Interpreting Releases using Sattva Capital Corp.
A recent SCC decision that will likely not receive much attention but is an important read for lawyers and businesspersons who draft, review and/or finalize releases as a part of their practice. Justice Rowe delivered reasons for the Court in answering the question whether there is a special interpretive principle in interpreting releases and, if not, how does Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53 apply to the release before the court.
Background.
The appellant, Mrs. Bailey, struck, the respondent, struck
Mr. Temple while drive a car. Mr. Temple was an employee of the City. The
resulting incident attracted the Baileys to commence an action against the City
for property damage to their car and physical injury to Mrs. Bailey.
Mr. Temple, on the other hand, lodged a claim against Mrs.
Bailey for the injuries he suffered.
The Baileys and the City entered into a settlement agreement
resolving the matter. The impugned section of the release is excerpted in the
decision. But it is a broad release capturing any past and future claims
arising from the accident.
Shifting back to the Mr. Temple action against the Mrs. Bailey,
Mrs. Bailey issued a third-party claim against the City for contribution or
indemnity from the City.
Subsequently, the City moved for a summary trial positing
that the third-party claim was barred by the release.
Application Judge.
Justice George L. Murphy concluded that the release stayed
the claim. He applied the Blackmore Rule which contains a certain interpretive
approach in interpreting releases. The rule’s objective was to ascertain the
intention of the parties. Namely, the court should look at:
·
the words of the release;
·
the context in which the release was signed to
interpret those words; and
·
what was in the contemplation of the parties at
the time of the release and specific context it was signed in.
Further, the court should perform its review from an
objective perspective.
In applying the above, the Justice found that the Mrs.
Bailey had the statement of claim against her from Mr. Temple in her possession
which demonstrated that she was aware of the underlying facts she subsequently
puts in her third-party claim. Further, the correspondence between counsel made
it clear that the parties contemplated any and all types of claims relating to
the accident.
On these grounds, the court stayed the third-party action.
Court of Appeal.
The Court of Appeal found Justice Murphy erred by
concluding:
·
the contemplation of the City was determinative
of mutual intent;
·
it was not necessary to determine what was
“specially” in the contemplation of the parties; and
·
it was sufficient that the broad general wording
of the release covered the third-party claim when the surrounding circumstances
suggested otherwise.
The Court found that these errors gave it jurisdiction to
apply the correctness standard. The Court found that the broad phrases in the
release should be considered against the more specific references to the action
against the City. Further, there were no pre-contract correspondence about the
third-party action. The Court concluded the context, and the exchange of
correspondence were all consistent with the release being interpreted as a
release only of the action against the City and not the third-party claim.
SCC.
A. Law
Governing Interpreting Releases
By way of summary, the SCC concluded that there is not much
of a distinction between the way Blackmore Rule that has been applied in Canada
and Sattva in respect of interpreting releases. The pre-Sattva general
jurisprudential rule in interpreting contracts was context played secondarily
to terms in the contract. The Blackmore Rule was an exception to that rule where
the courts would look at the factual context to give meaning to the words.
Specifically, the Blackmore Rule permitted the court to look at what was specially
in the contemplation of the parties at the time the release was given
The exception, as Justice Rowe stated, has become the
general rule that, where now factual context is squarely considered in
interpreting contracts.
Further, Justice Rowe held that any tendency to interpret
releases is not a function of a special rule but is a function of the context
in which releases are given.
B. Standard of Review: Sattva:
Contractual Interpretation is a question of mixed question of fact and law
Sattva created a demarcation in the common law on the
treatment of contractual interpretation. Whereas before contractual
interpretation was a question of law, it is now considered a question of mixed
fact and law for the purposes of appellate review. Where there is an extricable
question of law, such as “the application of an incorrect principle, the
failure to consider a required element of a legal test, or the failure to
consider a relevant factor”, then the considering question is a question of law
rather than a question of mixed fact and law.
Justice Rowe found the Court of Appeal mischaracterized the application
judge reasons at it application judge did not conclude that the City’s
contemplation was considered to be a determinative of mutual intent.
