Supreme Court of Canada on contract interpretation: Lessons from Corner Brook (City) v. Bailey

Introduction

The Supreme Court of Canada (SCC) decision in Corner Brook (City) v. Bailey[1] provides helpful clarification and direction respecting the interpretations of contracts. The case arises in the context of the interpretation of a release. However, it has significantly broader application and reaffirms the contextual approach to the interpretation of contracts previously articulated in the SCC's 2014 decision in Sattva.[2]  

The facts

Bailey was involved in a motor vehicle accident and struck an employee of the City of Corner Brook. This accident resulted in two separate proceedings.  In the first proceeding, the City employee sued Bailey for physical injuries (the "Employee Claim"), and in the second proceeding Bailey sued the City for physical injuries and property damage (the "Bailey Claim").

The Bailey Claim was settled and Bailey delivered a standard broad release in favour of the City (the "Release"). The Release covered "all actions, suits, causes of action… past, present or future…, foreseen or unforeseen… and all demands and claims of any kind or nature whatsoever arising out of or relating to the accident … and without limiting the generality of the foregoing from all claims raised or which could have been raised …"

After the settlement, Bailey commenced a third-party claim against the City for contribution and indemnity in respect of the Employee Claim (the "Bailey Third Party Claim"). Predictably, the City moved to stay the Bailey Third Party Claim and relied on the Release in support of its position.

The City was successful in the first instance. However, the decision was reversed on appeal. The case then went to the SCC.

The SCC decision

The SCC granted the appeal and reinstated the decision of first instance. In a unanimous decision, the Court clarified that a release is subject to the same rules of interpretation as any other contract as stated in Sattva. Thus, the Court held that the court of first instance correctly interpreted the Release broadly to include the Bailey Third Party Claim. The Court also reaffirmed that interpretation of a contract is a matter of mixed fact and law and hence the standard of review is palpable and overriding error as stated in Sattva.

Historical context

Historically, the interpretation of a release has been governed by the Blackmore rule. This rule provided that the general words in a release are limited always to those matters that were specially contemplated by the parties at the time the release was given.[3]

The Blackmore rule was formulated over 150 years ago, at a time when the interpretation of a contract was a matter of law, not mixed fact and law. Put differently, it was formulated when "Black Letter" law governed and courts were reluctant to admit (if not prohibited from admitting) evidence of or taking into account the facts surrounding the formation of a contract to assist with the interpretation of a contract. The Blackmore rule became the exception to this traditional approach of contract interpretation.

In Canada, the Blackmore rule has been narrowly applied. While it prohibited a court from considering the subjective intention of the parties, it permitted a court to make an objective assessment based on surrounding factual circumstances.[4] Similarly, it did not preclude a party from releasing unknown claims.[5] (For example, in Biancaniello v. DMCT LLP, the Ontario Court of Appeal applied the Blackmore rule and held that where sufficient wording is used, releases can include claims unknown to the parties.[6])

In Corner Brook, the SCC expressly acknowledged that things have changed. The Court referred to its earlier decision in Sattva and restated that a court must "read the contract as a whole, giving the words used their ordinary and grammatical meaning, consistent with the surrounding circumstances known to the parties at the time of formation of the contract."[7] The Court further stated, "[t]he meaning of the words is often derived from a number of contextual factors, including the purpose of the agreement and the nature of the relationship created by the agreement"[8], but that the surrounding circumstances "must never be allowed to overwhelm the words of that agreement."[9] Finally, the Court clarified that relevant surrounding circumstances must "consist only of objective evidence of the background facts at the time of the execution of the contract… that is, knowledge that was or reasonably ought to have been within the knowledge of both parties at or before the date of contracting."[10]

The SCC expressly stated that the Blackmore rule has been overtaken by the general principles of contractual interpretation set out in Sattva. There is no longer a need for a "special rule" to interpret releases as the jurisprudential concerns that gave rise to the rule in Blackmore no longer exist – and further, that the rule does not add anything new to the regular repertoire of contractual interpretation principles post-Sattva. Hence, "the Blackmore Rule has outlived its usefulness."[11]

Key takeaways and a practical comment

• There is no longer a specific rule of construction applicable to the interpretation of releases. The Blackmore rule should no longer be referred to, nor should the jurisprudence relying on it.[12]
• A release is subject to the same principles of interpretation as any other contract.[13]
• Post-Sattva, the interpretation of a contract is question of mixed fact and law. As such, it is subject to the standard of palpable and overriding error for the purposes of appellate review, except in rare circumstances where an extricable question of law is identified.

Litigators should appreciate that Corner Brook is yet another case that confirms the enhanced discretion of a court to bring about a fair result, and one consistent with the intention of the parties, in contract cases. The corollary is equally apposite: it will be difficult to appeal on a question of contractual interpretation given that the standard of review is the more onerous test of palpable and overriding error.