Settlement agreements and releases: the latest Supreme Court guidance

By Moira Lavoie and Matt Woodley

Settlement agreements typically involve a release, which is an enforceable promise by one party not to proceed with a legal claim against another party in exchange for compensation. In July, the Supreme Court of Canada (SCC) released its unanimous decision in Corner Brook (City) v Bailey [Corner Brook], which dealt with the proper approach to interpreting the scope of a release.

The facts

Mary Bailey struck an employee (the Employee) of the City of Corner Brook (the City) with her husband’s car. The Employee sued Bailey for his injuries. In a separate action, Bailey sued the City. Bailey and the City settled. In exchange for a payment of $7,500, Bailey released the City from liability relating to the accident, and discontinued her action.

Almost five years later, Bailey brought a third-party claim against the City in relation to the ongoing lawsuit between the Employee and Bailey. Bailey sought to blame the City in whole or in part for the Employee’s injuries. The City initially succeeded in having Bailey’s claim summarily dismissed, but this was overturned on appeal. The matter was ultimately brought before the SCC, which unanimously held that the release barred Bailey’s claim.

Releases are governed by the modern approach to contractual interpretation

Prior to Corner Brook, there was some confusion as to whether releases remained subject to a special rule of contractual interpretation known as “The Blackmore Rule”. The Blackmore Rule was initially developed in 1870, and provided that a release only applied to “those things which were specially in the contemplation of the parties at the time when the release was given”.

In Corner Brook, Bailey argued that because a third-party claim had not been explicitly listed in her release, she retained the right to bring such a claim against the City.

The SCC found this to be an overly narrow interpretation of the Blackmore Rule, and in any case, that the Rule has been overtaken by the modern approach to contractual interpretation set out in Creston Moly Corp v Sattva Capital Corp, 2014 SCC 53 [Sattva].

Sattva directs the courts to adopt a “practical, common-sense approach” to interpreting contracts. This requires courts to give contractual language its “ordinary and grammatical meaning, consistent with the surrounding circumstances known to the parties at the time of formation of the contract”. Because a release is a contract, it should be interpreted according to the general principles of contractual interpretation set out in Sattva.

Releases can still be interpreted narrowly

When interpreting releases, tensions can arise between ‘the ordinary meaning of the words’ and ‘the surrounding circumstances’, for two reasons. First, releases are often deliberately expressed in the broadest possible language; a literal interpretation of such language could prevent the releasor from suing the releasee indefinitely about anything. Second, parties to a release are often trying to account for risks that at the time of contract are unknown – an inherently imprecise task.

In the SCC’s view, the unique conflict between the broad wording and the surrounding circumstances of a release can justify a court in interpreting releases more narrowly than other types of contracts. Indeed, the broader the language of the release, the more likely a narrower interpretation is appropriate.

This release encompassed third-party claims

In Corner Brook, the release that Bailey signed with the City 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, and without limiting the generality of the foregoing from all claims raised or which could have been raised in [the Action]”.

The SCC concluded that this wording was sufficient to encompass Bailey’s third-party claim. The fact that the parties narrowed the subject matter of the release to claims arising out of a specific accident showed that the parties were contemplating any and all types of claims relating to that event. It would be unreasonable to require the parties to actually list every possible type of claim that might arise.

The surrounding circumstances supported this interpretation. Both parties objectively ought to have known at the time of the release that the injured Employee may have an outstanding claim against either or both parties. They also ought to have known that if one of them was sued by the Employee, it would be advantageous for that party to try to blame the Employee’s damages on the other party. This weighed in favour of interpreting the words of the release to include Bailey’s third-party claim.

Practical implications for drafting releases

Corner Brook provides some guidance as to how parties should draft their releases. A releasee seeking finality in relation to their future liability should ensure the release explicitly encompasses “all claims”, “known or unknown”. As much as possible the release should speak to the type or scope of unknown claims intended to be captured, but this need not be an exhaustive list of every type of possible claim that could arise. A releasor should ensure the release specifies the particular event or subject matter to which the release applies, in order to protect the releasor’s right to future claims unrelated to that event.

Of course, no specific set of words in a release will guarantee a particular interpretation in relation to future claims. Ultimately, the question of whether a particular type of claim is encompassed by a release will depend on both the wording and the surrounding circumstances of the release in each case.

If you have questions or are dealing with an issue relating to a release, contact the authors of this article, or reach out to your RMRF lawyer.


This post is meant to provide information only and is not intended to provide legal advice. Although every effort has been made to provide current and accurate information, changes to the law may cause the information in this post to be outdated.