In a decision released today, July 23, 2021, in Corner Brook (City) v. Bailey, a unanimous Supreme Court of Canada overturned a decision of the Court of Appeal for Newfoundland and Labrador and restored a stay of a third party claim brought against the City of Corner Brook. The stay was granted based on the wording of a release given in a previous, separate action arising from the same accident. In doing so, Canada's top court made it clear that releases are subject to the same rules of interpretation as any other contract and that, absent an extricable issue of law, appellate courts should rarely overturn a lower court's interpretation of a release (or any other contract).
The underlying litigation stemmed from a car accident in which the respondent Mary Bailey struck David Temple, an employee of the appellant City of Corner Brook, with her husband's car. Mr. Temple sued Mrs. Bailey. In a separate action, Mrs. Bailey sued the City. Mrs. Bailey and the City settled, and Mrs. Bailey released the City from liability relating to the accident and discontinued her action. Years later, Mrs. Bailey brought a third party claim against the City for contribution or indemnity in the action brought against her by Mr. Temple. The City claimed that the release barred Mrs. Bailey's third party claim. Corner Brook successfully obtained an Order staying the third party claim based on a broad interpretation of the release - in which the release was interpreted based on its wording and the surrounding facts as applying to all types of claims relating to the accident, including ones that had not yet been brought. In doing so, the Newfoundland Supreme Court judge applied a rule called the "Blackmore Rule" from an 1870 decision that dictates that a a release is to be interpreted in accordance with what was in the contemplation of the parties at the time the release was signed.
A unanimous Court of Appeal overturned the decision on the application, finding that the Blackmore Rule has been subsumed into the broader contractual interpretation principles dictated by the Supreme Court of Canada in Sattva Capital Corp. v. Creston Moly Corp.,2014 SCC 53 and determining that the lower court had erred in finding that the general wording of the release covered the third party claim brought in the Temple action when the circumstances surrounding the negotiation of the release suggested otherwise. The third party notice against the City of Corner Brook was reinstated.
In his Reasons for restoring the original stay of the third party claim, Mr. Justice Rowe reaffirmed the direction from the Supreme Court of Canada in Sattva that courts are 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." The Supreme Court of Canada however, warned that while "[t]he meaning of words is often derived from a number of contextual factors, including the purpose of the agreement and the nature of the relationship created by the agreement", the surrounding circumstances "must never be allowed to overwhelm the words of that agreement" or to be used by the court to deviate from the text of the contract to the point where the court "effectively creates a new agreement." It is also important to note that surrounding circumstances relevant to interpretation must be limited to objective evidence of the background facts that indicate what would have reasonably been within the knowledge of the parties at the time of the contract.
The Supreme Court of Canada also made it clear that it is the language used in a release that ultimately will govern and that, with appropriate language, a release can cover an unknown claim and, in doing so, it "does not necessarily need to particularize with precision the exact claims that fall within its scope."
Finally, the Supreme Court of Canada reiterated what it said in Sattva that "contractual interpretation is a fact specific exercise, and should be treated as a mixed question of fact and law for the purpose of appellate review, unless there is an "extricable question of law"." As such, unless there is an extricable question of law such as "the application of an incorrect principle, the failure to consider a required element of a legal test, or the failure to consider a relevant factor" Here, there was none of that, nor was there a palpable and overriding error in the interpretation of the release. As a result the Supreme Court of Canada found that the original decision to stay the third party claim should be restored.
In summary, the Supreme Court of Canada has affirmed that it is the language of a release that is paramount in its interpretation and that the surrounding facts are to be used only with a view to interpreting the objective meaning of that language. These are the same rules that apply to other contracts.
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