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Contracts - Interpretation - Commercial Principles. Pinnacle International (One Yonge) Ltd. v. Torstar Corporation
In Pinnacle International (One Yonge) Ltd. v. Torstar Corporation (Ont CA, 2024) the Ontario Court of Appeal allowed an appeal, here in a sublease profit-sharing dispute.
Here the court cites central principles of contract interpretation:[51] The first, second, and fourth issues involve the interpretation of the Lease and the Boreal Sublease. As neither document is a standard form contract, this court must review the motion judge’s interpretation of those contracts in accordance with the dictates of Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, [2014] 2 S.C.R. 633, at paras. 52-53. In Sattva, the Supreme Court of Canada explained that because the interpretation of a contract involves questions of mixed fact and law, absent an extricable question of law which attracts a correctness standard, the standard of review is palpable and overriding error: at paras. 50, 53. See also Earthco Soil Mixtures Inc. v. Pine Valley Enterprises Inc., 2024 SCC 20, 492 D.L.R. (4th) 389, at paras. 27-28.
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The governing legal principles
[59] Sattva is the seminal case on the modern approach to interpreting contracts. At para. 47 of Sattva, the Supreme Court provides the following guidance. The modern approach to interpreting contracts is rooted in practicalities and common-sense; it is “not dominated by technical rules of construction”. The court’s overriding concern is to determine the intent of the parties and the scope of their understanding. This requires the court “to read the contract as a whole, giving the words used their ordinary and grammatical meaning, consistent with the surrounding circumstances known to the parties at the time of formation of the contract”. Consideration of the surrounding circumstances – often referred to as the “factual matrix” – “recognizes that ascertaining contractual intention can be difficult when looking at words on their own, because words alone do not have an immutable or absolute meaning”.
[60] Further, commercial contacts must be interpreted in accordance with commercial reasonableness, sound commercial principles, and good business sense, and in a manner that “avoids a commercial absurdity”: Ventas Inc. v. Sunrise Senior Living Real Estate Investment Trust, 2007 ONCA 205, at para. 24; Ontario Securities Commission v. Bridging Finance Inc., 2023 ONCA 769, 169 O.R. (3d) 109, at para. 21.
The factual matrix
[61] The role and nature of the factual matrix in interpreting the terms of a contract are described as follows at paras. 57-58 of Sattva. The interpretation of a contract must always be grounded in the text and read in light of the entire contract. However, the terms of the contract are not to be read in isolation. In furtherance of the court’s goal of understanding the mutual and objective intentions of the parties as expressed in the contract, the factual matrix must be considered when construing contractual provisions. The factual matrix should consist only of objective evidence of the background facts at the time of the execution of the contract – knowledge that was, or reasonably ought to have been, known by both parties at or before the date of contracting. As noted above, the Supreme Court emphasized the need to always consider the factual matrix when construing contractual provisions “because words alone do not have an immutable or absolute meaning”: Sattva, at para. 47.
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A commercially absurd result
[83] As noted above, commercial contracts must be interpreted in accordance with commercial reasonableness and good business sense: Ventas, at para. 24. Interpretation of commercial contracts is to be rooted in common sense and practicality, not dominated by technical rules of construction: Sattva, at para. 47. .... . SS&C Technologies Canada Corp. v. The Bank of New York Mellon Corporation
In SS&C Technologies Canada Corp. v. The Bank of New York Mellon Corporation (Ont CA, 2024) the Ontario Court of Appeal dismissed a contractual appeal, and here addresses contract interpretation based on commercial principles:[1] Every day, sophisticated parties enter into commercial contracts to achieve their business objectives and provide certainty and stability for ongoing business relationships. Sometimes the parties’ subjective understandings of the deal they made diverge. In those circumstances, the courts are asked to intervene, and to hold parties to the bargain they struck by objectively determining the meaning of the words the parties chose within the context of the contract’s surrounding circumstances and commercial purpose. If applying those tools leaves any doubt, then courts can also look to the parties’ course of conduct in performing the contract to determine what they meant.
