What is Settlement Privilege & What are the Exceptions?

By Chyanne Sharma, BC Family Lawyer

Settlement negotiations are an integral part of the legal process, allowing parties to explore resolutions without resorting to litigation. Settlement privilege is a legal principle that protects the confidentiality of communication between parties during the negotiations. The purpose of this privilege is to encourage open and honest dialogue by ensuring that anything said or written cannot be used against the parties in court if the negotiations fail and litigation ensues. This allows parties to freely discuss potential settlement terms without fear of admissions or offers being used as evidence in subsequent legal proceedings. However, like any legal principle, settlement privilege is not absolute and is subject to certain exceptions.

When does Settlement Privilege Apply? 

In general, settlement privilege applies in the following circumstances:

  1. Mediations;
  2. Collaborative divorce processes;
  3. Presenting offers, including communications that are marked “without prejudice”; and
  4. Negotiations.

If parties attend mediation, with either a private mediator or a family justice counsellor, anything that parties discuss within that scope of service is privileged and cannot be used in court as evidence. Furthermore, if parties choose to enter into a collaborative family law process, then anything that is said is also privileged as the main purpose of the collaborative family law process to encourage and reach settlement.

"Without prejudice" is a legal term used in negotiations to indicate that the communication cannot be used against the authoring party in later proceedings. However, simply labeling a communication "without prejudice" does not automatically grant it settlement privilege. The correspondence must satisfy a two-step test to identify whether it falls within the scope of settlement privilege:

1. There must be a dispute or a potential dispute between the parties which could be resolved through litigation; and

2. The purpose of the communication must be to attempt a settlement of that dispute.

Additionally, if an offer is provided and the correspondence is not marked “without prejudice”, it does not mean that it is not privileged, if it still passes the two-step test above, it is still covered by settlement privilege.

The Exceptions to Settlement Privilege

Pre-trial and pre-litigation settlement negotiations enjoy a privilege that extends throughout the entire negotiation process. When the purpose of communication is to achieve a settlement, it is generally considered privileged, promoting open dialogue. However, the case of Progressive Holdings Inc v. Crown Life Insurance Co., provides two exceptions to this rule. First, once an agreement is reached, there is no need for privilege to continue. Second, if litigation arises over whether a settlement was reached, communications relevant to that issue cannot be privileged.

If there is a document that falls within one of these exceptions, it can be used as evidence despite meeting the test of settlement privilege. The generally recognized exceptions to settlement privilege have been identified in various court decisions, some of which include:

  1. Dispute over agreement: If one party claims an agreement exists while the other party disputes it, the communications regarding the agreement may not be privileged.
  2. Ambiguity of agreement: When the parties cannot agree on the interpretation of an agreement, the communications related to its meaning may lose their privileged status.
  3. Threats and fraud: Communications that involve threats or fraudulent behavior to obtain a settlement are not protected by privilege.
  4. Illegal actions: Communications that involve illegal activities or intentions to commit criminal acts are not privileged.
  5. To prevent double recovery: if a plaintiff seeks excessive compensation, an exception to settlement privilege might be established to prevent over-compensation.
  6. In Claiming Costs: if an offer was provided and rejected, the correspondence and be provided to the courts to seek costs where a party is successful at trial.

The Supreme Court of Canada also released its decision in the case of The Union Carbide Canada Inc. v. Bombardier Inc. where it outlined another exception to the principle of settlement privilege. The court held that when necessary to prove the existence of settlement terms, privilege will not apply to discussions and correspondence leading to the settlement. While without prejudice communications are protected, the privilege only applies to pre-settlement negotiations and communication, this means that it does not apply to final settlement documents.

Reasons to Set Aside Privilege

In some cases, there may be compelling reasons to set aside settlement privilege. For example, if a party reaches a settlement with one defendant but continues to pursue damages against other parties, access to the settlement-related documents may be necessary to prevent double recovery. However, in the absence of a compelling reason, settlement privilege should be maintained.

The principle of settlement privilege is based on a public policy objective of encouraging dispute resolution without litigation. It allows parties to freely discuss and propose settlement terms to reach a compromise. The implicit admission of liability often involved in settlement negotiations ensures that these communications are generally not admitted as evidence. This protection fosters a willingness among parties to engage in settlement negotiations. However, settlement privilege is not an absolute rule and can be outweighed by competing public policy interests. For instance, in such cases, a competing public interest outweighs the privilege. The exceptions to settlement privilege must be construed narrowly to strike a balance between the need for confidentiality in negotiations and other important policy objectives.

Settlement privilege plays a crucial role in facilitating open and honest discussions during pre-trial negotiations. By protecting the confidentiality of these communications, parties are encouraged to explore settlements and resolve disputes without resorting to litigation. While settlement privilege is generally robust, it is not without exceptions. These exceptions are limited and carefully defined, serving as safeguards when competing public policy considerations outweigh the privilege. Ultimately, the delicate balance between encouraging settlements and promoting justice underscores the importance of settlement privilege in the legal landscape.

Our experienced team of lawyers and mediators at Crossroads Law are well versed in the nuances of settlement privilege and its exceptions. We have the necessary expertise to guide you through sensitive settlement negotiations during your separation or divorce, always ensuring your interests are protected. To gain a deeper understanding of how settlement privilege might affect your situation, schedule a free 20-minute consultation with any one of our experienced lawyers or mediators.

The information contained in this blog is not legal advice and should not be construed as legal advice on any subject. The information provided in this blog is for informational purposes only.