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Contracts - Interpretation - Sattva (2). 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 considers the use of parole evidence - as viewed in the leading Sattva case:[42] .... Sattva held that courts can only consider background facts within the parties’ common knowledge, meaning those facts that both parties knew or should have known at the time of entering into the contract, as surrounding circumstances: at paras. 58-60; see also Earthco, at para. 65. This rule prohibits considering a party’s subjective intention (NexJ Systems Inc. (Re), 2023 ONCA 451, 43 B.L.R. (6th) 224, at para. 10), as well as other facts that one party knew but that its counterparty neither knew nor should have known: Taggart v. McLay, 1998 CanLII 5541 (B.C.C.A.), at para. 7; Geoff R. Hall, Canadian Contractual Interpretation Law, 4th ed. (Markham: LexisNexis, 2020), at p. 34. ....
[43] The trial judge’s conclusion that courts can consider individualized background facts to establish commercial purpose is incorrect. Rather, Sattva’s rule against individualized background facts applies globally, including when parties seek to use them to advance commercial reasonableness arguments: Sattva, at para. 58; Geophysical Service Incorporated v. Plains Midstream Canada ULC, 2023 ABCA 277, at para. 10. This makes sense because, like background facts, commercial reasonableness must be assessed objectively and from both parties’ perspective, not from one party’s subjective perspective: Harvey Kalles, at para. 6; Atos, at para. 60.
[44] The trial judge was also incorrect to suggest that not considering these individualized background facts is unfair. Rather, Sattva’s rule against individualized background facts is fair to both parties because it prevents either party from relying on undisclosed background facts that the other party had no reason to know. This ensures that courts determine the meaning of contracts based on both parties’ shared, objective understanding of the background facts. .... . Spina v. Shoppers Drug Mart Inc.
In Spina v. Shoppers Drug Mart Inc. (Ont CA, 2024) the Ontario Court of Appeal considered class action franchise appeals (direct and cross) from summary judgment decisions.
Here the court considers Sattva principles of contractual interpretation:[69] The goal of contract interpretation is to determine the objective intentions of the parties. The contract must be read 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”: Sattva, at para. 47.
[70] The surrounding circumstances, while relied on in the interpretative process, “must never be allowed to overwhelm the words of the agreement”: Sattva, at para. 57 (citations omitted). The surrounding circumstances should only consist of “objective evidence of the background facts at the time of execution of the contract”: Sattva, at para. 58 (citation omitted).
[71] Subject to these requirements and the parole evidence rule, the surrounding circumstances include “absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable [person]” at the time the agreement was entered into: Sattva, at para 58, quoting from Investors Compensation Scheme Ltd. v. West Bromwich Building Society, [1998] 1 All E.R. 98 (H.L.), at p. 114. . Earthco Soil Mixtures Inc. v. Pine Valley Enterprises Inc.
In Earthco Soil Mixtures Inc. v. Pine Valley Enterprises Inc. (SCC, 2024) the Supreme Court of Canada allows an appeal on the contractual and statutory interpretation of the exclusion provision [SGA s.53] in the Sales of Goods Act.
Here the court overviews modern contractual interpretation:(2) The Modern Principles of Contractual Interpretation
[61] The principles governing the interpretation of contracts, including the enforceability of exclusion clauses, have undergone significant change over the years, and the SGA requires the use of common law principles as they exist from time to time. Technical and legalistic formulations and complex doctrines have been softened in favour of an interpretive approach that focuses on the objective intention of the parties, how the words used were reasonably understood by the parties, and how, subject to limits such as unconscionability, the parties sought to allocate contractual risk.
[62] In Sattva, which concerned a dispute over an agreement to pay a finder’s fee, this Court clearly stated how agreements should be interpreted and reviewed. The Court explained how the jurisprudence has shifted towards a more flexible, “practical, common-sense approach” to contractual interpretation and has retreated from an archaic approach dominated by technical rules of construction (para. 47). Such changes reflect and reinforce the overriding concern of contractual interpretation, which is to determine the parties’ intention and the scope of their understanding (para. 47, citing Jesuit Fathers, at para. 27).