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(i) Governing Interpretive Principles and Standard of Review
[25] The trial judge correctly instructed himself to ground his interpretation in the contract’s text, consider the contract’s commercial purpose, and examine the parties’ course of performance to resolve any ambiguity. Parties are presumed to mean what they say in the text, which is the focal point of contract interpretation: Earthco Soil Mixtures Inc. v. Pine Valley Enterprises Inc., 2024 SCC 20, 492 D.L.R. (4th) 389, at para. 63; Heritage Capital Corp. v. Equitable Trust Co., 2016 SCC 19, [2016] 1 S.C.R. 306, at para. 47. Courts also favour interpretations that advance the contract’s commercial purpose and are commercially reasonable: 2484234 Ontario Inc. v. Hanley Park Developments Inc., 2020 ONCA 273, 150 O.R. (3d) 481, at para. 65. Finally, the parties’ course of performance can help determine what the parties intended if the text, considered together with the surrounding circumstances, is ambiguous: Prism Resources Inc. v. Detour Gold Corporation, 2022 ONCA 326, 162 O.R. (3d) 200, at para. 18.
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[34] Second, BNY argues that the trial judge’s conclusion was commercially unreasonable because the affiliates of Mellon Trust also needed data to service customers. This submission fails because it takes a one-sided approach to commercial reasonableness, which is an objective interpretative tool that requires considering both parties’ perspectives: Harvey Kalles Realty Inc v. BSAR (Eglinton) LP, 2021 ONCA 426, at para. 6, leave to appeal refused, [2021] S.C.C.A. No. 314; Atos IT Solutions v. Sapient Canada Inc., 2018 ONCA 374, 140 O.R. (3d) 321, at para. 60, leave to appeal refused, [2018] S.C.C.A. No. 218. As the trial judge found, while paying the same Mellon Trust Agreement rates would have been convenient for BNY, this interpretation was unreasonable from SS&C’s perspective: Kentucky Fried Chicken Canada v. Scott’s Food Services Inc. (1998), 1998 CanLII 4427 (ON CA), 114 O.A.C. 357 (C.A.), at para. 27. It would have permitted BNY to “cannibalize” SS&C’s business by selling data to an unknown and ever-shifting group of after-acquired entities.
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[45] .... I would still disagree with the trial judge that treating Mellon Financial as the “Client” is clearly commercially unreasonable. BNY has not met this high standard. See Simex Inc. v. Imax Corporation (2005), 2005 CanLII 46629 (ON CA), 206 O.A.C. 3 (C.A.), at paras. 23, 52-54. ....
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[48] Third, the trial judge overlooked the focal point of contract interpretation, the text, and the constraints it imposes on commercial reasonableness. Courts can legitimately use commercial reasonableness as a tool to interpret the text because parties are unlikely to have intended to strike bargains that make no business sense: Earthco, at paras. 64-65, 72; Bhasin v. Hrynew, 2014 SCC 71, [2014] 3 S.C.R. 494, at para. 45. But the text, in turn, helps courts determine which interpretations are commercially reasonable and prevents using this factor to rewrite contracts that, in hindsight, appear improvident or inconvenient: Atos, at paras. 60-61; Thunder Bay (City) v. Canadian National Railway Company, 2018 ONCA 517, 424 D.L.R. (4th) 588, at para. 52, leave to appeal refused, [2018] S.C.C.A. No. 358; Jardine v. General Hydrogen Corp., 2007 BCSC 119, 68 B.C.L.R. (4th) 162, at para. 37. Thus, commercial reasonableness is not always determinative (Canadian Premier Holdings Ltd. v. Winterthur Canada Financial Corp. (2000), 2000 CanLII 5724 (ON CA), 132 O.A.C. 172 (C.A.), at para. 13), nor is it a licence to depart from the text to engineer whatever result seems “fair” to the court: Kilitzoglou v. Curé, 2018 ONCA 891, 143 O.R. (3d) 385, at paras. 57-59. Further, because parties are presumed to intend the legal consequences of the words they chose, it is not commercially unreasonable to hold them to those words’ meaning: John E. Dodge Holdings Ltd. v. 805062 Ontario Ltd. (2003), 2003 CanLII 52131 (ON CA), 63 O.R. (3d) 304 (C.A.), at paras. 14-16, 35-36, leave to appeal refused, [2003] S.C.C.A. No. 145; Heritage Capital, at para. 47. . Ungar v. MOD Developments
In Ungar v. MOD Developments (Ont CA, 2024) the Ontario Court of Appeal dismissed an appeal from orders resulting from merged counter-applications, here arising from a commercial-residential APS purchase and renovation that had to be modified to comply with a municipal 's.111 Agreement' [under City of Toronto Act, 2006, s.111].
