10 Aug Energy Fundamentals Group Inc. v. Veresen Inc. 2015 ONCA
The Court of Appeal recently reaffirmed when a court will imply terms into commercial contracts.
Energy Fundamentals Group Inc. (“EFG”) provided investment banking services to Veresen pursuant to a letter agreement. The letter agreement was not comprehensive, but it provided for an option for EFG to acquire up to a 20% interest in a limited partnership, the Jordan Cove energy project.
Veresen appealed from the decision of the application judge who ordered Veresen to disclose information to EGC so that it could determine the price of the option and the value of its 20% stake in the project.
The Court of Appeal upheld the application judge’s decision of the existence of an implied term that EFG would be entitled to certain confidential pricing and dismissed the appeal.
The Court found that whether a contractual term can be implied is a question of mixed fact and law. Citing MJB Enterprises Ltd. v. Defence Construction (1951) Ltd., the Court held that 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.”
The business efficacy test considers how the law can give effect to a transaction that both parties must have intended at the time the contract was formed. This is to be measured based on the what the reasonable person with knowledge of the relevant background would have viewed the transaction. Courts should consider what circumstances would frustrate the apparent business purpose of the parties.
The officious bystander test is based on the intentions of the actual parties at the time the contract was formed. A term can be implied in circumstances where both parties would have obviously agreed that it be included as part of the agreement.
The Court of Appeal held that with respect to both the business efficacy test and the officious bystander test, it is important to consider the intention of the actual parties, rather than determining the intentions of reasonable parties. However, the court held that reasonableness is an inescapable part of determining whether to imply a contractual term. The Court held that the analysis must be based on the actual relationship between the parties and the specific contractual context, rather than an abstract analysis of what in general, a reasonable person might have agreed. Therefore the reasonableness of an implied term in a specific context should be assessed.
This decision is consistent with the recent trend to afford greater deference to trial judges regarding their interpretation of contracts. The implication of terms is becoming increasingly prevalent in contract law in order to achieve justice between the parties. Notably, the court recognized that the implication of a contractual term does not require a finding that a party actually thought about a term or expressly agreed to it. Often terms are implied to fill gaps to which the parties did not turn their minds. However, terms will not be implied that are unreasonable or contradict the express language of the contract.