Is Signing On The Line Really Final?

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Introduction

In M&A transactions, parties often expect the final purchase agreement to be a complete, self-contained statement of the agreed-upon terms. Yet, recent jurisprudence cautions that when drafting leaves uncertainty, courts may draw upon context outside the four corners of the definitive agreement to determine meaning.

The Ontario Superior Court's 2025 decision in Project Freeway provides valuable insight for M&A lawyers for multiple reasons. First, as discussed in our previous article, Not So Fast: Ontario Court Weighs In on Earnout Acceleration Clauses, the court provided guidance on whether certain post-closing transactions could trigger the acceleration of an earnout clause. Second, as we will discuss below, Project Freeway reminds lawyers that even a robust entire agreement clause ("EAC") in an M&A purchase agreement may not preclude a court from consulting the parties' initial letter of intent ("LOI").¹ While EACs are generally intended to create a conclusive presumption that the definitive agreement represents the final, exclusive and entire agreement between the parties, Project Freeway reminds us that Ontario courts may look to the LOI to resolve ambiguity in the definitive agreement, even when faced with an EAC that expressly excludes the terms of the LOI.

The question remains: how do contracting parties ensure that the negotiated EAC truly accomplishes its purpose? This article unpacks the Project Freeway ruling and offers some key drafting considerations to improve the likelihood that an EAC achieves its intended effect.

Why EACs Matter in M&A Transactions

EACs are "generally intended to lift and distill the parties' bargain from the muck of the negotiations."² In M&A transactions, they are particularly important given the breadth and complexity of diligence, lengthy negotiations and the sheer volume of documents involved. Including an EAC helps contracting parties provide certainty about the final terms of a deal by preventing either party from relying on prior discussions and agreements (oral or written) if a dispute arises.

Project Freeway Ruling

In Project Freeway, the court waded backinto the "muck" to interpret the definitive agreement. The dispute between the parties turned on the meaning of the word "material" in an earnout acceleration clause: the purchaser contended that the term should be interpreted in relation to the impact on the business's ability to achieve the earnout performance target, whereas the vendor maintained that the term should be understood in terms of size or value of the transaction.

To resolve this ambiguity, the court consulted the LOI, the terms of which supported a performance-based definition of "material." The vendor argued that the court should not have considered the LOI in its analysis, given the presence of an EAC which expressly stated that the purchase agreement was the entire agreement and superseded the LOI.³ The court disagreed, holding that the terms of the LOI may be considered for the purpose of ascertaining background facts at the time of entering into the definitive purchase agreement, despite the EAC.⁴

Does Project Freeway Erode the Effectiveness of EACs?

EACs remain effective in emphasizing that the definitive agreement is the parties' final and exclusive bargain. Ever since Sattva (2014),⁵ Canadian courts have regularly looked to the "surrounding circumstances" or the "factual matrix" when interpreting contracts, including oral and written negotiations, collateral agreements (including an LOI), industry norms and commercial reasonableness.⁶ Within this context, EACs act as a clear boundary between what information is included in the definitive agreement and what is external, and therefore a part of the surrounding circumstances.

Project Freeway illustrates a case where the definitive agreement, in isolation, did not clearly convey the parties' intent. The EAC set the boundary for what constituted the entire agreement; however, that agreement did not define the term "material." As a result, the court looked to the factual matrix at the time of the definitive agreement, including the existing LOI, and found a clear, unambiguous meaning for the term, based on the objective intent of the parties at that time. This approach is consistent with prior court rulings since Sattva – in fact, the Ontario Court of Appeal has previously stated that an "entire agreement clause alone does not prevent a court from considering admissible evidence of the surrounding circumstances at the time of contract formation."⁷

The ruling in Project Freeway reiterates that Canadian courts will not be restrained by EACs in their approach to contract interpretation.

Other Considerations

Agreements with collateral contracts or transactions with multiple documents containing EACs, among other items, further complicate efforts to adjudicate what is internal or external to an entire agreement.

Collateral Agreements

In M&A transactions, EACs can preclude collateral agreements (i.e., a supplementary agreement between the parties that is made alongside the definitive agreement). When the definitive agreement's language is clear, courts have consistently refused to use collateral agreements to vary its terms, reflecting the principle that "an agreement that is negotiated between sophisticated parties ought to be enforced in accordance with the terms they select in all but the most exceptional circumstances."⁸ In these cases, courts will use collateral agreements only to confirm intent between the parties.⁹

In cases where intent is not clearly communicated or where there is ambiguity within the definitive agreement,¹⁰ as in Project Freeway, or when a collateral agreement is entered into after the definitive agreement,¹¹ courts may give weight to the collateral agreement. In essence, collateral agreements entered into after the definitive agreement is executed are not normally captured by an EAC that integrates only prior or contemporaneous materials.¹²

A prudent drafting approach would be to specify, within the EAC, exactly which collateral agreements are excluded. In such a case, courts would be more likely to treat those documents as outside the four corners of the definitive agreement when such exclusion is explicit.¹³

Multiple EACs

Some transactions involve multiple agreements, each containing an EAC. In those cases, the court must determine which agreement or combination of agreements constitutes the "entire agreement." Where the agreements serve distinct purposes, courts may uphold both by keeping their scopes separate.¹⁴ Where the purposes overlap, a court will select a governing agreement.¹⁵ In either scenario, courts may still consult the factual matrix for context.

