Corner Brook (City) v. Bailey, 2021 SCC 29 – Contracts – Interpretation –Releases

On appeal from a judgment of the Newfoundland and Labrador Court of Appeal (2020 NLCA 3) setting aside a decision of Murphy J (2018 NLSC 177).

While driving her husband’s car, B struck a City employee who was performing road work. The employee sued B for injuries he sustained in the accident. In a separate action, B and her husband sued the City for property damage to the car and physical injury suffered by B. B and her husband settled with the City, and released the City from liability relating to the accident and discontinued their action. Years later, B brought a third party claim against the City for contribution or indemnity in the action brought against her by the employee. The City brought a summary trial application, on the basis that the release barred the third party claim. B’s position was that it did not, because the third party claim was not specifically contemplated by the parties when they signed the release. The application judge concluded that the release barred B’s third party claim against the City and stayed the claim. The Court of Appeal unanimously allowed the appeal and reinstated the third party notice.

Held (9-0): The appeal should be allowed and the order of the application judge reinstated.

There is no special rule of contractual interpretation that applies only to releases. A release is a contract, and the general principles of contractual interpretation apply. The rule set out in London and South Western Railway v. Blackmore (1870), L.R. 4 H.L. 610 (“the Blackmore Rule”), which stated that 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, has been overtaken by the general principles of contract law set out in Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, [2014] 2 S.C.R. 633. Courts are directed 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 Blackmore Rule and the jurisprudence pursuant to it should no longer be referred to, as the function that it had served has been subsumed entirely by the approach set out in Sattva. Historically, the Blackmore Rule allowed courts to consider factual context when that was not the general rule, but this has been overtaken by a general rule that factual context is considered in interpreting contracts. Further, the Blackmore Rule has been interpreted narrowly. First, the Blackmore Rule does not allow courts to consider the subjective intentions of the parties. This is consistent with the current approach to contractual interpretation in Sattva which clarified that 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 the time of contracting. Second, the Blackmore Rule does not preclude parties from releasing unknown claims. A release can cover an unknown claim with sufficient language, and does not necessarily need to particularize with precision the exact claims that fall within its scope. Accordingly, the Blackmore Rule no longer adds to or deviates from the general principles of interpretation that apply to all contracts.

Any judicial tendency to interpret releases narrowly is not a function of any special rule, but rather a function of releases themselves. Releases may tend to lead to dissonance between the words of the agreement on their face and what the parties seem to have objectively intended based on the surrounding circumstances, with greater regularity than other types of contracts. In resolving this tension, courts can be persuaded to interpret releases narrowly more so than other types of contracts, not because there is any special rule of interpretation that applies to releases, but simply because the broad wording of releases can conflict with the circumstances, especially for claims not in contemplation at the time of the release. The broader the wording of the release, the more likely this is to be so. The drafter of a release might consider wording that makes clear whether the release will cover unknown claims and whether the claims must be related to a particular area or subject matter. Also, releases that are narrowed to a particular timeframe or subject matter are less likely to give rise to tension between the words and what the surrounding circumstances indicate the parties objectively intended. Distinctions can be drawn between claims based on facts known to both parties and claims based on facts that were not known to both parties. Such distinctions may be relevant when interpreting a release and assessing whether the claim at issue is the kind of claim the parties mutually intended to release. The ultimate question is whether the claim is of the type of claim to which the release is directed. This will depend on the wording and surrounding circumstances of the release in each case.

With respect to the standard of review, Sattva explained 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”. Extricable questions of law in the context of contractual interpretation include 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. The circumstances in which a question of law can be extracted will be uncommon. Whether something was or should have been within the common knowledge of the parties at the time the contract was entered into is a question of fact.

In the instant case, the application judge made no extricable errors of law warranting appellate intervention. There is no reviewable error in the application judge’s conclusion that the release includes B’s third party claim and his order should be reinstated. The claim comes within the plain meaning of the words of the release, the surrounding circumstances confirm that the parties had objective knowledge of all the facts underlying B’s third party claim when they executed the release, and the parties limited the scope of the release to claims arising out of a particular event. Whether one approaches the matter on the basis of the Blackmore Rule or not, the result is the same, and the application judge’s reliance on the Blackmore Rule is of no moment.

Reasons for judgment: Rowe J. (Wagner C.J. and Abella, Moldaver, Karakatsanis, Côté, Brown, Martin and Kasirer JJ. concurring)

Neutral Citation: 2021 SCC 29

Docket Number: 39122