When a Party Breaches a Settlement Agreement: Being Made Whole

Settlement agreements that conclude litigation are often reached once the parties have gotten to a point of a loss of faith in one another or a complete breakdown in whatever relationship they may have enjoyed pre-litigation. It is probably for this reason that a question often asked of lawyers by their clients is “How do I assure that the other side doesn’t breach the settlement given?” The case of Shewchuk v IBM Canada Limited, 2017 BCSC 2211 (CanLII) concerns the consequences where a party refuses to abide by settlement terms.

At the heart of the case was the settlement of a wrongful dismissal dispute. It was uncontested that the parties reached a settlement as to the settlement amount, but the defendant failed to pay $5,250 of the settlement funds. When confronted by this shortfall, the defendant took the position that it would simply not pay the shortfall on the basis that the plaintiff would recover the shortfall when he filed his taxes.

An application seeking to enforce the settlement, seeking special costs and seeking punitive damages was filed. In the face of the application, the defendant paid the shortfall; however, the plaintiff went ahead with the application to seek costs and punitive damages.

The court found that the defendant’s conduct and the implied terms of the settlement contract confirmed that the defendant was to deliver the settlement funds as soon as reasonably possible. The court further found that the defendant’s delay in payment amounted to a breach of the term to pay the settlement funds as soon as reasonably possible.

The court went on to find that the defendant’s conduct was high handed and that there was no tenable basis for its refusal to pay the settlement funds; however, the defendant’s conduct was not found to be so malicious or reprehensible so as to attract punitive damages.

The court reflected on a history of prior judgments awarding special costs for breaches of settlement agreements and that the defendant demonstrated a lack of candour or forthrightness all of which grounded an order for special costs. In awarding special costs, the court effectively made the plaintiff whole for the legal expenses incurred in an effort to collect the remaining settlement funds including, presumably, the costs of the application.

While settlement agreements can be drafted in a manner so as to give an explicit, contractual right to seek full indemnification for the costs to enforce a settlement agreement in the face of any breach of the settlement, Shewchuk v IBM Canada Limited provides some assurance and is a reminder that the terms of a settlement agreement are contractual and enforceable by the court. A party that breaches a settlement agreement risks both being forced to complete the agreement and having to pay the legal costs of the party seeking to enforce the agreement.

In short, the courts are prepared to enforce settlement agreements and make the innocent party whole with respect to any costs associated with enforcing a settlement agreement.

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