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Contracts - Interpretation - Business Efficacy - Implying Terms

Energy Fundamentals Group Inc. v. Veresen Inc. (Ont CA, 2015)

In this case the Court of Appeal considered when a court could imply terms into a contract as a means of giving it business efficacy:
[28] The application judge’s largely factual conclusion that the right to value and price disclosure was necessary to give business efficacy of the agreement is owed deference. This flows from Olympic Industries Inc. v. McNeil, 1993 CanLII 318 (BC CA), 86 B.C.L.R. (2d) 273, [1993] B.C.J. No. 2565 (C.A.), at para. 31, cited more recently by Moulton Contracting Ltd v. British Columbia, 2015 BCCA 89 (CanLII), 381 D.L.R. (4th) 263, at para. 56, which held that “[t]he question as to what the parties must have intended as a matter of necessity is a question of fact to be decided in the circumstances of each case.” [Emphasis added]

[29] The issue of implication of contractual terms raises questions of mixed law and fact, as would interpretation of the contract, and the same standard of review should apply, palpable and overriding error, unless extricable errors of law are evident. (Sattva Capital Corp. v. Creston Moly Corp. 2014 SCC 53 (CanLII))

[30] As observed by the application judge, a contractual term may be implied “on the basis of the presumed intentions of the parties where necessary to give business efficacy to the contract or where it meets the ‘officious bystander test.’” (M.J.B. Enterprises Ltd. v. Defence Construction (1951) Ltd., 1999 CanLII 677 (SCC), [1999] 1 S.C.R. 619).

[31] The officious bystander test was most famously articulated in Shirlaw v. Southern Foundries (1926) Ltd., [1939] 2 K.B. 206 at 227, [1939] 2 All E.R. 113 at 124 (C.A.):
Prima facie that which in any contract is left to be implied and need not be expressed is something so obvious that it goes without saying. Thus, if while the parties were making their bargain, an officious bystander were to suggest some express provision for it in their agreement, they would testily suppress him with a common: “Oh, of course.”
[32] The business efficacy test in its modern form originated in The Moorcock (1889) 14 P.D. 64, [1886-90] All E.R. Rep. 530 (C.A.) at 68:
In business transactions such as this, what the law desires to effect by the implication is to give such business efficacy to the transaction as must have been intended at all events by both parties…
[33] The Moorcock concerned a contract between a wharf operator and a ship owner; the court implied a warranty that the ship could be safely moored at the wharf with “the object of giving to the transaction such efficacy as both parties must have intended” (p. 68, 70).

[34] The business efficacy test was reviewed more recently by the Privy Council in Attorney General of Belize v. Belize Telecom Ltd., [2009] UKPC 10, [2009] 2 All E.R. 1127, at para. 22:
Take, for example, the question of whether the implied term is "necessary to give business efficacy" to the contract. That formulation serves to underline two important points. The first, conveyed by the use of the word "business", is that in considering what the instrument would have meant to a reasonable person who had knowledge of the relevant background, one assumes the notional reader will take into account the practical consequences of deciding that it means one thing or the other. In the case of an instrument such as a commercial contract, he will consider whether a different construction would frustrate the apparent business purpose of the parties. …
[35] Implication of a contractual term does not require a finding that a party actually thought about a term or expressly agreed to it. Often terms are implied to fill gaps to which the parties did not turn their minds (Belize Telecom, para. 31).

[36] On the other hand, a court will not imply a term that contradicts the express language of the contract, or is unreasonable: G. Ford Homes Ltd. v. Draft Masonry (York) Co. Ltd. (1984), 1983 CanLII 1719 (ON CA), 43 O.R. (2d) 401 (C.A.).

[37] The conclusions drawn by the application judge were reasonably available to him on the evidence. Here, it is apparent that the letter agreement was not intended to comprehensively define the relationship between the parties. In a commercial setting, there may be contracts “where the parties to a contract may have been content to express only the most important terms of their agreement, leaving the remaining details to be understood” (H.G. Beale, ed., Chitty on Contracts, 31st ed. (London UK: Sweet & Maxwell, 2012) vol. 1 at 13-002).


