Often when concluding a settlement agreement, it is late in the day. The participants are eager to cement the deal and go home. Issues such as a release, a letter of recommendation, a confidentiality term, tax withholdings, tax allocations, E.I. clawback and the like may not be specifically stated. Frequently the minutes may call for the  “usual release” or a “complimentary reference letter”, without further detail. What may then follow when the parties cannot agree on such undefined terms. Is the deal off ? Perhaps not.

Formation of the Deal

The usual law of contract will apply to determine whether the parties have reached an enforceable settlement. The general principle is cited in a 2000 decision of the Chief Justice of the B.C.S.C.: ¹

If whatever a man’s real intention may be, he so conducts himself that a reasonable man would believe that he was assenting to the terms proposed by the other party, and that other party upon that belief enters into the contract with him, the man thus conducting himself would be equally bound as if he had intended to agree to the other party’s terms.

The same decision noted that the test is an objective one, based on that which a reasonable party would see, not what the opposing party inwardly desires. All this is based on the parties’ words and conduct. Presuming a contract is found, the analysis then will turn to the second step, which is to determine whether the agreement was completed or documented.

Often this issue becomes a contest between (1) has one party introduced a new term or (2) is this party merely implementing the terms of settlement.

No formalities are required to prove the settlement. It can be formed by a telephone conversation, a discussion in a cloak room, exchanged texts, emails or in letter form. ²

Needless to say, there must be offer, acceptance, consideration and agreement on all essential terms.

Where such fundamental terms are agreed, the failure to set out or agree to “incidental matters” will not allow the settlement agreement to be set aside. In a 2017 case from Newfoundland and Labrador, the court found that the failure to set out in precise dollars of the vacation pay owing would not allow the employer to escape the settlement agreement: ³

From this, I would accept that while agreement on the essential terms is necessary for the formation of an agreement, failure to specify or agree to incidental matters will not invalidate the remaining terms.  In particular, when a provision for which final agreement has not been reached can be severed without affecting the agreed upon terms, then that, by itself, will not render invalid those terms for which agreement has been reached.

This applies also to “completion terms”, such as the form of the release, or the contents of a letter or recommendation, as discussed below.

The evident theme is that the courts will strive to uphold the agreement, once proven, and will enforce it upon the application of either party. ⁴

Counsel’s Authority

The general rule is that legal counsel’s representations will bind the client absent a limitation of that authority which is known to the opposing party. There are further unusual exceptions which are reviewed here. ⁵

Without Prejudice Communications

It is clear that the usual protections afforded to settlement discussions as privileged is absent where one party alleges such communications created a settlement agreement. ⁶

No agreement Reached

As noted above, the first step of the analysis is to determine whether an agreement to settle has been reached. In an Ontario case decided in 1999, the parties during settlement negotiations, the plaintiff had tendered a draft reference letter as a settlement term, and requested this be provided or “something reasonably similar”. The employer submitted its draft of such a letter which was rejected by the plaintiff. After this event, the defendant submitted a further offer to settle.

On these facts, the court found that there was no agreement reached, which was, the court stated, recognized by the employer as it submitted a renewed offer. ⁷

Release in Debate

This issue has been frequently debated. The consensus is that the court will enforce the “usual release” where the parties cannot agree on the precise terms.

In what has become the leading authority on this subject, the B.C. Court of Appeal considered this question in its 1989 decision. ⁸The dispute centred upon tax being deducted from the settlement funds and more importantly, that the release submitted by the employer counsel “was an unusual one containing covenants and indemnities that were excessive and unnecessary”.

The trial judge found that there was no settlement, a decision which was reversed on appeal.

The analysis applied by the Court of Appeal was first to determine whether the parties had concluded a contract. The court did add, parenthetically, that a settlement implies an obligation to provide a release. This issue was not relevant to the instance case as the parties had agreed that the plaintiff would provide a release.

The second step is then to consider whether the agreement was completed.

On the specific issue of the release, the Court of Appeal stated that the parties were free to submit the form of release each thought appropriate, barring a specific form of release which had been previously agreed.

Notably, the Court of Appeal found that by submitting such a document does not rescind the settlement agreement. This is a critical point. Where the release, as in this instance, is not accepted, then there must be further discussion.

As to the terms of the release, which were not spelled out in the decision, this court found that this was an “over-zealous” attempt to get the best possible release. Such a dispute, dealing with the wording of the release, should be “resolved by application to the court” or by “common sense within the framework of the settlement” and in accordance with the “common practices” of the bar. The court added that “it will be rare for conduct subsequent to a settlement agreement to amount to repudiation”.

