The Delicate Dance of Partial Settlement Agreement: Pierringer and Mary Carter Agreements

In multi-party litigation, partial settlement agreements allow the plaintiff to settle some of their claims, while maintaining claims against the non-settling defendants. Generally, the plaintiff would achieve partial success and some certainty.

The purpose of this article is to review partial settlement agreements and outline the considerations and risks – take a wrong step and the consequences can be dire and stay the proceeding.

Partial settlement agreements:

The origin of formalized partial settlement agreements (the Mary Carter agreement and Pierringer agreement) originated in the United States to address settlement in complex multiparty disputes and these agreements have since been adopted in Canada.

Partial settlement agreements that do not self-proclaim themselves as Pierringer agreements or Mary Carter agreements are still recognized by the Ontario Courts. Reference to Pierringer agreements in Canadian case law has generally been used to describe proportionate share settlement agreements in which the settling defendant is removed from the action, in contrast to Mary Carter type agreements in which the settling defendant remains in the action and participates at the trial.

Despite that these partial settlement agreements do not necessarily need to mirror the two established agreement types, they are still compared and evaluated by the Courts under the criteria established for Pierringer Agreements and Mary Carter Agreement.

In evaluating any partial settlement agreement, the Courts should be involved in reviewing the fairness of the partial settlement and the consequences on all parties. If a non-settling defendant impugns the fairness of the settlement agreement, then the Court must consider the fairness of the settlement.

A party to a partial settlement agreement may choose to seek formal Court approval of the settlement, although this is not necessary. It is always open for a settling party to move before the Court for directions as to whether the partial settlement agreement has the effect of changing the adversarial position of the contracting parties and the considerations for mandatory disclosure. Moving before the Court for directions is a prudent course of action should the party wish to reduce the risk of adverse consequences. 

There are two competing principles the Court must balance in assessing partial settlement agreements. First, parties to a civil lawsuit have broad discretion in deciding whether to settle some or all claims and on what terms. Settlement has also been recognized as being critical to the administration of justice, considering the limited judicial resources. The second principle is of public interest. Partial settlement agreements in multi-party disputes can lead to serious procedural and substantive effects on the non-settling defendants. Consequently, Courts must prevent a partial settlement from causing unfairness or prejudice to non-settling defendants and must ensure the integrity of the Court’s process.

Generally, a plaintiff to a partial settlement agreement will limit their claims in the action so as to proceed only against the non-settling defendants; in other words, limit their claim to the several liability of the non-settling defendants. Limiting the claim this way also serves to exclude any crossclaims or third-party claims that the non-settling defendants may make against the settling defendants arising from the issues in the action. The plaintiff will also waive any claims against the settling defendants.

Disclosure requirements

Parties are required to disclose partial settlement agreements. This disclosure requirement is an exception to the settlement privilege that is typically provided to settlement agreements.

The timing for disclosure is strict. Any partial settlement agreement must immediately be disclosed to all non-settling parties and the Court if the agreement has the effect of changing the adversarial position of the parties set out in their pleadings into a co-operative one.

Both the existence of the agreement and its terms must be disclosed immediately. The settling parties may withhold terms of the agreement that do not affect the litigation landscape. For instance, the amount upon which the parties settled may not need to be disclosed. Though, it would be in a risk-averse party’s best interest to consider disclosing the amount as jurisprudence has supported judicial discretion as to whether the financial details must be disclosed.

Pierringer agreements:

Pierringer agreements permit some defendants to withdraw from litigation, while leaving the remaining defendants in the action. Pierringer agreements have been characterized as “proportionate share settlement agreements” as the remaining, non-settling defendants are responsible only for their proportionate share of any loss.

Under the terms of a Pierringer agreement, a plaintiff may only seek recovery from the non-settling defendants on a several liability basis instead of a joint and several liability basis. The settling defendants are assured that they cannot be subject to a contribution and indemnity claim from the non-settling defendants (typically the plaintiff will indemnify the settling defendant against any cross claims or third-party claims by the non-settling defendants arising out joint liability). The practical result is that settling defendants are no longer involved in the litigation and the remaining non-settling defendants are responsible only for the loss they actually caused.

Put succinctly, the features of a Pierringer agreement are:

  1. the settling defendants settle with the plaintiff;
  2. the plaintiff discontinues its claim action the settling defendants;
  3. the plaintiff continues its action against the non-settling defendants but limits its claim to the non-settling defendants’ several liability (a "bar order");
  4. the settling defendants agree to co-operate with the plaintiff by making documents and witnesses available for the action against the non-settling defendants;
  5. the settling defendants agree not to seek contribution and indemnity from the non-settling defendants; and,
  6. the plaintiff agrees to indemnify the settling defendants against any claims over by the non-settling defendants.

By their nature, Pierringer Agreements have the potential to prejudice the procedural rights of non-settling defendants. This prejudice includes depriving the non-settling defendants of the benefits of a full discovery and evidence of the non-settling defendants.

Accordingly, Pierringer Agreements must be immediately disclosed to the non-settling parties and the Court if the agreement has the effect of changing the adversarial position of the parties set out in their pleadings into a co-operative one. Both the existence of the agreement and its terms must be disclosed.

Pierringer Agreements routinely include requirements that the non-settling defendants will be given access to the settling defendants’ evidence. This can include the settling defendants providing an affidavit of documents, attending examinations for discovery and providing access to retained experts.

One of the fundamental differences between Pierringer agreements and Mary Carter agreements is that in Pierringer agreements the settling parties are removed from the proceeding.

