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 jurisdictions 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.