Canada: The Devil Is In The Details: Getting The Terms Of A Settlement Agreement Right

Last Updated: March 10 2014
Article by Elizabeth Mayer

A recent BC Court of Appeal decision is a useful reminder of ensuring that the terms of a settlement agreement are accurately drafted and include all relevant provisions.  

The case of Chateau Granville Partnership v. Kindred Construction Ltd. (2013 BCCA 486) related to a settlement agreement between the owners of the Chateau Granville Hotel in Vancouver and Kindred Construction Ltd., who had been engaged as construction manager for renovations on the hotel. The hotel became dissatisfied with the way the project was progressing and reached a settlement agreement with Kindred in July 2009. The terms of the settlement agreement provided that the hotel would pay Kindred $400,000 to pay the trade contractors, that Kindred would use this money to pay all the trade contractors in full and that the hotel would set off its claims against Kindred's management fee.  

Following payment by the hotel of the $400,000, Kindred entered into settlement agreements with various trade contractors. These resulted in Kindred retaining around $100,000 of the amounts due to the trade contractors. The hotel argued that any amount withheld should be returned to the hotel as Kindred was in breach of its agreement to pay the trade contractors in full and forfeit its management fee.  

In the BC Supreme Court, Kindred argued that there was either an implied term in the settlement agreement or a collateral agreement that Kindred would be entitled to "share the pain" of the settlement with the trade contractors. The judge in that court compared the initial draft of the settlement agreement, which had expressly allowed Kindred to make claims against the trade contractors, with the final wording of the settlement. In the judge's view, the final wording of the settlement agreement was clear. The fact that the pain sharing wording had been deleted from the draft reinforced the evidence of the hotel that it had expressly rejected the suggestion from Kindred that it should be entitled to make claims against trade contractors in order to "share the pain".  

In the Court of Appeal, Kindred raised a different argument. It acknowledged that the original settlement agreement did not allow it to reach a different agreement with the trade creditors. However, in March 2010, Kindred had entered into new arrangements with the trade contractors. Kindred claimed that these resulted in it paying the trade contractors in full, and then receiving payments back from the trade contractors. Kindred claimed that the payments back did not relate to the original contract, but were settlements of independent tort claims that Kindred had against the trade contractors.  

The Court of Appeal held that the March 2010 transactions did not make a difference to the substantive result. The Court of Appeal held that once Kindred breached the settlement agreement, by withholding amounts from the trade contractors, it could not subsequently remedy that breach by the subsequent arrangements.  

There are two important lessons to be learnt from this case.  

  1. If there are important terms in relation to a settlement, always ensure these are fully reflected in the final settlement agreement. In the BC Supreme Court, Kindred had argued that the hotel was fully aware of its intention to "share the pain" with the trade contractors and had in fact suggested this to Kindred. However, this provision was deleted from the draft settlement agreement. Kindred's arguments for a separate oral contract or an implied term in the written agreement were rejected by the courts. In other words, if the other party to the settlement agreement will not include the terms you want, then do not assume, simply because they have been discussed, that they will apply to the settlement.
  2. The settlement agreement must be fully complied with. Kindred's attempts to cure its breach, by the March 2010 arrangements, were ineffective. It did not pay the trade contractors in full at the time of receipt of the money from the hotel, and was therefore in breach of the settlement agreement. It could not afterwards try to remedy this breach by putting in place new arrangements.  

The Court of Appeal did not deal with the question of whether the March 2010 arrangements would have been effective, had they been put in place at the time of the settlement. In other words, could Kindred have paid the trade contractors in full using the hotel's money and then receive the payments back from the trade contractors? The construction management contract provided that any trade discount, rebate or refund should accrue to the owner. Kindred's argument was that the payments back were not a refund, but were a settlement of a separate claim between Kindred and the trade contractors. The reported cases do not give sufficient information to make a judgment on this point and this will have to wait for a further case.  

It is interesting to note, that the funds in question were paid back to the hotel, and not to the trade contractors. Whether the trade contractors will have any subsequent claim, either against Kindred or the hotel, the repayment of this money remains to be seen.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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