Today’s Court of Appeal decision in 3869130 Canada Inc. v. I.C.B. Distribution Inc., 2008 ONCA 396 deals with a fairly complex business transaction. In the course of reviewing the transaction the Court had an opportunity to restate the principles of contractual interpretation. The statement, below, is useful.
The reader is drawn especially to the Court’s holding that where a complex transaction contains numerous agreements, all those agreements are to be interpreted together – this is very sensible.
One is reminded of the principle of noscitur a sociis which suggests that words are to be construed in the light of their context. As Viscount Simonds in AG v Prince Ernest Augustus of Hanover [1957] AC 436 at p.461 says ‘Words, and particularly general words, cannot be read in isolation; their colour and their content are derived from the context.’
In the English case of Bourne v Norwich Crematorium Ltd, [1967] 2 All ER 576 the Court commented as follows:
‘ English words derive colour from those which surround them. Sentences are not mere collections of words to be taken out of the sentence, defined separately by reference to the dictionary or decided cases, and then put back again into the sentence with the meaning which you have assigned to them as separate words, so as to give the sentence or phrase and meaning which as a sentence or phrase it cannot bear without distortion of the English language.’
The relevant passages of today’s decision follow:
Contractual Interpretation
Principles of Contractual Interpretation
…
[31] In Ventas, Inc. v. Sunrise Senior Living Real Estate Investment Trust (2007), 85 O.R. (3d) 254 at para. 24, this Court summarized the principles applying to the interpretation of commercial contracts as follows:
Broadly stated … a commercial contract is to be interpreted,
(a) as a whole, in a manner that gives meaning to all of its terms and avoids an interpretation that would render one or more of its terms ineffective;
(b) by determining the intention of the parties in accordance with the language they have used in the written document and based upon the “cardinal presumption” that they have intended what they have said;
(c) with regard to objective evidence of the factual matrix underlying the negotiation of the contract, but without reference to the subjective intention of the parties; and (to the extent there is any ambiguity in the contract),
(d) in a fashion that accords with sound commercial principles and good business sense, and that avoids a commercial absurdity.
See also SimEx Inc. v. IMAX Corp. (2005), 11 B.L.R. (4th) 214 at paras. 19-23 (Ont.
[32] In addition, where the language of a written contract is unambiguous, extrinsic evidence is not admissible to alter, vary, interpret, or contradict the words used in the contract: see Hawrish v. Bank of Montreal, [1969] S.C.R. 515; Mechanical Pin Resetter Co. v. Canadian Acme Screw & Gear Ltd., [1971] S.C.R. 628 at 636; Eli Lilly & Co. v. Novopharm Ltd., [1998] 2 S.C.R. 129 at para. 55; and G.H.L. Fridman, The Law of Contract in
[52] No doubt, the dictionary and grammatical meaning of the words (sometimes called the "plain meaning") used by the parties will be important and often decisive in determining the meaning of the document. However, the former cannot be equated with the latter. The meaning of a document is derived not just from the words used, but from the context or the circumstances in which the words were used. Professor John Swan puts it well in Canadian Contract Law (Markham, Ont.: Butterworths, 2006) at 493:
There are a number of inherent features of language that need to be noted. Few, if any words, can be understood apart from their context and no contractual language can be understood without some knowledge of its context and the purpose of the contract. Words, taken individually, have an inherent vagueness that will often require courts to determine their meaning by looking at their context and the expectations that the parties may have had.
[53] The text of the written agreement must be read as a whole and in the context of the circumstances as they existed when the agreement was created. The circumstances include facts that were known or reasonably capable of being known by the parties when they entered into the written agreement: see BG Checo International Ltd. v. British Columbia Hydro and Power Authority, [1993] 1 S.C.R. 12, [1993] S.C.J. No. 1, at pp. 23-24 S.C.R.; H.W. Liebig & Co. v. Leading Investments Ltd., [1986] 1 S.C.R. 70, [1986] S.C.J. No. 6, at pp. 80-81 S.C.R., La Forest J.; Prenn v. Simmonds, [1971] 1 W.L.R. 1381, [1971] 3 All E.R. 237 (H.L.), at pp. 1383-84 W.L.R.; Staughton, “How Do the Courts Interpret Commercial Contracts?”, supra, at 307-08.
[54] A consideration of the context in which the written agreement was made is an integral part of the interpretative process and is not something that is resorted to only where the words viewed in isolation suggest some ambiguity. To find ambiguity, one must come to certain conclusions as to the meaning of the words used. A conclusion as to the meaning of words used in a written contract can only be properly reached if the contract is considered in the context in which it was made: see McCamus, The Law of Contracts (Toronto: Irwin Law, 2005) at 710-11.
[55] There is some controversy as to how expansively context should be examined for the purposes of contractual interpretation: see Geoff R. Hall, "A Curious Incident in the Law of Contract: The Impact of 22 Words from the House of Lords" (2004) 40
[56] I would adopt the description of the interpretative process provided by Lord Justice Steyn, "The Intracticable Problem of the Interpretation of Legal Texts", supra, at 8:
In sharp contrast with civil legal systems the common law adopts a largely objective theory to the interpretation of contracts. The purpose of the interpretation of a contract is not to discover how the parties understood the language of the text, which they adopted. The aim is to determine the meaning of the contract against its objective contextual scene. By and large the objective approach to the question of construction serves the needs of commerce.
[Emphasis in original. Citation omitted.]
[33] To those principles, I would add the following in the present context. The Cyr parties and the Chenier parties entered into a series of contracts in order to give effect to the “deal” whereby Mr. Cyr was to acquire both the I.C.B. and O.F.S. operations. While the Mutual Undertaking was not signed at the same time as the Asset Purchase Agreement, the commitments it contains were contemplated in the latter Agreement and formed part of the same global transaction. In these circumstances, the court must have regard not only to the language of the particular contract that is being interpreted (the Mutual Undertaking or the Non-Competition covenant), taken as a whole, but to the surrounding contracts as well. As Professor John D. McCamus notes in The Law of Contracts (
Many transactions, especially large commercial transactions such as the purchase and sale of a large and complex business, may involve the execution of several agreements. In such contexts, it is an interesting question, then, whether in the interpretation of one of the agreements, regard may be had to the others. The basic principle is that such regard may be had only where the agreements essentially form components of one larger transaction. Where each agreement is entered into on the faith of the others being executed and where it is intended that each agreement form part of a larger composite whole, assistance in the interpretation of any particular agreement may be drawn from the related agreements. [Emphasis added. Citation omitted.]
[34] In Mechanical Pin Resetter, for example, the Supreme Court of Canada read four interrelated agreements together in order to ascertain the geographical scope of a licence to manufacture set out in one of them. Here, in my view, the Non-Competition covenant in the Asset Purchase Agreement and the provisions in the Mutual Undertaking must be considered together in order to determine the true intention of the parties as to their individual and combined meaning and effect, as expressed in the language they used.
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