Introduction
When should the existence of a partial settlement agreement be disclosed?
What elements of a partial settlement agreement must be disclosed?
Do partial settlement agreements require court approval?
Comment
Introduction
Litigation is an expensive process; litigation involving multiple defendants even more so. One obvious way of reducing litigation costs is by entering into settlement agreements with one or more defendants. These agreements often take the form of 'Mary Carter' or 'Pierringer' agreements. While both of these agreements are partial settlement agreements, they have different characteristics.
In a Mary Carter agreement, the plaintiff settles with one or more, but not all, of the defendants and the action continues against the non-settling defendants. The plaintiff receives a specific sum of money regardless of the outcome at trial and the settling defendant's liability is capped at this amount. The settling defendant remains in the lawsuit and the plaintiff agrees not to pursue the non-settling defendants for any amount beyond their several liabilities in order to ensure that the settling defendant is subject to no cross-claims for contribution and indemnity from the non-settling defendants. In a true Mary Carter agreement, the plaintiff will agree to decrease the amount to be paid by the settling defendant in direct proportion to any increase in liability of the non-settling defendants.(1)
In a Pierringer agreement, the settling defendants are removed from the action by the plaintiff agreeing to limit its recovery against the non-settling defendants to their several liability. Generally, the plaintiff will also indemnify the settling defendants against any claims over by the non-settling defendants, and the settling defendants will cease to pursue their cross-claims against the non-settling defendants.(2)
In entering into these partial settlement agreements, several issues arise:
- When should the existence of a partial settlement agreement be disclosed to the non-settling defendants and the court?
- What elements of the partial settlements agreements must be disclosed?
- Do the partial settlement agreements require court approval?
When should the existence of a partial settlement agreement be disclosed?
Procedural fairness dictates that partial settlement agreements be disclosed "as soon as the agreement is made".(3) The non-settling defendants must be advised immediately of the partial settlement agreement, as such an agreement may have an impact on their litigation strategy. The court too must be advised immediately in order to control its own process in the interests of fairness and justice to all parties.(4) In a recent decision the Ontario Court of Appeal held that while it is open to parties to enter into partial settlement agreements, "the obligation upon entering such an agreement is to immediately inform all other parties to the litigation as well as to the court".(5) The rationale behind immediate disclosure is that such agreements alter the relationship among parties to the litigation. After the execution of such an agreement, it is likely that the position of all parties to the proceedings will have changed from those set out in their pleadings. Such agreements change the landscape of the litigation.(6)
What elements of a partial settlement agreement must be disclosed?
The reason behind immediate disclosure on executing such agreements is to ensure that the requirements of procedural fairness are met. Related to timing of disclosure is the content of such disclosure. The Alberta Court of Appeal has held that the terms of such an agreement, although not necessarily the amount of the settlement, should be disclosed.(7) However, the issue of whether amounts must be disclosed is to be considered by the Supreme Court of Canada in March 2013 in Sable Offshore Energy Inc v Ameron International Corp, a decision appealed from the Nova Scotia Court of Appeal.(8)
In Sable Offshore Energy Inc, the applicants commenced three actions against multiple defendants arising from paint failures on their offshore and onshore facilities. The respondents were among the defendants in the action. Some of the defendants entered into Pierringer agreements with the applicants. The effect of the Pierringer agreements was to allow the settling defendants to withdraw from the litigation, leaving the respondents as the remaining defendants responsible only for their proportionate share of the loss.
The respondents requested disclosure of the settlement amounts, which was denied by the motions judge. In denying disclosure, the motions judge reasoned that while settlement amounts were relevant to pre-trial preparation, that relevance did not overcome the importance of encouraging settlement, and that disclosure could discourage parties from entering into settlement negotiations. The court of appeal allowed the appeal and ordered disclosure of the settlement amounts. In reversing the motions judge, the court of appeal focused on the principles of a fair trial. The court was of the view that defendants are entitled to know the case that they must answer, including the potential value of the claim.(9) According to the court of appeal, the value of the claim forms an important part of pre-trial preparation, settlement positions and trial preparation. The court of appeal ordered the disclosure of the settlement amount to the non-settling defendants (but not to the trial judge). The court of appeal left the issue of whether the settlement amounts were admissible at trial to be determined by the trial judge.(10)
Although partial settlement agreements must be disclosed immediately on being executed, there remains a lack of clarity with respect to what the actual content of the disclosure must be. The conflicting decisions of the Nova Scotia Supreme Court and the court of appeal do not aid the analysis. The forthcoming decision of the Supreme Court of Canada should clarify what must be disclosed in order to ensure that procedural fairness between the parties is maintained.