Here the court applies commercial practices in contractual interpretation:[42] Similarly, it was not an error for the application judge to interpret the APSs, taking commercial reasonableness and efficacy into consideration. The parties’ differing commercial positions, including their respective abilities to recoup expenses from renters as compared to condominium buyers, was known to all parties at the time they entered into the APSs. Commercial realities can be relevant to the interpretation of a contract: Resolute FP Canada Inc. v. Ontario (Attorney General), 2019 SCC 60, [2019] 4 S.C.R. 394, at para. 79.
[43] Notably, the interpretation exercise in this case required consideration of the surrounding circumstances and the parties’ objective intentions because the APSs did not directly address how costs were to be shared. The APSs gave the appellant the discretion to develop cost sharing agreements and required that the respondents act reasonably in executing such agreements. In the face of the significant changes imposed by the City in the Section 111 Agreement, it was necessary for the application judge to determine whether the cost sharing agreement proposed by the appellant was reasonable. This necessarily required consideration of the circumstances under which the APSs were formed and the parties’ expectations at that time. I see no error in the application judge’s reliance on the surrounding circumstances or in the conclusions he reached regarding how costs should be allocated. Accordingly, I see no palpable and overriding error in the application judge’s decision regarding the portion of the shared expenses the respondents should be required to pay. . Ontario Securities Commission v. Bridging Finance Inc.
In Ontario Securities Commission v. Bridging Finance Inc. (Ont CA, 2023) the Court of Appeal considered what I think can be describes as a securities liquidation. A "privately held investment management firm" was put into receivership pursuant to s.129 of Ontario's Securities Act (OSA) by the Ontario Securities Commission, in addition to related ancillary orders.
The case itself was an appeal of an application to declare priority (or rather non-priority: pari passu) of different investors. In the course of the liquidating several investors sought to claim 'Liability for misrepresentation in offering memorandum' [OSA 130.1]:[21] ... Contracts are to be interpreted as a whole, in a manner that gives meaning to all of their terms and avoids an interpretation that would render one or more of the terms ineffective. They are also to be interpreted in a fashion that accords with sound commercial principles and good business sense, and that avoids a commercial absurdity: Ventas, Inc. v. Sunrise Senior Living Real Estate Investment Trust, 2007 ONCA 205, 85 O.R. (3d) 254, at para. 24. . First National Financial GP Corporation v. Golden
In First National Financial GP Corporation v. Golden (Ont CA, 2022) the Court of Appeal considered business efficacy as an element in contractual interpretation:[71] Further, an implied term was not necessary to give business efficacy to the FN mortgages. Courts may imply a term into a contract based on the presumed intentions of the contracting parties if the term is necessary for business efficacy or if it meets the officious bystander test: see Energy Fundamentals Group Inc., at paras. 30-40; M.J.B. Enterprises Ltd. v. Defence Construction (1951) Ltd., 1999 CanLII 677 (SCC), [1999] 1 S.C.R. 619, at para. 29. Neither condition was met in this case. ... . Harvey Kalles Realty Inc. v. BSAR (Eglinton) LP
In Harvey Kalles Realty Inc. v. BSAR (Eglinton) LP (Ont CA, 2021) the Court of Appeal held that commercial realities inform contractual interpretation:[6] It is also well settled that courts should avoid commercially absurd interpretations of contracts. Commercial reasonableness must be interpreted from the perspective of both contracting parties: Resolute FP Canada Inc. v. Ontario (Attorney General), 2019 SCC 60, at para. 148. . Owners, Strata Plan LMS 3905 v. Crystal Square Parking Corp.
