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Settlements between some, but not all, parties to a dispute

By Dan Parlow (posts)

A seemingly counter-intuitive process has just come a bit closer to being the final law of Canada.

We often act for clients who are asserting or defending claims against multiple parties.  These can arise in a myriad of situations, for instance:

  • claims by purchasers of land may target the buyer’s lawyer and realtor as well as the vendor
  • developers’ construction claims may assert wrongdoing by contractors, subcontractors, engineers and architects
  • actions alleging securities misrepresentations may target the issuer, the issuer’s principals, and the underwriters

In most cases the various defendants will have very different legal positions and, just as importantly, the prospects of recovery against deep-pocketed or insured defendants will be drastically different than against others.

It only makes sense, therefore, that settlements between some, but not all, parties to the dispute should be explored by all parties.    For instance:

  • a defendant whose potential liability is minimal may wish to pay a relatively small sum early  to avoid being entangled in the morass of a lengthy dispute;
  • a plaintiff may find it advantageous to collect some money from one defendant to fund its claims against the others;
  • even where multiple defendants have similar prospects of liability, differences in personality or in the availability of funding may dictate completely different responses to the litigation.

Recently, the Ontario Court of Appeal ruled that settlements involving some but not all parties – sometimes called “Mary Carter agreements” – must be immediately disclosed to level the playing field between the remaining parties: Aecon Buildings, a Division of Aecon Construction Group Inc. v. Stephenson Engineering Limited (2010 ONCA 898, 328 D.L.R. (4th) 488)    There has been considerable buzz about this ruling and whether it will be applied in British Columbia.

Arguments in favour of immediate disclosure focus on the notion that a plaintiff shouldn’t recover more than the total amount of its losses and costs (except in rare cases involving punitive damages).  People also insist that if a defendant claims “over” against a third party, that party should know whether the defendant is truly fighting the primary claim or is whether its position is a mere fiction.

Consider, for example, the common scenario where a developer claims its prime contractor provided deficient building and the contractor claims that fault actually originated in misleading architectural plans and/or deficient structural steel of its subcontractor.     Even if – leaving aside the possible architect’s negligence – the owner recognizes the source of the deficient steel, it must claim against the party it has a direct contract with.     The contractor wishing to wash its hands of the dispute may pay a small sum upfront and pass on to the owner any recovery against the subcontractor.

Another scenario is that the owner and contractor may be related parties such that the owner’s shareholders will not, in reality, gain anything unless blame can be passed further down the line to the subcontractors.   In this case, it may be argued that the subcontractor should be entitled to be informed of any “sweetheart deal”.

On the other hand, to encourage settlements and minimize litigation there is a strong argument that disclosure of such settlements to remaining parties should not be required, at least until it is time to enter judgment.   One reason concerns secrecy – the settling defendant will almost always wish to protect its own name through a confidentiality clause; if secrecy cannot be assured it will often not be willing to settle.  Another argument is that commercial parties are best left to settle their own disputes in their own ways, without having the court as a big brother.  There is nothing stopping the remaining parties from asking whether there has been a settlement with some parties, and  at what price.

In my own experience, and in that of other litigators I have spoken with on this matter,  settlements of entire cases often follow after partial settlements are made, even if not yet disclosed.  The more  It follows that partial settlements should be encouraged on whatever terms, so long as there is no deceit or subterfuge involved.

It does not appear that the Supreme Court of Canada shares my view on this.  Today in an interim ruling on the Aecon appeal the court moved a step closer to endorsing the requirement for immediate disclosure: http://scc.lexum.org/en/2011/2011scc33/2011scc33.html .

Once this appeal is finally heard and judgment rendered, we will know whether the immediate disclosure principle applies in BC.  In the meantime, parties wishing to enter into “Mary Carter” settlements must beware.  Plaintiffs in particular must know that if they fail to immediately disclose such a settlement to the remaining parties to the dispute, they may well face a stay of the entire proceedings.   For this reason, confidential partial settlements are not currently part of the landscape in British Columbia.

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