The Court of Appeal1 recently
ruled that the complete release of a co-debtor who is primarily
liable in solidum might have the effect of releasing the
secondarily liable co-debtor.
Tandalla Inc., a holding company, purchased all of the shares of
Plastic OK Inc. ("Plok"). It alleged that Plok's
majority shareholder, Mr. Cohen, had misrepresented or concealed
important financial information about Plok. The parties settled
during mediation, whereby it was agreed that Cohen refund the share
purchase price. While Tandalla was initially claiming above $1.3M
which amount included an additional investment and other costs, the
parties settled for just above $400,000. The parties signed a
transaction agreement which included a release and discharge
benefiting "Cohen, his representatives and attorneys" as
well as a clause preventing both parties from suing any other
person or firm who could have a claim for contribution, indemnity
or in warranty against them.
Meanwhile, Tandalla also claimed in negligence against the
accounting firm hired by Plok to audit the financial statements on
which Tandella had relied upon to make its decision to buy the
The trial judge2 had decided that as
Cohen's representative, the accounting firm was released by the
transaction agreement. It had also considered that Cohen and the
accounting firm were liable in solidum for Tandalla's
loss. The primary liability lied with Cohen who committed the fraud
whereas the accounting firm was secondarily liable for not
detecting the fraud. As a result, it held that the release of Cohen
operated as a release of his co-debtor, the accounting firm.
The Court of Appeal did not agree with all the reasons of trial
judge's, but upheld the decision nonetheless. Though it agreed
that Cohen and the accounting firm were liable in solidum, it found
that the reason for dismissing the action against the accounting
firm was the apportionment of the debt as between co-debtors and
not just the in solidum nature of the liability.
What's more, Tandalla could no longer sue the accounting firm
in a separate legal action in accordance with the provision
contained in the transaction agreement, considering that the latter
could in turn have a claim for indemnity against Cohen.
The Court clarified that the release of one in solidum
co-debtor does not automatically discharges the other. In this
case, what resulted in the complete release of the accounting firm
was the fact that Cohen, as a primarily responsible, was completely
released from his share of the debt. Indeed, under the Civil
Code of Quebec, the express release granted to one of the
solidary debtors releases the other co-debtors for the share of
that co-debtor. Considering that Cohen's share of the debt was
100% as between co-debtors, the release from his share through the
agreement with Tandalla resulted in the release of the accounting
firm from the whole debt.
1 Tandalla Inc. v Lippman Leebosh April, 2016
2 Tandalla inc. v Lippman Leebosh April, 2014
The author wishes to thank Jessica Pilote-Boisse, Marketing
Intern, for her contribution
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