Canada: Benefits Of "Pierringer Agreements" Diluted By Ontario Superior Court Of Justice

Last Updated: January 28 2013
Article by Don McGarvey, Q.C.

One of the best tools in my litigator's toolbox is a Pierringer Agreement. A Pierringer Agreement, sometimes called a "Proportionate Share Settlement Agreement", is often used in multi-party litigation when one or more Defendants (the "Settling Defendants") resolve their dispute with the Plaintiff or Plaintiffs.

A Pierringer Agreement allows the Settling Defendants to be released from the lawsuit leaving the remaining Defendants (the "Non-Settling Defendants") to continue to defend the Plaintiff's claim. Based on the terms of the Pierringer Agreement, the Non-Settling Defendants are precluded from issuing cross claims against the Settling Defendants. Further, the Pierringer Agreement stipulates that the Plaintiff must amend its Statement of Claim to only seek recovery for the Non-Settling Defendants' "several liability" as opposed to the more encompassing joint and several liability that the Non-Settling Defendants would typically be liable for.

Courts have consistently held that they are willing to favour the benefits of settlement (not only to the parties but on the judicial system and the administration of justice generally) through a Pierringer Agreement over the disadvantage or sometimes even the prejudice suffered by the remaining, Non- Settling Defendants. Courts have often approved Pierringer Agreements and the withdrawal of the Settling Defendants from the action prior to document discovery and oral discovery notwithstanding that to do so would seemingly put the Non-Settling Defendants at a disadvantage.

The benefits of a Pierringer Agreement suffered a recent blow by the Ontario Superior Court of Justice in CCAA (Companies Creditor Arrangement Act, R.S.C. 1985 c. C-36, as amended) proceedings related to the proposed plan of compromise or arrangement with respect to Hollinger Inc., 4322525 Canada Inc. and Sugra Limited.

In the Hollinger case, the Court was faced with an approval of a settlement entered into between the Applicants (collectively "Hollinger Inc.") and his former auditors, KPMG and lawyers, Torys LLP.

Approval of the settlement was objected to by the Non-Settling Defendants, being (former Lord) Conrad Black and several of his close associates. At least in North America, the past several years have seen Conrad Black very much in the news in relation to both civil and criminal proceedings brought against him. Hollinger Inc., which up until 2007, was the parent company of Hollinger International Inc., brought lawsuits against several individuals and entities.

Its settlement with its former auditors and lawyers was objected to by Black and his former associates (collectively the "Non-Settling Defendants") largely on the basis that the release of KPMG and Torys LLP would, if approved, deprive the Non-Settling Defendants of substantial rights they would have for documentary production and oral discovery that the Non-Settling Defendants would have as of right if the settlement did not occur or was not approved.

The Third Party Releases and Bar Orders contained within the Pierringer Agreement between Hollinger Inc. and the Settling Defendants, contained an express limitation on Hollinger Inc.'s right of recovery from a Non-Settling Defendant. Hollinger Inc. agreed to seek no more from the Non- Settling Defendants than the Non-Settling Defendants' "several liability" as opposed to any joint and several liability the Non-Settling Defendants would otherwise have. Seeking to pursue only the Non- Settling Defendants' several liability is a fundamental feature of a Pierringer Agreement.

As the litigation trustee of Hollinger Inc. indicated:

It is Hollinger's intention to make the settlements by Torys and KPMG an economically neutral event for the Non-Settling Defendants ...

Hollinger Inc. is prepared to waive its right to joint and several liability in respect of the liability between either Torys, KPMG or other Settling Defendant on the one hand and a Non-Settling Defendant on the other. Hollinger Inc. proposed that the settlement approval orders provide that if any Non-Settling Defendant would otherwise be able to establish a right of contribution and indemnity from Torys, KPMG or other Settling Defendant, then the damage owing to Hollinger Inc. jointly and severally by any such non-Defendant will be reduced by the degree in which Torys and/or KPMG or other Settling Defendants are found to be at fault or negligent.

Therefore, while each Non-Settling Defendant will not have a claim for contribution and indemnity against KPMG, Torys or other Settling Defendant for the amount which any of them might be found to be at fault or negligent, there would be no economic detriment because any such amount will not be sought from the Non-Settling Defendant if that Defendant could have otherwise asserted a claim.