[63] The actual words chosen are central to the analysis because this is how the parties chose to capture and convey their contractual objectives. To determine their true intent, decision-makers “must 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” (Sattva, at para. 47). While “[t]he facts surrounding the formation of a contract are relevant to its interpretation” (Corner Brook, at para. 19), they “must never be allowed to overwhelm the words of that agreement” or cause courts to create brand new agreements (para. 20; Sattva, at para. 57; see also D. Bertolini, “Unmixing the Mixed Questions: A Framework for Distinguishing Between Questions of Fact and Questions of Law in Contractual Interpretation” (2019), 52 U.B.C. L. Rev. 345, at pp. 402-3; D. Bertolini, “Releasing the Unknown: Theoretical and Evidentiary Challenges in Interpreting the Release of Unanticipated Claims” (2023), 48:2 Queen’s L.J. 61, at p. 65; D. Bertolini, “Unpacking Entire Agreement Clauses: On the (Elusive) Search for Contractually Induced Formalism in Contractual Adjudication” (2021), 66 McGill L.J. 465, at p. 500).
[64] While the language used is central, courts recognize that words are not ends in themselves: they are a means to demonstrate, discern and determine the true intention of the parties. The jurisprudence seeks certainty but acknowledges the limits of language. This Court recognized how “words alone do not have an immutable or absolute meaning” and cannot, by themselves, convey the commercial purpose of a contract (Sattva, at para. 47). When seeking the meaning of a document, the focus of the court is properly on what the parties objectively intended and what they reasonably understood their words to mean. This is because the “meaning of words is a matter of dictionaries and grammars; the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean” (Sattva, at para. 48, citing Investors Compensation Scheme Ltd. v. West Bromwich Building Society, [1998] 1 All E.R. 98 (H.L.), at p. 115).
[65] Courts are therefore directed “to have regard for the surrounding circumstances of the contract — often referred to as the factual matrix — when interpreting a written contract” (Sattva, at para. 46). The meaning of the words of a contract can be derived from reference to various contextual factors, which include the purpose of the agreement and the nature of the relationship created by the agreement (para. 48). Sattva allows courts to interpret contractual terms in light of the contract as a whole and with reference to objective evidence that illustrates what was within the parties’ knowledge at or before the time of their contract’s formation (para. 58). Ultimately, ascertaining the objective intent of the parties involves not only a consideration of the actual words used in a contract but also a consideration of the factual matrix surrounding the contract. . Lozon v. Lozon
In Lozon v. Lozon (Ont CA, 2023) the Court of Appeal considered contractual interpretation, here with the focus being on the Sattva 'extricable question' standard of review exception:[14] While deference is generally owed to decision makers on points of contractual interpretation, extricable questions of law will be reviewed on a correctness standard: Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, [2014] 2 S.C.R. 633, at paras. 52-53. As the Supreme Court identified in Sattva, at para. 53, citing Housen v. Nikolaisen, 2002 SCC 33, [2002] S.C.R. 235; King v. Operating Engineers Training Institute of Manitoba Inc., 2011 MBCA 80, 270 Man. R. (2d) 63:[I]t may be possible to identify an extricable question of law from within what was initially characterized as a question of mixed fact and law (Housen, at paras. 31 and 34-35). Legal errors made in the course of contractual interpretation include “the application of an incorrect principle, the failure to consider a required element of a legal test, or the failure to consider a relevant factor” (King, at para. 21). Moreover, there is no question that many other issues in contract law do engage substantive rules of law: the requirements for the formation of the contract, the capacity of the parties, the requirement that certain contracts be evidenced in writing, and so on. ....
