e.g., timing and

manner of payment) or the granting of a release (Apotex, para. 33).

There may be words or phrases in a settlement that are susceptible to a range of meaning.

So long as the court can determine the meaning from the circumstances, a settlement will not be

void for lack of certainty (Apotex, para. 27).

“Subject to Formal Agreement”

If an offer or acceptance contains the phrase “subject to formal agreement”, it may or may

not mean that an enforceable settlement has been reached. That phrase or other similar language

may mean that the parties have only reached an agreement to agree and still have to come to an

understanding on essential terms. It may also mean that the binding nature of the agreement is

deferred until a formal contract is executed.

However, it may also be true that the parties have, in fact, agreed on all essential terms and

have bound themselves to an agreement either orally or in writing. Even in the face of such

“subject to formal agreement” language, courts may still determine that a settlement was reached

looking objectively at the correspondence between the parties and the relevant circumstances.

Courts will objectively assess whether the parties agreed on essential terms and intended to

immediately create legal obligations (Apotex, paras. 34-39).

Statutory Requirements

In some circumstances, there may be statutory requirements that bear on the question of

whether a settlement has been reached and the terms of a settlement. For example, a sale of land

must be in writing. In addition, legislation may impose particular terms on parties in certain

circumstances whether they agree to them or not. Legislation may also preclude the making of

certain types of contracts (Apotex, paras. 40-41).

Scope of Counsel’s Authority

Where a party is dealing through legal counsel, the scope of counsel’s authority to enter

into a settlement on the party’s behalf will be relevant to determining whether a settlement has

been reached. It is essential that counsel outline any limits to their authority during settlement

discussions. If counsel has expressly indicated that any agreement is subject to the approval of the

client, no settlement can be reached until counsel indicates that the client has approved. However,

if the authority is unqualified, two counsel can create a settlement where there is a matching offer

and acceptance on essential term (Apotex, paras. 42-43).

Overturning the Motions Court in Apotex

The Federal Court of Appeal in Apotex determined that the motions Judge committed some

critical errors in determining that a settlement had been reached between Allergan and Apotex.

Most notably, Stratas J.A. criticized the motions Judge for adopting a subjective standard in

determining whether the settlement existed and for failing to properly analyze whether agreement

had been reached on all essential terms.

When properly analyzed, Statas J.A. determined that a settlement had not, in fact, been

reached for two primary reasons: 1) there was no agreement as to the scope of the restrictions on

the ability of Apotex to manufacture, distribute and sell the patented invention; and 2) counsel for

Apotex did not have apparent authority to bind his client. Counsel made it clear that he had to

check with his client and there was no communication indicating that the client had approved the

putative settlement (Apotex, paras. 55-88).

Conclusion and Warning

In Apotex, Stratas J.A. offers a stark warning to parties and their counsel respecting

settlement negotiations:

“The foregoing shows that a settlement agreement may be reached quickly without

formality and, from a subjective standpoint, sometimes unexpectedly: settlement

agreements almost always involve consideration, settlement discussions usually

take place in a context where an intention to create legal relations can be presumed,

informal discussions can count, a meeting of minds is assessed objectively, an

agreement on all essential terms is binding even though the parties are still

negotiating over other terms and, unless essential, terms such as the provision of

releases can be easily implied into an agreement to complete it. The recent decision

of the Supreme Court of the United Kingdom in RTS Flexible Systems, above,

underscores these points.

This has practical ramifications. If a party does not want to be bound until it has

agreed to all terms it subjectively considers essential to the deal, in every offer it

communicates it must make that wish objectively clear.” (Apotex, paras. 52-53)

Common Mistakes & Pitfalls:

Negotiating, Drafting & Accepting

Settlement Offers

Alexandria Little

Laidlaw, Paciocco, Dumanski, Spadafora, Johnson LLP

April 20, 2017

Releases

Common Mistakes & Pitfalls: Negotiating, Drafting & Accepting Settlement Offers

By Alexandria M. Little

Introduction

The Rules of Professional Conduct impose ethical obligations on lawyers to encourage and

facilitate settlement. With the high cost of litigation and the requisite expenditure of time and

energy, many parties to an action simply cannot take on the burden of a protracted dispute. Over

the last few decades, clients’ appreciation of the advantages of early settlement has increased and

there is a greater expectation placed on counsel to negotiate effective settlements wherever

possible.

By its very nature, a settlement will either resolve a dispute, thus alleviating the need for further

litigation, or it will attempt to secure for a party a superior position as it relates to potential cost

awards.

When drafting settlements, counsel must be mindful of the applicable provisions of the Rules of

Civil Litigation as well as the ordinary principles of contract law. All of the essential terms of the

contract must be agreed upon and the concepts of offer and acceptance, certainty and the intent of

the parties will be considered by the courts when determining if a valid settlement agreement has

been entered into.

The next few paragraphs highlight some of the common ways in which counsel can misstep when

taking instructions from their clients, negotiating with opposing parties or in applying strategies to

maximize their client’s potential recovery.

1. FAILING TO PROPERLY COMMUNICATE WITH YOUR CLIENT

When giving advice and taking instructions on steps in the litigation that relate to offers to

settle, ensure that your client has a good understanding of the advantages and consequences

of various strategies under the Rules. Spend some time discussing the impact of an offer to

settle with your client. Don’t just explain the operation of the Rules - try to think practically

and from their point of view about what matters specifically to them.

Consider discussing the following:

Whether to seek partial or substantial indemnity costs and the implications to your

client depending on the various outcomes;

How the funds might be characterized and potential implications, including tax

consequences;

Does the client have a specific release or specific clauses that it requires in any

settlement; conversely, a willingness to agree to certain terms, such as a

confidentiality clause.

PRACTICE TIP– CONFIRM YOUR ADVICE IN WRITING WITH YOUR CLIENT OR MAKE A NOTE IN

YOUR FILE DETAILING TO DISCUSSION AND THE ADVICE THAT WAS GIVEN.

2. FAILING TO PROPERLY COMMUNICATE WITH OPPOSING COUNSEL

When negotiating settlements, counsel are often most focused on the number that they need

to reach in order to obtain a settlement agreement. Other details fall to the wayside until

the time comes to complete the various terms of settlement that may not have been properly

discussed by counsel at the time of negotiation. This can lead to a collapse of the settlement

agreement and the dissatisfaction of one’s client. It can also lead to further litigation to

enforce the settlement agreement.

Spend some time in advance of negotiation with opposing counsel to consider the

mechanics of the offer you are about to make and whether and how the following might

apply to your client’s situation and, if so, what your strategy will be to address it.

The nature of the claims to be released;

Terms of payment;

How are the funds being characterized and will this impact tax treatment?

