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Court Clarifies Condition “Subject to Court Approval”

Published in the June 2006 issue of Transportation Notes - View Article

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The Ontario Court of Appeal recently ruled that when a party under disability dies unexpectedly before court approval of a settlement agreement, the estate of the party under disability can enforce the settlement.

The litigation guardian of Rebecca Wu settled an accident benefits claim against two insurance companies but because of mental disability, the settlement was “subject to necessary court approval”. Wu died before approval was obtained.

Wu’s estate brought an application to enforce the settlement. The application judge ruled that the requirement for court approval was a “true condition precedent” that had to be satisfied, otherwise there was no binding agreement.

At first blush, this would appear to be supported by the authority of the English House of Lords which, some 35 years ago, allowed the repudiation of a settlement which was subject to court approval. However, the relevant rule in that case was quite different from the rule in Ontario. The English rule stipulated that no settlement involving a person under disability would “be valid without approval of the court”. On the other hand, the Ontario rule states that no settlement of a claim by a person under disability “is binding on the person”.

The Ontario Court of Appeal considered this distinction and reversed the judge of first instance. The Court noted that the statutory requirement for court approval is derived from its parens patriae jurisdiction, which is protective and neither creates substantive rights nor changes the means by which claims are determined. It held that immediately prior to Wu’s death, there was a legal agreement which the respondents could not disavow, but its operation was simply suspended pending “necessary” court approval.

The defendants argued that the settlement died with Rebecca Wu. To the contrary, the court found that Wu’s contingent right (contingent only on court approval) passed to her estate on her death. That being the case, the right no longer resided with a person under disability and court approval was no longer necessary.

Unlike a condition precedent, such as cases involving real estate transactions subject to planning approval, the circumstances differed as the intent of the parties was to include a term legally imposed upon the parties specifically to protect the interests of the party under disability. The Court noted that the language of R. 7.08(1) provides that the agreement is not binding on the party under disability until the court approves the agreement, but says nothing to limit the binding effect of the agreement on the other party, reflecting the unilateral and protective purpose of court approval.

The Court rejected the insurers’ second argument that Wu’s death made court approval impossible, thereby making the agreement void ab initio. The Court found this argument contrary to the protective purpose of the parens patriae jurisdiction and concluded that the risk created by the gap in time to allow the court to review the settlement to ensure it meets the plaintiff’s interest should not be borne by the plaintiff. Finally, the Court noted that as parties under disability cannot re-open settled claims when unfavourable contingencies materialize, fairness requires the same of insurers.

The Court noted that if the parties intend that the party under disability be alive at the time of court approval, then the minutes of settlement should so stipulate.