Unsettling Settlements

December 23, 2020

By Nick Melchiorre

Careful drafting of your settlement agreements may avoid future grief, legal expense, uncertainty and delay. Poor drafting may even make your settlement vulnerable to being reopened. If it is a settlement you reach without lawyers, this is particularly problematic; but even if you have a lawyer, they need your participation to make sure that the document the lawyer prepares matches what you understand the deal to be, that it is clear to both parties, and is complete.

With increased numbers of people and businesses proceeding to mediate or arbitrate disputes without lawyers, the risk is magnified.

In the first category, we see clients come to us from time to time who have tried to resolve issues on their own. Deals are made all the time, both in business and between individuals. In some situations though, especially family law, there are “magic words” or steps required that make it dangerous to proceed without legal advice.

Homemade settlements often unravel, and getting back to a deal is more expensive than the cost of professional advice would have been at the drafting stage. A new deal usually requires one or both sides to alter their positions to make a new deal. For at least one party, it is usually not a better deal.

The recent Ontario Court of Appeal case of Kearns v. Canadian Tire Corporation, Limited is an example of where having a lawyer at mediation does not avoid issues on the settlement terms when there is poor communication.

Kearns was a long time Canadian Tire Corporation (CTC) executive who was terminated without cause. CTC made certain post termination payments to him, but after he started his action for wrongful dismissal the parties went to mediation.

The mediated settlement agreement provided that Kearns would receive “$150,000.00 in addition to amounts already paid.”

Unfortunately, the CTC representatives at the mediation were unaware of one of the payments made to Kearns (the “November payment”), in the amount of $115,465.20 less statutory deductions. They discovered the error before making payment, so deducted that amount from the settlement funds of $150,000.00. Kearns moved to enforce the agreement as he understood it.

There were numerous issues argued as to whether there was ever a binding agreement; whether Kearns misled CTC at the mediation by not bringing up that payment; and as to how the judge ought to interpret the wording “amounts already paid”.

Kearns was successful. CTC appealed. The Court of Appeal agreed with Kearns and the motion judge that there was a binding settlement and that Kearns was entitled to $150,000.00 in addition to the November payment.

First, they held that the subjective belief of the CTC representatives at the mediation was not relevant, because the written agreement was a complete agreement and not ambiguous. In those situations, the law is clear that a subjective mistake of one party does not matter. There was no evidence that Kearns was aware of their mistaken belief, so the principles of good faith bargaining were not triggered.

The equitable doctrine of rectification did not apply because in cases of unilateral mistake, there must be evidence of fraud or something similar to fraud, and there was no evidence that Kearns was acting fraudulently. Although the CTC representatives at mediation were unaware of the November payment, the corporation had the knowledge, and there was a pay stub that those representatives just failed to notice.

In addition, the “statement of issues” prepared by CTC for the mediation reflected the November payment having been made.

In their reasons dismissing the appeal, the Court of Appeal pointed out that the  “litigation could have been avoided through the simple drafting device of quantifying in the Minutes the “amounts already paid”.” A bit of an odd comment that suggests the phrase used was in fact ambiguous, even though the court said it was not. The court seems to be sending a couple of messages:

  • Precise drafting counts
  • Parties in a position to ensure that the document reflects the deal will not be rewarded for their mistakes

This result is also consistent with the apparent trend of courts to favour employees in termination cases, reflecting the reality that employers are the stronger, better funded party, often with greater access to professional advice.

Kearns and CTC probably entered into mediation to to save delay and cost. Among the other usual reasons to mediate. By ending up with an appeal, they suffered increased cost and unfortunate delay.  More precision would have avoided the entire mess – though perhaps it might have blown up the settlement at mediation, or led to a different deal.

If the definition of a good settlement is one that leaves everybody a bit unhappy, then this was not a good settlement. No doubt CTC was a lot unhappy, and Kearns was likely more than a bit unhappy about stress, anxiety, cost and delay.

Lessons to be learned:

  • know all the facts going into mediation;
  • make sure both sides share a common understanding of the facts before settling;
  • make sure both sides share a common understanding of the settlement terms;
  • make sure you understand the terms of any written settlements;
  • make sure those terms are are clear, complete and precise; and
  • make sure those terms reflect the deal you intend to make.