Are there goods to be delivered or returned and if so what is the timing and the

logistics?

What are the terms of disclosure?

Notes:

PRACTICE TIP – CONSIDER INCLUDING THE FORM OF RELEASE THAT IS SOUGHT AS A

SCHEDULE TO THE OFFER.

3. VAGUE ACCEPTANCE OF OFFER TO SETTLE

An acceptance of an offer to settle must be unconditional and unqualified. Attempts to

clarify the terms of the offer may be taken as evidence that the parties are not ad idem or,

in some cases, could be misconstrued as a counter-offer.

PRACTICE TIP – MAKE ACCEPTANCES IN WRITING AND ATTACH THE OFFER TO SETTLE IN

CASES WHERE THERE HAVE BEEN MULTIPLE OFFERS.

4. REVOCATION OF OFFERS TO SETTLE

Ensure that any offers to settle that are revoked are done so in writing.

Notes:

5. TIMING OF OFFERS AND REVIEWING PRIOR FORMAL OFFERS TO SETTLE

Beware of the “risk of acceptance”.

To take the most advantage of cost incentives, making offer to settle in an action or

application early on in the litigation is key; however, it is critical that offers that are open

for acceptance be monitored closely.

As the litigation progresses, your client’s position can change: costs can increase

considerably or the claim itself can increase in value. Offers to settle should be reviewed

periodically to ensure that they accurately reflect the offeror’s current position in the

litigation.

PRACTICE TIP – DIARIZE DATES TO PERIODICALLY REVIEW OPEN OFFERS TO SETTLE AND

REVISIT THEM WITH THE CLIENT.

6. FAILING TO PROTECT THE INTERESTS OF SUBROGATED CLAIMANTS

In personal injury claims, subject to certain provisions of the Insurance Act, OHIP may

have a subrogated claim that the Plaintiff’s lawyer has a responsibility under Ontario’s

Health Insurance Act to protect. Under section 34 of the Health Insurance Act, settlement

agreements and releases are subject to approval by the Plan and, without it, neither are

binding.

When reviewing and advising a personal injury clients on an offer to settle that has been

received, note that payment may have to be made to OHIP even if it is not listed specifically

in the Defendant’s offer.

Notes:

7. FAILING TO RECOMMEND ILA TO SELF-REPRESENTED PARTIES

It can become tricky to navigate any kind of negotiation with a self-represented party, let

along an agreement to settle the claim. Make it clear to the other party who you are

representing and what that means in terms of each party’s interests. If there are serious

discussions surrounding settlement, recommend independent legal advice to a self-

represented party and include a paragraph in the release setting out that the opportunity to

obtain legal advice was afforded to each party to the release.

PRACTICE TIP: WHERE POSSIBLE, CONDUCT NEGOTIATIONS WITH A SELF-REPRESENTED

INDIVIDUAL IN WRITING AND, WHERE ORAL DISCUSSIONS HAVE OCCURRED, CONFIRM THOSE

DISCUSSIONS IN WRITING AS WELL.

Notes:

Settling Complex Litigation –

When ½ a Loaf is better than none!

Mary Carter and Pierringer Agreements

Neena Gupta

Gowling WLG (Canada) LLP

April 20, 2017

Releases

Settling Complex Litigation – When ½ a loaf is better than none!

by P.A. Neena Gupta, Partner, Gowling WLG1

Introduction

Litigators are often frustrated at their inability to resolve complex multi-party litigation. In some cases, one or more parties are willing to settle their part of the case, but it seems impossible to settle the overall case.

There are two techniques that are used occasionally to try to resolve a specific portion of litigation, while the remaining portion(s) continue. In this short introductory note, we will discuss (a) Mary Carter Agreements and (b) Pierringer Agreements.

These techniques are not without risk. Throughout this note, I have assumed that the litigation involved a single plaintiff and multiple defendants with cross-claims against each other. Variations of the techniques discussed in this note can be used for various types of multi-party litigation.

Mary Carter Agreements

A Mary Carter Agreement2 is an arrangement under which one of two (or more) co-defendants agrees to a cap on damages, a portion of which is typically advanced to the Plaintiff prior to the resolution of the balance of the case.

Despite this settlement arrangement, the Settling Defendant3 remains a party to the proceeding. The Settling Defendant tries to reduce its liability by increasing the liability apportioned to the other non-settling defendants.

The effect of a Mary Carter Agreement is to make the Plaintiff and the Settling Defendant allies as against the other defendant(s) in the proceeding. In effect, the arrangement is intended to maximize the liability of the non-settling defendant(s). The advantage to the Settling Defendant is that damages are capped.4 This technique may be useful where the Settling Defendant wishes to settle, but the non-defendants are unwilling or unable to contribute.

The amount ultimately owed by the Settling Defendant to the Plaintiff is reduced in direct proportion to how much liability is placed on the non-settling defendants. Therefore, the Settling Defendant continues to be involved in the action with respect to the determination and apportionment of liability.

Assume that the Plaintiff and the Settling Defendant agree to cap the latter’s liability at $1,000,000. Assume further that there are two other defendants, who refuse to settle or contribute.

P.A. Neena Gupta and Gowling WLG (Canada) LLP. The assistance of Katherine Metcalfe is gratefully acknowledged. 2 Mary Carter Agreements get their name from the decision in Booth v Mary Carter Paint Co, 202 So 2d 8 (Dist CA 1967). Some commentators refer to these arrangements as "loan receipt agreements”. 3 For simplicity’s sake, I am using the example of a single defendant who settles, but the commentary applies to multiple defendants as well. 4 See Abrams and McGuinness, Canadian Civil Procedure Law (Toronto: Lexis Nexis 2010) at §17.161. See J & M Chartrand Realty Ltd v Martin, (1981), 22 CPC 186 (Ont HCJ); Laudon v Roberts, 2009 ONCA 383, leave to appeal to the SCC refused, 2009 CanLII 61390 (SCC).

Mary Carter and Pierringer Agreements P.A. Neena Gupta, Gowling WLG

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The Plaintiff is guaranteed damages of $1,000,000. Depending on the nature of the Mary Carter Agreement, the Settling Defendant may advance all or a portion of the agreed-upon amount, which may be subject to repayment, depending on the results at trial. In this example, there are two other Defendants who do not settle.

