Interpreting Contracts

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is a litigation lawyer practicing at Perley-Robertson, Hill & McDougall LLP in Ottawa, Ontario. He may be reached at 613.566.2823 or obourns@perlaw.ca.

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Many, if not most, commercial legal disputes revolve around one or several contracts.  The parties will often differ on their interpretation of the contracts, the number of contracts, or whether other related or collateral agreements added to or changed the terms of the contract(s).

This article endeavours to tackle the cornerstones of contractual interpretation in Canada.  It is imperative that the guiding principles below are regarded when entering into new contracts and when disputes arrive with respect to existing ones.

1.  The Contract Matters

The Courts will presume the parties have intended what is set out in writing in the contract.  If the court finds that the contract is ambiguous, it may then resort to extrinsic evidence to clear up the ambiguity.  Where no such ambiguity exists then the contractual terms stand and “the contract speaks for itself”.

2. True Intention of the Parties

Where ambiguities exist and the courts must interpret the contract then a fundamental principal is that the courts intend to determine the true intention of the parties to the contract at the time they entered into the agreement.

3. The Whole Contact

The courts will interpret the contract in a manner that gives all of the terms therein value.  An interpretation that renders some words or provision irrelevant is to be avoided.

4. Objective Evidence

Contractual interpretation may require courts to consider objective evidence of the factual matrix of the context surrounding the negotiation of the contract.  This is permitted as a means to ascertain what the parties reasonably intended to agree to at the time.  However, subjective and retrospective evidence as to the intention of one of the parties is not permitted.

5. Avoid Commercial Absurdities

Courts are to interpret the contract so as to accord with sound commercial principles and good business sense, and are to avoid commercial absurdity.  A contract should be interpreted in a manner which reconciles both the text of the contract and the relevant context, including the commercial context.  What is commercially absurd will depend on the contract subject matter and circumstances.

6. Related Contracts / Agreements 

Where a contract is part of a transaction involving several documents and/or agreements then then assistance in the interpretation of one contract may be drawn from the related agreements.

 

In support of the above principles please see the following contract cases from the Ontario Court of Appeal:

Scanlon v. Castlepoint Development Corp., [1992] 11 O.R. (3d) 744 (Ont. C.A.)

KPMG Inc. v. Canadian Imperial Bank of Commerce, [1998] O.J. No. 4746 at para. 5 (Ont. C.A.)

Toronto-Dominion Bank v. Leigh Instruments Ltd. (Trustee of), [1999] O.J. No. 3290 at para 9 (Ont. C.A.)

Salah v. Timothy’s Coffees of the World Inc., 2010 CarswellOnt 7643 (Ont. C.A.)

 

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Owen Bourns is a litigation lawyer in Ottawa, Ontario.  He may be reached at 613.566.2823 or at obourns@perlaw.ca

 

 

 

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