The end result was that the parties were bound by the settlement agreement and that the plaintiff was required to provide a general release. It is unfortunate that the decision did not reveal the specific “over-zealous” terms of the release which was initially tendered. It did speak of indemnities contained within the draft.

To be released from the agreement, one party must insist upon a term which had not been agreed, or is not reasonably implied in the context of the case.

On the tax issue, the appellate court agreed that there was a legal obligation to deduct tax at source.

Where the terms of the release are not specifically agreed, the court may determine the terms based on common practice or what which is commercially reasonable and issue a binding declaration to that effect. ⁹

Release an Implied Term

The B.C. Supreme Court determined in 2000, that a settlement of a threatened wrongful dismissal claim and its subsequent settlement would be presumed to be subject to the implied term to provide a general release. ¹⁰

This is not the case for a release to be provided by the employer to the plaintiff. This must be bargained for and not presumed, absent possibly a counter-claim. ¹¹ where it would be expected as a reciprocal term.

The issue may arise as to whether such an implied term requires a release of all claims, known or unknown, or alternatively, only claims which are related to, or included in the pleaded claim. The Saskatchewan Court of Appeal in a 2008 decision concluded that implicit within the offer which was accepted, was the execution of a release of claims pleaded. ¹²

Other Implied Terms

The B.C. Court of Appeal in Fieguth, apart from the release and tax issues, also considered the appellant’s submissions that there was no stipulation made as the timing of the delivery of settlement funds, and the method of payment. Needless to say, the court concluded that the time for payment was to be a reasonable one. It did not address the method of payment, which was a curious submission in any event.

Indemnity

In the same case, the court also addressed the issue of an indemnity in the release. It  concluded that this was not to be an implied term. It is not clear from the decision what type of indemnity had been proposed. There was in this case no suggestion that such a clause would be normally included. The indemnities, that is plural, were described in the reasons of the Court of Appeal as “excessive and unnecessary”.

This being said, most “usual releases” contain an indemnity in the event the plaintiff later sues other parties which may seek contribution from, or third party the employer. Also, in cases where agreed tax allocations are made , often without withholding, there is typically an indemnity given by the plaintiff to make the employer whole for any tax liability. It would be prudent, nonetheless, to include a specific term for such an indemnity in the “usual release”.

An Alberta K.B. decision in 2018 considered this issue in a case alleging defective construction work. The court found that a release would normally include an indemnity in the event of a subsequent claim against a non-party. This, however, would depend on the context of the case: ¹³

Formal releases commonly include indemnities in the event of claims over against released parties in actions brought by the releasers against others. I cannot say, however, that these are customary or implied in every case (Imperial Oil at para 22; Norwich at para 29; Fieguth at para 21). Rather, the terms are dependent on the context. An indemnity might sometimes be implied. For example, where a claimant asserted, in his pleadings, conspiracies and involvement by other unnamed persons in the harm he suffered, and the wording of the settlement agreement contemplated a wide settlement of claims, an indemnity in the event of further litigation against unnamed parties was implied (Gregory v KPMG LLP, 2012 BCSC 1387 at paras 16-19, 26-27).

A civil action for personal injuries was also implied, on settlement, to require an indemnity be provided within the general release, upon the application of the “officious bystander” or “business efficacy” test. The defendant was fairly entitled not to “dragged back into any litigation by future actions” of the plaintiff. ¹⁴

Letter of Reference

This issue was considered by the Ontario Superior Court in 2004. ¹⁵ The parties had settled the wrongful dismissal case, subject to “mutual agreement with respect to the letter of reference”. Following this agreement, the defendant sent a draft reference letter to the plaintiff. The response was that the letter was “totally unacceptable and offensive”. The plaintiff further asserted due to this submission that the settlement agreement was off.

The court found that this was not so, and that the parties had agreed to the resolution of the case, subject to agreement on the reference letter. This, the court determined, consistent with the above 1989 B.C. Court of Appeal case dealing with the release, required that both parties make good faith efforts to reach a consensus on this letter. The decision required the two parties to agree on such terms within 30 days.

The same fact pattern and conclusion was reached in a 2006 B.C. Supreme Court decision. ¹⁶ The parties had agreed to a settlement of the dismissal claim which included that a letter of reference be provided which was to be mutually acceptable and “positively address her competence and character”.

The plaintiff had asserted that she was required to qualify for American government security clearance and that the letter must recite her refusal to accede to the wrongdoings of the officers of the employer as the reason for termination.