Justice Rowe found the second and third leg of the errors
the Court of Appeal based its decision on were not extricable questions of law
pursuant to Sattva. Sattva held that whether something was or
reasonably should have been within the common knowledge of both parties at the
time a contract was entered into is a question of fact. To note Justice Rowe’s
point at para 47:
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.
Justice Rowe agreeing with the application judge who
considered the surrounding circumstances and made a finding about what was in
the contemplation or mutual intention of both parties. Further, the application
judge held it was not necessary for parties to specifically contemplate
a particular type of claim but rather it was sufficient that the parties were
contemplating any and all types of claims relating to a particular event such
as the accident.
Justice Rowe held that such analysis is appropriate and is
owed deference.
Lastly, the Court of Appeal rendered some comments about the
fact Ms. Bailey knew about the action against her by Mr. Temple. She in fact
delivered the claim to her insurer. On this base, the Temple action was
contemplated. Justice Rowe held that such commentary is not line with the objective
theory of contract law. Unless that knowledge was communicated to the City, it is
not a “surrounding circumstance” within the “common knowledge” of the parties:
Sattva, at para. 58.
Such knowledge was subjective knowledge and does not inform
the surrounding circumstances.
C. Application.
Justice Rowe siding with the application judge found that
the release encompasses Mrs. Bailey’s third-party claim. Justice Rowe found
that there is no principled reason for parties to particularize the scope of
the release further than how it was stated in the release.
Further, Justice Rowe found that the next clause had
provision that stated “foregoing generality of the release is not limited to
them” which indicates that the release was broad enough to include claims such
as the third-party claim.
D. Comments in Obiter Dicta
Justice Rowe found that both the application judge and the
Court of Appeal used the pre-contractual negotiations in reaching their
conclusion that the parties mutually intended to release Mrs. Bailey’s claims.
Justice Rowe commented that no on argued the issue, therefore, the court could
not adjudicate this issue.
There is a longstanding and traditional rule that evidence
of negotiation is inadmissible when interpreting a contract.[1] As
Justice Rowe states:
Justices Côté and Brown observed
in Resolute that this rule “sits uneasily” next to the approach from Sattva
that directs courts to consider the surrounding circumstances in interpreting a
contract: para. 100. Hall and the authors of Canadian Contract Law both
emphasize the difficulty in drawing a principled distinction between the
circumstances surrounding contract formation and negotiations.
My Comments.
Sattva plays a critical role in the interpreting of
contracts and will continue to do so for the foreseeable future. Practitioners
producing, reading and amending releases should take particular care in
understanding the “surrounding circumstances”. Specifically, what is being
discussed between parties. The email exchanges that discuss the release and
settlement. These emails can become a part of the “surrounding circumstances”.
They are objective pieces of evidence that inform the surrounding circumstances
and what was contemplated by the parties.
The tension arises where the communications overwhelm and
cannot be construed as harmonious with the terms of the release. Therefore, the
terms of the release should take light of the discussions and spell out what
will be released and what will not be released. This is a daunting task for the
lawyer, but that is what the law will require to protect the client.
The Justice Rowe point in respect of pre-contractual
negotiations becoming a part of the surrounding circumstances to interpret the
contract is not in line with the law is an interesting one. The common
law rule is that pre-contractual negotiations are inadmissible. This is
contrary to civil law jurisdiction where such negotiations can form the basis
of liability.
Justice Rowe’s point shows an anomaly in the common law
currently since on the one the hand the common law holds Sattva is the
applicable standard to use when interpreting contracts and on the other hand,
the common law holds pre-contractual negotiations are not admissible.
In my view, both principles cannot co-exist. The SCC will at
some point deal with this issue as law is currently disharmonious.
[1] Resolute FP Canada Inc. v.
Ontario (Attorney General), 2019 SCC 60, at 2021 SCC 29 (CanLII)
para. 100, per Côté and Brown JJ., in dissent
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