SCC Allows Appeal in Interpretation of Release in MVA Claim

In a previous blog post, we advised that the Supreme Court of Canada granted leave in a matter involving the interpretation of a release in a motor vehicle accident claim. The appeal was argued and the Supreme Court has rendered a decision in Corner Brook (City) v. Bailey, 2021 SCC 29.

Bailey was operating a vehicle and struck Temple who was in the course of his employment with the City of Corner Brook.

Temple sued Bailey. Bailey’s insurers advised her that they would take care of the matter.

Bailey then sued the City of Corner Brook for alleged property damage and physical injury. Bailey’s claim settled, and Bailey executed a release.

Several years later, in the claim commenced by Temple, Bailey’s automobile insurers commenced a third party claim against the City of Corner Brook.

Before the application judge, the City successfully argued that the release executed by Bailey covered the third party claim filed by Bailey’s automobile insurers.

The Court of Appeal of Newfoundland and Labrador overturned the trial judgment. The Court of Appeal stated that the trial judge was required to determine what was specifically contemplated by both parties. It was not sufficient that the broad general wording of the release potentially covered a subsequent third party action for contribution if the surrounding circumstances suggested otherwise.

The Court of Appeal indicated that a trial judge is required to assess the surrounding circumstances for the purpose of determining what an objective bystander would conclude was the specific intent of both parties, and the scope of their understanding.

The Court of Appeal went beyond the strict wording of the release and examined the context in which the claim was settled, as well as the exchange of correspondence between the parties, in determining that the release only applied to Bailey’s claims in the Bailey action and not to the third party claim commenced by Bailey against the City.

The Supreme Court reinstated the order of the application judge. The Court outlined the following principles from its decision in Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53:

• 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 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, but that the surrounding circumstances must never be allowed to overwhelm the words of that agreement.
• While the surrounding circumstances are relied upon in the interpretive process, courts cannot use them to deviate from the text such that the court effectively creates a new agreement.
• The relevant surrounding circumstances consist only of objective evidence of the background facts at the time of the execution of the contract, that is, knowledge that was or reasonably ought to have been within the knowledge of both parties at or before the date of contracting.

The Supreme Court found no reviewable error in the application judge’s conclusion that the wording of the release encompasses Bailey’s third party claim. The release is broad and applies to all actions foreseen or unforeseen, and claims of any kind or nature whatsoever arising out of or relating to the accident.

Further, the Court stated that the surrounding circumstances are consistent with a broad interpretation of the release. Both the City and Bailey “…knew, or ought to have known on an objective basis, that the City employee who had been hit may have an outstanding claim against Mrs. Bailey, or the City, or both, and that such a claim could put the City and Mrs. Bailey in an adverse position to one another, where it would be to both of their advantages to blame the damage on the other”.

The Court declined to determine whether pre-contract negotiations are admissible when interpreting a contract, but noted that there is a longstanding, traditional rule that evidence of such negotiations is inadmissible.

As a result, the City’s appeal was allowed and Bailey’s third party action is barred.

As noted in our previous blog post, in matters where a person is a plaintiff in one action and a defendant (or potential defendant) in another action arising from the same incident, counsel acting for the person as plaintiff should carefully review proposed releases to ensure that their client does not prejudice the rights of their insurer in the claim in which the person is a defendant. This could amount to a breach of the insurance policy and make the person personally liable for damages.