Supreme Court of Canada clarifies contract law as it applies to releases using Newfoundland case

It may be a relatively small case emanating out of Corner Brook, Newfoundland and Labrador, but a Supreme Court of Canada decision has set out some principles on contract law for releases, says Stikeman Elliott lawyer Alexandra Urbanski.

In Corner Brook (City) v. Bailey, the Supreme Court ruled in July that a release tied to the settlement of a lawsuit is a contract and the general principles of contractual interpretation set out in a 2014 decision Sattva Capital Corp v. Creston Moly Corp. should apply.

“For anyone who drafts releases or advises clients on releases, this is probably a ‘must-read’ case,” says Urbanski. Not only does it make clear that there are no special rules for interpreting releases, and it provides guidance on the need to consider words in a release to make it clear that it will cover unknown claims and subject matter.

While the facts are straightforward in Bailey, Urbanski says the Supreme Court “recognized that real guidance was needed to clarify how releases should be interpreted,” given there has been some uncertainty in various courts on the interpretation.

Indeed, the SCC decision in Bailey says that Sattva supersedes the rule set out in an 1870 decision, South Western Railway v. Blackmore. That decision, stating that the general words in a release are limited to “those things which were specifically in the contemplation of the parties” at the time the release, has “outlived its usefulness” and is subsumed entirely by the current approach to contractual interpretation set out in Sattva.

Says Urbanski: Bailey “clarifies that [Blackmore] is no longer adding anything of value when interpreting leases. And the jurisprudence and the rule pursuant to it shouldn’t be referred to.”

Urbanski says the implications of the Bailey decision are significant, as it provides “welcome guidance” on the proper approach to interpreting the scope of a release. Not only does it clarify that a release is a contract, “it also offers some practical takeaways for drafting releases.” She points out that most settlements in commercial matters and other litigation are contingent on releases.

Specifically, to avoid running into disputes about the parties’ true intentions, Urbanski says that when drafting a release, parties ought to consider wording that clarifies whether the release will cover unknown claims and whether the claims must be related to a particular event or subject matter.

Distinctions between claims based on facts known to both parties and claims based on facts not known to both parties may be relevant, the SCC decision said, when interpreting a release and assessing whether a claim is one that parties mutually intended to release.

The ultimate question is whether “the claim is of the type of claim to which the release is directed.” That will depend on the wording and surrounding circumstances of the release in each case.

Bailey arises from an accident in which a woman driving her husband’s car struck an employee of the City of Corner Brook. The city employee sued the woman for injuries sustained in the accident. In a separate action, the woman and her husband sued the city of Corner Brook for property damage to the car and physical injury to the woman.

The couple settled with the city and, in doing so, released the city of liability relating to the accident. They “release[d] and forever discharge[d] the city… from all actions, suits, causes of action… foreseen or unforeseen… and claims of any kind or nature whatsoever arising out of or relating to the accident.”

However, several years later, the woman brought a third-party claim against the city, claiming contribution or indemnity from the city in action brought against her by the city employee. The city brought a summary trial application before the Newfoundland and Labrador Supreme Court, alleging that the release barred the third-party claim.

At the Newfoundland and Labrador Supreme Court, the application judge concluded that the release barred the third-party claim against the city and stayed the claim. The woman then brought the case to the provincial court of appeal, which unanimously allowed her appeal and reinstated the third-party lawsuit.

The Newfoundland and Labrador Court of Appeal held that the application judge made three extricable errors of law and that the words, the context, and the exchange of correspondence were consistent with the release being interpreted as a release of the couple’s claim in their action against the city only. The city appealed to the Supreme Court of Canada.

However, in a unanimous decision, the Supreme Court of Canada disagreed with the court of appeal and reinstated the application judge’s decision. Writing for the panel, Justice Malcolm Rowe emphasized that 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.”

Justice Rowe held that a release is a contract, and the Blackmore rule and jurisprudence pursuant to it should no longer be referred to.

Justice Rowe cautioned that courts may be persuaded to interpret releases more narrowly than other types of contracts, but this is not because there is any special rule of interpretation applying to releases. It is because the broad wording of a release can conflict with the circumstances, especially for claims not in contemplation at the time of the release. The more general the language of the release, the more likely this is.

Therefore, Justice Rowe noted that a “sensible approach” to drafting releases would be to consider wording that clarifies whether the release will cover unknown claims and whether the claims relate to a particular subject matter.

Urbanski says the Sattva decision made it clear that contractual interpretation is a fact-specific exercise and should be treated as a mixed question of fact and law for appellate review unless there is an “extricable question of law.” Justice Rowe held that the application judge in Bailey did not make any extricable errors that required appellate intervention.

Specifically, Justice Rowe held that the woman’s third-party claim “came within the plain meaning of the words" of the release. "The surrounding circumstances confirmed that the parties had objective knowledge of all the facts underlying [the] third party claim when they executed the release, and the parties specifically defined the release as applying to claims relating to the accident.”

Even though the parties may not have explicitly turned their minds to the possibility of a third-party claim, the court held that “it was their objective, mutual intent to cover such a claim within the scope of the release.” In support of this, Justice Rowe quoted the application judge, who had written, “what was in the contemplation of the parties was that [the woman] could no longer bring any claim or demand whatsoever against the City relating to the accident.” According to the SCC, this was a fact-specific application of the principles of contractual interpretation and was owed deference.

The SCC in Bailey recognized that distinctions between claims based on facts known to both parties and claims based on facts that were not known to both parties might be relevant to interpreting a release and assessing whether the claim at issue is the kind of claim the parties mutually intended to release. The court emphasized the ultimate question when interpreting a release is “whether the claim is of the type of claim to which the release is directed.” This inquiry will depend on the wording and surrounding circumstances of the release in each case.

Urbanski says it is worth noting that both the application judge and the provincial appeal court considered the pre-contract negotiations leading up to the settlement and release but drew different conclusions from the negotiations. While neither party argued that there was anything wrong with this approach by the courts below, Justice Rowe stated that considering pre-contractual negotiations may be at odds with the longstanding rule that evidence of negotiations is inadmissible when interpreting a contract.

Ultimately, Justice Rowe decided to defer the question of whether and when negotiations will be admissible in interpreting a release. That issue needs to await a case where it has been fully argued and is necessary to decide the appeal. In this case, the application judge did not consider the negotiations to be determinative in interpreting the release one way or another.

Urbanski says, “it will be interesting to see what happens in the future in a case where the parties’ negotiations reflect an intention, apparently very different from the text of the release.”