Before entering into a mediation, the parties to a dispute typically sign a written agreement relating to the mediation process. A common condition in these agreements is that the proceedings will be held confidential. Such terms are intended to ensure that, should the mediation fail, the statements by the parties and their lawyers cannot be disclosed in later litigation relating to the underlying dispute.

What happens, however, if the parties settle the dispute at the mediation but afterwards disagree on what the terms of the settlement were? Can they refer to what was said during subsequent litigation relating to whether a settlement was achieved at all and on what terms?

In May this year, the Supreme Court of Canada in Union Carbide Canada Inc. v. Bombardier Inc. addressed the question of whether the confidentiality terms in a mediation agreement were enforceable. If they were, one party would be unable to repeat what was said in the mediation in order to prove what the scope of the settlement was in a subsequent legal action to enforce the settlement.

The dispute between the two companies involved alleged defects in gas tanks that Union Carbide Canada supplied to Bombardier for use in its manufacture of water craft. Following a mediation, the parties were at odds over whether the settlement at the mediation was limited to one lawsuit in Quebec or if it extended to numerous claims in related actions in other venues over similar issues.

As a result of the disagreement over the scope of the settlement, no settlement funds were paid. Subsequently, Bombardier brought an application to court for an order confirming its version of the settlement. In doing so, it referred in affidavits to a number of disclosures and statements made between it and Union Carbide during the mediation leading up to the settlement.

Union Carbide objected to the disclosures and applied for an order striking out those parts of the affidavits which it said were protected from disclosure by the common-law rules relating to negotiation privilege as well as by the confidentiality provisions in the mediation contract.

Bombardier sought disclosure of the statements made on the mediation by relying on the common-law rule of “settlement privilege” which operates to permit the disclosure of statements made during negotiations that lead to a settlement agreement.

Settlement privilege does not permit the disclosure of statements made during an unsuccessful mediation or negotiation. If the parties fail to reach an agreement, the negotiations remain privileged and cannot be disclosed later to a court trying the underlying dispute. This rule enables the parties to engage in honest and frank discussions with the assurance that nothing they say will be held against them if there is no settlement and they subsequently find themselves in litigation on the unresolved dispute.

The situation is different, however, when the parties agree to a settlement but later disagree on the scope of the settlement. In such a case, statements made during mediation cease to be confidential between the parties according to the common law. If the parties want to extend confidentiality beyond the settlement to maintain confidentiality over statements even if a settlement is achieved, they must do so by agreement between them in the mediation agreement.

The standard form confidentiality clause in the mediation agreement used by the parties in Union Carbide stated that “anything which transpires in the mediation will be confidential [and cannot] be alleged, referred to or put into evidence in any legal proceedings,” including statements in documents created and exchanged during the mediation. The confidentiality clause went on to say that the mediator’s notes and “work product” would also be held confidential and not be subject to disclosure or be admissible in evidence in legal proceedings. The question was whether the mediation agreement operated to prevent the admissibility of negotiations in a subsequent action to enforce one party’s version of the settlement terms.

In this case, the Supreme Court of Canada decided that the settlement privilege rule–which allowed the parties to introduce evidence of negotiations in subsequent litigation to prove and enforce the settlement—applied. The terms of the mediation agreement were not specific enough to indicate that the parties had ever intended them to prevent admissibility of the negotiations in later proceedings to enforce the settlement agreement. On that basis, it decided that one party could, in subsequent court proceedings to establish its version of the scope of the settlement, set out in affidavits what had been stated and had transpired during the apparently successful mediation.

The Supreme Court then carefully analyzed the language of the confidentiality terms in the mediation agreement to see if the parties had contracted out of the settlement privilege rule. Simply put, it found that, based on the language used, the parties did not demonstrate a common intention to displace the common-law settlement privilege rule.

Therefore, there was nothing to prevent one party from producing evidence of communications made during the course of the mediation to prove its version of the scope of the settlement. Had the parties wished to, they could have agreed in the mediation contract to prevent disclosures even where there was a settlement—but the language used in the mediation did not go that far.

The Supreme Court decision in Union Carbide underscores the importance of drafting clear confidentiality provisions in a mediation contract where the parties wish to maintain absolute confidentiality even in later litigation as to whether a settlement was entered into and was enforceable on its terms. The Court refrained from deciding the question of whether such a properly drafted confidentiality clause in a mediation agreement could always prevent one party’s recourse to statements and representations made during the mediation.

Could an innocent party lead evidence of a fraudulent misrepresentation made during the mediation to show in subsequent litigation that the settlement be set aside? We will have to wait for another case to see what the Supreme Court says about this situation. The Supreme Court also left for another day the question of whether, if the common-law rule of settlement privilege was not displaced by a properly drafted confidentiality clause, a mediator could be compelled to give evidence as to his or her recollections of what was said in direct dealings with the parties during the mediation process.

This case underscores the practical desirability of immediately reducing the terms of any settlement to writing at the end of the mediation to avoid later misunderstandings as to what was agreed.