The rule of settlement privilege and its exceptions

^{Settlement privilege has some exceptions; Credits: by taezhniy31 – stock.adobe.com} 

While confidentiality and secrecy may be usual in our everyday lives, the same goes for the law, as in the rule on settlement privilege. But as with any other information, and in keeping with public interest, there are instances when parties can be compelled to divulge these confidential matters. 

In this article, we’ll discuss the rules under this privilege and its exceptions. This article can be used by lawyers who want to know more about this privilege, or for their clients as an educational piece. 

What is settlement privilege? 

Settlement privilege is a legal doctrine under Canada’s common law rule of evidence. This privilege protects any form of communications made in a negotiation of a settlement from being used against any of the parties involved. 

In other words, this privilege prohibits parties in a settlement agreement from using any information and statement related to the settlement process in a separate litigation.  

The privilege is also called the ‘without prejudice’ rule. This means that when a party says or writes something, it is without prejudice to their stand that they’re not in the wrong and are therefore not liable. 

When this privilege is violated, it would render the communication being offered an inadmissible piece of evidence. This is because common law dictates that the privilege creates a “prima facie presumption of inadmissibility.” 

The video below explains settlement privilege or without prejudice rule in a nutshell: 

For more information about this privilege, contact one of the best personal injury lawyers in Canada as ranked by Lexpert. 

Objectives of settlement privilege 

Settlements are prevalent in civil cases, especially with personal injury cases. Before going through lengthy and costly litigation proceedings, both parties usually sit at a table and talk about it among themselves to resolve the issue. 

During these negotiations, this doctrinal privilege is there to:  

• ensure that parties can freely negotiate, without any fear of retaliation from the other party 
• encourage a genuine conversation, making the whole process easier for them to reach a settlement 
• promote settlement in the justice system, especially if the law allows the issue to be resolved 

General rule: When does settlement privilege apply? 

With settlement privilege as the general rule, every communication is protected in a settlement process (e.g. negotiations) that genuinely tries to resolve a dispute.  

Below are the ways on how this privilege applies: 

• whether oral or written: protects anything made during the negotiations, whether made in writing or orally, and whether found in a legal document or other forms of correspondence 

• applies to future cases: protected communications cannot be disclosed in another civil or criminal case involving the same or related issue, even if through a discovery 

• applies to contents: the privilege protects statements not only that are made throughout the settlement, but also those that are found in the settlement or compromise agreement itself 

• marked communications: applies to communications that are marked “without prejudice” (although common law says that it can apply even if marked “with prejudice” in certain cases) 

• whether settled or not: applies to admissions, offers, and compromises, regardless of whether a settlement or compromise was reached after the negotiations or not 

A good rule of thumb is that the rule applies to all kinds of alternative dispute resolution (ADR) methods. Whether court-mandated or not, these methods include:  

• negotiations 
• mediations 
• arbitrations 
• divorce processes 

The privilege applies to a wide range of legal practice areas, such ADR methods in: 

• criminal procedures (e.g. in plea negotiations) 
• commercial disputes 
• expropriation proceedings 
• family and divorce cases 
• labour and employment cases 

Here’s another video that explains settlement privilege in Canada: 

Know more about this privilege by reaching out to a Lexpert-ranked best personal injury law firms in Canada. 

Test for application of settlement privilege 

Aside from the test established by Sable (discussed below), the test on the applicability of the privilege is stated in Hollinger Inc. (Re), 2011 ONCA 579. The Court said here that a “without prejudice” communications will be protected from disclosure if it’s made where: 

• there is a litigious dispute 
• it's made with the express or implied intent that it would not be disclosed in a legal proceeding, even if the negotiations failed 
• its purpose is to attempt to make a settlement 

Using the words “without prejudice” 

In relation to communications that are marked with the words “without prejudice,” it’s not the label that would be controlling all the time. This is well-settled in Bellatrix Exploration Ltd. v. Penn West Petroleum Ltd., 2013 ABCA 10. 

Just like other documents that are presented in court as evidence, it is the content — and not the marking — that would matter. Hence, whether a correspondence is protected by settlement privilege or not ultimately depends on its content. 

At the same time, marking a document “with prejudice” automatically disqualifies it from being protected by the privilege. Although marking documents with these words is still a good legal practice. 

Exceptions: When would settlement privilege be disregarded? 

As held in the case of Sable Offshore Energy Inc. v. Ameron International Corp., 2013 SCC 37, settlement privilege has its exceptions, as with other class privileges.  

To come within the privilege’s exceptions, Sable says that the “defendant must show that, on balance, a competing public interest outweighs the public interest in encouraging settlement.” In subsequent cases, the Courts usually use this pronouncement in Sable to determine whether the privilege applies or not. 

In any case, here are the exceptions to the settlement privilege based on common law and other rules of evidence: 

1. When both parties consent or waives the privilege 
2. When it’s used to prove overcompensation 
3. When proving the existence or scope of a settlement 
4. When settlement is reached 
5. When there’s illegality, bad faith, and other instances 

We’ll discuss each of these exceptions below. 

