The Ontario Court of Appeal has ruled that a final release to settle an action covered an unanticipated claim that came to light years later.
The Court of Appeal held that in signing the release, the parties intended to finally settle the dispute.
“The language of the release covers all claims arising from the work the accountants did on the butterfly transaction in 2007,” Justice Kathryn Feldman wrote in the decision. “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.”
Lawyers say if the Divisional Court’s ruling was left to stand, it could have had significant implications on releases.
Darlene Madott, of Darlene Madott PC, says the decision nailed down the practical reality of why people create releases, which is to wipe the slate clean with respect to a dispute between two parties.
Madott was not involved in the case.
“I think it would have made settlements in many cases so much more difficult, because people who are settling, those who are paying out will never feel insulated,” Madott says of the possibility that the Divisional Court decision was left to stand.
“How do you protect against a future situation or one that arose out of the relationship?”
The underlying dispute arose in a fee dispute in 2007 over more than $66,000 that accounting firm DMCT LLP had billed its client, Prinova.
The fees were for three matters, which included applying for a scientific research and experimental development tax credit, negotiating the departure of an employee and structuring a “butterfly transaction.” This transaction involved dividing up Prinova’s software and consulting businesses into separate companies and transferring assets and intellectual property into a new company on a taxdeferred basis.
Prinova objected to paying the fees, arguing the work the accountants had done on preparing the application had provided little or no value and that DMCT was in a conflict of interest by providing advice to the departing employee.
The company also contended the accountants had overcharged them for fees on the butterfly transaction and that it had obtained little value for what the accounting firm had charged.
DMCT then sued for the fees and the parties settled for a payment by Prinova of $35,000. As part of that settlement, the parties executed a mutual release in 2008, which became the subject of later litigation.
The release provided that both parties were released from all manner of actions, suits and claims “against each other they had, now have or hereafter may.”
In 2011, Prinova learned that the butterfly transaction would be subject to $1.24 million in income taxes, due to the way it had been structured.
The company then filed a notice of action against the accounting firm for an order setting aside the release. The company also claimed $3 million in damages for negligence, breach of contract, misrepresentation and breach of fiduciary duty. DMCT then filed a motion for summary judgment to dismiss the action based on the argument that the release of the previous settlement precluded any such action.
The motion judge dismissed the accounting firm’s motion, finding the release did not bar Prinova’s claim as it refers to claims that are “existing to the present time,” which would have been in 2008.
The judge found that as the alleged negligence came to light in 2011, it was not covered by the release. The judge dismissed the summary judgment motion and set the matter down for trial.
The Divisional Court then threw out their appeal of that ruling, saying that “unless a release has exceptionally comprehensive language, it applies only to claims that were known to the parties at the time it was executed.”
The Divisional Court went on to say that if parties “want to bar unknown claims, they must use clear and unequivocal language to express that intention.”
The Court of Appeal, however, granted the summary judgment action and dismissed Prinova’s action.
Thomas Galligan, the lawyer representing DMCT, says the Court of Appeal’s decision shows that releases should be treated like any other contract and interpreted not only through the text of the document but also the surrounding circumstances so that the intentions of the parties come through.
“The vast majority of disputes, not just including lawsuits, are settled without going to court and almost all of them have releases or releases could be demanded,” says Galligan, of Blakeney Henneberry Murphy & Galligan.
“So it’s important that they be, for the purpose of finality . . . at an end. Because, otherwise, the courts wouldn’t be able to handle all the litigation, nor would the parties be able to afford it.”
Galligan adds that the Divisional Court decision could have resulted in lawyers writing really long releases, which might not have been any clearer.
Madott says the lower court decisions also could have had significant consequences for other areas of law, such as family law, where 99 per cent of cases settle.
“As a lawyer drafting a release, how can you ever bar the unknown? That’s the whole essence of the unknown — it’s unknowable. That was terrifying. That sent a huge chill through me,” she says. The decision brings greater clarity to releases and provides a helpful set of drafting guidelines in the form of five principles, says Madott.
Adam Pantel, the lawyer representing Prinova, did not respond to a request for comment.