[41] Veresen’s argument that the application judge departed from the correct test for implication of a term (which requires analysis of the actual intentions of the parties) and instead used a test of what reasonable parties would have agreed is based on para. 85 of his reasons:
If Veresen was looking for a 20% equity partner in the Project, it is clear beyond peradventure that it would have to provide access to confidential financial information about the Project. No one would ever invest several hundred million dollars in this Project without performing detailed due diligence on the value of the stake in the Project being acquired.
[42] Veresen relies on para. 29 of M.J.B Enterprises Ltd., where Iacobucci J. said:
What is important in both formulations [the business efficacy test and the “officious bystander test”] is a focus on the intentions of the actual parties. A court, when dealing with terms implied in fact, must be careful not to slide into determining the intentions of reasonable parties… [Emphasis in the original]
[43] As observed in John D. McCamus, The Law of Contracts, 2nd ed. (Toronto: Irwin Law, 2012), at 781, reasonableness is an inescapable part of determining whether to imply a contractual term:
Thus, it is plainly the case that the implied terms must themselves be reasonable. One would not expect a court to imply terms into an agreement that it considered to be unreasonable. Further, keeping in mind that the implied in fact term rests on the presumed intentions of the parties, courts quite understandably presume intentions of the parties that are reasonable. In other words, in attributing to the parties hypothetical intentions as to what they would have agreed to if the matter had been raised at the time of contracting, courts assume that the parties would behave reasonably and would agree to a reasonable term. Indeed, in the absence of actual but unexpressed intentions it is inescapable that courts would apply a reasonable intentions standard. In other words, although necessity appears to be the threshold that must be met before engaging in the exercise of implying the term, the formulation of the term to be implied is very much an exercise that rests on a concept of reasonableness. At the same time, however, the implied term is tailored to the needs of the actual transaction of the actual parties rather than to some hypothetical reasonable transaction; accordingly, to the extent that relevant actual intentions of the parties are manifest in the transaction, they must form a basis for the implied term.
[44] The court’s warning in M.J. B. Enterprises about the need to be “careful not to slide into the intentions of reasonable parties,” mandated an analysis rooted in the actual relationship between the parties and the specific contractual context, rather than a detour into an abstract analysis of what in general, a reasonable person might have agreed. In M.J.B. Enterprises itself the court went on to assess the reasonableness of the proposed implied term in the specific context, but also relied on the general reasonableness of such a term, saying, at para. 30, “…I find it difficult to accept that the appellant, or any of the other contractors, would have submitted a tender unless it was understood by all that only a compliant tender would be accepted.”

[45] In my view the application judge did not depart from the proper test cited by him in the immediately preceding paragraph of his reasons. His analysis is in no way abstracted from an analysis of the specific relationship between these parties.

[46] The finding that no reasonable person would have embarked on an exercise of the option without disclosure, supports a finding of the necessity of the implied term for purposes of business efficacy.

(3) Did the application judge err by confounding the requirement of good faith performance of a contract with the test for implying contractual terms?

[47] In my view, the application judge’s references to good faith do not undermine his earlier factual conclusions as to necessity and business efficacy.

[48] As he indicated, in Bhasin, the court observed:
The implication of terms plays a functionally similar role in common law contract law to the doctrine of good faith in civil law jurisdictions by filling in gaps in the written agreement of the parties: Chitty on Contracts, at para. 1-051 [emphasis added].
[49] Reference to this common doctrinal underpinning, after concluding that implication of the term was necessary to give business efficacy to the contract, does not amount to error. As explained in Swan & Adamski, Canadian Contract Law, 3rd ed. (Markham: LexisNexis, 2012) at para.8, p.113:
Like custom and the device of the implied term or the imposed or supplied term to fill a gap in the agreement, good faith is a device for supplementing the terms of the contract to deal with aspects of the relation that have not been specifically dealt with by the parties.

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