After initial blows have been exchanged in most litigated disputes, opponents often resolve their differences with a negotiated settlement agreement. To preserve the ceasefire, a key term included in many settlements is the exchange of a “release”.
Releases, however, may take many forms. If the release’s key terms are left undefined in the settlement agreement, a major difference of opinions may threaten the viability of the settlement. The recent case Terranata Winston Churchill Inc. v. Teti Transport Ltd., et al., 2020 ONSC 7577 (“Terranata”) proves that the opposite may also be true: parties’ failure to agree on a release may lead to the court imposing one.
Terranata explores the meaning of a “standard” release in the context of multi-party and multi-action construction disputes. This decision also serves as a warning to settling parties— unconditionally agreeing to an undefined release may have unintended consequences.
Background
Terranata was decided in the context of a construction lien action related to the Eglinton Crosstown Light Rail Transit project in Toronto. The plaintiff, Terranata, was subcontracted by Teti Transport to receive “mining spoils” from the excavation. A dispute emerged over amounts allegedly due to Terranata from Teti for the spoil disposal.
On March 13, 2019, Terranata commenced an action against Teti, a group of defendants referred to as the “Crosslinx Defendants,” and the owner, Metrolinx, advanced a claim for lien and breach of contract. In the same action, Terranata made a contaminated soil claim against certain defendants. Terranata’s lien was vacated.
Teti had two other actions from the same dispute against certain defendants common to the Terranata lien action. The Teti actions had previously been referred to arbitration.
On April 1, 2019, a group of defendants referred to as the “Crosslinx Defendants” served a Request to Inspect and Demand for Particulars on Terranata related to the contaminated soil claim. The Crosslinx Defendants also communicated their intention to cross examine Terranata on its lien pursuant to section 40 of the Construction Act. Neither Teti nor the owner, Metrolinx, had delivered defences at the time.
The Settlement Agreement
On April 16, 2019, the Crosslinx Defendants served an offer to settle on a without costs basis requiring, among other things, “a full release in favour of the Crosslinx Defendants in a form acceptable to counsel for the Crosslinx Defendants, acting reasonably.” No form of release was attached to the offer. The deadline for acceptance of the offer to settle without costs was April 23, 2019.
The reported decision states that the parties had without prejudice communications before the offer to settle was ultimately accepted. Terranata was invited to send the Crosslinx Defendants a list of specific issues it wanted addressed regarding the release. No list was ever provided.
On April 23, 2019, Terranata accepted the settlement offer unconditionally, before Metrolinx or Teti had defended the actions.
The Crosslinx Defendants provided their form of release to Terranata. Terranata tried to mark up the release, but its changes were not accepted. The parties reached an impasse.
The major terms in dispute related to the requirements that Terranata had to:
(1) release the Crosslinx Defendants from all claims, not just the claim for lien;
(2) release the Crosslinx Defendants from all past and future events related to the litigation “or that relate to a claim of contamination or pollution of the Lands”;
(3) indemnify and hold the Crosslinx Defendants harmless in the event they were sued by anyone in relation to the matters being released; and
(4) avoid starting or continuing any proceeding against any party or non-party that could claim contribution or indemnity from the Crosslinx Defendants arising from the released matters.
In addition to broadly releasing the Crosslinx Defendants from future causes of action outside Terranata’s knowledge, the release would have had a detrimental impact on its continuing claims against the non-settling defendants, Metrolinx and Teti.
The Crosslinx Defendants brought a motion pursuant to Rule 49.09 to enforce the settlement agreement. Terranata agreed there was a binding settlement but refused to agree on the broad scope of release sought by the Crosslinx Defendants.
The Motion to Strike
At the start of the motion, Terranata asked the court to strike portions of the Crosslinx Defendants’ supporting affidavit for disclosing without prejudice communications prior to reaching a settlement.
The court refused to strike the evidence, relying on the Supreme Court of Canada’s decision Union Carbide Canada Inc. v. Bombardier Inc., 2014 SCC 35: “A communication that has led to a settlement will cease to be privileged if disclosing it is necessary in order to prove the existence or the scope of the settlement.” Terranata’s motion to strike was dismissed.
The Motion to Enforce the Settlement Agreement
The court began by closely reading the express terms of the settlement. Terranata advanced several arguments to encourage a restrictive interpretation of the release. The fact that there were no express carve-outs agreed upon in the terms of settlement ultimately proved fatal.
Terranata first argued for a restrictive interpretation of the release on the basis it was referred to by the parties as a “full” release rather than a “full and final.” The court gave little weight to the missing words, instead noting that there were no terms in the settlement agreement narrowed the release. The court maintained the presumption that a “release” as a term of settlement is intended to be broad, does not depend on a reference to being “final,” and requires explicit language to limit its application.