Other Nonbinding Documents and Factors

Courts may also consider nonbinding documents when interpreting a definitive agreement, such as pre-contractual representations,¹⁶ internal memorandums¹⁷ and drafts of the definitive agreement.¹⁸ When consulted, these materials serve only to highlight the surrounding circumstances; a clear written agreement remains controlling.

Interpretation of EACs in the United States

The objective of contractual interpretation is the same in the United States as it is in Canada, which is to give effect to the mutual intention of the parties.¹⁹ Where American and Canadian courts diverge is in the approach they take. American courts generally focus on the "technical" meaning of the words and try to infer intent solely from the written provisions of the contract.²⁰ American courts typically avoid using a factual matrix in the absence of ambiguity. The approach used by Canadian courts is to incorporate the factual matrix regardless of whether there is ambiguity in the words of an agreement.²¹ For American companies looking to transact in Canada, it will be important to consult Canadian counsel to ensure sound legal structure and commercial efficacy in their agreements.

Considerations for Your M&A Transactions

After Project Freeway, the definitive agreement remains the primary document referred to by courts when interpreting an ambiguously worded portion of the agreement. Where ambiguity exists, a court may consult the surrounding circumstances of the transaction despite an EAC. Those circumstances inform the objective intent expressed in the contract. There is no iron-clad way to prevent this from occurring in your transaction, though you can reduce the risk by considering the following:

1. Intent Is Paramount: No EAC will override the parties' intent. Ensure intent is clearly expressed throughout the definitive agreement, especially through precise definitions and carefully drafted operative provisions.
2. Remain Conscious of the Entire Factual Matrix: Parties should be cognizant of prior agreements and communications (e.g., LOIs, term sheets, emails). Update or expressly disclaim earlier agreements and terms to avoid mixed signals regarding intent.
3. Minimize Ambiguity: Define all material terms and aim for consistency across the agreement, schedules and collateral agreements.
4. Draft the EAC Deliberately: The EAC should be drafted with the intention of creating a conclusive presumption that the written definitive agreement represents the final and exclusive entire agreement between the parties. This includes expressly excluding specified collateral agreements, drafts and other non-binding agreements.
5. Duty of Good Faith: Be mindful that the duty of good faith and honest performance applies regardless of any drafting stating otherwise.
6. Include EACs in Your Transaction: EACs remain an effective tool to designate the final and exclusive agreement and the parties' corresponding intent.

The Capital Markets Group at Aird & Berlis LLP will continue to monitor matters relevant to your future M&A transaction. If you have any questions regarding your M&A needs, please contact the authors or a member of the group.

Footnotes

1 Project Freeway Inc. v. ABC Technologies Inc., 2025 ONSC 1048.

2 Soboczynski v. Beauchamp, 2015 ONCA 282 at para 43.

3 Supra note 1 at para 50.

4 Ibid at para 51.

5 Sattva Capital Corp v. Creston Moly Corp., 2014 SCC 53 at para 57.

6 Weyerhaeuser Company Limited v. Ontario (Attorney General), 2017 ONCA 1007 at para 65.

7 Ontario First Nations (2008) Limited Partnership v. Ontario Lottery and Gaming Corporation, 2021 ONCA 592 at para 62.

8 MacMillan v. Kaiser Equipment Ltd., 2004 BCCA 270 at para 45.

9 IFP Technologies (Canada) Inc. v. EnCana Midstream and Marketing, 2017 ABCA 157 at para 162.

10 See Project Freeway Inc v. ABC Technologies Inc, 2025 ONSC 1048; Kaup v. Landrex Hunter Ridge Inc., 2023 ABKB 542 at paras 56-58.

11 See Hole v. Hole, 2016 ABCA 34.

12 Ibid at para 46.

13 Salvatore v. Tomassini, 2021 ONCA 691 at paras 6-14.

14 1346134 Ontario Limited v. Wright, 2023 ONCA 307.

15 Cultivate Capital Corp. v. 1011173 B.C. Ltd., 2021 BCSC 1258.

16 Ontario First Nations (2008) Limited Partnership v. Ontario Lottery and Gaming Corporation, 2021 ONCA 592.

17 RS Distribution Services Ltd. v. MTS Inc. et al., 2023 MBCA 34.

18 Wesbell Networks Inc. v. Bell Canada, 2015 ONCA 33.

19 Bank of the West v. Superior Court, 2 Cal. 4th 1254, 833 P.2d 545, 10 Cal. Rptr. 2d 538, 1992 Cal. LEXIS 3489, 92 Cal. Daily Op. Service 6640, 61 U.S.L.W. 2102, 92 Daily Journal DAR 10597 (Cal. July 30, 1992).

20 24th & Hoffman Investors, LLC v. Northfield Ins. Co. , 82 Cal. App. 5th 825, 298 Cal. Rptr. 3d 816, 2022 Cal. App. LEXIS 745 (Cal. App. 1st Dist. August 30, 2022).

21 Weyerhaeuser Company Limited v. Ontario (Attorney General), 2017 ONCA 1007 at para 65.

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.