[17] In short, the law on contractual interpretation requires the court to read the contract as a whole, giving the words their ordinary and grammatical meaning consistent with the surrounding circumstances at the time the contract was formed. The court is not to consider the subjective intentions of the parties. The interpretive process should consist only of objective evidence of the background facts at the time of the execution of the contract: Sattva, at paras. 57-59. . Corporation of the Municipality of Strathroy-Caradoc v Corporation of the Township of Adelaide Metcalfe
In Corporation of the Municipality of Strathroy-Caradoc v Corporation of the Township of Adelaide Metcalfe (Div Court, 2023) the Divisional Court considered an appeal from an OLT decision [brought with leave under Ontario Land Tribunal Act, s. 24], the issue being the OLT's jurisdiction to resolve a contractual dispute between two neighbouring municipalities. In these quotes, the court cites applicable contractual interpretation principles (primarily Sattva):The Principles of Contract Interpretation
[27] The Supreme Court of Canada has observed that the courts’ approach to contract interpretation “has evolved towards a practical, common-sense approach not dominated by technical rules of construction”: Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, [2014] 2 S.C.R. 633, at para. 47. The primary object of contract interpretation is to give effect to the intention of the parties at the time of contract formation: Bhasin v. Hrynew, 2014 SCC 71, [2014] 3 S.C.R. 71, at para. 45. The “intent of the parties and the scope of their understanding,” is determined by reading a 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”: Sattva Capital, at para. 47.
[28] While contextual factors are relevant to the interpretation of a contract, “the interpretation of a written contractual provision must always be grounded in the text and read in light of the entire contract.” Sattva Capital, at para. 57. In Weyerhaeuser Company Limited v Ontario (Attorney General), 2017 ONCA 1007, at para. 76, the Court of Appeal described that “the plain meaning of the words in a contract is the logical place to start the contractual interpretation exercise.”
[29] Similarly, in The Plan Group v. Bell Canada, 2009 ONCA 548, at para. 37, the Court of Appeal held that a commercial contract should be interpreted: (i) as a whole, by giving meaning to all the terms of a contract to avoid an interpretation that would render any term ineffective; (ii) by determining the intention of the parties with reference to the words used in the contract; (iii) with regard to objective evidence of the factual matrix underlying the negotiation of the contract, but without reference to subjective intention; and (iv) to the extent that there is any ambiguity in the contract, in a fashion that accords with sound commercial principles and good business sense and that avoids a commercial absurdity. See also Ventas, Inc. v. Sunrise Senior Living Real Estate Investment Trust, 2007 ONCA 205, at para. 24.
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[35] Moreover, the contract should be read as a whole. In Thunder Bay (City) v. Canadian National Railway Company, 2018 ONCA 517, at para. 46, the Court of Appeal explained that it is an error of law to interpret a contract in such a way that fails to give effect to all of a contract’s terms or that renders one or more of the contract’s terms ineffective.
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[38] In Sattva Capital, at para. 57, the Supreme Court of Canada stated that surrounding circumstances must never be used to overwhelm the words of the agreement and that “the interpretation of a written contractual provision must always be grounded in the text and read in light of the entire contract.” Surrounding circumstances “should consist only of objective evidence of the background facts at the time of the execution of the contract, that is, knowledge that was or reasonably ought to have been within the knowledge of both parties at or before the date of contracting.”: Sattva Capital, at para. 58. . White v. Gauthier
In White v. Gauthier (Ont CA, 2023) the Court of Appeal cited authority for 'contextual' contract interpretation:[3] We see no error in the trial judge’s reasons. The contemporary rules of contractual interpretation require a contextual consideration of the language used in the agreement. The interpretative process must engage the factual matrix in which the contract was created: see G. Hall, Canadian Contractual Interpretation Law, 4ed 2020, Ch. 1-2.
[4] The trial judge did exactly that. He interpreted the agreement consistent with the surrounding circumstances in accordance with the judgment of the Supreme Court of Canada in Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53. . Spot Coffee Park Place Inc. v. Concord Adex Investments Limited
In Spot Coffee Park Place Inc. v. Concord Adex Investments Limited (Ont CA, 2023) the Court of Appeal considered Sattva for the standard of review on issues of contractual interpretation:(a) Standard of Review
[27] In Sattva, at para. 50, Rothstein J. reasoned that contractual interpretation involves issues of mixed fact and law as it is an exercise in which the principles of contractual interpretation are applied to the words of the written contract, considered in light of the factual matrix. He went on to note, at para. 51, that:One central purpose of drawing a distinction between questions of law and those of mixed fact and law is to limit the intervention of appellate courts to cases where the results can be expected to have an impact beyond the parties to the particular dispute. [28] As he observed at para. 52, legal obligations arising from a contract are, in most cases, limited to the interests of the particular parties. Deference to first instance decision-makers on points of contractual interpretation promotes the goal of limiting the cost of appeals and the autonomy and integrity of trial proceedings. In Corner Brook (City) v. Bailey, 2021 SCC 29, 460 D.L.R. (4th) 169, Rowe J. affirmed this deferential standard of review in the face of a question of mixed fact and law involving the interpretation of a contract.