In Owners, Strata Plan LMS 3905 v. Crystal Square Parking Corp. (SCC, 2020) the Supreme Court comments on the need for certainty in commercial contracts:[44] On the other hand, there are very compelling reasons why general contract law principles should continue to apply to strata developments. Lord Mansfield’s old dictum that in commercial law “the great object should be certainty” is as relevant today as it was in the eighteenth century: Vallejo v. Wheeler (1774), 1 Cowp 143, 98 E.R. 1012, at p. 1017. In the same vein, this Court has stated that the common law of contracts should be developed in a way that “gives due weight to the importance of private ordering and certainty in commercial affairs”: Bhasin v. Hrynew, 2014 SCC 71, [2014] 3 S.C.R. 494, at para. 66. In addition, this Court takes account of the “reasonable expectations of commercial parties” when contemplating a change to the common law: Bhasin, at paras. 32, 34, and 41. Abrogating the generally applicable principles of contract formation in the case of strata corporations would undermine commercial certainty and thwart the reasonable expectations of commercial parties by casting aside the wisdom and experience found in centuries of incrementally developed precedent and principle governing commercial relations. Rather than attempting to reinvent contract law to accommodate the novelty of strata property ownership, this Court can in my view do no better than to “avail [itself] of the general bank and capital of nations and of ages” by resorting to the settled and generally applicable principles established in the jurisprudence: E. Burke, Reflections on the Revolution in France (1790), at p. 84. Thus, the need for certainty in commercial affairs and the importance of protecting the reasonable expectations of commercial parties compel the continued ordinary operation of the common law in this area. . 2484234 Ontario Inc. v. Hanley Park Developments Inc.
In 2484234 Ontario Inc. v. Hanley Park Developments Inc. (Ont CA, 2020) the Court of Appeal commented on commercial factors in contractual interpretation:
[64] The court should also seek to avoid an interpretation of a commercial contract that “would result in commercial absurdity”: Toronto (City) v. W. H. Hotel Ltd., 1966 CanLII 8 (SCC), [1966] S.C.R. 434, at p. 440; Ventas, at para. 24(d). Rather, commercial contracts are to be construed in accordance with sound commercial principles and good business sense, objectively rather than from the perspective of one contracting party: Kentucky Fried Chicken Canada v. Scott’s Food Services Inc., 1998 CanLII 4427 (Ont. C.A.), at para. 27. ...
[65] ... An interpretation that allows the contract to function in furtherance of its commercial purpose is preferred over one that does not: Humphries v. Lufkin Industries Canada Ltd., 2011 ABCA 366, 68 Alta. L.R. (5th) 175, at para. 15. . 2099082 Ontario Limited v. Varcon
In 2099082 Ontario Limited v. Varcon (Ont CA, 2020) the Court of Appeal commented as follows on the role of commercial principles in contract interpretation:[24] .... Varcon’s interpretation of the warranty would effectively make AWD — one of the many subcontractors on the project — a guarantor of any or all defects in the project, whether its own work has been defective or not. A plain reading of the warranty provisions does not support this position and does not accord with sound commercial principles and good business sense: All-Terrain Track Sales and Services Ltd. v. 798839, 2020 ONCA 129, at para. 27. . Himidan v Farquarson
In Himidan v. Farquharson (Ont CA, 2019) the Court of Appeal articulated basics of contract interpretation:[20] A contract must be interpreted in accordance with sound commercial principles and good business sense: Ventas, Inc. v. Sunrise Senior Living Real Estate Investment Trust, 2007 ONCA 205 (CanLII), 85 O.R. (3d) 254, at paras. 24, 50. On the appellant’s argument, she was agreeing to sell only a seven-foot strip of the driveway. If the appellant’s contentions against the neighbours are correct, namely that the appellant owned the other two-foot strip by adverse possession, then the APS was reserving that two-foot strip to her (because she was not including it in the sale). If the neighbours’ assertion is right, then the appellant was selling a seven-foot strip of a nine-foot-wide driveway under circumstances in which the neighbours could block the other two feet, interfering with the functioning of the driveway as it appeared at the time of the APS. In either event, the appellant’s proposed interpretation does not make commercial sense.
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