Do partial settlement agreements require court approval?
A recent decision of the Ontario Superior Court of Justice in Rains v Molea made clear that it is not necessary that a party to a partial settlement agreement seek formal court approval of the settlement in every instance.(11) However, Rains also suggests that where the non-settling defendant impugns the fairness of the settlement agreement, it is necessary that the court, through its inherent jurisdiction, consider the fairness of that agreement.(12) In this respect the court stated that:
"[T]he overarching need to ensure public confidence in the administration of justice is the reason why the court must review the fairness of a partial settlement of a lawsuit and its consequences. Public confidence in the administration of justice is enhanced when there is a partial settlement of a lawsuit by ensuring the integrity of the court's process."(13)
The court will support partial settlement agreements where the fairness of the settlement is unchallenged and prejudice arising from the full implementation of the settlement has not been alleged or shown. A settlement in these types of case cannot be upset unless there is just and substantive cause.(14)
Comment
In addition to hedging risk, partial settlement agreements are a useful means to minimise litigation costs. Such agreements are likely to be encouraged by an increasingly overburdened court system. It is clear that once such an agreement is entered into, it must be disclosed immediately to all parties and to the court.
The content of the disclosure and, in particular, whether settlement amounts must be disclosed remain unclear. Conflicting decision from the Nova Scotia Supreme Court and the court of appeal will give the Supreme Court of Canada the opportunity to provide practical advice in this regard to counsel engaged in multiparty settlement discussions.
The recent decision in Rains provides some useful clarity on the requirement for court intervention in matters involving partial settlements. Settling parties must be aware that while they do not need to obtain court approval, their settlements may be subject to court-imposed terms if unfairness to the non-settling parties can be shown.
For further information on this topic please contact Douglas BB Stewart, Rahim Punjani or Christina Porretta at Fraser Milner Casgrain LLP by telephone (+1 416 863 4511), fax (+1 416 863 4592) or email ([email protected], [email protected] or [email protected]).
Endnotes
(1) Moore v Bertuzzi, 2012 ONSC 597 at para 41. The origin of the Mary Carter agreement can be traced back to Booth v Mary Carter Paint Co, 202 So2d 8 (Fla Dist Ct App 1967). In addition to the features set out above, the District Court of Florida, Second Circuit also stated that typically a Mary Carter agreement is kept secret in that jurisdiction.
(2) Moore at para 41. Pierringer agreements derive their name from the Wisconsin case of Pierringer v Hoger, 124 NW 2d 106 (Wis SC 1963).
(3) Pettey v Avis Car Inc, 1993 CarswellOnt 425 at para 32 (Gen Div).
(5) Aecon Buildings v Brampton (City), 2010 ONCA 898 at para 13; leave to appeal refused: (2011), 328 DLR (4th) 488.
(6) Laudon v Roberts (2009), 308 DLR (4th) 422 (Ont CA) at para 39; see also Aecon at paras 13-15.
(7) Amoco Canada Petroleum Co v Propak System Ltd, 2001 ABCA 110 at para 40.
(8) 2011 NSCA 121 [Sable Offshore]; leave granted on June 28 2012, SCC Docket# 34678.
(9) Sable Offshore at para 34.
(10) Sable Offshore at para 52.
(11) 2012 ONSC 4906 at para 15 [Rains]. This motion was brought by the non-settling defendant, Molea. FMC acted for the settling co-defendant in this action and motion. The motion was dismissed and the settlement upheld.
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