Sometimes a bad deal is just a bad deal: unconscionability and insurance claim settlements in Downer v Pitcher, 2017 NLCA 13

Joe Thorne and Meaghan McCaw

The doctrine of unconscionability is an equitable remedy available in exceptional circumstances where a bargain between parties, be it a settlement or a release, may be set aside on the basis that the bargain is unfair to one party.

Unconscionability is applied sparingly, as it is recognized as a significant departure from the general principle that parties are free to contract with one another as they wish without interference of the courts.

In Downer v Pitcher,¹ the Newfoundland and Labrador Court of Appeal considered the application of unconscionability where the trial judge set aside a release given as part of settling a car accident claim.

The Court of Appeal unanimously held that the trial judge erred in concluding the release was unconscionable. The Court of Appeal went on to declare that the Appellant could rely on the release given by the Respondent in his defence to the Respondent’s personal injury claim.

This decision is of note for insurers, who frequently negotiate settlements with plaintiffs that may or may not have the benefit of legal counsel. This decision clarifies the law in this province regarding the enforceability of such settlements where the plaintiff later cries foul.

Background

On October 7, 2009, Ms. Pitcher’s taxi was rear-ended by Mr. Downer’s vehicle. There was no dispute as to liability.

Following the accident, Mr. Downer agreed to pay Ms. Pitcher for the cost of repairs of her taxi, as well as $300.00 as compensation for lost income while her cab was repaired. In return, Ms. Pitcher signed a release given to her by Mr. Downer. The release was prepared by Mr. Downer based on a precedent provided to him by a lawyer who was an acquaintance. Neither Downer nor Pitcher was represented by legal counsel, though Mr. Pitcher had consulted a representative from his insurance company.

The release was entitled “Full and Final Release” and stated that Ms. Pitcher released Mr. Downer “without qualification or limitation” from all claims and causes of action, including “not only all known injuries, losses and damages, but also injuries, losses and damages not now known or anticipated but which may later develop or be discovered”. Notwithstanding that she signed the release and accepted the funds, approximately seven months later Ms. Pitcher developed soft tissue injuries and commenced an action in the Newfoundland and Labrador Supreme Court, Trial Division.

When faced with the release, Ms. Pitcher claimed that there was “no meeting of the minds” when she signed it, and therefore there was no binding agreement prohibiting her action. Specifically, Ms. Pitcher claimed that she did not read the release in its entirety and thought it related only to property damage and income loss.

The matter of the enforceability of the release proceeded to trial. At trial, Justice Marshall held that although there was a concluded agreement, the release was unconscionable and thus unenforceable.

Mr. Downer appealed.

Court of Appeal Decision

The Court of Appeal overturned Justice Marshall and upheld the validity and enforceability of the release.

The Court of Appeal noted that the doctrine of unconscionability is fluid and evolving. To that end, the Court of Appeal found that Justice Marshall’s focus on the specific language of the test as enunciated in various cases was incorrect. The Court of Appeal noted that such focus was ultimately a “sterile and artificial exercise”.²

In reviewing previous cases, the Court of Appeal noted that while there are differences in various statements of the test for unconscionability, the general formulation focused on two elements:

1. inequality of bargaining power amounting to a special or significant disadvantage; and,
2. leverage of the disadvantage in the resulting transaction.³ 

The Court of Appeal also noted that while the fact a claimant had legal advice is strong evidence that the claimant was not taken advantage of by the other party, it is not a requirement to meet the test.

The Court of Appeal went on to re-state the principles to be applied in determining whether a contract is unconscionable:

1. A person claiming relief on the grounds of unconscionability may succeed where:
   a. there is an inequality of bargaining power between the parties as a result of a special or significant disadvantage that provides an opportunity for the other party to take advantage of the party suffering the disadvantage;
   b. the other party unfairly takes advantage of that opportunity;
2. Inequality of bargaining power may include personal inequality (such as a significant disadvantage due to age, disability, or immaturity), or situational inequality (such as severe financial need or other pressure);
   a. In either case, it must involve more than what would be considered reasonable differences between parties engaged in self-interested bargaining;
3. The advantage arising from the inequality of bargaining power need not be financial advantage, but could be an intangible kind of advantage;
4. The surrounding circumstances must be such that the advantaged party knew, or ought to have known, of the relief-seeker’s vulnerability, therefore making it unfair to obtain and retain a benefit from the disadvantaged party;
5. Where the conditions in (1) are present, the burden shifts to the other party (i.e. there is a reverse onus) to demonstrate:
   a. the resulting transaction was not unfair;
   b. the relief-seeker had the benefit of relevant advice;
   c. the other party took steps to bring the unequal circumstances to the relief-seeker; or
   d. a recognized equitable defence applies.
6. While not a requirement for relief, evidence of a resulting unwise bargain may be relevant to drawing an inference of a special or significant disadvantage or an unfair use of that disadvantage by the other party.⁴

The Court of Appeal held that Justice Marshall erred in tying her findings of fact to an unsuitable test. Nevertheless, the findings of fact themselves could be relied upon by the Court of Appeal.

In applying the principles above to the facts, the Court of Appeal determined that the bargain between Mr. Downer and Ms. Pitcher did not meet the threshold required to establish unconscionability.

In particular, the Court of Appeal noted while Mr. Downer did not inform Ms. Pitcher that the release extinguished her right to make a personal injury claim, he was not required to do so and did not mislead her on that issue. Further, the Court of Appeal found that Ms. Pitcher did not suffer from a special or significant disadvantage sufficient to establish inequality. There was no indication of mental or physical impairment, immaturity, or vulnerability to suggest that Ms. Pitcher was under a significant disadvantage.

The Court of Appeal concluded that Justice Marshall erred in concluding that Ms. Pitcher was disadvantaged and in an unequal bargaining position without sufficient evidence to reach those conclusions.

Finally, the Court of Appeal reiterated that insured parties can still negotiate releases privately in accordance with the Insurance Companies Act,⁵ and the Automobile Insurance Prohibited Underwriting Regulations.⁶

Lessons for Insurers

This decision reinforces the status of the principle that a bargain between parties should not be interfered with lightly. In overturning Justice Marshall, the Court of Appeal confirmed that much more is needed to quash a release that just a “bad deal” and inequality of information.

Because this was a settlement between private parties, it remains to be seen how the doctrine might be applied if Mr. Downer had been a claims adjuster or defence counsel (i.e. parties with more significant knowledge and positional experience in negotiating insurance claims). Insurers should consider the re-stated principles closely, but can take some comfort from this decision.

¹ 2017 NLCA 13 (“Downer”).
² Downer, para 14.
³ Downer, para 54.
⁴ Ibid.
⁵ RSNL 1990, c I-10, s. 96.2.
⁶ NL Reg 80/04, s. 4(1)(b); Downer, para 70.