Acting the Part: Ontario Court of Appeal Clarifies Use of Future Conduct in Contractual Interpretation
December 8, 2016
On December 2, 2016, the Ontario Court of Appeal (Court) provided new guidance on the principles of contractual interpretation in the wake of the Supreme Court of Canada’s 2014 decision in Sattva Capital Corp. v. Creston Moly Corp. (Sattva) (see our August 2014 Blakes Bulletin: Un-Appealing: Supreme Court of Canada Limits Appeals from Arbitrators). In Shewchuk v. Blackmont Capital Inc. (Shewchuk), the Court clarified the post-Sattva law regarding the extent to which subsequent conduct of the parties can be considered in interpreting a contract, and the standard of review to be applied by an appellate court to a decision interpreting a contract. Blakes acted for the successful respondent on the appeal.
The plaintiff was an employee of the retail division of the corporate defendant. The dispute concerned the scope of an enhanced compensation agreement that had been negotiated between the parties. The plaintiff alleged that the agreement applied to the defendant’s entire business, including the capital markets division, while the defendant alleged that the agreement only related to the retail division that employed the plaintiff.
The trial judge held that the scope of the contract was ambiguous and proceeded to resolve the ambiguity through consideration of the parties’ conduct subsequent to the agreement’s execution. The trial judge considered the plaintiff’s repeated attempts to negotiate a compensation agreement with the capital markets division and the plaintiff’s failure to assert his existing agreement in relation to disputes with capital markets, as illustrating that the plaintiff had himself only regarded his existing agreement as applying to the retail division.
The trial judge ruled in favour of the defendant, and the primary issue on the appeal was the trial judge’s consideration of the parties’ subsequent conduct in interpreting the contract at issue, with the plaintiff/appellant alleging that the trial judge had erred in his use of subsequent conduct as an interpretive aid.
Standard of Review
The Court first considered the standard of review for decisions interpreting a negotiated contract and determined that, following Sattva, the reasonableness standard of review applied. By contrast, decisions interpreting standard form contracts as opposed to negotiated contracts are reviewable on the more stringent correctness standard as discussed in our December 2015 Blakes Bulletin: Appeal Court Applies Correctness Standard of Review for Standard Form Contracts, Distinguishes Sattva.
Evidence of Subsequent Conduct
In dismissing the appeal, Chief Justice Strathy, writing for the Court, offered detailed guidance on the use of subsequent conduct in interpreting a contract post-Sattva. In particular, the Court addressed: when evidence of subsequent conduct is admissible in interpreting a contract, and how courts should assess the weight or cogency of subsequent conduct evidence.
In addressing the first issue, the Court held that evidence of subsequent conduct can, when properly considered, be useful in resolving contractual ambiguities as it may show the meaning that parties gave to the words of their contracts and this may in turn support an inference concerning their intentions at the time they made their agreement. However, the Court held that evidence of subsequent conduct should be considered not as part of the initial Sattva analysis, but instead only where the contract remains ambiguous after applying the Sattva approach of considering the text and factual matrix of the contract.
The Court reached this conclusion for two reasons. The first was that in Sattva, the Supreme Court had limited the temporal scope of the factual matrix to objective evidence known at the time of contracting, thereby excluding evidence of subsequent conduct from the initial interpretative stage. The second reason arose from concerns about the reliability of subsequent conduct evidence. The Court identified three “dangers” inherent in subsequent conduct evidence that warrant giving such evidence a lesser weight:
- Parties’ behavior in performing a contract may change over time
- Evidence of subsequent conduct may itself be ambiguous, and therefore of little use in resolving an ambiguity
- An over-reliance on subsequent conduct may reward self-serving conduct by a party that would support its preferred interpretation of the contract
As a result of the dangers outlined above, the Court cautioned that such evidence must be used carefully and its weight will vary from case to case. In considering the cogency of such evidence in a particular case, a court must evaluate the extent to which the dangers are mitigated in the circumstances.
The Court highlighted factors to assist evaluation of the probity of subsequent conduct evidence. Factors that will tend to make subsequent conduct evidence more reliable include whether:
- The conduct is conduct of both parties
- The conduct is intentional and consistent over time
- The conduct is engaged in by individuals rather than agents of corporations
- The conduct occurs closer in proximity to the time of the contract’s execution
- The evidence is unequivocal in the sense of being consistent with only one of the two alternative interpretations of the contract
In Shewchuk, the Court confirms that subsequent conduct evidence remains admissible as an aid to contractual interpretation in the post-Sattva environment, and provides a framework for assessing the admissibility and weight to be accorded to such evidence. Where, as here, a contract remains ambiguous following a Sattva-style analysis, a Court may consider evidence of post-contractual conduct of the parties where it can be shown to be sufficiently reliable. Shewchuk offers litigants important insight into how such evidence will be admitted and weighed by the courts in contractual disputes.
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