The court again noted that the parties were required to act in good faith to conclude the reference letter, as an implied term. The decision upheld the settlement agreement and ordered that the reference letter be mutually agreed within 30 days.

Failure to Provide a “Reference Letter”

In 2000, the B.C. Supreme Court agreed with the plaintiff’s position that the employer had failed to provide a letter of recommendation as had been agreed at the time of settlement. ¹⁷ The letter it did submit was simply a confirmation of the position held and the dates of employment. The court agreed that the failure to comply with this term allowed the plaintiff to withdraw from the agreement.

Confidentiality Clause

The law is now clear that a confidentiality clause must be one which is bargained for and cannot be presumed to be included in the “usual release”. ¹⁸.

In Abouchar, the various claims were settled. A release was discussed but the precise terms were not set out. The defendant did present a release which contained a non-disclosure clause. The plaintiff objected to signing the Release. At paragraph 11, Sedgwick J. said:

When, on June 30, 1999, the plaintiff accepted the defendants’ offer to settle, the parties also agreed that the plaintiff would also execute a “final and complete” release (para. 3) with no further details being discussed. The terms of the release must be in accord with the offer to settle that was accepted by the plaintiff. In my view, a “complete and final” release does not entail the inclusion of a non-disclosure clause. Such clause does not constitute by necessary implication a term of the settlement reached by the parties. The gist of a “complete and final” release is for the plaintiff to discharge the defendants (and other persons referred to therein) from any action, complaint, claim, indebtedness, etc. In my opinion, the non-disclosure clause is not part and parcel of a release. If one wishes to insert one, it must be negotiated.

Tax

Absent words to the contrary in the settlement agreement, the employer will be required to withhold tax on the severance sum, as is required by the Income Tax Act. ¹⁹ The Act does not require tax be withheld on legal fees. The parties are free to set out sums which may be descriptive of non-taxable sums and agree that no tax will be withheld on certain sums of that nature. This may raise the issue of an indemnity for not withholding on such sums.

Employment Insurance Clawback

There are no decided cases on this subject. Presuming that the payment is to be compensation attributable to a notice period, and benefits were received in this period, the statute mandates that the employer remit such sum to the Commission. It should follow, as is the case with tax at source, that this is not a new term at variance with the settlement agreement.

Repudiation Generally

To succeed on this argument, the party disputing the settlement must show that the opposing party has insisted upon terms and conditions which have not been agreed nor may they be reasonably implied. ²⁰

Success in this position would then negate the settlement and restore the litigation.

However, the innocent party may well decide to affirm the agreement and sue for its breach, as opposed to attempting to repudiate the settlement. This will allow this party to claim the settlement funds and seek a remedy for the violation. For example, in the case referenced above where the employer failed to provide a true reference letter, the victim may be able to assert the loss of a new job opportunity due to the breach. This would likely be assessed on the reasonable likelihood of obtaining the new position.

A reference letter as a settlement term does not allow for a fair comment defence as it is a contractual obligation. The failure to adhere to this settlement term may allow for further impetus to such a claim.

There may also be a claim for aggravated and punitive damages. Ironically, this may place the innocent party in a better position than had the agreement been fulfilled.

 

 

 

 

1. Langley Lo-Cost Builders Ltd. v. 474835 B.C. Ltd, citing Smith v Hughes, an 1871 decision of the QB
2. McCabe v. Verge Newfl & Lab CA  
3. Miffin v North Atlantic Refining
4. Le Soleil Hotel & Suites v Le Soleil Mgmt 2009 B.C. S.C.
5. Scherer v. Paletta
6. B.C. Children’s Hospital v Air Products 2003 B.C. Court of Appeal
7. Del Ben v. 170629 Canada Ltd., [1999] O.J. No. 3098
8. Fieguth v Acklands
9. Coco Homes Inc v Caleron Properties 2017 Alta KB
10. Brown v Arbutus
11. Sinanan v. Woodyer NS CA
12. Great Sandhills Terminal Marketing Centre Ltd. v. J-Sons Inc.
13. Alfaiate v 1014784 Alberta Inc.
14. McCabe v. Verge 1999 Newfoundland & Labrador C.A.
15. French v Miller [2004] O.J. No. 5723
16. Placer Dome v Rizzo
17. Brown v Arbutus
18. 2002 Abouchar c. Ottawa-Carleton  and 2022 Bouzanis v Greenwood  
19. Coffey and Miller B.C. E.S.T.
20. Orr v Pioneer