IN BRIEF
- Can Canadian courts consider evidence of the parties’ conduct after they enter into a commercial agreement as an aid to its interpretation?
- A recent case by the Ontario Court of Appeal says “yes,” but only in cases of contractual ambiguity.
- It remains to be seen, however, whether the decision will inject a level of contractual uncertainty in the Canadian legal landscape.
A court’s primary goal in the interpretation of a commercial contract is to discern the parties’ intentions. In Canada, courts use a range of tools to achieve this end. They look to the ordinary meaning of the words chosen by the parties in their agreement. They also consider which interpretation of the contract will give it business efficacy or which will make the most commercial sense.
A recent debate has emerged in Canadian contract law about whether and how courts should consider the parties’ conduct in determining their contractual intentions. In a leading case, Sattva Capital Corp. v. Creston Moly Corp., [2014] SCC 53, per Rothstein J., the Supreme Court of Canada made it clear that when interpreting a commercial agreement, courts should consider evidence of what it calls the “factual matrix” to determine the contract’s meaning.
The factual matrix “consists 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” (emphasis added).
Evidence of the factual matrix may very well include evidence of the parties’ negotiations and correspondence at the time they executed the agreement. In this way, Sattva aligns Canadian contract law with its American counterpart. See, for example, Droplets Inc. v. E*Trade Financial Corp., 939 F. Supp. 2d 336 (Apr. 4, 2013).
Sattva left one key issue unresolved, however: can a court consider evidence of the parties’ conduct after they enter into a commercial agreement as an aid to its interpretation?
Canadian courts have now answered this question in the affirmative, with one significant qualifier. Evidence of the parties’ post-contract conduct is admissible as an aid to contract interpretation, but only in cases of contractual ambiguity. In the absence of ambiguity, the evidence is inadmissible. Even where the court finds that evidence of the parties’ “subsequent conduct” is admissible, it must then decide whether to accord the evidence any weight. Shewchuk v. Blackmount Capital Inc., [2016] ONCA 912, per Strathy C.J.O., at ¶ 56.
This approach represents a departure from the rigid position in the United Kingdom, where post-agreement conduct has long been deemed inadmissible. See id. at ¶ 43 (citing James Miller & Partners Ltd. v. Whitworth Street Estate (Manchester Ltd.), [1970] A.C. 583 (H.L.), per Lord Reid, at 603; F.L. Shuler A.G. v. Wickman Machine Tool Sales Ltd., [1974] A.C. 235 (H.L.), per Lord Wilberforce, at 261. U.K. courts have expressed concern that if post-agreement evidence is used as a tool for contractual interpretation, the meaning of the commercial contract will change over time. This could undermine the principle of contractual certainty. As one U.K. court put it, “one might have the result that a contract meant one thing the day it was signed, but by reasons of subsequent events meant something different a month or a year later.” James Miller & Partners, supra, at 603.
In rejecting the U.K. position, Canadian courts are not blind to the inherent dangers of using the parties’ subsequent conduct to interpret a contract. In Shewchuk, which opened the door to the admissibility of evidence of the parties’ subsequent conduct, the court identified the perils of such evidence as:
- allowing the meaning of the contract to fluctuate over time, as recognized by the U.K. courts;
- ambiguity in that a party not enforcing strict legal rights under a contract does not necessarily mean that the party never enjoyed those rights; and
- the commercial parties beginning to conduct themselves in a way that favors their interpretation of the contract; by admitting evidence of post-agreement conduct, the courts would be rewarding this type of self-serving behavior.
Despite these concerns, the Shewhuck court recognized that “evidence of subsequent conduct may be useful in resolving ambiguities”—that is, the parties’ behavior after the execution of the contract could support an inference regarding their original intentions at the time of contract formation. The court likened the evidence of post-contract conduct to a criminal’s behavior after the commission of an offence:
However, the lesson learned in Canada from the British position is that the parties’ subsequent conduct is relevant only to inferentially establishing their intentions at the time they executed their contract. Like evidence of post-offence conduct in criminal matters, it is a kind of circumstantial evidence that “invokes a retrospectant chain of reasoning”; the trier of fact is invited to infer the parties’ prior intentions from their later conduct. . . .
Once admitted, however, the evidence is still subject to the court’s scrutiny. The court must decide whether to give it any weight. In deciding the evidence’s reliability, the court will consider whether the conduct is that of both parties, is intentional, is consistent over time, and belongs to individuals, rather than agents of corporations. The court will also give the evidence more weight if it is unequivocal “in the sense of being consistent with only one of the two alternative interpretations of the contract.” Moreover, the closer in time to the execution of the contract, the more likely the evidence will be considered reliable.
The reasoning in Shewchuk remains to be tested. As a recent decision of the Ontario Court of Appeal, it is not yet clear whether Shewchuk has injected of level of contractual uncertainty in the Canadian legal landscape.
Despite all the safeguards in place to ensure that evidence of post-agreement conduct is properly admitted and weighed by the courts, commercial parties may be tempted to engage in self-serving behavior after the execution of the contract, knowing that there is a possibility such behavior could support their preferred interpretation of a contractual ambiguity.
Canadian courts must be on their guard and approach any evidence of the parties’ post-contract dealings with caution. They must bear in mind that post-agreement conduct is generally unreliable and often undermines the parties’ original contractual intentions.