1. When both parties consent or waive the privilege 

Settlement privilege aims to protect a party who is unwilling to submit a communication to the court, whether its contents are true or not. However, there’s nothing more to protect if the parties themselves consent that part of the negotiations be disclosed to the court. 

The same goes for a situation when a party who is intended to be protected by the privilege waives it. As with any other personal right or privilege, the privilege can be ignored by the very party who can invoke it. 

For this consent or waiver to be valid, it’s important that: 

• it is made in writing or before the open court where the case is being tried 
• it is done in a clear and unequivocal manner, and must not be vitiated 

2. When it’s used to prove overcompensation 

When a defendant is sued for damages, one usual defense to dismiss the case is double or overcompensation. To prove this, the defendant would need to produce evidence that the plaintiff already received something in the past for their injuries. They would then offer a previous settlement they entered into with the plaintiff. 

But is this covered by the settlement privilege, which will now bar the defendant from offering the settlement as evidence? 

This question was settled in the case of Burwash v. Levy, 2021 ONSC 7196. Here, the privilege was not applied because of the plaintiff’s possible double recovery.  

Applying Sable, the Court said that “[p]reventing a plaintiff from being overcompensated has been recognized as a countervailing public interest that may outweigh the public interest in encouraging settlement.” 

In weighing that the public interest in preventing overcompensation or double recovery should prevail, the Court decided in favour of the defendants in Burwash. The plaintiff was then ordered to produce the relevant documents that relate to the earlier settlement. 

3. When proving the existence or scope of a settlement 

Another exception to the privilege is when the production of the document or its contents is necessary to prove its existence or scope. This is the ruling of the Court in the case of Association de médiation familiale du Québec v. Bouvier, 2021 SCC 54. 

In this case, it is held that confidentiality under the privilege can be lifted “to prove the existence or scope of a settlement arising from mediation.” It added that this exception applies “where an agreement is not entered into until after mediation.” 

However, as a caveat to this exception, the Court said that “the exception applies only to what is necessary to prove the existence or scope of the settlement.” 

While it can be argued that this exception defeats its purpose, or as any other exceptions to the privilege, the Court held otherwise: “The exception serves the same public interest as the privilege itself, that is, the promotion of settlements.”  

This exception is also necessary if any of the parties would need to prove the terms of their agreement, after they’ve agreed to it. Similarly, if the parties cannot agree to the interpretation of these terms, the communications exchanged during the negotiations can be reproduced in court. 

4. When settlement is reached 

Again, the main goal of the privilege is to protect the parties from whatever they’ve said or written during the settlement negotiation. As such, the privilege will not apply when a settlement is already reached. 

The case that expresses this exception is Progressive Holdings Inc. v. Crown Life Ins. Co. et al., 2005 MBQB 175. Here, the Court laid down two exceptions to the settlement privilege: 

• where an agreement is reached: the Court said that there is no need for the privilege to continue because the dispute was already resolved 

• where the issue in a litigation is if a settlement was reached: similar with the later pronouncement in Bouvier; here, the Court held that the communications relevant to the determination of this issue cannot be privileged 

In this case, the material issue in litigation is whether the Progressive’s (the plaintiff) claim against Enerplus (the defendants) was settled. Defendant asserts that it was, while the plaintiff says otherwise. To resolve this issue, the Court decided to compel Progressive to produce the documents in question. 

5. When there’s illegality, bad faith, and other instances 

It’s basic in law that illegal acts and those that are tainted with bad faith are not protected by any privilege, nor does it prevail over any right. This too applies to settlement privilege. 

There are some instances where this privilege cannot be used to cover up any illegality or bad faith. These are discussed in the case of Meyers v. Dunphy, 2007 NLCA 1.  

Aside from the other exceptions already discussed above, Meyers put forward the following exceptions to settlement privilege: 

• if the settlement should be set aside on the grounds of misrepresentation, fraud, and undue influence during the negotiations 

• if a statement made by one party to the negotiations gives rise to estoppel on their part, where the other party acted on such statement 

• if the protection would serve as a protection to perjury, blackmail, or other unambiguous impropriety, but only if there’s clear abuse of a privileged occasion 

• to explain a party’s delay, or apparent acquiescence, in responding to an application to strike out a proceeding for want of prosecution 

• to prove that the claimant had acted reasonably to mitigate their loss 

Application of the privilege in labour cases 

The illegality exception also applies to wrongful dismissal cases, such as in a severance offer. Generally, this is protected by the privilege. However, as explained in Ramos v. Hewlett-Packard (Canada) Co., 2017 ONSC 4413, it may be offered in court: 

• to prove that the defendant-employer has pleaded that the plaintiff-employee was dismissed for cause 
• where the offer of settlement is evidence of the claim for mental distress by a plaintiff-employee 

Settlement privilege: protecting parties in a negotiation 

Through the assurance that communications will be maintained confidential, entering a settlement or compromise is made easier with the rule on settlement privilege. However, counsels and litigants must be aware of the instances when this rule cannot apply. Although these exceptions do not render the rule useless, knowing them can help lawyers guide clients in resolving a dispute through the easier out-of-court ADR methods. 

Check out our page on The Lexpert Special Edition: Litigation for more resources on litigation matters, aside from settlement privilege.