The Interpretation of Releases
Releases are contracts signed by parties that would bar the releasors from suing the releasees. In other words, releases are powerful contracts that allow the releasees to avoid legal liabilities. If you are the releasor, you would want the release to be drafted as narrowly as possible, and the opposite, if you are the releasee. The question comes down to the rules on interpreting releases, thereby affecting their enforceability. The Supreme Court of Canada (“SCC”) in Corner Brook (City) v Bailey, 2021 SCC 29 [Bailey], clarified for us the rules on interpreting releases.
The Bailey Case
The event happened in the City of Corner Brook. Mr. Temple was an employee of the City and Mrs. Bailey was a resident of the City. While Mr. Temple was doing roadwork for the City, Mrs. Bailey struck him while driving her husband’s vehicle. Two actions ensued from this accident. 1. Mrs. Bailey and her husband (the “Baileys”) sued the City for physical damages to the vehicle and for the physical injuries suffered (the “Bailey Action”). 2. Mr. Temple sued Mrs. Bailey for the physical injuries sustained (the “Temple Action”). The Bailey Action was settled outside of court proceedings, and part of the settlement was a signed release whereby the Baileys agreed to release the City from “all demands and claims of any kind or nature whatsoever arising out of or relating to the accident which occurred […], and without limiting the generality of the foregoing from all claims raised or which could have been raised in the [Bailey Action]”. A few years later, Mrs. Bailey commenced a third-party claim against the City with respect to the Temple Action, whereby she sought indemnity from the City in the event that she is found liable to Mr. Temple in the Temple Action. The City argued that the release barred the third-party claim sought by Mrs. Bailey. Mrs. Bailey disagreed on the basis that the third-party claim was not contemplated at the time when the release was signed.
The lower court sided with the City, but the appellate court overturned its decision. In the end, the SCC reinstated the lower court’s decision on the basis that there is no reviewable error of the lower court’s decision. The key takeaway in this case, though, is the SCC’s clarification on the legal principles surrounding the contractual interpretation on releases.
The SCC’s Clarification
Firstly, the SCC clarified that there is no special rule of contractual interpretation that applies ONLY to releases. A release is a contract, so therefore the general rule of contractual interpretation applies.
The SCC further noted that the court’s tendency to interpret releases narrowly is not a function of any special rule of contractual interpretation, but rather a function of releases themselves – namely, (1) releases often have broad wordings that would conflict with the parties’ objectives to apply the releases to specific circumstances, and (2) releases often try to account for unknown risks that would cause disagreement as to the intention of the parties at the time when the release was executed. Due to these reasons, the broader the wording of the releases, the more likely it is for the court to interpret them narrowly so as to reconcile these discrepancies.
Some History: The Blackmore Rule No More
For 150 years, the courts have been applying the “Blackmore Rule” to interpret releases. The Blackmore Rule was a special rule of contractual interpretation that applied ONLY to releases.
The Blackmore Rule was formulated under the case London and South Western Railey v Blackmore (1870), LR 4 HL 610), and it states as follows: “the general words in a release are limited always to that thing or those things which were specially in contemplation of the parties at the time when the release was given. But a dispute that had not emerged, or a question which had not at all arisen, cannot be considered as bound and concluded by the anticipatory words of a general release”. In laymen’s terms, the court cannot look at the subjective intention of parties at the time when the release was executed, but rather, the court can look at the objective evidence of the surrounding circumstances at the time when the release was executed to give meaning to the words used in the release. Further, release can include claims unknown to the parties at the time when the release was executed.
The SCC in Bailey noted that while the Blackmore Rule has been in use for 150 years, it has outlived its time. The Blackmore Rule has now been “subsumed” into the “Sattva Rule”, which is a general rule of contractual interpretation that came from the case Sattva Capital Corp. v Creston Moly Corp., 2014 SCC 533 [Sattva]. The Sattva Rule has expanded the Blackmore Rule and it is now being applied broadly to the all contracts, and not just releases.
The Sattva Rule
The Sattva Rule states that “courts are directed to 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”. But surrounding circumstances “must never be allowed to overwhelm the words of the agreement”, thereby allowing the courts to effectively create a new agreement. The surrounding circumstances “consist only of objective evidence of the background facts at the time of the execution of the contract”.
Like the Blackmore Rule, the SCC in Sattva made clear that courts must look at the objective evidence of the surrounding circumstances when interpreting releases, specifically, knowledge that was known or ought to be reasonably known at the time of executing the release. Further, the SCC reaffirmed the Blackmore Rule in Bailey that releases can include claims unknown to the parties when the release was executed. However, the SCC adds in Bailey that if the release were intended to include unknown claims, it should include the following specificities in the drafting:
(a) whether the release covers unknown claims,
(b) whether the release applies to claims related to a particular subject matter, and
(c) whether the release is limited to claims within a specific timeframe.
The SCC concludes that the Blackmore Rule has outlived its usefulness, so therefore should not be used in the Canadian jurisprudence going forward. The Blackmore Rule has now been “subsumed” by the Sattva Rule and the latter should be the guiding principle in Canadian jurisprudence on interpreting contracts (which includes releases).
To summarize, the key lessons in Bailey are these:
- The Blackmore Rule is no longer in use.
- The Sattva Rule applies going forward.
- Both text and context matter in interpreting releases.
- Release can include unknown claims, but if such is the case, it should specify in the drafting whether it applies to unknown claims and whether it is limited to a particular subject matter and a specific time frame.
As alluded to earlier, release is a powerful contract. We do not suggest that you execute a release without obtaining proper legal advice. Release needs to be carefully drafted and properly calibrated depending on the risk associated with the circumstances and the pending transactions.
At Bell Alliance, we can assist you, whether you are the intended releasor or the releasee.