Legal Blog

Best of Both Worlds

Posted on June 1, 2006 | Posted in Lawyers' Issues

We discussed in our December 2002 newsletter how a seemingly innocuous clause in a release has real teeth. We refer to the “no claims over” clause, which disallows a releasor from commencing another action, if the releasees are drawn into that action by way of a third party claim for contribution or indemnity.

In Woodcliffe Corp. v. Rotenberg [2005] O.J. No. 2800 (C.A.), we have another example of the battle that ensues when somebody settles against one person and then takes the fight to another.

Original Dispute

A developer engaged in litigation against a number of its partners in a complex land development that went bad. A law firm, which was not a party to the original litigation, had acted for most, if not all, of the combatants, including the developer. The developer alleged that the partners had improperly conducted themselves, behaviour that the law firm had allegedly made possible by its own conduct.

Ultimately, the developer and the partners settled their litigation. The developer signed a release of the partners containing the usual “no action if it will result in a claim over” clause. The developer tried to insert in the clause an exception for an action against the law firm, but was unsuccessful. What happened next? Of course, the developer commenced an action against the law firm claiming breach of fiduciary duty and professional negligence. The law firm immediately third partied the partners. The partners moved to stay the action and the third party action based on the release.

New Cause

It was crucial for the law firm and the partners to demonstrate that the law firm’s third party action against the partners reasonably arose out of the developer’s claim against the law firm. For example, assume that the developer’s action against the law firm related to a completely different transaction with completely different parties and the law firm concocted a third party claim against the partners solely to activate the “no claims over” clause in the release. In this scenario, the partners and the law firm would be unsuccessful in staying the developer’s action and the law firm would ultimately lose its third party action against the partners. However, the developer conceded that its action made claims against the law firm that gave rise to the law firm’s third party claim against the partners. Regardless, the developer argued that its action made other allegations of negligence and breach of duty that were unrelated to the allegations that it had made against the partners.

The Court held that the allegations of negligence and breach of duty were inextricably linked to the allegations of wrongdoing against the partners and that the claims against the law firm could not have been litigated without re-litigating the claims against the partners. Accordingly, the action was an abuse of process.

The Court noted that the object and purpose of the release was not only to prevent the developer from suing the partners, but also to ensure that the partners would not be further disturbed as a result of the actions of the developer. The Court emphasised that if a releasor wishes to commence an action against another person, then the releasor must specifically insert an exception to the “no claims over” clause in the release.

Accordingly, the Court stayed both the developer’s action and the law firm’s third party action – to the mutual satisfaction, we assume, of everybody but the developer.

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