Confidentiality Clauses and Privilege: A Delicate Balance

May 12, 2014

Parties to a mediation have a wide latitude to contractually shape the extent of confidentiality that applies, and even may exclude exceptions to settlement privilege, the Supreme Court of Canada recently held in Union Carbide Canada Inc v Bombardier Inc, 2014 SCC 35 [Union Carbide].

In Union Carbide, the parties to a private mediation signed the mediator's standard-form mediation agreement containing a confidentiality clause. That clause established a blanket ban on alleging, referring to or putting into evidence in any proceeding anything that transpired in the mediation. After the mediation, the parties disagreed on whether they had reached a deal, and, if they had, what the terms were. Did the confidentiality clause really prevent the party who thought it had an agreement from referencing what happened at mediation to make its case?

Answering this question required the Supreme Court to address the interaction between confidentiality clauses and the common law evidentiary rule known as "settlement privilege", which also protects the confidentiality of settlement discussions.

Settlement privilege, also known as the "without prejudice" rule, protects communications exchanged by parties in the process of trying to settle litigation from being disclosed without the consent of the parties. It applies even if no statute or contract assures confidentiality. But one of the limited exceptions to settlement privilege is that a communication "that has led to a settlement will cease to be privileged if disclosing it is necessary in order to prove the existence or the scope of the settlement" (para 35).

The potential for the scope of a contractual confidentiality clause to differ from that of settlement privilege required the Supreme Court to consider, first, whether parties could agree under any circumstances to oust the settlement exception to settlement privilege, and, second, whether the parties in this specific case had done so.

The Supreme Court held that parties are free to agree to confidentiality clauses that differ from the ordinary scope of settlement privilege, even to the extent of barring themselves from having recourse to communications made in the course of mediation to prove the fact of a settlement agreement or its terms. The "will of the parties" in this regard should "presumptively be upheld absent such concerns as fraud or illegality" (para 49).

However, it will not be presumed that a confidentiality clause in a mediation agreement "automatically displaces settlement privilege, and more specifically the exceptions to that privilege that exist at common law" (at para 3). Where parties have agreed to greater confidentiality "in order to foster frank communications and thereby promote a settlement", it cannot be presumed that they also intended to "displace an exception to settlement privilege that serves the same purpose" (para 54). A specific contract might effect this result, but it would have to be clear in its expression of this intent (ibid). Absent an express provision to the contrary, it may be "unreasonable to assume that parties who have agreed to mediation for the purpose of reaching a settlement would renounce their right to prove the terms of the settlement" (para 65).

Whether in any given case the parties intended to displace settlement privilege falls to be determined in accordance with the applicable principles of contractual interpretation. As Union Carbide arose in Québec, the Supreme Court applied that province's law of contractual interpretation. In the result, the Court held that the parties had not intended to sign away the potential to prove that they had reached a settlement. They had entered their mediation contract with the express purpose of trying to reach settlement, and it was a standard-form contract provided by the mediator that they both signed without modification.

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