Signing a Release? Make Sure You Understand What it Includes.

The recent Court of Appeal decision in Biancaniello v. DMCT LLP provides a very useful review of the law of Releases in general, and the extent to which a full Release will include claims of which the parties may not even be aware.

In this case, the defendants, a firm of accountants, provided services to the Plaintiff on three separate matters in 2007. One had to do with an application for a Scientific Research and Experimental Development Tax Credit. The second had to do with the negotiation of the departure of an employee. The third involved the structuring of a “butterfly” transaction in which the Plaintiff’s business was divided into separate companies on a tax-free basis.

The Defendant billed the Plaintiff about $66,000.00 for these services. The Plaintiff complained about both the amount of the fees and the quality of the work and refused to pay.

The Defendant sued for its fees. In 2008, the parties settled on the basis that the Plaintiff would pay $35,000.00. As part of the settlement, the parties executed a Mutual Release which provided that in consideration for that payment, the Plaintiff released the Defendant from any and all claims arising out of the services provided by the Defendant through to the end of 2007, including all claims that were either pleaded or could have been pleaded in the lawsuit over the fees.

Three years later, in the course of a restructuring, the Plaintiff learned that the butterfly transaction as structured by the Defendant was not at all tax free. In fact, the Plaintiff found that it could be subject to a tax liability of over $1.24 million.

The Plaintiff then sued the Defendant in negligence, seeking an order setting aside the Release and for damages. The Defendant moved for summary judgment dismissing the action on the basis that the Plaintiff’s claim was barred by the Release that it had signed in 2008.

The motion led to an expensive and lengthy journey through the court system. It was initially heard by a single judge, who dismissed the motion after finding that the Release did not bar the Plaintiff’s claim. She felt that the Release referred to claims as of the end of 2007, and that the Defendant’s negligence with respect to the tax issue only came to light in 2011.

The Defendant sought leave to appeal the decision to the Divisional Court. Leave was granted by the presiding judge who found that it was “open to serious debate that this wording is broad enough to cover any claim, even a future claim, in relation to the advice that the Defendants gave to the plaintiffs prior to December 2007”.

The Divisional Court, consisting of three judges, heard the appeal and dismissed it. Agreeing with the motion judge, it held that unless it has “exceptionally comprehensive language”, a Release would apply only to claims known to the parties at the time it was signed. A dispute that had not emerged by that time, or a question that had not arisen, could not be absorbed by the words of a general Release. If the parties want to bar unknown claims, that has to be spelled out in clear language.

The Defendant then obtained leave to appeal to the Court of Appeal.

By the time the matter reached a three member panel of the Court of Appeal, it had been considered by a total of six judges. Four of them felt that the claim could proceed. The two judges who granted leave had serious doubts about the point.

The Court of Appeal unanimously allowed the appeal and dismissed the action on the basis that the claim was, indeed, barred by the Release. To the Court of Appeal, no explicit language was required in the general Release signed by the Plaintiff in order to bar claims unknown to it. The negligence claim came into existence before the Release was signed, even if nobody realized it. It could have been discovered by the Plaintiff if it had hired another set of accountants to review the documents (although there was no discussion as to why the Plaintiff would ever have done such a thing at the time). Therefore, it was caught by the broad language of the Release barring any claims existing up to December, 2007. The only limiting factor in the Release, as this one had been drafted, was that the released claims would have to have been related to accounting work done by the defendants up to that date.

In my world, Releases are frequently the subject of considerable negotiation. The party signing the Release will want to limit it to the extent possible, and hopefully to only those claims actually articulated in the litigation being settled. The party receiving the Release will want to know, in essence, that it will never hear from the Plaintiff again under any circumstances.

The Release negotiated in this case was fairly typical. It was restricted as to subject matter (accounting work) and time (the end of the year in which the services had been rendered) but not in any other way. So one would have to assume that, if properly advised, this Plaintiff would have understood that in signing the Release, it was signing away any claim it might ever have against the accounting firm up to that date whether it was aware of the existence of the claim or not. In a perfect world, a Plaintiff in that position would indeed hire another accountant to check all of the work ever done by the Defendant up to the cut-off date. This is not something that would normally be done, although in this case, given that the Plaintiff was complaining that the Defendant’s work quality was poor, it might not have been a bad idea.

In any event, the moral of the story is that Plaintiffs being asked to sign Releases of this nature must understand that they are walking away from any claim they might ever have against the party being released as of that time. If there is the slightest doubt that another claim might be out there somewhere, it is up to the Plaintiff to investigate that possibility thoroughly before signing on the dotted line.

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