One rule to bind them all: Supreme Court provides guidance on interpreting releases

A release is a crucial element of dispute resolution, but how courts interpret them has been a source of uncertainty in Canada. Provincial rules vary in relation to how specific a release needs to be and whether it can bar future claims parties had not turned their minds to at the time of contracting. In its recent decision in Corner Brook v. Bailey, the Supreme Court of Canada sets out principles that (mostly) clarify that releases should be interpreted consistent with the general principles of contract interpretation.

What you need to know

• In its ruling, the Court held that there are no special rules for releases and they should be interpreted like any other clause in a contract.
  • This means applying the Sattva rule: interpreting the words of the release in light of the surrounding circumstances of its creation.
• Courts have a natural tendency to apply releases narrowly because they are typically written using very general language, to cover unforeseen circumstances.
• Parties seeking to make their releases broad—including to cover unknown or unforeseen claims—may do so, but must draft them accordingly.
• The Court has left open the question of whether evidence of parties’ negotiations should be used to interpret contracts.

Background

In 2009, Mary Bailey drove her car into an employee of the City of Corner Brook. The employee sued Mrs. Bailey. Mrs. Bailey also sued the City (claiming it was vicariously liable for the employee’s actions). The City settled the claim for $7,500 in exchange for Mrs. Bailey releasing the City from liability relating to the accident. The release "forever discharge[d]" the City from "all actions" in Mrs. Bailey’s claim, including "all claims … past, present or future … foreseen or unforeseen … and all demands and claims of any kind or nature whatsoever arising out of or relating to the accident … without limiting the generality of the foregoing from all claims raised or which could have been raised".

Years later the employee revived his claim against Mrs. Bailey, who in turn brought a third-party claim against the City for contribution and indemnity. The City brought a summary judgment motion to have Mrs. Bailey’s third-party claim dismissed, claiming it was covered by the release.

Blackmore no more

The motion judge dismissed Bailey’s claim against the city on the basis of the release. The Court of Appeal overturned the decision, holding that the Blackmore rule required the release to be interpreted contextually and not literally. Canadian courts have frequently relied on the House of Lord’s 1870 decision London and South Western Railway v. Blackmore, which allows courts to consider evidence of surrounding circumstances in order to ascertain what the parties had in mind at the time they entered into a release, typically for the purposes of narrowing releases. Although the Blackmore rule had been formulated at a time when the common law gave more weight to the plain meaning of a contract and much less to context, it is largely redundant in the modern era in which the general approach to interpreting contracts includes the broader context.

The Supreme Court’s decision

In Corner Brook, the Supreme Court unanimously held that Blackmore should no longer be followed, and that releases should not be subject to special rules of interpretation. Rather, the correct approach to interpreting a release should be the same as it is for any other type of non-standard form contract. That approach was set out by the Court’s decision in Sattva, which requires a consideration of the words of the contract within the circumstances in which it was made.

Interpreting releases

In its ruling, the Court acknowledged the historical tendency of courts to give releases a narrow interpretation. It reasoned that this tendency was not because of any special rule of construction, but rather because of two distinctive features of releases. First, releases are often worded very generally to cover a broad swath of claims. Second, parties to a release often turn their minds toward risk of potential litigation, an exercise that is inherently imprecise. This requires interpreting courts to consider the context of the release to determine whether it is intended to be as broad as it appears on its face.

The Court recognized that these two features of releases can cause dissonance between the plain words of the agreement and what the surrounding circumstances suggest the parties had objectively intended. As a result, courts often lean toward "reading down" the words in the release to reconcile this dissonance, particularly if a release purports to be very wide in scope. However, the Court emphasized that there is no rule of law requiring releases be interpreted narrowly.

Uncontemplated claims

The Court also settled a hotly disputed issue in case law: is it possible to release claims that the releasor does not know about at the time of the release? The answer appears to be yes, but not without some effort. In particular, the Court stated, "[a] release can cover an unknown claim with sufficient language, and does not necessarily need to particularize with precision the exact claims that fall within its scope." What constitutes "sufficient language"? The Court recommended drafters of these types of releases consider including wording that makes clear the release will cover unknown claims that are circumscribed to a particular time frame or subject matter.

On the facts, the Court agreed with the motion judge’s conclusion that the wording of the release encompassed Mrs. Bailey’s third-party claim. While the release did not cover "any and all" future claims by Mrs. Bailey and the City, it did cover "all actions", including those "unforeseen" and "claims of any kind or whatsoever" related to the 2009 accident. If this wording were held to be insufficient to include a claim arising out of the accident, it would be "hard to imagine what wording would be sufficient, aside from listing every type of claim imaginable one by one". The surrounding circumstances of the release were consistent with this reading: both the City and Mrs. Bailey were aware that Mrs. Bailey had struck a City employee, and that this knowledge was mutual; and both the City and Mrs. Bailey knew that the employee might have an outstanding claim against Mrs. Bailey, the City, or both, and that the parties might therefore have claims for indemnity or contribution against one another.

An open question, left open

One issue that sometimes arises in disputes concerning releases (and contracts more generally) is whether evidence of negotiations should be considered by the court. Historically, such evidence has been inadmissible. However, three dissenting judges in Resolute FP Canada Inc. v. Ontario (Attorney General) raised the issue of whether negotiations are part of "surrounding circumstances." In Corner Brook, the Court concluded that this was perhaps not as open-and-shut as the current jurisprudence would suggest, but decided that it would be better addressed in the context of a case where the issue is fully argued and necessary in order to actually determine the appeal.