At the end of trial, there can be several results:

i) The Court finds that there is no liability. The Plaintiff still is guaranteed $1,000,000, but the Plaintiff will likely have cost obligations to the non-settling defendants.

ii) The Court finds that there is liability in the amount of $1,000,000 and apportions liability equally amongst the three Defendants. The Settling Defendant’s liability is reduced, because the two non-settling Defendants have been apportioned liability. The Plaintiff will be obligated to refund the monies received from the non-settling defendants to the Settling Defendant.

iii) The Court finds that there is liability in the amount of $6,000,000, equally amongst three Defendants. The Settling Defendant’s liability is capped at $1,000,000 (the amount stipulated in the Mary Carter Agreement).

Michael Kennedy5 also gives the example of an agreement between a Plaintiff and the Settling Defendant in a catastrophic personal injury case. The Settling Defendant agrees to pay $500,000, based on its own assessment of a 50-50 liability with the non-settling defendant. However, the Plaintiff agrees to repay ever dollar received beyond $1,000,000 in repayment of the $500,000. In Mr. Kennedy’s example, the jury awards $2,000,000 and assesses the non-Settling Defendant 75% liability. Effectively, the net result is:

(a) The Non-Settling Defendant pays $1,500,000.

(b) The Settling Defendant is reimbursed its $500,000 completely and effectively pays nothing.

(c) The Plaintiff initially receives $500,000 (from the Mary Carter Agreement) and $1,000,000 (the payment from the non-settling Defendant less the repayment to the Settling Defendant).

Mary Carter Agreements are not without risks. The reader should refer to Laudon v. Roberts6, wherein the Plaintiff, Rick Laudon, was injured in a boating accident on August 2, 2002. The boat was operated by the Defendant, Keith Sullivan, and was struck by a boat operated by the Co-Defendant, Will Roberts. The Plaintiff entered into a Mary Carter Agreement with the Defendant Roberts, by which Roberts agreed to pay the sum of $438,000 inclusive of costs, disbursements and HST.

At trial, the jury awarded assessed the total damages at $312,021.00 and apportioned liability as follows; Roberts – 50%; Sullivan – 39% and even found the Plaintiff contributorily negligent at 11%. Since the Plaintiff had already recovered more than the jury award, he received nothing after a long-fought battle.7

5 Michael Kennedy, Mary Carter Agreements (http://clcnow.com/uploads/articles/49/mary-carter-agreements.pdf?1402955774 accessed April 10, 2017 6 2009 ONCA 383. 7 The Court of Appeal applied the rule against double recovery, see 2009 ONCA 383.

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The result ended up being a disaster for the Plaintiff, who ended up being assessed costs to the Defendant, Sullivan in the amount of $763,000.8

Commentators have often used the result in Laudon v. Roberts as a precautionary tale. Nonetheless, it has been suggested that if there were a repayment obligation, such that the benefit of the “excess” went first to the Settling Defendant, it would have avoided the unfortunate result in Laudon v. Roberts.9

Due to the nature of Mary Carter Agreements, and the fact that a Mary Carter Agreement can drastically change the course of the litigation, Canadian courts require prompt disclosure of the both the existence of the Mary Carter Agreement and its terms to the other parties and to the court.10 Typically, the quantum of the settlement is not disclosed to the trier of fact, but is subject to disclosure to the court and opposing counsel.11 The court is also entitled to set up protocols regarding the scope of cross-examination and other aspects of the trial.

Pierringer Agreements

Pierringer Agreements, which get their name from Pierringer v Hoger, 124 NW 2d 106 (Wis SC 1963), are sometimes called “proportionate share settlement agreements” or “bar orders”.

Pierringer Agreements are a variation on the classic Mary Carter Agreement. One of the major shortcomings of the Mary Carter Agreement is that the Settling Defendant remains in the action through to trial and therefore continues to incur costs.

The objective of the Pierringer Agreement is to permit the Settling Defendant to be removed from the action entirely, without any remaining exposure to crossclaims, third party claims, or further liability to the Plaintiff.

As a result, the Settling Defendant is no longer involved in the action and the non-settling defendant(s) are only held liable for the percentage of damages reflecting their responsibility.

Pierringer Agreements have the following features:

1. The Settling Defendant settles with the Plaintiff; 2. The Plaintiff discontinues its action against the Settling Defendant with prejudice or, obtains an

Order to dismiss the action against the Settling Defendant; 3. The Plaintiff continues its action against the non-settling defendant(s), but limits its claim to the

non-settling defendant’s several liability; 4. The Settling Defendant agrees to cooperate with the Plaintiff by making documents and

witnesses available for the action against the non-settling defendant(s); 5. The Settling Defendant agrees not to seek contribution and indemnity from the non-settling

defendant(s); and 6. The Plaintiff agrees to indemnify the Settling Defendant against any claims over by the non-

settling defendants.

8 Michael Kennedy, Mary Carter Agreements (http://clcnow.com/uploads/articles/49/mary-carter-agreements.pdf?1402955774 accessed April 10, 2017) 9 Ibid. 10 Stamatopoulos v. Regional Municipality of Durham, 2014 ONSC 6313. 11 Noonan v. Alpha-Vico, 2010 OJ 2807 (ONSC); see also Pettey v. Avis Car Inc., 1993 CanLII 8669.

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The incentive for the Settling Defendant is to exit the lawsuit early, having capped its liability. The incentive for the Plaintiff is to obtain funds from the Settling Defendant that might then help the Plaintiff "finance" its lawsuit against the non-settling defendant(s).

Generally, the non-settling defendant(s) are not entitled to know the financial terms of the settlement in the Pierringer Agreement12. Since the non-settling defendants can only be held liable for their share of the damages and are severally, and not jointly, liable with the Settling Defendant, the quantum of the settlement is not relevant. The non-settling defendants know what remains at issue and what the Plaintiff is seeking against them. Therefore, the courts have consistently ruled that there is no prejudice created by withholding the amounts of the settlement from the non-settling defendant.

WARNING NOTE – DISCLOSE IMMEDIATELY

Mary Carter Agreements and Pierringer Agreements are complex, with significant risk. Readers should be reminded of the unintended result in Aecon Buildings, a division of Aecon Construction Group Inc. v. Stephenson Engineering Limited.13

This case arose from delays in the construction of the Brampton Performing Arts Centre. The City of Brampton entered into an agreement with Aecon Buildings in late December 2006, which was formalized in writing by February, 2007. Aecon Buildings agreed to sue City of Brampton, which in turn agreed to bring a third-party claim against Page & Steele, the architects. The agreement effectively capped the City of Brampton’s liability and allowed Aecon Building to benefit from any recovery from the third party.

The Statement of Claim was issued before the agreement was finalized. The Agreement was disclosed before the Third Party was required to provide its defence. It was only produced upon a specific request. The reasons of the Court of Appeal are worth reviewing.

