When is a settlement a settlement?

It is not uncommon for a lawsuit to settle before a full trial takes place. Whether the lawsuit pertains to a shareholder dispute, a real estate transaction, a software contract or a construction project, many lawsuits that are filed with our courts end with a settlement agreement between the disputing parties.

Occasionally, parties who have engaged in settlement negotiations will diverge on their views as to whether a settlement agreement has actually been reached. The case of Sumarah v. International Property Group (Toronto) Limited, 2024 ONSC 334, is one such case. In Sumarah, Justice Perell was tasked with determining whether the facts of the case supported a finding that a settlement agreement had been reached. In his reasons, he embarked on an interesting assessment of the facts and discussion of the law on settlement agreements.

Background

The dispute involved an abortive real estate transaction. The purchaser (defendant) moved to have the action and counterclaim dismissed, submitting that the litigation settled when it purchased the subject property under a revised agreement of purchase and sale.^[1] The vendors (plaintiffs) disputed that the action had settled, arguing that the subsequent sale was a mitigation of the aborted first transaction and did not resolve the litigation.^[2]

The parties had agreed to the sale of a property owned by the vendors, but the transaction did not initially close. The vendors subsequently commenced an action against the purchaser for breach of contract, against which the purchaser defended and counterclaimed for return of its deposit and damages for negligent misrepresentation.^[3] Following delivery of their pleadings, the parties paused the litigation and began settlement discussions involving a revised purchase agreement and releases. After negotiating a revised purchase agreement, then a “revised-revised” purchase agreement, the sale finally closed.^[4]

A year and a half later, the vendors amended their statement of claim in the litigation to assert that the revised-revised agreement was simply in mitigation of their damages for breach of contract from the aborted first transaction and did not resolve the litigation.^[5] The purchaser then delivered an amended statement of defence and counterclaim, and subsequently brought the motion to dismiss the (still outstanding) action and counterclaim that was heard by Justice Perell.^[6]

The vendors’ and purchaser’s divergent interpretations of the raw facts

The parties agreed about the normative contract law with respect to settlement agreements but disagreed on how to interpret the raw facts in light of the applicable law.^[7]

On one hand, the vendors’ interpretation was that the purchaser breached the first agreement and that in as much as releases were never agreed to and signed, the sale of the property pursuant to the revised-revised agreement did not settle the litigation. Rather, the vendors submitted that the only consequence of the sale of the property was that the vendors had mitigated their damages suffered by the purchaser’s breach of the first agreement.^[8]

On the other hand, the purchaser’s interpretation was that the parties did settle the litigation. According to the purchaser, the settlement involved three essential terms: (a) the parties would complete a sale of the subject property; (b) the parties would exchange mutual releases; and (c) the claim and counterclaim would be dismissed without costs. Moreover, the purchaser submitted that the parties mutually performed the first essential term of their settlement agreement pursuant to the revised-revised agreement of purchase and sale but that the vendors reneged on the settlement agreement by, firstly, treating the completion of the sale as a mitigatory act rather than as a term of the settlement agreement and, secondly, by refusing to exchange releases to have the claim and counterclaim dismissed.^[9]

Findings

Justice Perell ultimately determined that the parties had reached a settlement agreement and granted the purchaser’s motion dismissing the action and counterclaim.

In his reasons, Justice Perell considered the timeline of events and various correspondence exchanged between the parties during the pause in the litigation.^[10] Among other things, Justice Perell noted that the purchaser mentioned that it would agree to settle the litigation based on a revived transaction and that the vendor said a release was required from the purchaser of its counterclaim as part of a revived transaction.^[11]

In respect of the law on settlement agreements, Justice Perell stated the following:

A settlement agreement is subject to the ordinary rules of contract. For there to be a binding settlement agreement, there must be a mutual intention to create a legally binding agreement and the essential terms of the agreement must have been agreed upon. The conduct of the parties, including the language they used, is viewed objectively in order to determine whether a contract has been made. However, it is not necessary to have reached agreement on incidental matters, such as the method of payment or the exchange of releases. An enforceable settlement agreement may be made orally, in writing, by correspondence, or by an exchange of emails.^[12]

Justice Perell agreed with the purchaser’s interpretation of the raw facts, finding that the “exchange of emails constitutes a Settlement Agreement (Minutes of Settlement of the litigation).”^[13] He noted that

This Settlement Agreement was drafted by the parties without the assistance of their litigation lawyers. The fundamental terms of the Minutes of Settlement were threefold: (a) the parties would revise the agreement of purchase and sale of [the subject property] with a purchase price of $3.4 million and close the transaction; (b) the parties would exchange mutual releases; and (c) the litigation would be dismissed or discontinued without costs.^[14]

Notwithstanding the vendors’ interpretation of the raw facts, Justice Perell concluded that “[i]t is demonstrably clear from the exchange of email and the conduct of the parties that the purpose of reselling the property was to end the litigation that had been paused by [the vendors].”^[15]

Conclusion

This case provides interesting insight into when courts will find that a settlement agreement has been entered into and is enforceable. Justice Perell cited authority that it is not necessary to have reached agreement on incidental matters, such as the method of payment or the exchange of releases. In the end, interpretation of the raw facts showing intention and the essential terms of a settlement agreement carried the day in his determination.