Alberta Court of Appeal Releases Landmark Decision on Contractual Interpretation
June 9, 2017
On May 26, 2017, the Alberta Court of Appeal (Court) released a landmark decision in IFP Technologies (Canada) Inc. v. EnCana Midstream and Marketing, which will impact principles of contractual interpretation in Alberta.
In addition to the legal principles discussed below, the Court recognized that business “craves certainty”, is “understandably risk adverse” and so ensuring the proper interpretation of contractual obligations is essential to the economic well-being of the country, especially in Alberta’s oil and gas sector where investments are often measured in millions, if not billions, of dollars.
The appellant, IFP Technologies (Canada) Inc. (IFP) is a French-owned research and development company. The respondents included a number of Canadian oil and gas parties including PanCanadian Resources (PCR), among others. IFP claimed that a contract formed with PCR conveyed to it an undivided 20 per cent working interest in oil and gas leases for a property in Alberta, known as Eyehill Creek. PCR insisted that IFP’s interest in Eyehill Creek was limited to an undivided 20 per cent interest only in oil and gas produced through certain recovery methods.
The matter was initially heard over the course of a six-week trial. The Queen’s Bench trial judge who oversaw the trial proceedings died before a decision was rendered. The parties agreed not to hold a new trial, but rather elected to have the chief justice (Trial Judge) of the Court of Queen’s Bench decide the matter based on the written trial record. The Trial Judge ruled in favour of the respondents on the basis that, among other things, the term “working interest” was not defined in IFP’s contract with PCR and that “working interests” was referenced only in relation to certain thermal and enhanced recovery methods.
IFP appealed on the claimed basis that the Trial Judge made a number of errors of law. Critically, IFP maintained that the term “working interest” was a legal term of art, which had a specific meaning in the context of the Canadian oil and gas industry. The Court of Appeal noted that the Trial Judge’s decision predated two groundbreaking decisions of the Supreme Court on contractual interpretation: Sattva Capital Corp. v. Creston Moly Corp. and Bhasin v. Hrynew.
In her majority reasons for judgment reserved (there was a dissenting judgment), Chief Justice C. Fraser allowed the appeal and reversed the decision of the Trial Judge. In doing so, she clarified and developed the law in Alberta with respect to the principles of contractual interpretation.
The Chief Justice began her decision with a forceful defence of a commercially reasonable approach to contract interpretation, which recognizes the presumption that contracts are entered into in good faith.
The Chief Justice held that a practical, common-sense approach was required where a court is called upon to determine what the parties to a contract intended. She held that must not be an exercise in second guessing what could have been included in the contract, but rather in determining the objective intention of the parties in a manner that accords with sound commercial principles and good business sense.
The Chief Justice made a number of important statements with respect to the principles of contractual interpretation and the standard of review thereof, as paraphrased below:
- Factual Matrix: A trial judge must consider the surrounding circumstances or “factual matrix” of a contract, regardless of whether the contract is ambiguous. It is an error of law for a trial judge to discount or disregard evidence of the factual matrix on the basis that a contract is not ambiguous. The Court will review such an error on the correctness standard.
- Parol Evidence Rule: It does not offend the parol evidence rule for a trial judge to consider the factual matrix where there is no ambiguity in a contract. That rule precludes evidence that would “subtract from, vary, or contradict” the written words of a contract. Evidence of the factual matrix, conversely, is an objective interpretive aid to assist in ascertaining the meaning of the written words of a contract. A trial judge must consider the factual matrix to ensure that he or she has a proper understanding of the parties’ mutual and objective intentions as expressed in the words of the contract. This includes evidence of the negotiation of the contract and antecedent agreements.
- Terms of Art: A legal term of art that has a common meaning to participants in a given industry need not necessarily be defined in a contract. If the term has an accepted meaning and usage in a sector, its interpretation by the court has precedential value and it must be interpreted consistently. In that respect, a term of art is analogous to a standard form contract. For a trial judge to misinterpret a term of art is an error of law, which the Court will review on the correctness standard. Likewise, it is an error of law reviewable for correctness for a trial judge to disregard a legal term of art or to fail to recognize that a legal term of art has a certain meaning.
The Chief Justice signalled that the Court will take a more interventionist role in ensuring that the Alberta courts interpret contracts in a practical, common sense and consistent manner.
Whether one agrees with the result or not (there was a strong dissenting decision), the Chief Justice’s decision appears to be a call for a more commercially reasonable approach to contract interpretation and may be a harbinger of a trend which will be adopted in other jurisdictions based on the Supreme Court of Canada case in Sattva. In clarifying the above principles, the Chief Justice seems to be reversing the trend in recent years wherein complex contractual disputes are often resolved through arbitration. The Chief Justice posited that perhaps companies have or will be motivated to pursue arbitration if court decisions on contractual interpretation are disconnected from economic reality.
The decision provides clarity for litigants seeking to enforce their contractual rights and may be persuasive in other jurisdictions. It also provides more robust rights of appeal to ensure that litigants have recourse where trial courts make erroneous findings or evidentiary rulings when called upon to interpret contracts.
We acknowledge the able assistance of Summer Law Student, Callin Haglund, in preparing this bulletin.
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