When Can Settlement Agreement Be Rescinded?


In a very recent decision in Deschenes v. Lalonde, 2020 ONCA 304 (CanLII), the Ontario Court of Appeal for Ontario examined the law on when a settlement agreement can be rescinded. The question arose in the context of a legal claim against a Roman Catholic Diocese by a victim of a sexual assault committed by one of its priests.

The key takeaway is that there is a strong presumption in favour of finality in settlement agreements. However, that presumption can be surmounted if one of the parties shows that it relied on a material misrepresentation made by the other party in entering into the agreement.

The Facts

The victim alleged that in the early 1970s when she was a child, she had endured a series of sexual assaults by a priest. In 1996 she sued the Roman Catholic Episcopal Corporation of the Diocese of London in Ontario (the “Diocese”), claiming it was vicariously liable for the priest’s actions, and was negligent for failing to prevent the assaults against her.

In its defence, the Diocese comprehensively denied knowing anything during the 1970s about the priest’s sexual misconduct. It claimed that it was only in the 1990s, two decades after the assault of the victim, that the Diocese first became aware of some earlier assault accusations from the 1960s against that same priest.

The parties entered into mediation, and in 2000 the victim settled her claims against the Diocese for $100,000. At the time of the settlement, there was no evidence that the Diocese knew about the priest’s criminal propensities when he assaulted the victim.

However, in 2006 the victim realized that the Diocese must have known about the priest’s sexual misconduct long before she herself was assaulted, which put its own vicarious liability and negligence back into question. Specifically, she learned that in 1962 three girls had complained to the police about having been sexually assaulted by the priest, and their police statements had been given to one of the other clergy members of the Diocese. Neither the police nor the Diocese took any action against the priest at that time, and the clergy member who received the statements later died suddenly. The statements were mis-filed among some accounting documents until they surfaced in 2006. The priest pleaded guilty that same year to having sexually assaulted 47 girls under the age of 18.

This new information about the police statements prompted the victim to launch a second action against the Diocese in 2008, in which she asked for recission of the $100,000 settlement agreement. She also claimed damages against the Diocese for vicarious liability and its negligence in failing to prevent the assaults against her. The victim asserted that she would never have settled the first action on the terms she did, had she known that the Diocese had information about the priest’s prior abuse of children at the time she endured his sexual assaults.

The parties each asked the court to rule on a motion for summary judgment, to determine whether the 2000 settlement agreement was enforceable. The motion judge found for the victim, concluding that the settlement agreement could be rescinded in the circumstances.

The Diocese launched an appeal on this point, but was unsuccessful. The Court of Appeal found that the motion judge had not erred in ordering the settlement agreement rescinded, on the ground that the Diocese had made an innocent misrepresentation on which the victim had relied.

Displacing the “Strong Presumption” Favouring the Finality of Settlements

The Appeal Court began by conceding that there is a “strong presumption in favour of the finality of settlements,” which are essentially compromises made on the basis of the information available to the parties at the time. That information plays into each party’s assessment of the strength or weakness of their case. In law, a settlement agreement will not be rescinded merely because some information later comes to light that suggests the deal was improvident.

However, a settlement agreement – like any other contract – can be rescinded on the basis of misrepresentation. Where there has been a false or misleading representation that induces a person to enter into a contract or settlement, rescission is an equity-based remedy. In the right circumstances, the justification for a rescission can “trump” the general legal principle that settlements should be considered final.

In this case, the victim was not seeking to resile from the settlement because of new information that would have strengthened her case; instead, she was asking to have the agreement rescinded because certain key information provided to her at the time by the Diocese was false.

The Court of Appeal revisited the essential elements that must be shown before the equitable remedy of rescission can be invoked.

In order to succeed, the victim had to show that: 1) the Diocese had made a misrepresentation; 2) the misrepresentation was material to the settlement; and 3) she relied on that material misrepresentation in deciding to settle. Although it was not necessary to show that the Diocese’s misrepresentation was the victim’s sole inducement, it had to pertain to a matter that a reasonable person would consider relevant to the victim’s decision to settle in the circumstances.

The evidence showed that the victim would not have settled in 2000 for only $100,000 if she had known about the 1962 police statements in the Diocese’s possession. That non-disclosure affected the victim’s assessment of the strength of her case. Since she had no evidence at the time that the Diocese knew about the priest’s history of sexually abusing girls, she had no ability to make out her case of negligence. By extension, this informed her decision-making around the settlement offer.

The Court noted that the victim could potentially rely on rescission even if the Diocese made the misrepresentation innocently, while believing it was true. There was no requirement to prove that there had been a crime, or even that the Diocese had committed an intentional wrong that might require an investigation of its own conduct.

The Diocese stated repeatedly – even while under oath – that no one knew of any reason to be concerned of the priest’s behaviour prior to the early 1970s, that there were no previous complaints about him, and that it only learned of his sexual abuse around 1990. Although these were mistaken assertions by the Diocese, they were tantamount to misrepresentations of material facts that the victim relied on in deciding to settle her legal claims.

The Court of Appeal found no reason to interfere with the motion judge’s finding in the victim’s favour. She had established all the necessary elements to support the rescission of the settlement agreement. The overarching interests of justice and fairness also bolstered this outcome.