[29] In Sattva, Rothstein J. carved out extricable questions of law from this more limited standard of review stating that: “Legal errors made in the course of contractual interpretation include ‘the application of an incorrect principle, the failure to consider a required element of a legal test, or the failure to consider a relevant factor’” (para. 53). They are reviewable on a correctness standard. He went on to caution that courts should be cautious in identifying extricable questions of law in disputes over contractual interpretation. This necessary caution was underscored by Rowe J. in Corner Brook (City). See also: Ontario First Nations (2002) Limited Partnership v. Ontario Lottery Gaming Corporation, 2021 ONCA 592.
[30] That said, ignoring a specific and relevant provision of an agreement may amount to a failure to construe a contract as a whole and constitute an extricable question of law: Sattva, at para. 64. See also: Corner Brook (City), at para. 44. . Cannon v. Gerrits
In Cannon v. Gerrits (Div Court, 2022) the Divisional Court considered the leading case of Sattva, here regarding surrounding circumstances in contractual interpretation (motivation):[54] In Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, [2014] 2 S.C.R. 633, at para. 57, Rothstein J. writing for the Supreme Court of Canada stated:[57] While the surrounding circumstances will be considered in interpreting the terms of a contract, they must never be allowed to overwhelm the words of that agreement (Hayes Forest Services, at para. 14; and Hall, at p. 30). The goal of examining such evidence is to deepen a decision-maker’s understanding of the mutual and objetive intentions of the parties as expressed in the words of the contract. The interpretation of a written contractual provision must always be grounded in the text and read in light of the entire contract (Hall, at pp. 15 and 30-32). While the surrounding circumstances are relied upon in the interpretive process, courts cannot use them to deviate from the text such that the court effectively creates a new agreement (Glaswegian Enterprises Inc. v. B.C. Tel Mobility Cellular Inc. (1997), 1997 CanLII 4085 (BC CA), 101 B.C.A.C. 62). [55] As well, the appellants rely on J.M.B. Cattle v. Kaufman, 2015 ONSC 7372, at para. 98, wherein Price J. stated a seller’s motivation is not relevant as, “either they have the right to terminate the APS or they do not.” . ALYU Inc. v. Deca-Yorkville Building Group Inc.
In ALYU Inc. v. Deca-Yorkville Building Group Inc. (Ont CA, 2022) the Court of Appeal stated briefly the Sattva standard of review for contractual interpretation:[3] We see no basis for interfering with the application judge’s findings for a number of reasons. It is common ground that contract interpretation is a matter of mixed fact and law and is governed by Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, [2014] 2 SCR 633, at para. 50. In the absence of an extricable error of law, the standard of review is that of palpable and overriding error: Corner Brook (City) v. Bailey, 2021 SCC 29, 460 DLR (4th) 169, at para. 4. We see none. . Briggs v. Durham (Police Services Board)
In Briggs v. Durham (Police Services Board) (Ont CA, 2022) the Court of Appeal considered principles of contractual interpretation:[41] In accordance with Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, [2014] 2 S.C.R. 633, at para. 47, a contract must be read as a whole, having regard to the ordinary and grammatical meaning of the words used, consistent with the surrounding circumstances or factual matrix. If based on a review of the wording of the agreement and the factual matrix, there is an ambiguity in the meaning of the agreement, the court can then have regard to external or parol evidence, which may include the subsequent conduct of the parties. However, in doing so, the court must give evidence of subsequent conduct the “appropriate weight having regard to the extent to which its inherent dangers are mitigated in the circumstances of the case at hand, to infer the parties’ intentions at the time of the contract’s execution”: Shewchuk v. Blackmont Capital Inc., 2016 ONCA 912, 404 D.L.R. (4th) 512, at para. 56. . WED Investments Limited v. Showcase
In WED Investments Limited v. Showcase (Ont CA, 2022) the Court of Appeal considered whether an intentional variation of the standard form APS regarding notice overrode the standard form. Unsurprisingly, it did:[25] The trial judge noted the importance of looking at the Agreement as a whole, the genesis of the transaction, the background, the context, and the market in which the parties are operating: Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, [2014] 2 S.C.R. 633, at para. 47.
