The Supreme Court of Canada Applies General Rules of Contractual Interpretation to Releases, Overtaking a 150-year-old Rule

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On July 23, 2021, the Supreme Court of Canada (SCC) released its unanimous decision in Corner Brook (City) v. Bailey (Corner Brook). The SCC held that the general rules of contractual interpretation apply to releases: courts are to read the contract as a whole, giving the words their ordinary and grammatical meaning consistent with the surrounding circumstances known to the parties at the time of contract formation. There is no longer a special rule of interpretation that applies only to releases.

In Corner Brook, the SCC stayed the third-party claim of the individual defendant, Mary Bailey, against the City of Corner Brook (the City), on the basis that the parties had signed a release regarding the same incident that barred Mrs. Bailey’s third-party claim.

BACKGROUND

While driving, Mrs. Bailey struck a City employee performing road work. The employee sued Mrs. Bailey for injuries he sustained in the accident (the Employee Action). In a separate action, Mrs. Bailey and her husband (who owned the car) sued the City for property damage to the car and for Mrs. Bailey’s physical injuries (the Bailey Action). Mrs. Bailey and her husband settled the Bailey Action, released the City from liability relating to the accident, and discontinued their claim. Years later, Mrs. Bailey brought a third-party claim against the City for contribution or indemnity in the Employee Action.

The City brought a summary trial application and sought a stay on the basis that the release barred the third-party claim. The release in question included “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 which occurred on or about March 3, 2009.” Mrs. Bailey contended that the third-party claim was not specifically contemplated by the parties when they signed this release and therefore the release did not bar the third-party claim.

The Newfoundland Supreme Court allowed the City’s application and stayed the third-party claim based on the wording of the release, along with the court’s finding that the parties had contemplated any and all types of claims relating to the accident at the time the release was signed.

The Newfoundland Court of Appeal unanimously allowed the appeal and reinstated the third-party notice, concluding that the words and the context of the release only released Mrs. Bailey’s claims in the Bailey Action and did not bar her third-party claim in the Employee Action.

THE SCC DECISION

The SCC allowed the City’s appeal, set aside the Court of Appeal’s order and reinstated the order of the application judge.

The SCC found that Mrs. Bailey’s third-party claim came within the plain meaning of the words of the release. Furthermore, the surrounding circumstances confirmed that the parties knew, or ought to have known, about the facts underlying Mrs. Bailey’s third-party claim when they executed the release. Because the parties had purposely limited the scope of the release to claims arising out of a particular event, the surrounding circumstances were consistent with the words of the release.

The SCC held that the “Blackmore Rule”, set out in an 1870 House of Lords decision which states that a release is to be interpreted in accordance with what was in contemplation of the parties at the time the release was signed, no longer applies. It has been overtaken by the broader contractual interpretation principles in the 2014 SCC decision, Sattva Capital Corp. v. Creston Moly Corp (Sattva). Sattva directs courts, when interpreting contracts, to consider the meaning of the contractual words in the surrounding circumstances. A release is a contract and should be interpreted in accordance with the same principles applicable to all contracts; there is no special rule of contractual interpretation that applies only to releases.

Lastly, in reaching their decisions, the lower courts considered pre-contract negotiations. The SCC did not decide whether evidence of negotiations is admissible when interpreting a contract.

IMPLICATIONS OF CORNER BROOK

In considering whether a release bars a claim, the ultimate question is whether the claim at issue is the kind of claim the parties mutually intended to release. This will depend on the wording of the release and the surrounding circumstances.

In drafting a release, parties should ensure that the wording of the agreement is clear in defining which types of claims are intended to be released. If the intention is to include all claims that arise out of or relating to a particular event, time frame, or subject matter, the release should state this explicitly. Claims which the parties were aware of at the time of the execution of the release, or objectively ought to have been aware of, may be covered if the words of the release are explicit. A release can also cover an unknown claim. Finally, a release can be drafted to bar all claims between the parties based on all events that have occurred up to the date of the release.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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