Interpretation and drafting of releases: lessons from the Supreme Court of Canada on the past, present and future of contractual interpretation

Introduction  

The Supreme Court of Canada’s decision in Corner Brook (City) v. Bailey[1] provides a definitive statement on the interpretation of releases. The core holding is simple – the interpretation of a release is an exercise in contractual interpretation like any other and is not subject to any special rules. At the same time, Corner Brook v. Bailey also provides an interesting statement on the history of contractual interpretation, it provides helpful guidance on the current state of contractual interpretation and contract drafting, and it alludes to a significant potential future development in contractual interpretation.

The holding

For 150 years, the interpretation of releases has been governed by the decision of the House of Lords in London and South Western Railway Co. v. Blackmore.[2] The “Blackmore Rule”, as Corner Brook v. Bailey called it, held that “general words in a release are limited to that thing or those things which were specifically in the contemplation of the parties at the time the release was given … a dispute that had not emerged, or a question which had not at all arisen, cannot be considered as bound and concluded by the anticipatory words of a general release.”[3] The effect of the Blackmore Rule was often to achieve non-literal interpretations, with language in a general release interpreted narrowly only to apply to the specific dispute that was settled by the release even if the literal language would also cover future and unknown claims.

In a unanimous decision authored by Rowe J., Corner Brook v. Bailey held that the Blackmore Rule has been overtaken by the general principles of contractual interpretation set out in Sattva Capital Corp. v. Creston Moly Corp.,[4] which always require a contextual approach that reads contractual language against the surrounding circumstances or factual matrix in which the parties contracted. As such, the “Blackmore Rule has outlived its usefulness and should no longer be referred to.”[5] The normal rules of contractual interpretation apply to the interpretation of releases. Moreover, “[a]ny judicial tendency to interpret releases narrowly is not a function of any special rule, but rather a function of releases themselves.”[6]

A look to the past of contractual interpretation

Corner Brook v. Bailey explained its holding by reference to the past. The Blackmore Rule was developed in an era of literalist contractual interpretation, when courts focused on the four corners of the contractual text and were reluctant to consider extrinsic evidence of the surrounding circumstances at the time of contractual interpretation. This approach created practical problems when interpreting releases, in which broad language might cover claims and circumstances not in the contemplation of the releasing parties at the time the release was signed. The Blackmore Rule was developed to address the problem and allow courts to interpret the language of a release in the context of the factual circumstances in which the release was signed.

Yet 150 years later, the surrounding circumstances are always admissible to assist in contractual interpretation. As such, “[t]he jurisprudential concerns that gave rise to the rule in Blackmore no longer exist. It is no longer needed. It has outlived its usefulness and should no longer be referred to.”[7] The general law of contractual interpretation, as enunciated by Sattva, already does what the Blackmore Rule did, such that a special rule for releases is no longer required.[8]

A look to the present of contractual interpretation: guidance on the interpretation and drafting of releases (and all other contracts for that matter)

While the holding of Corner Brook v. Bailey is grounded in the past, it contains important observations on the present, with teachings on the interpretation and drafting of releases – teachings which have implications for all types of contracts. These teachings consist of the importance of context, and of the concept of risk allocation.

Under Sattva, context is always relevant. As such, “context can serve as a limiting factor to the breadth of wording found in a release.”[9] This is because there can be a “dissonance between the words of an agreement on their face and what the parties seem to have objectively intended based on the surrounding circumstances”[10] – a tension between text and context that can occur with respect to any type of contract, but which is especially apt to happen when broad language is used in a release.

A contract drafter can resolve this problem by taking advantage of the principle set out in Sattva that the context cannot overwhelm the text: where there is clear text, the context cannot change its meaning. As such, it is “a sensible approach” for the drafter of a release to “consider wording that makes clear whether the release will cover unknown claims and whether the claims must be related to a particular area or subject matter.”[11]

This approach is equally sensible for the drafting of all contracts. In an era where context is always considered, clear language limits the risk that there will be a departure from the contractual text, and contract drafters must always keep in mind that a court considering disputed language will consider not only the contractual language but also the factual context in which that language was used.