[12] The Statement of Claim was issued before the agreement between Aecon and Brampton was reduced to writing. The agreement was, however, disclosed to the appellant [third party] before it was required to deliver its pleading. The motion judge found on that basis that there was no prejudice caused to anyone from the delay in disclosing the agreement. We agree that there was no prejudice. However, in our view the matter does not end there.

[13] We do not endorse the practice whereby such agreements are concluded between or among various parties to the litigation and are not immediately disclosed. While it is open to parties to enter into such agreements, the obligation upon entering such an agreement is to immediately inform all other parties to the litigation as well as to the court. As this court said in Laudon v. Roberts (2009), 2009 ONCA 383 (CanLII), 308 D.L.R. (4th) 422, at para. 39:

The existence of a “Mary Carter” agreement significantly alters the relationship among the parties to the litigation. Usually the position of the parties will have changed from those set out in their pleadings. It is for this reason that the existence of such an agreement is to be disclosed, as soon as it is concluded, to the court and to the other parties to the litigation. The reason for this is obvious. Such agreements change entirely the landscape of the litigation.

12 Sable Offshore Energy Inc v Ameron International Corp, 2013 SCC 37. 13 2010 ONCA 898.

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[14] In this case, the agreement was not voluntarily produced immediately upon its completion. It was only produced several months after its existence was discovered by the appellant and it was specifically requested.

[15] Other parties to the litigation are not required to make inquiries to seek out such agreements. The obligation is that of the parties who enter such agreements to immediately disclose the fact.

[16] Here, the absence of prejudice does not excuse the late disclosure of this agreement. The obligation of immediate disclosure is clear and unequivocal. It is not optional. Any failure of compliance amounts to abuse of process and must result in consequences of the most serious nature for the defaulting party. Where, as here, the failure amounts to abuse of process, the only remedy to redress the wrong is to stay the Third Party proceedings and of course, by necessary implication, the Fourth Party proceedings commenced at the instance of the Third Party. Only by imposing consequences of the most serious nature on the defaulting party is the court able to enforce and control its own process and ensure that justice is done between and among the parties. To permit the litigation to proceed without disclosure of agreements such as the one in issue renders the process a sham and amounts to a failure of justice. [Emphasis added.]14

Despite the finding of Justice Klowak at first instance that there was no prejudice due to the late disclosure, the Court of Appeal dismissed the Third Party and Fourth Party Claims. Leave to appeal was dismissed by the Supreme Court of Canada. When I went to law school, the great television series Hill Street Blues revolutionized detective/police shows. The character Sgt. Esterhaus always ended his briefings, “Let’s be careful out there.” Not a bad piece of advice to lawyers contemplating partial settlements.

14 2010 ONCA 898; application for leave to appeal dismissed, 2011 CanLII 38818 (SCC).

EDC_LAW\ 1621177\4

PIERRINGER AGREEMENT

THIS AGREEMENT is made effective this 10TH day of April, 2017.

AMONG:

ANNE PLAINTIFF, (hereinafter referred to as the “Plaintiff”)

- and -

JENNIFER DEFENDANT

(hereinafter referred to as the “Settling Party”)

WHEREAS:

(a) The Plaintiff has allegedly suffered or will suffer injury, loss, damage and expenses with respect to or arising from an accident which occurred on August 14, 2014 in or near Kitchener, Ontario (hereinafter referred to as the “Accident”), as is more particularly described in pleadings filed by the Plaintiff in the ______________; (hereinafter referred to as the “Action”) between the Plaintiff and the Settling Party and a number of other parties as Defendants (such other parties hereinafter collectively referred to as the “Non-Settling Parties”);

(b) The other Non-Settling Parties have advanced or may in the future advance claims against the Settling Party for contribution or indemnity;

(c) The Plaintiff and the Settling Party desire to resolve amongst themselves all claims or possible claims between them, including all claims advanced directly or indirectly in the Action, including claims for costs, and all claims arising directly or indirectly from or respecting the Accident;

(d) The Plaintiff and the Settling Party acknowledge that the total of the Plaintiff’s claims with respect to the Accident and the Action may exceed the consideration paid by the Settling Party hereunder; and

(e) The Plaintiff desires to preserve her rights and claims from the Accident as against the Non-Settling Parties and to continue the Action only as against the Non-Settling Parties.

NOW THEREFORE THIS AGREEMENT WITNESSES that for and in consideration of the matters hereinbefore referred to, the releases given herein, the payments, agreements, covenants and undertakings hereafter referred to, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Plaintiff and the Settling Party agree as follows:

1. With the execution of this Agreement by counsel for the Settling Party and the Plaintiff, the sum of $Two Hundred and Fifty Thousand ($250,000) shall be paid on behalf of the

Settling Party to the Plaintiff, in care of counsel for the Plaintiff, John Able of Very Able Barristers LLC.

2. The Plaintiff shall forthwith file a Partial Discontinuance of Action as against the Settling Party in the Action, and provide copies of the filed Partial Discontinuance of Action to counsel for the Settling Party.

3. The Plaintiff does for herself and for and on behalf of her heirs, insurers, executors, administrators, subrogees, successors and assigns, hereby remise, release and forever discharge the Settling Party and her insurers, administrators, successors and assigns, of and from any and all manner of action and Action, cause and causes of action, suits, debts, sums of money, dues, expenses, general damages, special damages, interest, costs, claims and demands of any and every kind whatsoever, at law or in equity or under any statute, which the Plaintiff ever had, now has, or which she, or her heirs, insurers, executors, administrators, successors or assigns, hereafter can, shall or may have against the Settling Party by reason of any claim for injuries, losses or damages, arising directly or indirectly from the Accident and with respect to any and all matters arising, directly or indirectly, out of the matters referred to in the pleadings in the Action.

4. Notwithstanding any other terms of this Agreement, it is the intent of the parties that the Settling Party shall not be liable to make any payment whatsoever to the Plaintiff or the Non-Settling Parties other than the payment described in paragraph 1 herein.

5. The Plaintiff hereby acknowledges satisfaction of that portion of her total damages in the Action, and from the Accident, which have been caused by the negligence, breach of contract, breach of statutory duty, or any other act or default of the Settling Party, if any, as may hereinafter be determined in the trial or other disposition of the Action, or any other action respecting the Accident.

6. The Plaintiff hereby releases and discharges that fraction or portion or percentage of her total causes of action and claims for damages respecting the Accident against all parties, including all current or future parties to the Action, which shall hereafter, by trial or other disposition of the Action, or any other action respecting the Accident be determined to be the fraction or portion or percentage of liability for which the Settling Party is or was liable due to negligence, breach of contract, breach of statutory duty, or any other act or default, or theory of liability.

