Settlement Privilege, Limitation Periods and the Meaning of Without Prejudice

Written By Michael P. Theroux, Peter D. Banks and Domenic J. Puglia

In Bellatrix Exploration Ltd. v Penn West Petroleum Ltd., 2013 ABCA 10, the Alberta Court of Appeal explains the key principles of settlement privilege and confirms the important protection this provides. The Court addresses significant issues including the scope of the protection, whether putting the "without prejudice" label on correspondence will on its own turn a document into a privileged one, and if there is any exception to settlement privilege in order to respond to a limitation period defence.

Background

The primary dispute in this case derived from a gas processing plant operated by Penn West, to which Bellatrix sent gas for processing. Bellatrix's predecessor had, in June 2007, asserted to Penn West that adjustments needed to be made to processing fees allocated to Bellatrix. Bellatrix asserted that the requested adjustments would result in a significant repayment to Bellatrix.

Much correspondence was exchanged between the parties, including letters, meetings minutes, and e-mails, with some of it being labelled as "without prejudice". By 2010, the discussions had not resolved the issues to Bellatrix's satisfaction. Bellatrix commenced an action for monies it alleged Penn West owed to it. Penn West defended, and pleaded that portions of Bellatrix's claims were out of time under the Limitations Act.¹ In response, Bellatrix pleaded that some of the correspondence between the parties constituted an acknowledgement of Bellatrix's claim and effectively extended the limitation period under the Limitations Act. It is this pleading that gave rise to the Court applications. Penn West argued that the correspondence that Bellatrix relied on as an "acknowledgement" of the claim was protected by settlement privilege and therefore inadmissible for any purpose, including for purposes of establishing an acknowledgement of a claim under the Limitations Act.

Penn West applied for a declaration from the Court of Queen's Bench on what aspects of the correspondence were covered by settlement privilege. A Master of the Court of Queen's Bench ruled the correspondence was indeed privileged, but it was still admissible for the limited purpose of allowing Bellatrix to respond to the limitations defence. An appeal of that decision to a Justice of the Court of Queen's Bench was dismissed. Penn West appealed to the Alberta Court of Appeal, with a corresponding cross-appeal by Bellatrix.

Discussion

Three main types of privilege are solicitor client privilege, litigation privilege and settlement privilege.² This case deals with settlement privilege, which provides that communications between the parties made in furtherance of settlement are protected and cannot later be used against that party during the litigation.

The generally accepted test for establishing settlement privilege is (a) the existence, or contemplation of a litigious dispute, (b) an express or implied intent that the communication not be disclosed to the Court if the negotiations fail, and (c) the purpose of the communication is to attempt to effect a settlement.

In this case, the Court of Appeal considered the scope of settlement privilege, including the underlying policies for granting the protection, and identified the following key principles:

• Settlement privilege is premised on the public policy goal of encouraging the settlement of disputes without the need to resort to litigation.
• The protection afforded by settlement privilege is intended to allow parties to freely discuss and offer terms of settlement in an attempt to reach a compromise.
• The protection given by settlement privilege ensures that admissions made during the course of settlement negotiations are not admitted into evidence. If it were otherwise, parties would rarely, if ever, enter into settlement negotiations.
• Communications must contain at least a hint of potential compromise or negotiation in order to trigger the privilege.
• Communications which are simply an assertion of rights, such as a demand letter, will not fall within the scope of settlement privilege.
• Once a communication satisfies the test for settlement privilege, the protection is broad in scope. The privilege will include communications that are reasonably connected to the negotiations.
• Settlement privilege belongs to both parties, and cannot be unilaterally waived by either of them. However, some of the generally recognized exceptions in which one party may unilaterally use otherwise privileged communications are: (a) to prevent double recovery, (b) where the communications are unlawful, such as threats or fraud, (c) to prove that a settlement was reached and its terms, and (d) to examine the "settlement posture of the parties" for the purpose of costs.

On the question of whether putting the "without prejudice" label on correspondence will turn a document into a privileged one, the Court of Appeal explained that:

• The "without prejudice" label is not determinative.
• It is the content of a communication – not the "without prejudice" label itself – that determines whether a communication is privileged.
• Putting the words "without prejudice" on correspondence will not turn a non-privileged document into a privileged one.
• Likewise, if the document is truly privileged, failing to include the words "without prejudice" will not matter.

In this case, the Court concluded that settlement privilege applied to the bulk of the correspondence between the parties and that an exception to the privilege did not apply. The Court did, however, conclude that two pieces of correspondence, which it described as simply statements of position and provided no hint of compromise, did not fall within the scope of the settlement privilege notwithstanding the "without prejudice" label.

On the question of whether the Court should waive privilege to permit a party to answer a limitations defence, the Court of Appeal concluded that the privilege should not be waived. The Court explained that "[t]o recognize an exception in this case would unnecessarily weaken and undermine the integrity of this important privilege, and other mechanisms, such as a standstill agreement, are available for such purposes."³ The Court concluded that "[w]e do not say that the privilege may never yield for this reason, though any proposed exception to settlement privilege must be justified on the basis that it promotes an alternative policy objective that clearly outweighs the underlying objective of the settlement privilege. There are no exceptional circumstances to justify doing so here."⁴

In the result, Penn West's appeal was allowed, and the orders of the chambers judge and Master were set aside.

Conclusion

Bellatrix Exploration Ltd. v Penn West Petroleum Ltd. is a welcome decision of the Court of Appeal which confirms the important principles of settlement privilege and the policy reasons for this protection. It also confirms the integrity of settlement discussions and ensures they cannot later be used against a party during litigation absent exceptional circumstances. This case also illustrates that although the "without prejudice" label might be useful as an indication of a party's intention when analyzing communications, the label itself is not determinative of privilege. The "without prejudice" label alone cannot protect a piece of correspondence. Most importantly, this case strongly suggests that, as a best practice, parties ought to avail themselves of mechanisms, such as standstill agreements or tolling agreements, in order to stop the limitation clock in situations where the expiry of a limitation period is a potential issue.

Notes

1. Limitations Act, RSA 2000, c L-12.
2. Other generally-accepted types, or classes, of privilege include spousal privilege, the privilege protecting third-person records in criminal cases, the privilege protecting an informant's identity, and public interest immunity (which is not a privilege per se, but has been referred to variously in the past as parliamentary privilege or Crown privilege). The courts also have a limited power to establish "case-by-case" privilege where the circumstances so provide.
3. Para. 39.
4. Ibid.