‘Secret’ tools and traps to keep in mind in settlement negotiations

Updated June 07, 2024

When a civil claim arises — such as a personal injury claim from a car accident — a common outcome is settlement negotiations. This is to prevent going to court, which can be stressful from the perspective of possibly litigating parties.

While this article is for lawyers who are searching for tips when doing negotiations, this is also for their clients, who may wonder if settlement negotiations are for them or not.

What are settlement negotiations?

Before we uncover what these tools and traps of settlement negotiations are, let’s first see

• how they are built
• what the laws around it are
• what the implications are

A settlement negotiation is a process when two parties who have different interests, or when one party has a claim over the other, discuss a possible solution to their dispute. It is also called an out-of-court settlement, or an extrajudicial settlement, because the parties themselves try to resolve the dispute, rather than submitting it to the court.

Its goal is for the parties to reach a settlement agreement and have it written in black and white, which is legally binding between the parties.

If the negotiations are mandated by the court, another goal is to have it registered with the court to prevent further litigation. This agreement may also include the legal remedies of a party when the other party breached their obligations or violated any of its terms.

Negotiations are also one of the modes of alternative dispute resolution (ADR), along with mediation and arbitration. Compared to the other two modes, negotiations are done only by the parties (or their agents, lawyers). However, mediation and arbitration need a neutral third-party intervention (e.g., mediator, arbitrator, or panel of arbitrators).

Here’s a short explainer on factors to consider during settlement negotiations, in the context of a personal injury case:

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Characteristics of negotiations

Compared to court proceedings, or to arbitration and mediation, the characteristics of negotiations may or may not be like these other legal methods. Below are some examples of these characteristics of negotiations:

• voluntary: just like the other ADR methods, settlement negotiations are voluntary, and one party cannot compel the other to negotiate with them if they’re not interested and they want to bring the matter before the court
• casual: settlement negotiation is a more informal method, as there are no rules to follow, while arbitration and mediation do have some procedures to follow (although not like in a court setting)
• confidential: all ADR methods are confidential; in addition, any communication shared by parties with each other are privileged and cannot be even used in a trial should the negotiations fail, and a case is filed in court
• faster and cheaper: although it’s on a case-to-case basis, negotiations are relatively faster than the other methods because there’s no fixed procedural rules to follow, and parties may only spend a small amount during its course

These are also the reasons why people would really want to explore settlement negotiations first before going to court.

Canadian laws on settlement negotiations

Aside from the other related laws to settlement negotiations mentioned below, there are a lot of laws that govern settlement negotiations in Canada. Although there's no direct federal law that deals with this, parties to a settlement negotiation may want to consider several statutes.

In any case, here are some of the legal areas that may affect negotiations, including the enforcement of the settlement agreement:

• civil or criminal laws: any contract, such as a settlement agreement, should not violate any civil or criminal statutes
• privacy laws: statutes on privacy and confidentiality apply to the information exchanged during negotiations, and may even cover the agreement itself
• laws on torts: the amount of settlement can also use the precedents set by the laws on torts and damages

Usual cases for settlement negotiations

So, what are the issues that can be negotiated? In most cases, these involve civil claims, since criminal offences may not be settled. It is also those whose amounts claimed are relatively small, compared with the legal costs if such claims are litigated in court.

There can be agreements that involve huge settlement amounts. An example is when the alleged defendant admits liability, and the other party accepts the amount.

Here are examples of cases that are usually the subject of settlement negotiations:

• personal injury claims
• commercial disputes
• liabilities arising from contracts
• labour and employment issues

How settlement negotiations are crafted

Again, there are no fixed rules and procedures to follow when doing settlement negotiations. There are some guides and tips that can follow to ensure that it’s successful:

• assess the willingness and interest of the party to go through the process
• arrange a conducive environment (considering time and venue)
• create a wide array of options where parties can choose which is the most viable
• take time as needed, but not too long

What to note in settlement negotiations

Mitchell Rose, a mediator, arbitrator, and settlement counsel in Toronto, shared three important things when it comes to settlement negotiations.

“I discovered certain legal tools that are useful for promoting early dispute resolution. However, ignorance of these provisions may prove hazardous and turn the tools into traps. As these provisions are not well known, I think of them as ‘secret,’” Rose said.

A lawyer’s duty to settle

First, Rose highlighted the lawyers’ professional responsibility of promoting settlement negotiations. “Most of us are aware of the tension between zealous advocacy and civility. However, did you know about the professional obligation to encourage settlement and to consider the use of alternative dispute resolution?”

Rules of law societies on settlement negotiations

Under Rule 3.2-4 of the Law Society of Upper Canada’s Rules of Professional Conduct, lawyers are obliged to:

1. advise and encourage the client to compromise or settle a dispute whenever it is possible to do so on a reasonable basis
2. discourage the client from starting or continuing useless legal proceedings
3. consider the use of ADR, inform the client of ADR options when appropriate, and take steps to pursue those options if so instructed

Other similar Rules are found in other provinces, as found in their respective law societies’ own RPCs.

Effect of rules on settlement negotiations

Rose said that these Rules “come close to imposing a 'duty to settle' (or, at least, to make reasonable efforts to settle) and to create the right environment for settlement to occur (i.e., through mediation or negotiation). This duty goes beyond mere strategy, such as making offers to settle to maximize the chances and quantum of a costs award or to simply comply with mandatory or contractual mediation requirements.”