7. Prior to the commencement of the trial of the Action the Plaintiff shall seek to amend her pleadings to limit her claims to that fraction or portion or percentage of the total amount of damages attributable only to the negligence, breach of contract, breach of statutory duty, or any other act or default, of the Non-Settling Parties.

8. The existence of this Agreement, and the contents thereof, except the amount paid by the Settling Party, shall be disclosed by the Plaintiff to the Non-Settling Parties forthwith and to the Court prior to commencement of the trial of the Action, or any other action respecting the Accident.

9. If the Court, following the trial of the Action or any other action respecting the Accident, grants judgment to the Plaintiff against the Non-Settling Parties in an amount exceeding the Non-Settling Parties’ share of the Plaintiff's total damages based upon the fraction or portion or percentage of causal negligence of the Non-Settling Parties as found by

the Court, the Plaintiff shall in any event not seek to recover, directly or indirectly, from the Non-Settling Parties any more than the Non-Settling Parties several share of the Plaintiff's total damages based upon the fraction or portion or percentage of causal negligence of the Non-Settling Parties as found by the Court.

10. This Agreement is made without prejudice to the Plaintiff’s rights and claims against the Non-Settling Parties and the Plaintiff shall be at liberty to settle, pursue or relinquish her claims against the Non-Settling Parties in her sole discretion. Any recovery of funds made by the Plaintiff against the Non-Settling Parties shall be solely to the credit of the Plaintiff except to the extent that indemnity may be required from the Plaintiff pursuant to paragraph 11 herein.

11. In the event that the Settling Party, through any Judgment or Order of a Court of competent jurisdiction, is found liable to the Non-Settling Parties for contribution or indemnity or costs, then the Plaintiff or Plaintiffs obtaining such Judgment or Order shall fully indemnify the Settling Party for any amount required to be paid by the Settling Party pursuant to that Judgment or Order.

12. This Agreement shall in no way be construed as an admission of liability by the Settling Party, by whom liability is specifically denied

13. The recitals hereto form part of this Agreement.

14. The Plaintiff shall execute all such further and other deeds and documents promptly and when required and shall do or perform, or cause to be done or performed, all such acts as shall be reasonably necessary to ensure the completion of the transaction contemplated herein.

15. This Agreement shall enure to the benefit of and be binding upon each of the parties hereto and their respective heirs, administrators, executors, successors and assigns.

16. This Agreement shall be governed by and construed in accordance with the law of the Province of Ontario and the parties hereto irrevocably attorn to the jurisdiction of the Courts of the Province of Ontario and agree that the Courts of the Province of Ontario shall have exclusive jurisdiction in the resolution of any legal disputes arising from or in connection with this Agreement.

17. This Agreement may be executed by counsel on behalf of the Settling Party.

18. The parties to this Agreement each hereby acknowledge that they have been represented by counsel of their own choice through all the negotiations which preceded the execution of this Agreement and that they have executed this Agreement with the consent of and on the advice of their legal counsel.

19. This Agreement shall not be construed in favour of or against any of the parties to this Agreement, but shall be construed as if all parties hereto drafted this Agreement. If any term, provision, covenant or condition of this Agreement is held by a court of competent jurisdiction to be invalid, void or unenforceable, the remainder of this Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated.

IN WITNESS WHEREOF, I have hereunto set my hand and seal at the City of Kitchener, in the Province of Ontario, this ____ day of _________, 20XX. SIGNED, SEALED & DELIVERED ) this ____ day of _________, 20XX ) in the presence of: )

Witness ANNE PLAINTIFF

Executed this ____ day of __________, 20XX. Very Able Barristers LLC

John Able, counsel to the Defendant

Economic Considerations in Legal

Settlements

Alan Mak

Ferguson Mak LLP

April 20, 2017

Releases

Economic Considerations in Legal Settlements

Presentation by Alan T. Mak, CPA, CA, CBV, CPA/CFF (Illinois), FCPA (Hong Kong), CGMA, CFE

Ferguson + Mak LLP

1. Outline

• Income Tax

• Context and rules

• Income Tax Act

• Characterization of amounts

• Surrogatum

• Considerations for recipient

• Considerations for payer

• Financial Management

• Time value of money

• Planning and preservation

2. Income Tax Act

• For the Recipient

• ITA 3(a) – Income from a source…office, employment, business and property

• ITA 6(1) – income from office or employment

• ITA 9(1) and 12(1) - income from business or property

• For the Payer

• ITA 18(1)(a) – No deduction except amount incurred to gain or produce income

• Also, ITA 18(1)(b) applicable to capital amounts

3. Characterization of Amounts

• Income (100% taxed)

• Business profits

• Property (investment) income

• Employment income

• Capital (50% to 75% taxed)

• Capital gains

• Eligible capital amount / Class 14.1

• “Nothing” (Not taxed)

• Special or general damages; personal injury

• Windfalls

4. Example: Net Proceeds from $1mm

5. Surrogatum

• Taxed in the same manner as the amount replaced by settlement/award

• Nature, character and purpose of payment

• Two-part test:

• What is the amount that a payment is intended to replace?

• How would that replaced amount have been taxed?

6. Example – Investment Broker Negligence

• Investor opens account with Ponzi & Co, which is entirely invested in a junior copper

exploration company. Investment is lost.

• Investor claims losses against an investment firm for unsuitably invested funds

• Damages calculated as:

• Loss of investment capital ($1mm)

• Loss of investment returns on capital ($500,000)

• Ponzi agrees to pay $750,000 to investor as full and final settlement, without admission of

wrongdoing

How might the settlement be characterized?

7. Example – Shareholder Dispute

• Key employee also holds 10% of common shares in Packaging Inc.

• Balance of shares held by private-equity firm, which engages in extensive dealings with

commonly-held companies (related party transactions; resulting in diversion of profits)

• Employee is dismissed

• Employee claims against Packaging Inc. and majority shareholder for wrongful termination

($500K) and shareholder oppression ($1mm)

• Packaging Inc. settles for $1mm, on account of severance and value of shares

How might the settlement be characterized?

Income Capital Gain Nothing

Gross Receipt $1,000,000 $1,000,000 $1,000,000

Taxable Income $1,000,000 $500,000 $ -

Taxes $500,000 $230,000 $ -

Net Receipt $500,000 $770,000 $1,000,000

8. Example – Contract Termination

• US Co. holds patent and rights to genetically engineered crop seed, which is licensed to Can

• US Co. terminates license for alleged breach of license

• Can Co. sues for improper termination

• US Co. settles with Can Co. for $3 million as compensation

How might the compensation be characterized:

• If the US Co. seed is 20% of Can Co.’s business?

• If the US Co. seed is 80% of Can Co.’s business?

