The interrelated contracts principle continues to gain momentum
in Canadian contract law. Simply put, the courts favour an
interpretive approach that looks beyond the four corners of a
single contract and will often consider a series of contracts to
give effect to a transaction; all of the contracts in a series of
contracts must be considered in interpreting any one of them. The
recent Ontario Court of Appeal decision of Downey v. Ecore
International Inc., contains a strong reaffirmation that the
privity of contract principle erodes when interrelated contracts
are at play.
Paul Downey, an engineer, was lured away by a competitor of his
previous employer to work at the competitor's Pennsylvania
based manufacturing company (Ecore International Inc.). For tax
purposes, Mr. Downey wanted his employment relationship to be
structured as a consulting agreement with his own company, CSR
Industries ("CSR"), rather than the traditional
employer-employee structure. Ecore agreed and entered into a
consulting agreement between CSR as well as a confidentiality
agreement between Mr. Downey personally. In other words, Mr. Downey
was not a party to the consulting agreement, and CSR was not a
party to the confidentiality agreement.
The confidentiality agreement contained a clause that gave
Pennsylvania courts jurisdiction to try any action "that
arises out of or in any way relates to the company's
[Ecore's] business relations with employee [Mr. Downey]."
Eventually, Mr. Downey brought an action against Ecore in Ontario
over intellectual property rights created while Downey worked with
Ecore. Ecore moved to stay the Ontario proceedings on he basis that
Pennsylvania courts had jurisdiction (per the confidentiality
At first instance, the stay was denied on the basis that the
confidentiality agreement failed for lack of consideration, since
it was CSR (not a party to the confidentiality agreement) not Mr.
Downey who received confidential information from Ecore. The
Ontario Court of Appeal reversed this decision, finding the
confidentiality agreement and its jurisdiction clause to be
effective. The Court of Appeal found that the confidentiality
agreement formed part of a single transaction between Ecore, Downey
and CSR. The court said
"[i]t is only when the two agreements are read together ...
that the intentions of the parties and the true business reality of
their relationship emerge."
It also concluded that the company's permission to Downey to
access Ecore's proprietary information in order to perform
services under the consulting agreement, was independent
consideration for signing the agreement.
Thus, the actual relationship was between Ecore and Mr. Downey.
The presence of CSR was simply a tax conduit and as such, it was
irrelevant that CSR had not signed the confidentiality
The Court of Appeal bolstered its reasoning with the use of the
commercial efficacy principle (without the need of an ambiguity in
the contract). The Court of Appeal held that the approach of the
motions judge (which would have led to a commercially unviable
result: Mr. Downey nor CSR being bound to protect Ecore's
intellectual property) violated the commercial efficacy principle
by stripping the confidentiality agreement of any purpose.
What this means for you
This case has not created any new law. Rather, it simply
reiterates and strengthens the principle of interrelated contracts.
It's a welcome decision that offers courts more authority to
give effect to the real intentions of the parties at play and that
intention can be unearthed notwithstanding old and burdensome
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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