Terranata also attempted to preserve the ability to pursue the Crosslinx Defendants for other unpleaded causes of action, on the basis that the settlement agreement only referred to settlement of “this proceeding”. This argument was also rejected by the court. “This proceeding” was held to mean the entire Action, not any individual part of it. If preserving causes of action against the Crosslinx Defendants was Terranata’s objective, then the carve-out had to be explicit.
A different case reviewed by the court in this case provided an example qualifier that may be used to limit a release only to pleaded causes of action. In Betser-Zilevitch v. Nexen Inc., 2018 FC 735, aff’d 2019 FCA 230 (“Betser”), the release in question was limited to “asserted” claims, and a party’s attempt to expand the wording to include “assertable” claims was rejected.
Terranata attempted to limit the application of the “claims over” clause in the Crosslinx Defendants’ preferred release, on the basis that was not Terranata’s intention. The disagreement over such a key term may have led to the settlement agreement being voided, as was the case in Roberts v. Canada Trustco Mortgage Co., 1997 CanLII 12282 (ON SC), [1997] 35 O.R. (3d) 396 (“Roberts”). The court distinguished Roberts because both Terranata and the Crosslinx Defendants insisted in this case that there was a binding settlement. Presumably, without a binding settlement, Terranata may have lost its opportunity to settle on a without costs basis.
The court was forced to determine whether a “claims over” clause was a usual element of a standard release. It held that it was, stating that,
"In my view, claims over/contribution and indemnity clauses are usual elements of a standard general release. The court will therefore imply these types of provisions as terms of standard general releases, unless expressly carved out or narrowed by the parties prior to reaching a settlement. If there is to be any narrowing in scope of these types of provisions, it must be specifically negotiated, agreed upon and reflected in the settlement agreement. This conclusion is supported by the caselaw and informed by a purposive analysis of general releases."
This finding has potentially far-reaching consequences for parties settling multi-party disputes. By offering an unconditional “release,” Terranata holds that releasors are automatically implied to be offering an indemnity to the released party for those matters.
Although indemnities and “claims over” clauses may very well be included in many releases, this decision causes practical problems for parties attempting to settle disputes in a cost-effective manner. The court’s reference to Brager v. Ontario (Minister of Natural Resources), 2017 ONSC 1759 (“Brager”) indicates that a releasor may ultimately be ordered to indemnify a released party as part of a standard release, even if an indemnity was never explicitly agreed upon.
In Terranata, the court decided that the indemnities and “claims over” clauses were usual and standard in releases, and therefore, Terranata was held to have indemnified the Crosslinx Defendants for the claims made against them arising from the same facts, including the two separate Teti actions, despite the facts that: (1) it was obvious Terranata intended to continue its claims against the non-settling defendants; and (2) it was evident that Terranata had no intention of indemnifying the Crosslinx Defendants for allegations made in Teti’s separate private arbitrations. The settlement agreement had no such carve-outs. The court held that the settlement had further-reaching consequences for Terranata than it anticipated. The Crosslinx Defendants’ form of release was enforced with minimal amendments.
Notwithstanding the Crosslinx Defendants’ success keeping in place the “claims over” and indemnity provisions resisted by Terranata, the court did hold that certain terms in the release were unreasonable. The court struck the release’s requirement that Terranata indemnify the Crosslinx Defendants on a full indemnity scale, the expansive and vague requirement that Terranata release and indemnify the Crosslinx Defendants for claims that “relate to a claim of contamination or pollution of the Lands,” and the requirement that Terranata release and indemnify the Crosslinx Defendants for future and unknown claims.
Insights
In this case, parties’ insistence that there was a binding settlement agreement appears to have bound the court’s hands. The court relied on the fact that a release had been promised, even if unparticularized, and Terranata was bound to provide a “standard” release. Had Terranata insisted that there was no meeting of the minds, the Crosslinx Defendants’ release terms were not in its reasonable contemplation, and there was no settlement, it is uncertain whether the court would have enforced the settlement agreement.
Brager suggests that even in those circumstances, Terranata may have been forced to indemnify the Crosslinx Defendants. Respectfully, in the construction and complex commercial dispute context, Brager is impractical and smacks of unfairness. Too many rights were impacted in this case by the simple agreement to provide a release. The outcome of this case is that parties appear to be required to particularize release terms in painful detail during settlement negotiations. At a minimum, litigants are well advised to make settlement agreements conditional on approval of an acceptable release.
In practice, the precise form of release is not always agreed before a settlement offer is accepted, but that practice may need to change. When settling disputes, the stakes are high. Releases are essential terms of settlement and ought to be treated as such. In multi-party and multi-action disputes, it is critical that settling parties expressly carve-out claims they intend to survive the release.
Although the court in Terranata did set ceiling limits on what can be considered “standard” in a release, the floor remains expansive. Without a draft release included as a schedule to the settlement agreement being considered, parties ought to assume the “release” they are agreeing to provide is a broadly inclusive one, and that it may impact their rights against other parties outside of the immediate dispute.