• Disclose Out-of-Court Agreements Immediately - Or Else!
  • September 16, 2011 | Author: Scott Brearley
  • Law Firm: Singleton Urquhart LLP - Vancouver Office
  • Out-of-court settlements during multi-party litigation
    As a matter of public policy, courts prefer parties to settle their disputes between themselves rather than before a judge. With multi-party litigation this means that individual parties often look for their own way out when achieving settlement of an entire action appears unattainable. But a recent Ontario Court of Appeal decision demonstrates that certain forms of settlement in multi-party cases can have attendant and serious risks if the settling parties don’t take care to keep the court and the other litigating parties fully and expeditiously informed.

    It was for just this reason that the Court stayed third and fourth party proceedings in Aecon Buildings v. Stephenson Engineering Limited. The case began when Aecon sued the City of Brampton for delays in the construction of an arts centre. Third and fourth party actions were then brought against, respectively, the architect, Page + Steele Incorporated, and engineers, Stephenson Engineering and others. But, before these actions began, Aecon and the City had informally agreed to enter into a “Mary Carter” agreement to settle their dispute. Only after legal proceedings started was this agreement put into writing.

    Definition of “Mary Carter” agreement
    A typical “Mary Carter” (named after a 1967 case in Florida) agreement has four main characteristics:
    1. The contracting defendant guarantees the plaintiff a certain monetary recovery and the exposure of that defendant is "capped" at that amount.
    2. The contracting defendant remains in the lawsuit.
    3. The contracting defendant's liability is decreased in direct proportion to the increase in the non-contracting defendants’ liability.
    4. The agreement is kept secret from the other parties involved in the lawsuit.

    “Mary Carter” agreements are used in Canada and the United States but are controversial. Critics claim that these agreements allow one plaintiff to buy support for its case at the expense of others. On the opposite side they can motivate more blameworthy defendants to settle early in an attempt to have a court infer that the remaining non-settling defendants are somehow more culpable.

    “Mary Carter” agreements change relationship among litigants
    Moreover, as a 2009 Ontario Court of Appeal judgment in Laudon v. Roberts (and quoted in the Aecon decision) stated:

    The existence of a [“Mary Carter” agreement] significantly alters the relationship among the parties to the litigation. Usually the position of the parties will have changed from those set out in their pleadings. It is for this reason that the existence of such an agreement is to be disclosed, as soon as it is concluded, to the court and to the other parties to the litigation.

    In Aecon, the agreement was disclosed to the appellant, Stephenson Engineering, before it was required to deliver its pleading but several months after Aecon and the City of Brampton reached their agreement (and only after the appellant requested it be produced). The Court of Appeal agreed with the judge in the Ontario Superior Court of Justice that there was no prejudice caused by delay in disclosing the agreement. But that finding did not end the matter.

    Such agreements must be immediately disclosed to all other parties
    The Court of Appeal concluded that these agreements must be immediately disclosed to all other parties to the litigation as well as to the court. “Such agreements,” the Court ruled, “change entirely the landscape of the litigation. . . . Here, the absence of prejudice does not excuse the late disclosure of the agreement. The obligation of immediate disclosure is clear and unequivocal.”

    Consequence of failure to disclose
    The failure to disclose in this case resulted in a stay of both the third and fourth party proceedings. Using forceful language, the Court justified its decision:
    Only by imposing consequences of the most serious nature on the defaulting party is the court able to enforce and control its own process and ensure that justice is done between and among the parties. To permit the litigation to proceed without disclosure of agreements such as the one in issue renders the process a sham and amounts to a failure of justice.

    The Supreme Court of Canada declined to hear an appeal of the Ontario Court's decision.