The Court of Appeal for Ontario recently released its decision
in Energy Fundamentals Group Inc. v Veresen
Inc.1 This decision revisited and reaffirmed the
circumstances in which a court will imply a term into a
contract.
Background facts and arguments
Energy Fundamentals Group (EFG) provided financial services to
the appellant pursuant to a letter agreement. The letter agreement
was not comprehensive, but provided EFG the option to acquire up to
a 20% interest in a liquid natural gas project contingent on
successful financing.
The relationship deteriorated when the appellant asserted that the
option had expired as a result of fundamental changes to the
project and, further, refused to provide EFG with documents to
verify the option price or its likely economic value.
The application judge's decision
The application judge declared that the option was still valid
and ordered the appellant to provide sufficient information to
enable EFG to calculate the option price and determine the value of
a 20% equity stake in the project.
Referring to the leading Supreme Court of Canada case on the
implication of terms, the application judge found that terms may be
implied where necessary to give business efficacy to a contract, or
where terms are considered too obvious to require express
inclusion.
Accordingly, the application judge concluded that disclosure of the
financial documents in this case was "a necessary incident to
the existence of the option right itself." The parties must
have intended a right to disclosure, as any other interpretation
would frustrate the business purpose of the agreement. He concluded
that without disclosure of the valuation information, "The
option right is really no right at all" and no reasonable
person would have embarked on an exercise of an option without
disclosure.
The appeal
The appellant declined to appeal the finding that the option had
not expired, and, instead, focused solely on the implied term of
disclosure, arguing it would never have agreed to undefined
disclosure terms, and submitted that terms requiring value and
price disclosure should not be implied. The appellant contended
that a court cannot imply a term mandating "sufficient
disclosure," as such a term is too indefinite and uncertain as
to the scope of disclosure.
The respondent argued that the option would be illusory without the
right to the requested disclosure and submitted that a court can
imply terms to a contract where necessary for the agreement to have
such commercial efficacy as the parties intended.
The Court of Appeal reaffirmed established principles of
contractual interpretation, holding that the application judge
correctly articulated the test for determining whether to imply
terms to a contract and dismissed the appeal.
The court found that the correct standard to apply in determining
whether to imply terms into a contract involves questions of mixed
law and fact. Ultimately, 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 such
effect to the transaction as must have been intended by both
parties. Assessed on the standard of a reasonable person "who
had knowledge of the relevant background," it asks what
construction would frustrate the parties' apparent business
purpose.
The officious bystander test is used to determine if an unstated
condition was originally implied at the time of contract formation.
It suggests that a term can be implied where it is prima
facie something both parties would have undoubtedly included
as part of their agreement, at the time they were making their
bargain.
The court ruled that both the business efficacy test and the
officious bystander test focus on the intentions of the actual
parties, but "reasonableness" is an inescapable part of
determining whether to imply a contractual term. A court should
assess the reasonableness of the proposed term to be implied in the
specific context, but also rely on the general reasonableness of
the term. Finally, the court recognized 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.
The take-away
This case is a helpful reminder that courts will imply a term
into a contract where such a term represents and gives effect to
the parties' intention in order to provide the contract with
the effectiveness and purpose that the parties intended. In
essence, courts will imply terms where necessary to give business
efficacy to a contract, having regard to the parties, the
contractual context and guided by what is reasonable in the
circumstances.
The authors wish to thank Gillian Moore, summer law student,
for her help in preparing this legal update.
Norton Rose Fulbright Canada acted as counsel to Energy
Fundamentals Group both on appeal and in the court below.
Footnote
1 Energy Fundamentals Group Inc. v Veresen Inc., 2015 ONCA 514.
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