[26] He noted that paragraph 26 of the Agreement provides that a provision added to the agreement governs to the extent it conflicts with or causes a discrepancy with any provision of the standard pre-set portion.
[27] He held that,[65] In my view, there is a “conflict or discrepancy” between Schedule A and the pre-printed standard form. The due diligence condition and notice of waiver are found in Schedule A, which contains many terms and conditions that were negotiated by the parties, including provisions addressing notice. [66] The paragraph in Schedule A dealing with the waiver says that there must be “delivery of written notice to the Seller.” It does not say how that written notice is to be delivered, but the requirement that the notice be “to the Seller” is different than the notice provision in paragraph 3 of the pre-printed portion of the APS, and therefore the Schedule should prevail. [Emphasis in original.]
[28] The trial judge applied the reasoning of this court in McKee v. Montemarano, 2009 ONCA 359, 251 O.A.C. 156. He noted that in both cases, there was a conflict between standard form wording requiring delivery of notices to a specific address, and a due diligence condition in a schedule that required waiver to be delivered to the Seller. In McKee, this court found that a specific notice provision was intended to prevail over a contradictory standard form notice provision, since it would have been unnecessary to include had the parties intended it to be overridden by the standard form provision. Moreover, in both cases, in all matters of substance, the parties dealt with one another directly. In McKee, as in this case, Schedule A governed the delivery of the waiver notice based on the language of the specific provision in Schedule A and the surrounding circumstances.
[29] The trial judge concluded that:i. The negotiated, specific provision in Schedule A that communications could be made by email prevails over the more general provision in the standard form Agreement requiring personal delivery;
ii. The surrounding circumstances, including that the parties specifically included a clause in Schedule A providing for the use of email, supports an intention to communicate by email on all issues and a practice of so doing; and
iii. Counsel for the appellant admits that he received the waiver by email. [30] The trial judge concluded that it would be inconsistent with the practical common sense approach described in Sattva to read the contract as disallowing email communication, in light of the surrounding circumstances. His conclusion reveals no palpable or overriding error and is entitled to deference
[31] He also considered the appellant’s argument that a notice should not be treated as an amendment to an agreement because a notice is unilateral and does not involve the consent of both parties. However, he concluded that where both parties are sophisticated and there is a past practice of sending all communications by email, and the circumstances of the agreement involve collaboration and cooperation, “that difference is not significant, and in my view it is unduly technical and contrary to the parties’ expectations to suddenly hold one party to a strict reading of the APS on one particular communication.”
[32] The trial judge also correctly distinguished High Tower Homes Corporation v. Stevens, 2014 ONCA 911, 123 O.R. (3d) 81. In High Tower, unlike in this case, there was no “clear practice” of the parties “communicating by email on all issues.” Moreover, as noted by the trial judge at paragraphs 79 to 80 of his judgment, unlike in this case:[79] High Tower Homes dealt with two parties of somewhat unequal bargaining power in which the purchaser had not disclosed changes it had made to an agreement, and then sought to take advantage of those changes by giving notice of the waiving of a condition by fax. In this case, however, the parties were on an equal footing that included collaborating with one another on the development proposal, and there was a clear practice of communicating by email on all issues. As Walker testified, and which the communications corroborate, it was clear that Kirshenbaum’s preferred method of communication was by email. As Walker said, the fact that Kirshenbaum had not put his email address under paragraph 3 of the APS did not trouble him as he had Kirshenbaum’s email address and they were acting openly and in good faith with one another.
[80] Further, unlike High Tower Homes (at para. 49), the APS did contain separate provisions calling for “delivery of notice in writing to the Seller” and for transmission of documents by email. [33] In sum, we see no error in the trial judge’s conclusion that Showcase wrongfully terminated the Agreement, as WED waived the conditions of purchase by email in accordance with the Agreement, and at that point Showcase was bound to proceed with the sale.
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