Nothing in the settlement approval orders will prevent any Non-Settling Defendant from requiring the Court to determine degree in which any of KPMG, Torys or other Settling Defendant is at fault or negligent with respect to any damages suffered by Hollinger. To the extent the Court finds KPMG, Torys or other Settling Defendant responsible for a proportionate share of those damages and the Non-Settling Defendant has a right of contribution or indemnity against either of them, then Hollinger Inc. will have no claim against any person in respect of the proportionate share.

If the decision would have stopped there, it would have been consistent with the majority of cases that have come before it. However, it did not.

The Court went on to find that while Pierringer Agreements have been increasingly utilized in Canada in a variety of litigation settings, including class actions, there was no question that settlement with some Defendants as opposed to all Defendants interferes with what might otherwise be the procedural rights of the remaining Defendants.

While the Court did recognize that any detriment should be balanced against the benefit to the Settling Defendants and to the Plaintiffs, as well as to the administration of justice as a whole on a case by case basis, in this case, it took the unusual step of approving the settlement on certain conditions allowing for discovery of the Settling Defendants.

Notwithstanding the fact that the Settling Defendants would typically be extracted from the litigation with no other obligation to the Plaintiff or the Court, the Court in this case grappled with the following issue:

The question then is does the Court simply say party discovery rights trump so that Settling Parties are subject to all of the obligations and costs they would have as if they were to remain Defendants OR does the Court say the process can be controlled through effective management particularly on the Commercial List. To say the former is to reject approval of an essential term of the settlements.

In determining the question, the Court parenthetically noted that:

If one were to go back 40 years, the parties to litigation and their counsel were largely responsible for managing production and discovery. In that bygone age there were often only 5 to 10 documents per production and less than half a day of oral discovery.

Parenthetically, most judges and many counsel report that at trial today there are rarely more than 5 to 10 documents that are truly determinative. However, in the last decade the world of document discovery has changed significantly.

Typically there are thousands if not hundreds of thousands and sometimes millions of documents that have become part of the discovery process.

This has given rise to the need for the Court to participate in the process. In Ontario, it commenced with case management which has achieved significant success in Ottawa and Windsor but less so in Toronto.

The Court held that both Settling Defendants would continue to have a role in the litigation. In particular, the Court approved the settlement but on conditions that:

1. At a minimum, each of Torys and KPMG agree to be bound by the respective procedural protocols which would form part of the appendices to the Orders;

2. That a term in each Order provided that each of Torys and KPMG recognize and accept that they will have ongoing obligations in the litigation as non-parties, subject to management by the Court.

Attached to the Court's decision is a document entitled Non-Party Document Production Protocol outlining the obligations of the Settling Defendants KPMG and Torys LLP in the context of the action. The expense to which these Settling Parties are necessarily put by the obligations on them as non-parties for document production and discovery may well give other Defendants in multi-party litigation pause before they consider settling (and presumably being extricated from) litigation if they are going to continue to be effectively subject to expensive document and oral discovery processes and the Court's order and direction.

When one resolves a case and believes that they are extricated from it, it is my view that a Court should do everything to uphold that. While there may be some procedural rights that are lost by the Non-Settling Defendants, they are just that, procedural rights. They do not appear to be substantive.

Of course, it is open for any party as a Defendant to engage in settlement discussions with a Plaintiff and hopefully extricate themselves (without the obligations of document and oral discovery, one would hope), at any time. The prudence of entering into these discussions and achieving a resolution of the case on terms typically found in a Pierringer Agreement should be a triumph and should be upheld by the Court. The fact that the settlement would be "economically neutral" to the Non-Settling Defendants by virtue of the fact that they are only liable for their several liability is enough to level the playing field again. The Settling Defendants should not then effectively be brought back in the action after they have settled nor should they be required to continue to be involved with expensive and extensive document and oral discovery under the Court's direction.

Unfortunately, the benefits of a Pierringer Agreement, at least in Ontario, have been dulled somewhat by the case of Hollinger Inc. Hopefully this is an anomalous decision and one that won't be followed by other jurisdictions. Certainly, other jurisdictions such as Alberta have been loath to take this step except in very extraordinary circumstances.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Don McGarvey, Q.C.
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