Legal Blog

Release (3)

We have previously discussed the importance of wording in releases (see August 2012, June 2006, and December 2002 newsletters). The decision in Biancaniello v. DMCT LLP 2017 ONCA 386 highlights how important it is.

Dispute

A client and an accounting firm had a dispute over fees and the services that the firm rendered, which included applying for research credits, negotiating the departure of an employee, and, most importantly, structuring a reorganisational “butterfly transaction.” The firm commenced an action for $67,000.00 for its fees. The client claimed that it obtained little value from the services and had incurred damages arising out of the firm’s advice. Before the client delivered a statement of defence, the parties settled the action by way of a payment from the client to the firm of $35,000. Since the client had alleged improper advice, the firm demanded and received a release before it agreed to take $32,000 less for its accounts than it had wanted to receive.

Words

The wording of the release was critical; we reproduce the important portions below.

“(The client and the firm)… in consideration of $35,000 … do hereby remise, release, and forever discharge each other of and from all manner of actions, causes of actions,… 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 (the firm) to (the client) 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 …”

Whoops

In 2011, in the course of another re-structuring, the client learned that the firm’s 2007 reorganisation work resulted in an unforeseen $1.2 million tax liability. Fortunately, the client was able to obtain a court order rescinding the old transaction, but it incurred $250,000 in legal and accounting fees in doing so.

The client sued the firm for over $3 million for alleged negligence, breach of contract, misrepresentation, and breach of fiduciary duty. The firm moved to dismiss the action, relying on the 2008 release. The motions judge dismissed the motion; the Divisional Court dismissed the appeal; and the matter moved to the Court of Appeal.

Criteria

The Court set out the interpretative criteria for a broadly worded release:

“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 the case before it, the Court noted that the release was given as part of a settlement and that its purpose was to wipe the slate clean. The Court also noted that the release did not purport to limit all possible claims existing between the parties. Indeed, because the release specified the exact claims that were being released, the Court held that it did not need to search for what the parties had contemplated.

Unanticipated

The client attacked the release, arguing that its 2011 claims were unknown to the parties and that, because neither party knew about them, they did not “exist” at the time of the release.

The court disagreed. It held that, although the release may not have specifically referenced unknown claims, it encompassed all claims up to December 2007. By referencing all claims, but limiting them to subject matter (i.e. services the firm rendered) and time (i.e. on or before December 2007), the release did not need to specify any further types of claims being included. All claims meant all claims, whether tort, negligence, breach of contract, etc.

Even more interestingly, the Court stated that the release could just as easily, and with the same effect, have said all claims, “including known and unknown claims.” We see these words being used all the time – unless the releasor resists their use.

Finally, the Court noted that the problem for the client was not that the words were unclear; they were very clear. The problem was that the claim that arose was unanticipated. The client was releasing all claims arising from the firm’s 2007 work, including the firms reorganisational work that later caused the problems. “The parties were wiping the slate clean in respect of that work. Had the client wished to exclude claims it might later discover arising from that work, it could have bargained for that result.”

The Divisional Court had decided that “because the parties were not aware that the (firm) had given negligent advice on the butterfly transaction, the client’s claim for negligence did not exist when the release was signed.” The Court of Appeal held that this statement, and the client’s argument in support of it, was wrong at law. In effect, it conflated two concepts: when did a cause of action arise and when was the cause of action discovered. Although the client did not discover the breach of contract and negligence until 2011 (and the limitation period did not start to run until then), the cause of action arose when the butterfly transaction was concluded in 2007.

Back Door

The client knew from the start of the action that the release posed a problem. It therefore claimed that the release ought to be set aside because it was unconscionable. It was based on a representation from the firm that the butterfly transaction would result in no tax consequences, a representation that turned out to be untrue

The Court held that the alleged misrepresentation was not fraudulent because all parties acknowledged that the firm did not then know that its advice had been ineffective or negligent. If the misrepresentation were merely negligent, then the release itself barred both the negligence claim and the unconscionability claim that was founded on the negligent advice.

Accordingly, the Court allowed the appeal and granted summary judgment dismissing the action.

Moral

There is no such thing as a simple release. Sometimes, we fight harder over the terms of a release than the settlement itself.

There has to be a very good reason for a releasor giving up all rights of action that can arise in the future, but for which it has no present knowledge. As an aside, our usual form of release releases only claims that are “existing and known up to the present time.”

 

Image courtesy of clairetrafton.

Written by Jonathan Speigel Jonathan Speigel, the founding partner of Speigel Nichols Fox LLP, leads the litigation and construction practices.