When is a Settlement not a Settlement?

By Irvin Schein, Litigation Lawyer, Mediator, and Arbitrator
Originally published at irvinschein.com.

The recent decision of the Ontario Court of Appeal in Deschenes v. Lalonde provides an example of one of those very rare occasions when a party to a settlement can obtain an order setting the settlement agreement aside.

As one might expect, a party to a settlement who is merely stricken by “buyer’s remorse” because he or she thinks that a better deal could have been achieved is not going to be able to undo a binding settlement agreement.

However, there are circumstances in which a settlement can be set aside.

In this case, Ms. Deschenes alleged that she was sexually assaulted as a child by a priest in the early 1970s. She sued the priest and the local diocese, claiming it was vicariously liable for the priest’s actions and also liable in negligence for failing to prevent the assaults. The diocese insisted that it had no knowledge of the priest’s prior abuse of others until many years after the assaults on Ms. Deschenes had ended. A finding that the diocese had or should have had knowledge of prior misconduct was critical to a successful claim in negligence. Therefore, given this representation by the diocese and the uncertainty of the law on the issue of vicarious liability, Ms. Deschenes felt that she had no choice but to settle the action in 2000 for a payment by the diocese of just $100,000.

In 2006, it came to light that in the early 1960s, the diocese had received police statements alleging that the priest had assaulted several girls long before Ms. Deschenes was assaulted. Shortly after this information came to light, Ms. Deschenes commenced a new action against the diocese asking that the original settlement agreement be set aside. The parties brought the matter to a motion judge seeking summary judgment to determine the enforceability of the settlement agreement.

The motion judge agreed with Ms. Deschenes and set aside the settlement agreement. The Court of Appeal has now affirmed that decision.

It is a well-established matter of public policy that settlement agreements and the releases typically signed upon settlement should be enforced unless doing so creates a real risk of injustice. The courts place a great deal of emphasis on the need for finality in litigation.

In this case, in order to establish that the diocese failed to take reasonable steps to stop the priest from committing these assaults, Ms. Dechenes would have had to establish that the diocese knew or ought to have known of the priest’s past misconduct, and done nothing to stop it from happening again. Her claim for vicarious liability was highly problematic because an employer is generally only vicariously liable if the employee’s conduct is within the scope of the employment.

Throughout the documentary and oral discovery process, the diocese maintained that it had no idea that there was a problem and that there was no basis upon which it could be said that it ought to have known that there was a problem. The motion judge was satisfied that Ms. Deschenes relied upon this representation in her ultimately agreeing to the settlement. He accepted that she would not have settled had she known about the earlier police statements, which clearly proved that the diocese did have knowledge of the priest’s pattern of sexual misconduct.

The motion judge was satisfied that while the denial by the diocese of this knowledge amounted to a misrepresentation, it was innocent in nature. Nevertheless, he concluded that this was a material misrepresentation, upon which Ms. Deschenes had relied in entering into the settlement agreement.

The law is clear that a party has the right to rescind a contract for a false or misleading representation that induced him or her to enter into the contract. The misrepresentation must relate to a matter that is relevant and material and the innocent party must show that he or she did rely on the misrepresentation, at least in part. This is true even if the misrepresentation is made innocently, that is, by a party who believes that the incorrect statement is actually true.

While it is true that there are public policy considerations that favour the finality of settlements, there are overarching considerations of fairness and justice that take precedence.

Accordingly, the motion judge set aside the settlement agreement, and the Court of Appeal affirmed that decision. Clearly, the interests of fairness and justice prevailed in this case.

Settlement agreements are very rarely set aside, but it does happen.