Canada: Contract Troubleshooting Tips

Contract troubleshooting is using the expertise gained in resolving contractual disputes in drafting contracts, to manage the risk of disputes by preventing them arising in the first place. This bulletin sets out some practical tips on how to do that.

GOVERNING LAW

The starting point is the contractual governing law. That determines how the contract will be interpreted by any tribunal called on to resolve a dispute under it. Every contract has a governing law. The parties can expressly choose it themselves. Or they can leave the choice to the tribunal resolving a dispute. That runs the risk of the governing law being something the parties didn't expect, and so their contract meaning something they didn't expect. Why would you run that risk? Expressly choose a governing law.

But just choose one. Don't make the legendary mistake of the drafters of the construction contract for the Chunnel, who chose to govern their contract by the principles common to English and French law. Legal lore has it that the legal fees for determining what those might be financed construction booms of vacation homes in Mallorca and the Algarve.

And choose the governing law early in the negotiation. Frankly, it should be the first thing agreed on. It's going to determine what everything else means. Why would you negotiate all the contractual detail without knowing how it's going to be interpreted?

LAW OF CONTRACT INTERPRETATION

Having chosen the governing law, you need a clear understanding of what it provides about contract interpretation. Everything about contract drafting circles back to that.

British Columbia law, similar to most common-law jurisdictions, focuses on the parties' objectively expressed intent - expressed in the ordinary grammatical meaning of the contractual language, in the context of the whole contract and the "factual matrix" in which it was negotiated. Notably absent from that analysis is the parties' subjective intent, the negotiating history and the parties' post-contract conduct.

One of the reasons the choice of governing law is so important is that the laws of other jurisdictions are different. To take a Canadian example, under Quebec's civil law system, the focus is very much on the parties' subjective intent. Obviously, that leads to a very different analysis.

PLAIN ENGLISH

The focus on the ordinary grammatical meaning of the agreed words leads to an emphasis on plain English drafting. Draft the contract so its meaning is clear. Draft it clearly and simply. Plain words, used grammatically correctly in short sentences, are usually the best choice. English is an extremely sophisticated language. Used with care, it can clearly express the most complex concepts.

I don't like using defined terms. I appreciate that's a bit heretical, but you can generally clearly express the parties' agreement without them. Using them detracts from the contract's clarity, by cluttering it up and making it hard to read. But if you are going to use them, use ones that make intuitive sense, and use them grammatically correctly.

Returning to the fundamental principle, at all costs avoid subjectivity (and so ambiguity). Subjective phrases like "reasonable efforts" and "in good faith" are dispute generators. Replace them with objective language. If you can't do that, "benchmark" them, putting objective parameters around the subjective language.

DISPUTE RESOLUTION

So far we've been talking about managing risk by preventing disputes about contractual meaning. But you need to recognize that disputes will arise, and focus on ensuring business continuity while they're resolved. One way to do that is to expressly choose an exclusive dispute resolution mechanism in the contract.

It's important to appreciate that litigation is the default dispute resolution mechanism in most of the world. So if you don't choose something else, you're really choosing to litigate. That's often not the best option. And it actually gets worse, because you're choosing to litigate in any jurisdiction in which any party can persuade the courts to exercise jurisdiction. That creates some frightening risks. Litigation in China anyone? Russia?

Fortunately, this risk is easy to manage. Just expressly choose an exclusive dispute resolution mechanism. I suggest you seriously consider commercial arbitration. Conducted by counsel and an arbitrator with the necessary expertise, it can be a significant improvement on litigation. But if you do want to litigate, expressly choose an exclusive jurisdiction in which to do it.

Now, a couple of subsidiary points. As with governing law, just choose one dispute resolution mechanism (unless there's good reason to resolve different kinds of disputes differently). Including in your contract, for example, both an arbitration agreement and choice of litigation jurisdiction isn't really choosing a dispute resolution mechanism. It's more like choosing to spend the first two years of a dispute litigating (who knows where) by what mechanism the merits of the dispute are going to be resolved. Another risk you don't have to run.

Transactions and relationships are often governed by a suite of related contracts. Ensure that (again, unless there's good reason otherwise) they all have the same dispute resolution mechanism. You can guarantee that if a dispute does arise it will engage more than one of those contracts. The last thing you want is to be simultaneously resolving different aspects of the same dispute by different mechanisms.

" BOILERPLATE"

Everyone who drafts contracts is familiar with "boilerplate", the routine provisions at the end of the contract that are probably copied and pasted in from some previous contract without much detailed consideration of their appropriateness. They're another dispute generator.

There is really no such thing as boilerplate. Boilerplate are contractual terms just like any others. They may be short and deal with apparently routine issues, but they have just the same contractual force, and can have just as much effect on the parties' rights and obligations, as any other term. So take the same care in drafting them.

FRESH EYES REVIEW

Recognizing the tremendous time pressure that contract drafters are often under, it's still enormously helpful to do a fresh eyes review of the contract when it's approaching being finalized. Any drafter will admit there comes a point when it's very difficult to think objectively about the detail they're so immersed in. It's always a good idea to have someone with fresh eyes review the draft. And if you're going to do that, why not use someone with contract troubleshooting expertise?

If you do have to review the contract yourself, try to create enough space around the draft to bring some freshness to the process. If you can, put it aside for a few hours, ideally overnight.

CONCLUSION

Following these practical contract troubleshooting tips will go a long way to manage the risk of contractual disputes, by drafting clearly to prevent them arising in the first place.

About BLG

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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