Case In Point
Appellate Court Finds Mutual Release Barred a New Claim Arising Years Later
Date: May 25, 2017
In a recent decision, Biancaniello v. DMCT LLP, the Ontario Court of Appeal held that a mutual release operated to bar a claim even though the claim was unanticipated and unknown at the time the release was executed by the parties. In doing so, the Court overturned the decisions of the motion judge and the Divisional Court, which had allowed the action to proceed on the basis that the mutual release did not specifically include the release of “unknown claims.”
Between 2006-2007, the appellant, DMCT LLP (DMCT), provided various accounting services to the respondent, Prinova Technologies (Prinova), including assistance with structuring a tax “butterfly” transaction. Prinova was dissatisfied with the services provided and refused to pay DMCT’s fees.
DMCT brought a claim against Prinova for the payment of its fees. The parties agreed to settle the litigation and, as part of the settlement, executed a mutual release on March 31, 2008 (Release). The Release included a release of “all claims arising from any and all services provided by DMCT through to and including December 31, 2007.”
In late 2011, Prinova learned that the butterfly transaction had a possible unintended tax liability of $1.24 million. It spent $250,000 in legal and other fees to rescind the transaction. In May 2012, it filed a claim against DMCT seeking an order setting aside the Release and damages in the amount of $3 million for negligence, breach of fiduciary duty and breach of contract.
DMCT moved for summary judgement to dismiss the action on the basis that it was barred by the Release. The main issue before the motion judge was whether the Release applied to the unanticipated claim relating to the butterfly transaction that arose years after the Release was executed by the parties.
The motion judge’s decision, upheld by the Divisional Court, found that the wording of the Release only referred to claims “existing to the present time.” The action was allowed to proceed as the language in the Release did not clearly and unequivocally bar “unknown claims.”
DMCT appealed to the Court of Appeal. The Court provided a helpful review of the general principles that apply to the interpretation of a release and at paragraph 42 summarized the principles set out in a decision of the UK House of Lords, Credit and Commerce International SA v. Munawar Ali:
- One looks first to the language of a release to find its meaning: at para. 8 [of Ali] .
- 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: at paras. 9-10.
- 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: at para. 13.
- When a release is given as part of the settlement of a claim, the parties want to wipe the slate clean between them: at para. 23.
- One can look at the circumstances surrounding the giving of the release to determine what was specially in the contemplation of the parties: at para. 28.
The Court considered the context in which the Release was given and found that “[b]ecause the release was given as part of the settlement of the fees claim, its purpose for both parties was to wipe the slate clean in respect of the dispute between the parties.” It held that while the Release did not release all possible claims, it limited the description of the claims intended to be covered by the Release by subject matter and time frame, which covered all the work DMCT did on the butterfly transaction in 2007. There was therefore no need for the Release to specify further the types of claims included.
The Court concluded that the Release barred Prinova’s subsequent action and it noted that had Prinova “wished to exclude claims it might later discover arising from that work, it could have bargained for that result.” DMCT’s appeal was allowed and summary judgment dismissing the action was granted.
This case highlights the risks to defendants in agreeing to a mutual release. A mutual release should usually only be agreed to where the defendant has advanced a counterclaim and after discussing the potential consequences with the defendant. If a mutual release is agreed to, then it is important that the release be carefully drafted with clear and unequivocal language in order to reflect the intention of the parties and avoid any unanticipated and potentially costly consequences.