*Since the writing of this blog the decision has been reversed.

The recent Newfoundland case of Temple v. Bailey, 2020 NLCA 3, [2020] N.J. No. 23 raises significant issues regarding the applicability of releases between related actions. Where the Supreme Court of Canada has granted leave to appeal it is probably worthwhile to examine this case since it will likely be on our collective radar once the judges in Ottawa deal with the case.

On March 3, 2009 Mr. Temple, a pedestrian, was performing road work in the course of his employment with the City of Cornerbrook when Mrs. Bailey, operating her husband’s vehicle, struck Mr. Temple. Mr. Temple commenced an action against Ms. Bailey (the “Temple Action”). Subsequent to service of the Temple Action on Ms. Bailey, she and Mr. Bailey commenced an action against the City of Cornerbrook (the “City”) for alleged property damage and physical injury (the “City Action”). Following negotiations, on August 29, 2011 the Baileys settled the City Action, signing a release in return for payment of $7,500.00.

Four and a half years later, counsel for the Baileys’ automobile insurers filed a defence in the Temple Action and issued a Third Party Notice against the City. The Third Party Notice claimed that the City was liable to Mr. Temple for his alleged injuries, or alternatively, claimed contribution from the City. The City defended the Baileys’ third party claim on the basis that the release in the Temple Action precluded it. Relying upon the release, the City applied for summary trial. The trial judge concluded that the release in the Temple Action covered the third party claim in the City Action, ordering the third party claim stayed with costs to the City. The Baileys appealed.

The standard of review for the appeal was that of palpable and overriding error, as a question of contractual interpretation is generally a question of mixed fact and law per Sattva Capital Corp v. Creston Moly Corp, 2014 SCC 53. The Newfoundland and Labrador Court of Appeal (the “NCLA”) held that the release did not fall within the correctness exception outlined in Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co., 2016 SCC 37. The release was not a standard form contract whose interpretation would have precedential value, nor was there an absence of a meaningful factual matrix specific to the parties to assist in the interpretive process.

In interpreting the release, the trial judge correctly cited the rule in London and South Western Railway v. Blackmore (1870), L.R. 4 H.L. 610 (U.K.H.L.) that a release is to be interpreted so that it covers only those matters which were specifically in the contemplation of the parties at the time the release was given. The trial judge also correctly cited the general interpretation principles for contracts listed at paragraph 47 of Sattva, namely that a decision-maker must 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 so as to determine the intent of the parties and the scope of their understanding. The appellants nevertheless argued that the trial judge failed to follow these interpretive principles in analyzing the release.

The NLCA held that notwithstanding the parties’ reliance on the rule in London and South Western Railway, that such rule had been subsumed into the general principles of contractual interpretation as set out by the Supreme Court of Canada in Sattva and Ledcor. The NCLA adopted the analysis of the British Columbia Court of Appeal in Bank of British Columbia Pension Plan v. Kaiser, 2000 BCCA 291. Namely, that a release will be construed in light of the circumstances existing at the time of its execution, and will not be construed as applying to facts that the parties had no knowledge of at the time.

The NCLA stressed that the judicial tendency is to interpret releases narrowly, citing Biancaniello v. DMCT LLP, 2017 ONCA 386 where broad language in a mutual release regarding an action for payment of fees was nevertheless temporally limited to services provided before a certain date mentioned in the release. Similarly, the NCLA cited Strata Plan BCS 327 v. Ipex Inc., 2014 BCCA 237 where it was held that despite a release for any and all actions, whether known or unknown, the release’s reference to the court file number from the Statement of Claim confined settlement to the damages claimed in that action.

In analyzing the trial judge’s reasoning, the NCLA noted that while there was evidence that the Baileys were or should have been aware of the Temple Action, there was no evidence before the trial judge to indicate that the City was aware of or contemplated third party liability in the Temple Action. It was therefore improper to rely on the broad language of the relief to infer what was contemplated by the City, nor was what was in the contemplation of the City in drafting the release determinative of mutual intent.

The NCLA emphasized that general clauses in the release were to be considered against more specific clauses to determine those things that were specifically in the contemplation of both parties at the time of execution. The release made specific reference to special and general damages, costs, pre-judgment interest and further relief in relation to the Baileys’ claims in the City Action. The NCLA held that these terms did not contemplate losses unrelated to the Baileys’ damages.

Additionally, the release made reference to “the accident which occurred on or about March 3, 2009 and without limiting the generality of the foregoing from all claims raised or which could have been raised in” the City Action, as identified by the court file number. The third party claim in the Temple Action was not raised in the City Action, nor could it have been since the City Action only pertained to the Baileys’ personal injury and property damage claims.

The settlement amount, $7,500.00, was identified in the release as compensation for the Baileys’ “nuisance claim”. This was, in the view of the NCLA, indicative that the release only contemplated settlement of the City Action and did not contemplate a wider scope of potential third party liability. Finally, the release did not reference the Temple Action or the possibility of a third party claim against the City arising from it. Nor did any of the correspondence between counsel in anticipation of the signing of the release make any mention of the Temple Action or any potential third party claims/liability arising from it. This made sense, as the third party claim in the Temple Action did not arise until after the release in the City Action was signed.

The NCLA accordingly held that the trial judge erred in putting too much weight on the broad, general language of the release, in failing to consider those things that were specifically within the contemplation of the parties at the time when the release was given, and in considering a dispute that had not emerged and/or a question that had not at all arisen when the release was signed, as relevant to the interpretation of it.

Until we have the final word from the Supreme Court of Canada, this decision highlights the importance of drafting settlement documents employing language which is both broad and specific, where a settlement is intended to dispose of all potential litigation between the parties – including third party claims.

Dakota Forster is a member of the Appellate practice group and is the author of this blog. If you have any questions about this blog or a similar file, please contact Dakota at 647-427-3334.