Erin Best and Giles Ayers

Earlier today the Supreme Court of Canada released a unanimous decision in Corner Brook (City) v. Bailey. The case was successfully argued by Erin Best and Giles Ayers of Stewart McKelvey, St. John’s.

Interpretation of releases clarified

Most settlements are contingent on a release: a type of contract where the party receiving money or other consideration agrees to release the paying party from certain claims. In this new, unanimous decision, the Supreme Court of Canada has clarified how releases should be interpreted.

The Blackmore Rule

For years, Canadian courts have been referencing a confusing, 150-year-old rule called the Blackmore Rule when interpreting releases.

In this new decision, the Supreme Court of Canada has indicated that the Blackmore Rule has outlived its usefulness and should no longer be referred to.

Justice Malcolm Rowe, writing for the Court, held that: “[t]here is no special interpretative principle that applies to releases.” He then referred to the Court’s prior decision in Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53:

Sattva directs courts to “read the contract as a whole, giving the words used their ordinary and grammatical meaning, consistent with the surrounding circumstances known to the parties at the time of formation of the contract” … [but the surrounding circumstances] “must never be allowed to overwhelm the words of that agreement.

Corner Brook (City) v. Bailey

This decision, Corner Brook (City) v. Bailey, arises from a motor vehicle accident that occurred on March 3, 2009, when Mrs. Bailey struck an employee of the City of Corner Brook who was conducting roadwork.

The Baileys commenced an action against the City for property damage to the vehicle and physical injury suffered by Mrs. Bailey. Meanwhile, the employee commenced a separate action against Mrs. Bailey seeking compensation for the injuries she sustained in the accident.

Though the City felt strongly that it was not liable for the accident, it agreed to pay Mrs. Bailey a settlement in exchange for her signing a broadly-worded, full and final release. The release provided, among other things, that Mrs. Bailey released the City from “all demands and claims of any kind or nature whatsoever arising out of or relating to the accident which occurred on or about March 3, 2009…”

Almost five years later, Mrs. Bailey’s insurer filed a third party statement of claim against the City, alleging that the City was responsible for the accident and the employee’s injuries.

The City applied to the Newfoundland and Labrador Supreme Court, seeking to strike out the third party claim, which it argued was barred by the words of the release. The applications judge, Justice George L. Murphy, agreed and struck out the third party claim. Counsel for Mrs. Bailey appealed.

The Newfoundland and Labrador Court of Appeal found that the applications judge made three extricable errors of law and concluded that the words, the context and the exchange of correspondence between the lawyers were all consistent with the release being interpreted as a release of the Baileys’ claims in their property damage and personal injury action only. The Court of Appeal reinstated the third party claim.

The Supreme Court of Canada disagreed, and reinstated the decision of the applications judge.

Standard of review

Writing for the Court, Justice Rowe found that the applications judge did not make any extricable errors of law. He pointed out that what was in the common knowledge of both parties at the time the contract was entered into is a question of fact, not of law. He further pointed out that just because a Court of Appeal disagrees with the lower court’s findings of fact, does not mean it can substitute factual findings of its own. Justice Rowe stated as follows:

[47] … The Court of Appeal treated the question of how the surrounding circumstances inform the words of a contract as an “extricable question of law”. This undermines the deferential approach to appellate review of contractual interpretation urged by this Court in Sattva. The Court of Appeal simply disagreed with the application judge’s interpretation of the surrounding circumstances, characterized it as a question of law, and then substituted its own factual conclusions. This does not accord with Sattva.

The SCC’s new approach to the interpretation of releases

Justice Rowe began his analysis by discussing the Blackmore Rule and the general principles of contractual interpretation. While historically, the written words of the contract were the most important part of the analysis and courts were reluctant to consider extrinsic evidence, this is no longer the case. In its 2014 Sattva decision, the SCC explained that courts have to “read the contract as a whole, giving the words used their ordinary and grammatical meaning, consistent with the surrounding circumstances known to the parties at the time of formation of the contract.” The SCC cautioned that while the surrounding circumstances are important, they “must never be allowed to overwhelm the words of that agreement,” and that courts cannot use surrounding circumstances “to deviate from the text such that the court effectively creates a new agreement”

The Blackmore Rule is no more

Justice Rowe held that a release is a contract, and the ordinary rules of contractual interpretation will apply. While the Blackmore Rule was useful once, it no longer adds anything and should no longer be referred to or used in Canadian contract law.

Releases can sometimes be interpreted narrowly

While there is no longer any general rule limiting the scope of releases, Justice Rowe cautioned that releases tend to have certain features that may mean that a narrow interpretation is appropriate. In particular, releases are often expressed in the broadest possible words.” As Justice Rowe observed, “[a] general release, if interpreted literally, could prevent the releasor from suing the releasee for any reason, forever,” even in circumstances where the parties might not have intended such extreme consequences.

This type of conflict between the broad words of a release and the surrounding circumstances can justify a narrow reading. To use the words of Justice Rowe, “courts can be persuaded to interpret releases narrowly more so than other types of contracts …. simply because the broad wording of releases can conflict with the circumstances.” In fact, the broader the language of the release, the likelier a narrow interpretation would be appropriate.

Tips for drafting a clear and enforceable release

This judgment offers useful guidance for drafting a release that will reflect the intentions of the parties:

• The release should include wording indicating whether the claims must be related to a particular event or subject matter.
• There is no need to list every type of claim imaginable, such as third party claims, subrogated claims, or cross claims, as long as all-inclusive language such as “all claims” is used.
• A release can release unknown or future claims. However, the wording must be clear. Parties should be especially careful in drafting releases when they are trying to allocate the risk of the unknown. In these circumstances, “it is not unusual for a claim to come to light whose existence was not known or suspected by either party.” To avoid a dispute, it is important for the text of the release to address unknown claims and to specify the type or scope of unknown claims intended to be captured.

Questions for another day

Both the applications judge and the Court of Appeal considered the correspondence between counsel leading up to the settlement, and drew different conclusions from that correspondence.

Justice Rowe noted that this approach may have been in conflict with a “longstanding, traditional rule that evidence of negotiations is inadmissible when interpreting a contract.” He also suggested that this rule may also have been overtaken by, and “sits uneasily with”, the modern law of contractual interpretation that requires looking at all of the circumstances surrounding the formation of the contract.

However, the Court decided to leave issue of admissibility of negotiations about the release for another day. This issue could be very important, for example, in a case where the parties’ negotiations reflect an intention apparently very different from the text of the release. In such a case, the evidence of negotiations could become crucial in determining the scope of the release.

Until this important issue is resolved, parties should continue to keep thorough records of their negotiations, but focus on drafting a release that achieves the parties’ true intentions.

This article is provided for general information only. If you have any questions about the above, please contact one of the authors.

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