9. In Practice

• Ensure that the characterization of settlement dollars is:

• Specifically contemplated in negotiation process

• Clearly documented in minutes of settlement

• Consider and discuss how each party might treat the settlement for tax purposes

• How an amount is calculated is not necessarily the same as how it is characterized

• Document the agreed-upon terms of settlement to corroborate intended tax reporting

position

• No requirement or assurance of symmetry in treatment

• Subject to risk of (re)assessment by tax authorities

10. For the Recipient

• Damages

• General: Personal injury/death

• Special: Loss of capital or earnings

• Income

• Employment income exceptions

• Human Rights complaints

• Future earning capacity

• Retiring allowance

• Compensation unrelated to employment

• Risk of personal injury payments found to be employment income

• Business income: payer has no responsibility to withhold

• Capital

• Income vs. Capital distinction may rest largely with magnitude of loss

• Payer has no responsibility to withhold taxes

11. Human Rights Complaints

• Amounts received as damages in respect of human rights complaints

• Canada Revenue Agency Interpretation-Internal 2006-0204971I7:

“only where general damages are received in respect of personal injuries sustained

before or after the loss of employment (for example, in situations of harassment during

employment or defamation after dismissal), or where a loss of employment involves a

human rights violation and is settled out of court, will general damages be viewed as

unrelated to the loss of employment and therefore non-taxable….”

12. Expropriation Payments

• Bellingham v. Canada, [1996] 1 FCR 613, 1995 CanLII 3544 (FCA)

• Appellant’s land expropriated by the town of Grand Centre, Alberta

• Paid fair market value, plus additional interest

• Additional interest on the compensation was found to be non-taxable; Court

deemed it similar to punitive damages. Payment was above and beyond the

value of the disposition of the property

13. For the Payer

• Characterization – Nature of payment:

• How would the payment have been treated if the obligation had been met?

(i.e., in a wrongful dismissal or termination of contract, supplier payment,

other?)

• Deductibility – morality and conduct

• BC Egg and CIBC .

• Symmetry generally not required; does not have to mirror the plaintiff (but may be helpful

to be consistent for purposes of factual assessment)

• Payments in respect of employment:

• Payer’s responsibility to withhold tax at source

• Confirmation of contribution room if characterized as retiring allowance paid

into RSP

14. Risk of Non-Deductibility

• BC Egg – Deductibility of fines/penalties and consideration of public policy.

• Trial court implied that conduct of taxpayer (public policy) was relevant;

Taxpayer prevailed at SCC….leading to ITA 67.6 (prohibition of fines and

penalties by statute)

• Canadian Imperial Bank of Commerce v. the Queen, 2013 FCA 122.

• Deduction of class action settlement challenged because CIBC had engaged in

“egregious and repulsive” conduct for role in mischaracterized transactions and

misrepresented financial reports for Enron and related companies. Argued that

CIBC’s conduct and the settlement was not related to any business expense or

activity.

• Appeal clarified that assessment of conduct is not part of ITA 18(1)(a)

15. Financial Management

• Delayed Payments

Interest

Security

Settlement loans

Planning and Preservation

Use of Trusts

16. Structured Settlements… and Beyond

• Strictly defined tool to protect parties in personal injury claims

• Purchase of annuity from Canadian LifeCo

• Irrevocably directed to pay injured party/claimant

• Non-transferrable, non-assignable

• Use of trust/contract to achieve same purpose

• Degree of flexibility/modification permitted in future

• Administered by major financial institutions

• Gross up of settlement to cover future tax consequences, admin. fees, etc.

• Consider use of structure specialists to forecast/model cash flows

The Ethics of Negotiating Settlements: What are the Rules?

Nadia Campion

Polly Faith LLP

Geoff Hall

McCarthy Tétrault LLP

April 20, 2017

Releases

The Ethics of Negotiating Settlements: What are the Rules?

By Nadia Campion1 and Geoff R. Hall2

The growth and popularity of alternative dispute resolution in Canada are relatively recent phenomena. It is only in the last 45 or 50 years that law firms began to employ retired judges and leading counsel to offer ADR services to clients, and various provincial authorities began to update their rules to reflect the growing popularity and proliferation of ADR processes. During this time, the law has shifted from a not-so-veiled hostility towards dispute resolution outside the courts towards a regime that strongly favours private dispute resolution as a matter of public policy. In 1996 that the Canadian Bar Association (CBA) engaged in a major review of the civil justice system in Canada resulting in numerous recommendations, including the use of ADR to increase efficiency and access to justice. The CBA’s task force encouraged the adoption of a “dispute resolution approach to the litigation practice” and described that approach as not only desirable but as a “new professional obligation.”3

ADR has since become an essential and permanent part of the Canadian judicial system. Its integration into the legal system recognizes the central role played by lawyers in the negotiation and resolution of disputes outside of court. As a result, lawyers must not only be effective negotiators, experienced in all aspects of ADR, but they must also possess a thorough knowledge and understanding of the ethical considerations that underlie strategies used to achieve settlements for their clients, whether by way of party-to-party negotiation or with the assistance of a neutral third-party.

In Ontario, lawyers negotiating settlements are governed by the Rules of Professional Conduct of the Law Society of Upper Canada. They are also guided by the CBA Model Code of Professional Conduct (the “Model Code”). These rules define a “competent lawyer” as an individual who has and applies knowledge, skills and attributes in a manner appropriate to each matter on behalf of a client including, among other things, negotiations.4 Lawyers

1 Nadia Campion is a partner at Polley Faith LLP, specializing in complex commercial litigation, shareholder disputes and estates litigation.

2 Geoff R. Hall is a partner and senior litigator at McCarthy Tétrault LLP. He is also the author of the text “Canadian Contractual Interpretation Law” published by LexisNexis Canada and an adjunct law professor at the University of Toronto Faculty of Law. 3 Canadian Bar Association, “Task Force Report on Systems of Civil Justice” (Ottawa: CBA, 1996), at p. 64 4 Rule 3.1-1 of the Rules of Professional Conduct, Law Society of Upper Canada, available online at http://www.lsuc.on.ca/list.aspx?id=671

are required to advise and encourage their clients to compromise or settle a dispute wherever it is possible to do so on a reasonable basis and to use ADR processes for every dispute.5

In representing a client, the lawyer must act resolutely and honourably within the limits of the law while treating the tribunal with candour, fairness, courtesy and respect.6 When acting as an advocate the lawyer shall not do anything dishonest or dishonourable, misstate facts or law or suppress what ought to be disclosed; knowingly misstate the contents of a document, the testimony of a witness, the substance of an argument or the provisions of a statute or like authority; or knowingly assert as true a fact when its truth cannot reasonably be supported by the evidence or as a matter of which notice may be taken by the tribunal.7 These duties extend to appearances before boards, administrative tribunals, arbitrators, mediators and others who resolve disputes.8

At first blush, the Rules of Professional Conduct appear to provide a comprehensive code according to which lawyers should conduct themselves in representing clients. However, a closer analysis reveals that the Rules offer little guidance regarding the professional ethics of negotiating settlements. They are silent on the standards of “truth” and “deception” that ought to govern lawyers when advocating for their clients’ interests in the settlement negotiation context. In particular, the Rules do not assist lawyers in determining the extent to which they can withhold information or positions from the opposite party when resolving disputes or whether there is an affirmative duty to inform of material facts when the opposite party is operating under a misapprehension of their own making.

