Settlement Releases and Unforeseen Claims

In May 2017, the Court of Appeal for Ontario ruled on the rarely heard matter of the scope of a release of claims.[1] Specifically, it touched on how settlement releases should be interpreted when considering claims that were unknown at the time the release was signed. The guidance provided in Biancaniello should be considered carefully when drafting and signing a release – you may be signing away your right to damages from a claim you don’t even know exists yet.

Settlement release agreements are documents signed by settling parties that lay out the terms of the settlement. The “release” component of the agreement refers to the terms outlining what specific claims are dealt with in the settlement agreement. Usually, a settlement agreement involves the permanent extinguishment of claims that form the basis of the dispute. However, the language of many releases often also involves the extinguishment of unforeseen claims (e.g. claims whose existence were not known when the agreement was signed). It is these claims that the court in Biancaniello addressed.

The Dispute in Biancaniello v DMCT

In this case, DMCT, an accounting firm, provided incorrect advice on a butterfly transaction, which resulted in the plaintiff accruing an unexpected tax liability worth approximately $1.24 million. The plaintiffs incurred further costs rescinding a related corporate restructuring that relied on DMCT’s advice.

However, the plaintiff and DMCT had, in 2008, settled a dispute over DMCT’s work in general. Although the plaintiff then alleged that it received little value for the money paid to DMCT, there were no allegations regarding the accuracy of the advice DMCT provided on the butterfly transaction.

When the advice concerning the butterfly transaction was discovered to be inaccurate in 2010, the plaintiff brought a second action against DMCT for negligence, breach of contract, misrepresentation and breach of fiduciary duty.

DMCT argued that this claim was barred by the 2008 settlement release. The plaintiff, in turn, argued that it was not as the claim in question was not known to either party at the time that the release was signed.

The Release in Biancaniello v DMCT

The settlement release at issue in Biancaniello read as follows (emphasis added):

KNOW ALL MEN BY THESE PRESENTS that DMCT LLP (« DMCT ») and PRINOVA TECHNOLOGIES INC. and PRINOVA SOFTWARE INC. (hereinafter collectively referred to as « Prinova »), (including their officers, directors, employees, representatives, associates and assigns) in consideration of the sum of THIRTY-FIVE THOUSAND DOLLARS ($35,000) and other good and valuable consideration, receipt and sufficiency of which is hereby acknowledged, do hereby remise, release, and forever discharge each other of and from all manner of actions, causes of actions, suits, debts, duties, accounts, bonds, covenants, claims and demands which against each other they had, now have or hereafter may, can or shall have for or by reason of any cause, manner or thing whatsoever existing to the present time with respect to any and all claims arising from any and all services provided by DMCT to Prinova through to and including December 31, 2007 and, without limiting the generality of the foregoing, with respect to any and all claims, counterclaims or defences that were pleaded or could have been pleaded in the action commenced in the Ontario Superior Court of Justice, as court file no. 08-CV-349246 PD3.

In analyzing this release, Justice Feldman, writing for Court of Appeal, turned to a British House of Lords decision: Bank of Credit & Commerce International SA (In Liquidation) v. Ali (No.1).[2] In Ali, the House of Lords expanded upon the seminal decision for interpreting releases, London & South Western Railway v Blackmore (1870). The latter decision held as follows:

The general words in a release are limited always to that thing or those things which were specially in the contemplation of the parties at the time the release was given.

The House of Lords then embarked upon a detailed analysis of the various interpretive issues which might arise in applying the concept of what was “in the contemplation of the parties” when they drafted a broadly-worded release. In Biancaniello, Justice Feldman further distilled this analysis into the following five principles:

1. One looks first to the language of a release to find its meaning.
2. Parties may use language that releases every claim that arises, including unknown claims. However, courts will require clear language to infer that a party intended to release claims of which it was unaware.
3. General language in a release will be limited to the thing or things that were specially in the contemplation of the parties when the release was given.
4. When a release is given as part of the settlement of a claim, the parties want to wipe the slate clean between them.
5. One can look at the circumstances surrounding the giving of the release to determine what was specially in the contemplation of the parties.

In applying these principles, the Court of Appeal held that the language of the release was “clear and unequivocal in its intent and effect”: the parties were looking to “wipe the slate clean” on all claims arising from the work DMCT did for the plaintiff up to the end of December 2007. If the plaintiff had wished to protect its right to claims that might be discovered later, it could have bargained for that result in the language.

Conclusion

Practically, the guidance provided by the Biancaniello decision means that anyone drafting or signing a settlement release should be particularly aware of how the language of the release may impact your as-yet undiscovered claims. Many standard-form releases may include language which bars any new claims arising from the matter in dispute, regardless of whether or not it was known to the parties. If you wish to protect your potential future claims, adjustments to the language of these settlement releases may be necessary.

[1] Biancaniello v. DMCT LLP, 2017 ONCA 386.

[2] Bank of Credit & Commerce International SA (In Liquidation) v. Ali (No.1), [2001] UKHL 8, [2001] 1 All ER 961 (Eng HL).