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Releases that don’t stay final

How to stop “phoenix” cases that rise from the ashes

By Will O'Hara

May 29 2009 issue


[Jon Lezinsky / Images.com]
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You settle a nasty lawsuit against your client and get a full and final release from the claimant as part of the settlement so your client will never have to deal with the claimant again. That’s the point of the release.

But it doesn’t always work out that way. The claimant may attempt to raise the claim from the ashes and set aside the release by alleging non-disclosure or misrepresentation on the part of your client. You resist with all your strength, but your client ends up back in court, paying more legal fees and dealing with the claimant once again. The whole point of the release has been defeated, or at least significantly eroded.

Attacks on releases based on non-disclosure can’t be avoided altogether, but recent decisions from the Ontario Court of Appeal indicate that the courts are losing patience with these phoenix cases and suggest new ways of reducing their numbers.

Quinn v. Epstein Cole LLP (2008), 92 O.R. (3d) 1 (Ont. C.A.) involved a matrimonial dispute and a tangential claim against a law firm. The husband had been ordered to provide financial information to his wife in a divorce proceeding, but before he had complied the parties agreed to a settlement. The wife later attempted to revive the claim by alleging non-disclosure on the part of her husband and inadequate advice from her lawyers.

The defendants brought a motion for summary judgment and the claim was dismissed on the basis of the full and final release between the parties. Each party had acknowledged to the other in the settlement agreement that they were “satisfied with the information provided and have no outstanding requests for information.”

The Court of Appeal unanimously upheld the decision of the motions judge, noting that in effect “the appellant simply wishes to revisit the entire issue of [the husband’s] finances in the hope that evidence will come to light indicating that he failed to disclose significant income, assets or their values when the separation agreement was entered into.” The court added, “having previously eschewed her court-sanctioned right to insist on further disclosure from [the husband], and having accepted the benefit of the separation agreement, this course of action is now foreclosed to the appellant.”

The same approach was taken in Isailovic v. Gertner, [2008] O.J. No. 5346, where the plaintiff had formed a partnership with a builder to develop a property for resale. The builder’s father, a lawyer, acted for the plaintiff and for the partnership. He was clearly a fiduciary of the plaintiff. The relationship turned sour when the plaintiff complained that the builder and his father were concealing information about funding for the project.

After an acrimonious dispute, the parties agreed to a settlement. The plaintiff received legal advice (that he claimed was inadequate) from a lawyer who had connections to the builder’s father.

The plaintiff received the settlement funds and signed a full and final release, not only releasing the builder but his father as well. The builder finished the project and sold the house at a profit. That’s when the phoenix emerged from the ashes. The plaintiff sued the builder and his (lawyer) father to recover his share of the profits. He claimed the release was invalid because of non-disclosure of material facts.

The defendant’s lawyer moved to dismiss the plaintiff’s claim on the basis of the release. Despite allegations of diversion of funds and non-disclosure on the part of the defendants, the motions judge granted summary judgment, relying on Radhakrishnan v. University of Calgary Faculty Assn., [2002] A.J. No. 961 that held that a settlement agreement cannot be set aside for failure to disclose what one suspected, even if the party had a duty to disclose.

The Court of Appeal upheld the decision of the motions judge, applying Quinn and Radhakrishnan.The court noted that “the appellant knew that the respondent was a fiduciary.  He knew that the respondent had not fully disclosed the financial dealings on the property... Yet, with all this knowledge, the appellant nonetheless decided to compromise his non-disclosure claim and signed the release. He did so with the benefit of legal advice. In these circumstances, he can no longer complain about the respondent’s conduct.”

In both cases, the releasees had a duty of disclosure, whether by court order or because of fiduciary obligations. Both releasors had legal advice (which appeared to be adequate despite their allegations to the contrary) and in both cases it was clear that the releasors had waived their rights to insist on further disclosure, even though they still had suspicions of wrongdoing.

The clear message from the Court of Appeal seems to be that if you don’t think you have enough information to settle — don’t settle.

Can a full and final release ever be forever? In light of the appellate decisions in Quinn and Isailovic, counsel can reduce the likelihood of post-release litigation by having the parties acknowledge in the release that they have received independent legal advice and that they are satisfied with the information provided and have no outstanding requests for information, as was done expressly in Quinn and implicitly in Gertner.

The practical result in the wake of these two decisions should be a full and final release that really is full and final.

Will O’Hara is a partner at Gardiner Roberts LLP in Toronto and a certified specialist in civil litigation.

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