Many scholars and commentators have written on the topic of disclosure in settlement negotiation and, more recently, have urged regulators to adopt a “code of negotiation ethics”. Yet lawyers continue to operate in a grey area using their own moral compass as a guide to point them in the right direction. Of course, not all compasses are created equal with the result that ethical standards in the negotiation context are anything but clear or consistent. There is no consensus in the legal community, at least in Ontario, as to where one should draw the line between acceptable negotiation strategies and unacceptable concealment or deception.9 The challenge is that, without direction, lawyers are at risk of taking wrong turns to the detriment of their clients who may be better suited to resolving the dispute rather than following the long path to trial.

5 Ibid. Rule 3.2-4 6 Ibid. Rule 5.1-1 and associated Commentary 7 Ibid. Rule 5.1-2 8 Ibid. Rule 5.1-1 9 Gavin MacKenzie, Lawyers and Ethics: Professional Responsibility and Discipline, 5th ed (Toronto: Carswell/Thomson Reuters Canada, 2009) at 15-2

This paper considers the sources from which lawyers in this province can derive certain standards by which negotiations should be conducted and settlements achieved, including rules that exist in other provinces, judicial opinions and decisions, and, most importantly, the values and norms that already exist and upon which Canada’s justice system is built.

The Rules in other Provinces

The starting point in analyzing the appropriate standards that should be applied are the rules that exist in various jurisdictions. With the exception of Alberta, codes of conduct in most, if not all, provinces have adopted and reflect the language in the Model Code, which, as discussed above, provides less than optimal guidance on the ethics of settlement negotiation.

By contrast, in Alberta, the Law Society has adopted a rule that states, “[a] lawyer must not lie to or mislead another lawyer.” The commentary to that rule states:

“[…] In no situation, including negotiation, is a lawyer entitled to mislead a colleague. When a lawyer (in response to a question, for example) is prevented by rules of confidentiality from actively disclosing the truth, a falsehood is not justified. The lawyer has other alternatives, such as declining to answer. If this approach would in itself be misleading, the lawyer must seek the client’s consent to such disclosure of confidential information as is necessary to prevent the other lawyer from being misled. The concept of "misleading" includes creating a misconception through oral or written statements, other communications, actions or conduct, failure to act, or silence.”10

The inevitable question that arises from the commentary is whether a lawyer, acting in Alberta, must disclose their “bottom line” settlement position if asked by the opposite party. While remaining silent is an option, the silence itself may signal to the other side that there is room to negotiate which may undermine the lawyer’s negotiating strategy or attempt to achieve the best result for his or her client. On the other hand, those advocating for reform in Ontario along the lines of what is now available in Alberta argue that “trustworthy bottom lines offered in accordance with [Alberta’s rule] will foster dispute resolution over prolonged

10 Alberta Code of Professional Conduct, Rule 7.2-2, available at http://www.lawsociety.ab.ca/docs/default-source/regulations/code.pdf

litigation.”11 The goal is to prevent lawyers from engaging in “puffing” during settlement negotiations on the theory that such tactics prolong the litigation beyond the point when a settlement could otherwise be reasonably achieved. In response to Alberta’s rules, some lawyers have taken to advising their clients not to disclose their bottom line settlement position to them. In that way, the lawyer can honestly advise the opposite party that the settlement position disclosed is, to the lawyer’s knowledge, the client’s “bottom line” offer.

To date, no other Canadian jurisdiction has ventured as far as Alberta in regulating and imposing ethical standards on the manner in which lawyers deal with one another in the negotiation context. However, as discussed in the following section, case law developments in other contexts suggest that there is a general duty of disclosure on negotiating parties as well as a duty to make reasonable efforts to reach an agreement. Negotiating parties should not engage in “receding horizon” or “faux impasse” bargaining, tactics commonly known in the collective bargaining world. Lawyers should take a page from the case law that has developed to help guide them in the ethical issues that arise when negotiating and/or settling disputes.

Case Law Developments

Courts have long recognized that a party has a duty to avoid misrepresentations in negotiations. In 978011 Ontario Ltd. V. Cornell Engineering Co.12 the Ontario Court of Appeal suggested that, in certain circumstances, the law will require parties who are negotiating to avoid misleading or omitting information from the other party. Such circumstances may arise where one party relies on the other for information necessary to make an informed decision, and the party in possession of the information has an opportunity, by withholding (or concealing) information, to bring about the choice made by the other party. In that case, the party who possessed the additional information was in a position of dependency with respect to the uninformed party.

In the world of collective bargaining, disclosure obligations are part of a statutory duty to bargain in good faith and to “make every reasonable effort” to make a collective agreement. The Ontario Labour Relations Board has held that an employer must reveal to a trade union any actual decision that may have a significant impact on the bargaining unit and

11 George Tsakalis, “Negotiation Ethics: Proposals for Reform to the Law Society of Upper Canada’s Rules of Professional Conduct”, (Toronto: Western Journal of Legal Studies, 2015), Vol, 5, Issue 4, pg. 9

12 (2001), 198 D.L.R. (4th) 615 (Ont. C.A,).

that the employer must answer honestly any questions by the bargaining unit as to whether initiatives are contemplated that would have an effect on the bargaining unit.13

Similar to the statutory context, an enforceable duty to negotiate in good faith can arise by contract. In considering an agreement to negotiate in good faith, courts will consider whether the parties intended that any breach of their commitment to negotiate in good faith was to have legal consequences.14 The issue not whether a court should enforce an obligation to negotiate in good faith as a matter of commercial morality but rather whether the parties themselves understood that they were contractually bound to the obligation to negotiate in good faith. In one case, the court went as far as implying such an obligation in the absence of an express covenant between the parties to negotiate in good faith on the basis that the obligation was a “necessary corollary” to a contractual relationship between the parties.15 However, the court was clear that in doing so it was not implying new substantive rights into the agreement.

