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 company.
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.