Mary Carter agreements:

In a Mary Carter agreement, the settling defendants settle with the plaintiff but remain in the lawsuit.

The settling defendants guarantee a minimum payment to the plaintiff, and the settling defendants’ liability is capped at the guaranteed sum. Should the plaintiff recover more than the guaranteed amount, the settling defendants’ liability is reduced on a dollar-for-dollar basis for the amount the plaintiff recovers in excess of the guarantee.

In this way, a Mary Carter agreement provides an incentive for the plaintiff and the settling defendants to cooperate to maximize the quantum of the plaintiff's recovery.

This structure is why Mary Carter agreements in particular have been challenged as champertous and why a Mary Carter agreement may be challenged as an abuse of process if it is not disclosed. The undisclosed settlement agreement distorts the adversarial orientation of the litigation. If not disclosed, then the trier of fact will have a misleading basis for understanding the evidence since apparent adversaries are in truth allies.

As with the Pierringer agreement, the Mary Carter agreement must be disclosed to the Court and to the other parties to the lawsuit as soon as the agreement is made. Both the existence of the agreement and its terms must be disclosed.

Comparison chart of Pierringer and Mary Carter agreements:

The chart below briefly sets out the hallmark features both unique to and shared between both agreements.

Hallmarks of a Mary Carter Agreement

Hallmarks of a Pierringer Agreement

Impact on settling defendants

The settling defendants remain in the lawsuit and aid plaintiff

The settling defendants are removed from the litigation. This requires consent of all parties or a Court order to discontinue the claim(s) against the settling defendants.

Settlement amount

Capped to a maximum, guaranteed amount. The amount paid by the settling defendants will be reduced

in direct proportion to the amount the plaintiff recovers from the non-settling defendants in excess of the capped amount.

Fixed amount.

Limit to liability

The plaintiff agrees not to pursue the non-settling defendants for any amount beyond their several liability (as opposed to joint and several) in order to protect the settling defendants from any potential crossclaims or third-party claims for contribution and indemnity from the non-settling defendants.

Indemnification

The plaintiff agrees to indemnify the settling defendant against any claims over by the non-settling defendants.

The plaintiff should only offer protection from contribution and indemnity based upon joint and several liability. Where the non-settling defendants have independent claims against the settling defendants for contribution and indemnity, e.g. by contract, the plaintiff is not in a position to protect the settling defendants.

Disclosure

The agreement must be disclosed to non-settling defendants and the Court immediately after being executed.

Not every term of the agreement must be disclosed. As long as the terms in the agreement that affect the litigation landscape are disclosed, other terms may be withheld.

Procedural considerations

There must be sufficient procedural safeguards to prevent an abuse of process.

The procedural entitlements often sought by the non-settling defendants include documentary discovery, oral discovery, and the ability to serve notices to admit on the settling defendants.

Court approval of settlement agreement

Not required in every instance, but to reduce risk it is advisable to move before a Court for directions on the agreement and disclosure obligations.

Consequence of failing to disclose partial settlement agreements:

The Court of Appeal has stayed actions where the settling parties failed to immediately disclose the partial settlement agreement, which in effect had shifted the settling parties’ adversarial relationship into a co-operative one. In the case of Aecon Buildings v Brampton, a delay of several months was sufficient to stay the plaintiff’s action against the non-settling parties.

Settling parties in multi-party disputes are obligated to immediately inform all other parties to the litigation as well as the Court of the settlement agreement. The non-settling parties are not required to make inquiries to seek out whether any partial settlement agreements have been entered into.

This obligation is required because the agreement significantly alters the relationship among the parties, strategy, and the steps the non-settling party may decide to take from that point forward.

The Court must be informed immediately so that it can properly fulfil its role in controlling its process in the interest of fairness and justice to all parties. To maintain the fairness of the litigation process, the Court needs to know the reality of the adversity between the parties and whether an agreement changes the dynamics of the litigation or the adversarial orientation.

The Court of Appeal has concluded that any failure of compliance to immediately disclose the partial settlement agreement amounts to abuse of process and must result in consequences of the most serious nature for the defaulting party. This is the case even where there is no prejudice to the non-settling party. Where the failure amounts to abuse of process, the only remedy to redress the wrong is to stay the proceeding.

Preventing unfairness and steps to reduce risks stemming from partial settlement agreements:

A party may move before the Court for directions on the implications of a partial settlement agreement, and specifically, whether the agreement has the effect of changing the adversarial position of the contracting parties and attracting the mandatory disclosure obligation.

Many of the procedural issues relating to partial settlement agreements relate to the production of documents and examinations for discovery of the settling defendants. These concerns can be addressed in the agreement or by the Court. Notably, Ontario courts have not always imposed a term requiring the settling party to produce documents or submit for discovery but have left it open for the non-settling defendants to obtain that relief under the ordinary Rules of Civil Procedure.

Procedural safeguards may include the imposition of limits on the conduct of examinations of witnesses by parties who were formerly adversaries but who have become allies as a result of the Mary Carter agreement.

The Court may also consider preservation orders to be justifiable so that the settling defendants are obliged to retain all relevant documents.

Further, the Courts may allow parties to cross-examine settling parties, and allowing all parties remaining in the action to cross-examine a settled defendant at trial.

Conclusion:

Partial settlement agreements can be an effective tool, but care should be taken to ensure procedural fairness is maintained and that the agreement is immediately disclosed to all parties and the Court. Failure to disclose the agreement can result in the serious consequence of having the action stayed.

For more information about the article or anything related to the topic, please contact Ryan Wilson.

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