Most important is the recent Supreme Court of Canada decision in Bhasin v. Hrynew establishing that good faith is a “general organizing principle” underlying contract law and declaring a new common law duty of honest performance. The duty of honest performance requires the parties to be honest with each other in relation to the performance of their contractual obligations. As stated by the Court, it “means simply that parties must not lie or otherwise knowingly mislead each other about matters directly linked to performance of the contract”.16

Some commentators have observed the incongruity of finding a duty of good faith in contractual performance but no duty of good faith in negotiations leading up to the contract to be performed. One such commentator noted:

Notwithstanding the courts’ general reluctance to find a duty of good faith in negotiating contracts, there may be a shift in judicial attitudes in light of the recognition of the organizing principle of good faith in contractual performance. It is possible that the basic level of honesty and good faith that commercial parties reasonably expect in contractual dealings could be found to apply (at least to some extent) to the process

13 Association of Management, Administrative and Professional Crown Employees of Ontario v. Crown in Right of Ontario, at para. 69, available at http://www.olrb.gov.on.ca/Decision/3711-09-U_AMAPCEO.pdf 14 Barclays Bank PLC v. Metcalfe & Mansfield Alternative Investments VII Corp., 2013 ONCA 494, 365 D.L.R. (4th) 15; Molson Canada 2005 v. Miller Brewing Company, 2013 ONSC 2758, at para. 108. 15 SCM Insurance Services v. Medisys Corporate Health LP, 2014 ONSC 2632 16 Bhasin v. Hrynew, 2014 SCC 71, at para. 81

of negotiating contracts. After all, the negotiation process is the very genesis of a contractual relationship. Can it really make sense that, once the parties sign up to a number of promises, they can reasonably expect honesty and fair play on each other’s part, but that these expectations are somehow absent while they are negotiating those promises?17

While the Court in Bhasin did not recognize a duty of honesty or good faith in the context of negotiations, parties do need to be mindful of conduct during negotiations that may be actively misleading or otherwise dishonest.18 A party cannot “knowingly mislead” another about facts material to their negotiations or allow the other party to persist in a mistaken understanding of fact to which that party has materially contributed. However, a party is likely not otherwise obliged to share relevant information unknown to the other party, or to correct a mistaken belief that he or she has not induced.19

The Standards required of a Court-Advocate

Having reviewed the rules and developments in the case law, the question remains: how far can a lawyer go in advocating for his or her client in a settlement negotiation? There is no question that, ethically, a lawyer should not lie or mislead the opposite party no matter the context or circumstances in which they find themselves. In addition, lawyers should not engage in negotiations where the parties’ positions are unreasonable, outrageous or entirely defeat the fundamental purpose of engaging in ADR which is to try to resolve disputes in a consensual fashion. As stated by the discipline committee of the Law Society of Upper Canada, “legal disputes should be resolved in an environment of calm and measured deliberation, free from hostility, emotion and other irrational or disruptive influences.”20

On the other hand, a lawyer seeking a settlement has an obligation to get the best deal for his or her client. Moreover, as all lawyers know, puffery and misdirection are commonplace in settlement negotiations. Misrepresentation can take multiple forms, including untrue statements, truthful statements that are incomplete, and the omission of information necessary to prevent misunderstandings by the other side. Some misrepresentations may be considered acceptable “puffing”. Others are clearly inappropriate. It is not always easy to draw the line, but a line must be drawn in a manner that is consistent with the standards and norms that lawyers currently apply when they appear 17 Neil Finkelstein et al, “Honour Among Businesspeople: The Duty of Good faith and Contracts in the Energy Sector”, 53 Alta. L. Rev. 2 18 Ibid. at para. 87 19 Shannon O’Byrne and Ronnie Cohen, “The Contractual Principle of Good Faith and the Duty of Honesty in Bhasin v Hrynew” (2015), 53 Alta. L. Rev. 1 20 2012 ONLSHP 94, at para. 65

court, make submissions and answer questions asked by a judge or other adjudicator. In the absence of such standards, the credibility and integrity of ADR in the eyes of the public will diminish.

These standards were best articulated in 1994 by former Chief Justice Brian Dickson of the Supreme Court of Canada.21 He stated the following as it relates to ADR and the standards that should permeate the processes that fall within its sphere:

[…] if the right kinds of cases are being channelled into ADR and if ADR functions effectively, then there is no question that it can play a useful role in promoting justice. But it seems to me that as we round out the judicial process with other settings in which to resolve disputes, we need to be extremely careful that the values that underlie those other settings are consistent with those that have evolved over many centuries and that lie at the heart of our judicial system. For it is these values which ensure that our system of justice is respected. If the average person facing one of the few disputes in his or her lifetime that calls for neutral third party intervention does not feel that ADR is delivering justice consistent with the norms that they have always understood to lie at the heart of the justice system in North America, then ADR may well cause more problems than it solves. The risk is that, poorly handled, ADR may undermine the very legitimacy upon which courts rely for their effectiveness. This is not a price that the judiciary can afford to pay.

In developing ADR techniques, I believe that we need to think long and hard before dispensing with these values. There may be instances in which complete openness or the full panoply of judicial procedure is unwarranted, but we should start with the assumption that these values are worth preserving and then go on to explore how they can best be reflected in each forum that is pointed to as an alternative to the traditional court based system. Obviously, it will be necessary to accommodate these values to the contours of the setting with which one is dealing. Careful thought must be given to the way in which they can best be respected rather than simply assuming that because one is no

21 Rt. Hon. Brian Dickson, “ADR, the Courts and the Judicial System: The Canadian Context” (1994) 28 L. Soc’y Gaz. 231, at pg. 236

longer in the courtroom these principles can be dispensed with. [emphasis added]

Based on the above, it is likely the case that, in Ontario, while lawyers and their clients are under no legal or ethical obligation to disclose their negotiating positions or “bottom line”, they must avoid any action or conduct that could be viewed as actively misleading the opposite party, whether by way of omission, partial disclosure or active misrepresentation. To the extent that a lawyer knows that the opposite party is operating under a mistaken understanding or belief in respect of a fact that materially impacts what may be a settlement, the lawyer should take reasonable steps to correct the mistaken understanding or belief. The standard that should be applied in such circumstances should be the same as the standard that the lawyer would apply if he or she were facing a judge or other adjudicator operating under a mistaken understanding or belief in respect of a material fact.

Ultimately, prudent lawyers should ensure that they live up to their best practices of acting with honesty and candour in negotiating settlements. This will not only assist their clients in the resolution of disputes, but will preserve and advance the lawyer’s reputation in the legal community as effective, forthright and trustworthy counsel, a reputation that we should all strive to achieve and maintain.

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