The Ontario Court of Appeal rendered a decision about when a court can imply terms into a commercial contract when the terms have not been expressly agreed.
The Court of Appeal found that 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’”, quoting M.J.B. Enterprises Ltd. v. Defence Construction (1951) Ltd.,  1 S.C.R. 619 (“M.J.B. Enterprises”). Referring to the more recent Supreme Court of Canada decision of Sattva Capital Corp. v. Creston Moly Corp. 2014 SCC 53, the Court of Appeal also noted that “the issue of implication of contractual terms raises questions of mixed law and fact, as would interpretation of the contract, and the same standard of review should apply, palpable and overriding error, unless extricable errors of law are evident.”
In this particular case, the issue of implied terms arose in the context of an option agreement. The application judge implied a contractual obligation on Veresen Inc. (“Veresen”) to disclose information to enable Energy Fundamentals Group Inc. (“EFG”) to determine whether to exercise an option to acquire up to 20 per cent of a limited partnership. The partnership developed a liquid natural gas terminal on the coast of Oregon. In 2005 EFG had provided investment banking services to Veresen, introducing Veresen to the project, which Veresen then acquired and controlled.
The Court of Appeal found that the application judge’s conclusions were reasonably available to him on the evidence. The written agreement was not intended to fully define the relationship between the parties and commercial contracts may on occasion set out expressly only their most important terms. The Court of Appeal also found that interpreting the written agreement in a manner where EFG would blindly exercise the option without knowing whether it would make economic sense to do so would frustrate the business purpose of the agreement.
The Court of Appeal added that the application judge did not depart from the proper test by referring to what reasonable parties would or would not have agreed. Justice Iacobucci in M.J.B. Enterprises sought to focus the analysis on the intentions of the actual parties and warned against “slid[ing] into the intentions of reasonable.” However, the Court of Appeal found that this warning spoke in favour of analysis rooted in the actual relationship between the parties and its specific context, and against abstract, general analysis. The application judge’s finding that no reasonable person would have exercised the option without disclosure supported, in the Court of Appeal’s view, the finding that such disclosure was necessary for the purposes of business efficacy.
Lastly, the Court of Appeal accepted the common doctrinal underpinning between good faith and the implication of a term because it was necessary to give business efficacy to the contract. Both are devices to fill gaps and deal with aspects of the relationship that have not been specifically dealt with by the parties.
EFG was represented by Norton Rose Fulbright LLP with a team made up of Orestes Pasparakis, Rahool Agarwal and Stephen Taylor.
Veresen was represented by Osler, Hoskin & Harcourt LLP. The Osler team consisted of Mark Gelowitz and Eric Morgan.