Implied Terms and Business Efficacy as tools for Contractual Interpretation: Not Quite Say What You Mean, Mean What You Say
August 17, 2015
The recent Court of Appeal decision of Energy Fundamentals Group Inc. v Veresen Inc., reminds us of the circumstances in which courts might exercise their power to imply a term into a contract. In this case, the parties entered into a joint venture by way of letter agreement, whereby they were to work together to obtain financing for an energy project. A condition of the letter agreement was that the respondent would have the option to acquire up to a 20% interest in the project upon securing financing.
After financing had been secured, the appellant took the position the option had expired and refused to provide the respondent with the documentation to verify either the pricing of the option or its likely economic value.
The lower court held the option was valid and, although the letter agreement did not address the issue of documentary disclosure, that disclosure “was a necessary incident to the existence of the option right itself”, as no reasonable person would have exercised an option without prior disclosure as to its value. The court’s reasoning rested upon the principle, as articulated by the Supreme Court of Canada in M.J.B. Enterprises Ltd. v. Defence Construction (1951) Ltd., that a term might be implied to give business efficacy to a contract, or where a term is considered too obvious to require express inclusion.
Curiously, the appellant only appealed the court’s finding that the option included an implied term with respect to disclosure and not the validity of the option itself. The Court of Appeal upheld the lower court’s decision, reaffirming that:
- in analyzing whether a contract includes an implied term, a deferential standard of review applies, and an appellate court should only intervene in a lower court’s decision if the court can be found to have made a palpable and overriding error, or extricable error of law;
- a contractual term may be implied “on the basis of the presumed intentions of the parties where necessary to give business efficacy (what the parties intended at all events) to the contract or where it meets the ‘officious bystander test’”, or in other words is so obvious that it goes without saying the parties would have agreed to the term;
- the implied term must be reasonable and assessed as such both in the specific context it is to be applied and on the basis of general reasonableness as a term; and
- the finding an implied term exists does not require a finding that a party actually thought about the term or expressly agreed to the term.
This case is a good reminder that ‘what we write may not always be what we mean’. The business efficacy and officious bystander tests are two interpretive tools which may be used by courts to give effect to disputes regarding contractual performance and parties should therefore be cognizant of these tests.