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Decision suggests greater freedom for trial judges in contract law cases

|Written By Jennifer Brown
Decision suggests greater freedom for trial judges in contract law cases

Eli Lederman, a partner at Lenczner Slaght Royce Smith Griffin LLP, says a recent Court of Appeal decision in Ontario adds to a growing trend that suggests trial judges may have greater freedom to determine whether parties are living up to their contractual obligations.

In Energy Fundamentals Group Inc. v. Veresen Inc., the case involved implied terms in contracts. When can a court imply terms into a commercial contract upon which the parties have not expressly agreed? Veresen Inc. appealed the decision of an application judge implying a contractual obligation on its part to disclose information to enable the Energy Fundamentals Group to determine whether to exercise an option to acquire up to 20 per cent of a limited partnership, the Jordan Cove energy project.

Energy Fundamentals, an investment bank, introduced Veresen to the project, which involved the development of a liquid natural gas terminal on the coast of Oregon.

Veresen argued the application judge should not have implied terms requiring value and price disclosure.

On July 8, the court dismissed the appeal with costs to Energy Fundamentals of $50,000.

“I think this case signals that the law and the courts are moving in a direction where they are giving greater freedom to trial judges in contract cases to interpret agreements in such a way that could effectively allow for contractual parties to improve their bargains,” says Eli Lederman, a partner at Lencnzer Slaght Royce Smith Griffin LLP.

“What we’re seeing is even the application of contract law is trending toward greater room for implication of terms and trying to do justice by the parties regardless of what the strict terms of the agreement say.”

WeirFoulds LLP partner Jeff Cowan says the decision is consistent with the Supreme Court decision in Bhasin v. Hrynew.

“The Court of Appeal found Justice [Michael] Penny properly applied the necessity and business efficacy tests for implying a disclosure requirement,” says Cowan.

“Having done that, referring to the common doctrinal underpinning of good faith was not an error. I don’t believe they found that doctrine of good faith on its own can be used to imply terms. It is a device for supplementing the terms to deal with aspects of the relationship that have not been specifically dealt with by the parties.”

Lederman agrees the case follows Bhasin and says gone are the days when the courts would confine the parties to the strict terms of their contractual agreement.

“To my mind, this is a trend we’re now starting to see, combined with the Sattva decision, in which greater deference is being paid to trial judges regarding how they are to interpret contracts, and contractual interpretation will be given greater deference on the basis it is now a question of mixed fact and law,” he says, referencing Sattva Capital Corp. v. Creston Moly Corp.

He says the trend may lead to greater uncertainty for in-house lawyers and their external counsel as it makes it more difficult to provide advice and an assessment of the risks to parties to contracts.

“Now, there are going to be certain efforts and arguments that can be marshalled in favour of an aggrieved or perceived aggrieved party to seek the assistance of the court,” he says.

“In this case, it was a fact of trying to say, ‘Well, it was an implied term that we would be entitled to certain confidential pricing information’ and the other party to the contract said, ‘Wait, that’s not actually stipulated in our bargain. It’s not part of the agreement that we had to hand over confidential information to you in order for you to exercise the option.’”

The court decided it was an implied term that, in order for the party to determine whether it wanted to exercise the option, it should be entitled to this confidential information so it could properly assess the economics of doing so.

The court found the term should be inserted into the agreement.

The Court of Appeal referenced the test in M.J.B. Enterprises Ltd. v. Defence Construction (1951) Ltd. that dealt with implied terms. In that case, Justice Frank Iacobucci said: “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.’’

“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 . . ..”

Lederman says that while lawyers drafting contracts will want to be more precise in the language of a contract, it doesn’t mean they will ever be ironclad.

“Even if you put an entire agreement clause into your contract, that doesn’t necessarily save you holus bolus from having an implied term put into it and it certainly doesn’t act to preclude a requirement that you have to perform in good faith,” he says.

“So you couldn’t put a clause in your agreement that says, quite apart from the terms of this agreement or what the Supreme Court has said in Bhasin, the parties are not required to perform any of these obligations in good faith because, in Bhasin, the court was clear you can’t contract out of this underlying duty of honest performance.”


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