Moreover, the concept of risk allocation must always be considered, both when interpreting and when drafting contracts. Corner Brook v. Bailey observed that a release reflects an agreed allocation of risk. This is true of all contracts. In the context of a release, “[t]he releasor takes on the risk of relinquishing the value of the claims he or she might have had, and the release pays for the guarantee that no such claims will be brought. The uncertainty or risk that is allocated to the releasor is precisely what the release pays for.”[12] As a result, broad language can be effective, and future and unknown claims can be released, with no need to particularize each and every particular claim released, provided that the text and context demonstrate that the agreed risk allocation places the risk of future and unknown claims on the releasor rather than the releasee.

The same process of using text and context to allocate risks and interpret the parties’ agreed allocation of risk is used for every type of contract.

A look to the future of contractual interpretation

Finally, Corner Brook v. Bailey provides a glimpse to a possible future development in the law of contractual interpretation.

Both courts below had considered the parties’ pre-contractual negotiations in the interpretive process. Corner Brook v. Bailey did not endorse that approach, noting that there is a longstanding rule that evidence of negotiations is inadmissible in contractual interpretation. At the same time, Corner Brook v. Bailey noted that the longstanding rule has been questioned in some cases and by commentators.[13] Corner Brook v. Bailey quite correctly left the status of the traditional rule for another case, as the issue had not been argued and was not necessary to decide the appeal.

However, the issue of the extent to which evidence of negotiations can be considered as part of the factual matrix is clearly one that will need to be addressed in the future. Litigators handling contractual interpretation cases should be aware of the issue, and should be prepared for a potential change in the law in the future.

Conclusion

Corner Brook v. Bailey has many layers. On one level, it sets out a very simple holding: the interpretation of a release is an exercise in contractual interpretation like any other, with no special rules applied. On another level, it provides an interesting lesson in the history of contractual interpretation, which has moved from a textualist to a contextualist exercise. On yet another level, it provides a useful lesson in contemporary contractual interpretation and drafting in light of the contextualist approach. On yet another level again, it provides a glimpse into the future, in which the contextualist approach may lead to the abolition of yet another longstanding rule, specifically the rule that evidence of negotiations is inadmissible in contractual interpretation. 

Case Information

Corner Brook (City) v. Bailey, 2021 SCC 29

Docket: 39122

Date of Decision: July 23, 2021

_____________________________________________ 

[1] 2021 SCC 29 [Corner Brook v. Bailey].

[2] (1870), L.R. 4 H.L. 610.

[3] London and South Western Railway Co. v. Blackmore (1870), L.R. 4 H.L. 610 at 623-624.

[4] 2014 SCC 53.

[5] Corner Brook v. Bailey at para. 3.

[6] Corner Brook v. Bailey at para. 3.

[7] Corner Brook v. Bailey at para. 19.

[8] At the risk of immodesty, I quote the Supreme Court of Canada quoting me: “I agree with Hall that the Blackmore Rule ‘is entirely consistent with the law of contractual interpretation generally’: p. 286”: Corner Brook v. Bailey at para. 28, quoting Geoff R. Hall, Canadian Contractual Interpretation Law, 4th ed. (Toronto: LexisNexis, 2020) at 286.

[9] Corner Brook v. Bailey at para. 36.

[10] Corner Brook v. Bailey at para. 38.

[11] Corner Brook v. Bailey at para. 41.

[12] Corner Brook v. Bailey at para. 27.

[13] Including by me: Geoff R. Hall, Canadian Contractual Interpretation Law, 4th ed. (Toronto: LexisNexis, 2020) at 423-32, cited in Corner Brook v. Bailey at para. 56.

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