Canada: Natural Justice Overtakes Deference In Contractual Interpretation

The Court of Appeal for Ontario has recently found another exception to the post-Sattva deference applicable to the interpretation of non-standard form contracts. In Union Building Corporation of Canada v. Markham Woodmills Development Inc., 2018 ONCA 401, Nordheimer J.A. allowed an appeal where the application judge had decided the case based on a different clause of the agreement than that relied upon by the parties. The resulting procedural unfairness warranted judicial intervention.

Background

The appeal turned on an agreement of purchase and sale in which the appellant agreed to sell an undeveloped parcel of agricultural-zoned land to the respondent. The agreement was conditional on the City of Markham consenting to the severance of the land. Clause 17 required the appellant to satisfy any conditions that the City imposed, except for "onerous or unreasonable" ones, in which case the appellant could give the respondent the opportunity to satisfy the condition or elect to terminate the agreement.

The City imposed a condition that the appellant must enter into a private cost sharing agreement with local developers requiring the appellant to provide more than $400,000 in funding for future land development (even though the appellant was the vendor of undeveloped land and was not itself proposing to develop the land). The appellant took the position that this condition was "onerous or unreasonable", and a dispute arose between the parties as to whether that was the case.

The notice of application sought a determination of the "single issue" of who was responsible for the more-than $400,000 payment—the appellant or the respondent—based on Clause 17 of the agreement. This turned on whether it was "onerous or unreasonable." The application judge held for the respondent, but not on the basis of Clause 17. Rather, he held that the appellant was responsible for the payment based on another clause (Clause 19) relating to the zoning of the land.

Standard of review on appeal

For a unanimous panel, Nordheimer J.A. started with the observation that, in a "normal situation", judges at first instance are entitled to deference in their interpretation of non-standard form contracts. However, Nordheimer J.A. found an exception to that rule and allowed the appeal.

Since the Supreme Court of Canada laid down the rule of deference in Sattva Capital Corp. v. Creston Moly Corp., appellate courts have found exceptions to that deference, arguably inching the law back from the watershed moment of Sattva where correctness review for contractual interpretation was largely relegated to exceptional cases. Examples of appellate courts finding exceptions include appeals involving terms of art and those finding various extricable legal errors, such as failing to read the contract as a whole and failing to analyze the contractual clauses at issue.

Union Building adds to those examples. Nordheimer J.A. held that judicial intervention is warranted where the judge at first instance decides the case on the basis of a clause of the agreement not argued by the parties. In this situation, "a broader principle involving natural justice overtakes questions of contractual interpretation" (para. 13). In other words, the procedural unfairness renders the post-Sattva deference inapplicable. The question then becomes whether to remit the matter back to the lower court for a fresh determination, or whether the appellate court is in a position to decide the contractual interpretation issues on the existing record and argument.

In Union Building, Nordheimer J.A. held the latter and concluded under Clause 17 that the City's condition that the appellant share in funding development costs was unreasonable because the appellant was not developing the land. Accordingly, the appellant properly exercised its rights under Clause 17 and was not responsible for the payment. Under Clause 17, it fell to the respondent to elect to either pay that amount itself (as the respondent did in fact), or to terminate the agreement.

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