As such, he advised counsel to consider the following:

1. Suggest mediation to the client and the other party as early as possible. While there are some situations where mediation is inappropriate, this is rarely the case. The usual reasons given to avoid mediating (i.e., the parties are too far apart in their positions or cost) are usually the very reasons why mediation is useful and effective
2. When in a private caucus at mediation, and at various points of a proceeding, set out for clients (ideally, in writing) the advantages and disadvantages of settling or not settling

In a discussion with @CanLawMag, McMillan’s Ralph Cuervo-Lorens explains how settlement counsel can help find creative solutions to disputes while minimizing costs and loss of goodwill. Learn more: https://t.co/cGSlCeKFdt #disputeresolution #settlementcounsel #litigationlaw pic.twitter.com/6tlVtKkmI5

— McMillan LLP (@McMillanLLP) April 25, 2023

Limitation periods after settlement negotiations

Secondly, settlement negotiations affect the running of prescriptive or limitation periods of the plaintiff’s cause of action. Counsel must always look out for these periods, which are governed by provincial laws when it comes to civil actions.

For instance, Rose emphasized s. 11 of Ontario’s Limitations Act, 2002. It says that when both parties agreed to have an independent third party resolve the claim or assist them in resolving it, the “basic” (s. 4) and “ultimate” (s. 5) limitation periods do not run from the date the agreement is made, until the date that:

• the claim is resolved;
• the attempted resolution process is terminated; or
• a party terminates or withdraws from the agreement

S. 11 also states that a person or entity that provides resolution of claims or assistance in resolving claims is an independent third party no matter how it is funded.

In other words, both the basic and the ultimate limitation periods do not run from the date both sides of a dispute agree to have a mediator assist them in resolution. “This statutory 'time out' is useful if you act for a plaintiff — but perhaps not if you act for a defendant. Or, at least, one should be wary of s. 11 since, as noted above, there is still the duty to settle,” Rose said.

Case law on settlement negotiations and limitation periods

Counsel in common law provinces, such as Ontario, must also take note of new case law in the relationship between settlement negotiations and limitation periods. Rose gave two cases for this matter, and their principles:

• A formal mediation agreement is not required to trigger s. 11 (Sandro Steel Fabrication Ltd. v. Chiesa, 2013 ONCA 434)
• S. 11 does not apply to the deadline for preserving construction liens (Logger Town Homes Ltd. v. Sadeghian, 2013 ONSC 6056).

Other recent case law includes the case of Association de médiation familiale du Québec v. Bouvier, 2021 SCC 54. In this case, the Supreme Court held that the settlement exception, applicable in the context of commercial mediations, also applies to family mediations. Settlement exception allows communications and information — which are confidential as a general rule — to be disclosed, if it’s necessary to prove the existence or scope of a settlement agreement.

Apology legislations

When it comes to settlement negotiations, asking for an apology is a hot topic as this may affect the course of the negotiations, and even the liabilities of the defendant. Since a sorry or apology may be said in abrupt and stressful situations, such as accidents, counsel must be aware of apology legislations.

“Many North American jurisdictions have apology legislation. Yet, I am amazed how many practitioners don’t know about its existence and implications — and how it’s a valuable settlement tool,” Rose said. One of these laws is Ontario’s Apology Act, which says that an apology is not necessarily an admission of guilt, fault, or liability on the part of the defendant.

Other provinces also have similar laws under a similar name, such as:

• British Columbia
• Manitoba
• Newfoundland and Labrador
• Nunavut

In Québec, s. 2853.1 of its Civil Code covers apologies in relation to admission of liabilities.

In Alberta and Saskatchewan, it’s found as a section under their provincial Evidence Act.

As for Prince Edward Island, its apology legislation applies only to healthcare issues, under s. 32 of its Health Services Act.

What is an apology

Under these laws, an apology could be:

• an expression of sympathy or regret
• a statement that a person is sorry
• other words or actions indicating contrition or commiseration

These acts are still considered an apology, regardless of whether it admits fault or liability or implies an admission of fault or liability.

Effects of an apology

Commonly, these laws provide the following effects of an apology:

• it is not an express or implied admission of fault or liability of the person apologizing
• it does not void, impair, or affect any insurance or indemnity coverage for both parties
• it cannot be considered in determining fault or liability of the person apologizing

In addition, an apology is not admissible as evidence of the fault or liability of any person in any proceedings. These proceedings can be civil, administrative, or conducted in arbitration.

An exception to this is when a person is apologizing while:

• testifying at a civil proceeding
• testifying at an out of court examination in any proceeding

In Ontario, related to its Apology Act is Rule 7.2-6 of LSO’s RPC. This Rule says that a lawyer cannot directly negotiate with the other party if they are represented by another lawyer. Unless, of course, the other lawyer consents to such a negotiation or a compromise, or when the other party’s lawyer is engaged only under a limited scope retainer.

Importance of apology legislations

“The key takeaway is that apologizing for a perceived wrong often reduces the likelihood of civil legal proceedings. Even if proceedings ensue, an apology can promote settlement,” said Rose.

“In any event, an apology (not made when testifying) cannot be used as evidence of fault or liability. Be mindful of this when advising a client who has called you in a panic, during early negotiations and at mediation (where an apology could have dual protection of the Act and confidentiality provisions of a mediation agreement).”

Rose added that counsel and their clients must consider the cost of not apologizing. “If your clients were aware of this legislation, would they be open to saying sorry instead of potentially incurring the cost and risk of a lawsuit?”

Settlement negotiations for a win-win solution

Settlement negotiations focus on finding a win-win solution rather than assigning blame. Various tools, including relevant laws, help protect the interests and rights of each party. It's crucial to avoid legal pitfalls, and lawyers play a vital role in facilitating a peaceful resolution between hostile parties

For more resources on settlement negotiations or on other modes of ADR, check out our ADR Practice Area page.