Corner Brook (City) v. Bailey, 2020 NLCA 32021 SCC 29 (39122)

“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.”

The SCC (9:0) allowed the appeal and reinstated the order of the application judge.

Justice Rowe wrote as follows (at paras. 3-4, 17-20, 43-44, 56-58):

“There is no special interpretive principle that applies to releases. The decisions below refer to the rule from the House of Lords decision in London and South Western Railway Co. v. Blackmore (1870), L.R. 4 H.L. 610, in which Lord Westbury stated, at p. 623: “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 when the release was given.” As I will explain, this “Blackmore Rule” has been overtaken by the general principles of contract law in Sattva. The Blackmore Rule has outlived its usefulness and should no longer be referred to. Any judicial tendency to interpret releases narrowly is not a function of any special rule, but rather a function of releases themselves.

In the instant case, the application judge interpreted the release broadly to include Mrs. Bailey’s third party claim in accordance with Sattva, and his reasons should have been reviewed on a palpable and overriding error standard. As the application judge made no reviewable error in his interpretation of the release, I would allow the appeal and reinstate his order.

Sattva marked a significant change in the jurisprudence. Traditionally, the interpretation of contracts was a matter of law, not mixed fact and law. This was because interpretation was seen primarily as an exercise in giving meaning to words. Circumstances were generally relevant to interpretation only where there was an ambiguity.

The Blackmore Rule was formulated in the traditional period to which I have just referred. In that view, courts were reluctant to have regard to the facts surrounding the formation of a contract, as an aid to its interpretation. The words of a contract were given their “black letter” meaning. This was problematic from the view of releases; the Blackmore Rule addressed this problem.

But 150 years after the Blackmore decision, things have changed. The facts surrounding the formation of a contract are relevant to its interpretation. The jurisprudential concerns that gave rise to the rule in Blackmore no longer exist. It is no longer needed. It has outlived its usefulness and should no longer be referred to.

This Court set out the current approach to contractual interpretation in SattvaSattva directs courts 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”: para. 47. This Court explained that “[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”, but that the surrounding circumstances “must never be allowed to overwhelm the words of that agreement”: paras. 48 and 57. “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”: para. 57. This Court also 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 or before the date of contracting”: para. 58.

Distinctions can be drawn between claims based on facts known to both parties (as in this case) and claims based on facts that were not known to both parties (as in Biancaniello). 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. Lord Bingham’s cautionary principle from Ali should be understood not as a rule of interpretation, but rather an observation as to the issues that releases will tend to give rise to given their subject matter. Any judicial tendency to narrow the meaning given to broad wording is not the function of any special rule, but rather a function of the context in which releases are given. Thus, the ordinary rules for contract interpretation set out in Sattva apply to releases as they do to other contracts.

In Sattva, this Court also 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”. The exception is standard form contracts, which is not relevant here: see Ledcor Construction. 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”: Sattva, at para. 53, quoting King v. Operating Engineers Training Institute of Manitoba Inc., 2011 MBCA 80, 270 Man. R. (2d) 63, at para. 21. 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: Sattva, at paras. 49-55 and 58.

I make one final observation. The application judge also considered the pre-contract negotiations in reaching his conclusion that the parties mutually intended to release Mrs. Bailey’s claim: paras. 30-38. The Court of Appeal did too, but reached a different conclusion: paras. 67-68. Neither party argued that there was anything wrong with this approach by the courts below. However, there is a longstanding, traditional rule that evidence of negotiations is inadmissible when interpreting a contract: see Resolute FP Canada Inc. v. Ontario (Attorney General), 2019 SCC 60, at para. 100, per Côté and Brown JJ., in dissent; Chartbrook Ltd. v. Persimmon Homes Ltd., [2009] UKHL 38, [2009] 1 A.C. 1101; Hall, at pp. 423-32; A. Swan, J. Adamski and A. Y. Na, Canadian Contract Law (4th ed. 2018), at pp. 745-48; K. Lewison, The Interpretation of Contracts (7th ed. 2020), at pp. 117-31; J. D. McCamus, The Law of Contracts (3rd ed. 2020), at pp. 809-13. Justices Côté and Brown observed in Resolute that this rule “sits uneasily” next to the approach from Sattva that directs courts to consider the surrounding circumstances in interpreting a contract: para. 100. Hall and the authors of Canadian Contract Law both emphasize the difficulty in drawing a principled distinction between the circumstances surrounding contract formation and negotiations.

I leave for another day the question of whether, and if so, in what circumstances, negotiations will be admissible in interpreting a contract. That issue needs to await a case where it has been fully argued and is necessary in order to decide the appeal. In this case, the application judge did not consider the negotiations to be determinative in interpreting the contract one way or the other: see paras. 37-38 and 41.

To conclude, there is no reviewable error in the application judge’s conclusion that the release includes Mrs. Bailey’s third party claim. 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 Mrs. Bailey’s third party claim when they executed the release, and like Biancaniello, the parties limited the scope of the release to claims arising out of a particular event.”