Every lawyer knows that, when interpreting a contract, one is
permitted to take into account the ”factual matrix”
that surrounded the execution of the agreement.A question that is
far less clear is the meaning of this concept —
i.e., in construing the contract, what contemporaneous
evidence is a court permitted to consider under the rubric of the
factual matrix, and what evidence is it forbidden to consider?
Useful guidance on these matters has recently been provided by
the Alberta Court of Appeal in Nexxtep Resources Ltd. v. Talisman Energy
Inc., 2013 ABCA 40.At issue was the proper
interpretation of a sale agreement conveying petroleum and natural
gas leasehold interests.
Even before the agreement was signed, the parties’
relationship had become contentious.The contract had only been
finalized after extensive negotiations, giving rise to two separate
letter agreements, multiple demand letters and a pre-contractual
lawsuit brought by the proposed purchaser against the proposed
vendor.A term of the final sale agreement was a release of all
claims arising from these pre-contractual dealings.The contract
also contained an “entire agreement” clause.
Regrettably, the parties’ relationship did not improve
following the execution of the sale agreement.The vendor of the
leasehold rights continued to extract natural gas from immediately
adjacent sites, and the purchaser claimed that the vendor was
improperly taking gas from the very deposit that had been sold to
The purchaser brought a suit in trespass and conversion, and the
key issue for the courts was the proper interpretation of the
parties’ sale agreement — i.e., based on the
description in the agreement, what exactly had been sold by the
vendor to the purchaser?
The Court of Appeal confirmed that “contracts should be
enforced in accordance with the intention of the parties, which is
to be gleaned from the words used in their agreements.”The
court’s goal is to establish the objective meaning
of the words, and of the parties’ intention.As part of this
interpretative exercise, consideration must be given to
“[c]ontextual evidence of surrounding circumstances,
disclosing facts known to the parties at the time the contract was
made” (at para. 20).
Applying these principles, the Court of Appeal affirmed the
approach of the trial judge in assessing the factual
Evidence of the parties’ pre-contractual negotiations
was not part of the factual matrix, and therefore should
not be admitted (at para. 32).
However, because the sale agreement made explicit reference to
the purchaser’s release of its claims under the previous
letter agreements, it was legitimate for the court to consider
those precursor documents.This was not inconsistent with the
“entire agreement” clause, because the earlier
documents were considered in an effort to understand the
parties’ intention, as distinct from adding terms to their
final contract (at paras. 29-32).
The Court of Appeal also expressed approval of the admission of
expert and regulatory evidence in order to establish the commercial
context within which the sale agreement was made (at paras.
Lastly, the Court focused on the principle that the
“factual matrix” was limited to “facts known to
the parties at the time of the making of the contract.”It had
been established that, when negotiating their agreement, the
parties had shared a mutual mistake regarding the physical
attributes of the deposit which had been sold.Knowledge of the true
facts supported a different interpretation of the
parties’ agreement.However, because these facts were
not known to the parties at the time of execution, they
could not be relied upon to assist in construing the terms of the
agreement (at paras. 3, 18 & 37)
The Court of Appeal concluded that the trial judge’s
approach was correct, as he had “relied upon the evidence
admitted before him only to construct the background factual
matrix, which shows the facts known to the parties at the time the
Agreement was made, as well as their commercial object from an
objective standpoint” (at para. 37).
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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