Often when parties are involved in litigation and the parties are able to agree on a settlement, one of the parties – quite often a corporation or government entity – will ask the other party to sign a “release” as part of the settlement. Usually, the purpose of the release is to prohibit that other party (the “signee” who is signing the release) from pursuing any further litigation against the company or government entity. But what happens in a situation when the party that asked for the release to be signed becomes drawn into further litigation as a “third party” to a dispute by the signee? Is this type of third-party claim by the release?
The Supreme Court of Canada recently released a decision, Corner Brook (City) v. Bailey, which had to determine the answer to this question and more generally whether releases should just be considered “regular” contracts in and of themselves.
Before we take a look at the facts of this case, let’s define the relevant legal terms.
What is a “Release”?
A “release” is a binding legal agreement between two parties in which one party agrees to relinquish a claim or right under the law that they had against another party. Although a release often comes into play in tort litigation, there doesn’t have to be a legal dispute in order for a release to be presented or signed. A release can be part of a broader signed contract, such as a termination agreement in an employment scenario. In order for the release to be valid and take effect, there needs to be adequate consideration provided to the party who is signing it. In other words, the signee must receive something of value in exchange for giving up their right to assert a legal claim against that other party.
What is a “Third-Party Claim”?
A third-party claim happens when, during litigation proceedings that are already underway, a claim is put forward within the existing litigation by a party (normally the defendant) against a party that wasn’t named in the original action. Often the purpose of doing so is to have the third party share some portion (if not all) of the liability should the defendant be found liable.
Can a Release Prohibit a Third-Party Claim?
To apply these concepts to the Corner Brook (City) v. Bailey case, the case concerned a woman, Mrs. Bailey who was driving her husband’s car in the City of Corner Brook, Newfoundland. She struck a city employee by the name of David Temple, who was performing road construction work, with the car. Mr. Temple sued Mrs. Bailey for damages resulting from his injuries.
Prior to the suit against Mrs. Bailey, Mr. and Mrs. Bailey had sued the City for damages to the car and for the injuries that she sustained in the incident. The Baileys and the City reached a settlement out of court for the damages, and as part of that settlement, the Baileys signed a release which agreed to exempt the City from any past, present or future claims relating to the accident. The “consideration” for this release was the financial settlement which the Baileys received from the City.
As part of the lawsuit between Temple and Bailey, Mrs. Bailey’s insurance company filed a claim against the City so that if she was found liable, the Judge would order the City to pay for Mr. Temple’s damages. This was the proverbial “third-party claim”, as Bailey was bringing the City into the legal action that was originally just between her and Mr. Temple.
In a nutshell, Bailey’s argument was that the release she signed did not apply because a third party claim had not been specifically contemplated by the parties (neither the Baileys nor the City) when the release was signed. The City countered that Bailey could not bring any kind of action against it due to the terms of the release. The trial judge agreed with the City, but on appeal, the Court of Appeal agreed with Mrs. Bailey. The matter was then sent to the Supreme Court of Canada (“SCC”) on appeal.
General Principles of Contract Law Interpretation
The SCC ended up agreeing with the City and the trial judge. They held that a release is very much just a regular contract between two parties and was not subject to any special or different rules of contract interpretation. Instead, the general principles of contract law interpretation apply. The Court noted that the release clearly stated that Mrs. Bailey was giving up her rights against the City in “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” and also that the term of this release lasted “forever”.
As such the SCC concluded that Mrs. Bailey’s third-party claim against the City came within the “plain” or “ordinary” meaning of those words and that there was no reason to interpret them to mean something else. The Court also determined that the surrounding circumstances of the case confirmed that the parties, when they had signed the release, had contemplated the possibility of a third-party claim.
The Court effectively adopted the trial judge’s reasoning that “it was not necessary that the parties be specifically contemplating a particular type of claim.” It was sufficient that the parties (of the Release) were contemplating any and all types of claims relating to the accident, which thus encompassed a potential third-party claim. As the SCC wrote, “Even though they may not have explicitly turned their minds to the possibility of a third party claim in particular, it was their objective, mutual intent to cover such a claim within the scope of the release.”
This case stresses the importance of seeking legal advice before signing any kind of release that is asking you to give up a legal claim or right under the law. When entering into agreements, it is best to carefully consider what claims the release will or won’t cover, and for what period of time. Legal representation can assist in this regard, particularly if the terms of the release need to be re-drafted or re-negotiated.
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