Lost in Contractual Interpretation: No Agreement at ABCA on Interpretation of Multiple Contracts Within a Single Transaction
In a very recent decision of the ABCA, Benfield Corporate Risk Canada Limited v. Beaufort International Insurance Inc, 2013 ABCA 200, the Court attempted to address a host of interesting contract issues, some with potentially wide implication, such as how to interpret multiple contracts within a single transaction, including the effect of entire agreement clauses and the ability to benefit from a breach of one of the related contracts. Also mentioned are general duties of good faith, the role of fairness and implying terms. However, unique circumstances and a lack of agreement in the Court leaves us, unfortunately, without clear direction in an area affecting most complex commercial transactions. Further, the majority decision runs contrary to previous authorities from the ONCA and SCC.
Background and Decision Below
The Defendant (Beaufort) entered into an asset purchase agreement (APA) to sell its insurance brokerage business and related assets to the Plaintiff (Benfield). The APA contained a clause which provided that the APA and the “ancillary agreements” constituted the “entire agreement” between the parties. The final payment of the purchase price was contingent on a key employee of Beaufort (Simpson) remaining in Benfield’s employment for two years, subject to certain exceptions for non-culpable behavior (i.e., death, sickness or disability).
In an ancillary employment agreement (stated to be one of the conditions of closing), Benfield agreed to employ Simpson for an initial 2-year fixed term with dismissal only for cause (after 2 years he could be dismissed with or without cause). But Benfield terminated Simpson’s employment without cause before the expiry of the 2-year fixed term by paying him his full 2-years’ salary and obtaining a full release from him. Then Benfield tried to rely on the fact Simpson was no longer employed to refuse final payment to Beaufort. Although, one unique aspect was that some months after the sale closed, a larger company bought Benfield, which introduced changes in business policy which Simpson did not agree with.
The chambers judge found for Benfield, concluding that the ancillary employment agreement did not form part of the interpretation of the APA because it involved a different party or, alternatively, that Benfield did not guarantee 2 years of employment. Beaufort appealed.
The ABCA Split Decision
On appeal, the majority of the ABCA dismissed the appeal. Conrad J.A., in dissent, would have allowed it.
Both the majority and Conrad J.A. agreed that this appeal was all about contractual interpretation. Unfortunately, there was little else they agreed on. The fundamental issue of disagreement was whether the two contracts at issue, which formed part of the same transaction and which were (expressly in the APA) the “entire agreement” between the parties, should be interpreted together or in light of each other (the view of Conrad J.A.) or whether such contracts could only properly be interpreted together if they could be seen to be, in law, one contract with the same parties, regardless of what the “entire agreement” clause stated (the view of the majority).
The majority judgment seems to indicate that, before multiple contracts of a transaction can be interpreted together or in light of each other, a finding would have to be made that they were a single contract between the same parties and could be legally “melded into one” or “fused”. Oddly, no party was asking the Court to make such a finding in this case and no authorities were cited by the majority in support of this approach. Apparently important to the majority view were notions of privity of contract, the fact that the APA made the employment contract “ancillary” and provided that in the event of a conflict or inconsistency the APA would prevail.
However, as pointed out by Conrad J.A., even without a clause explicitly binding separate contracts into a single agreement, courts have held that where a group of related agreements with overlapping parties are used to effect a single transaction, the contracts should be interpreted in light of each other, citing 3869130 Canada Inc. v. I.C.B. Distributing Inc, 2008 ONCA 396 (“3869130 Canada”), per Blair J.A. for the ONCA at paras. 33-34, citing The Law of Contracts (Toronto: Irwin Law Inc., 2005) and the SCC decision in Mechanical Pin Resetter v. Canadian Acme,  SCR 628. 3869130 Canada has been followed in many subsequent decisions, including by the ONCA. Conrad J.A. emphasized there is no reason why all parties had to be party to each agreement and that other provisions of the two contracts here showed they were meant to be read together, including the “in case of conflicts” provision. Overall, Conrad J.A. held that interpreting the two contracts together was correct as it was the only way to give meaning to the whole of the agreement in a commercially reasonable way.
Another, related, key area of disagreement was whether Benfield could take advantage of its own breach of an ancillary contract to avoid obligations under the main contract and deny payment of part of the purchase price to Beaufort. Not according to Conrad J.A., since the contracts together formed the “entire agreement” between the parties and should be interpreted together and also because a breach with payment of damages is no less of a breach. However, the majority found such a breach was merely a “technical wrong” and that the lack of privity of contract here was fatal.
This decision has great potential significance for situations involving multiple contracts within a single transaction – like most complex commercial transactions - especially given the unique approach taken by the majority; an approach that runs contrary to previous decisions of the ONCA and SCC. Given that, an appeal to the SCC in this case would not be surprising and further debate is likely to come.
A number of other contractual interpretation issues were discussed by the majority in this case. Important statements made in that regard include: (i) confirmation that there is no general common law duty to act in good faith, independent of express terms of a contract and where there is no question of eviscerating the main objectives of the contract, especially with an entire-agreement clause; and (ii) that fairness in general or fairness of the bargain is not relevant to interpretation of a contract.
Court File No: 1201-0095-AC
Date of Decision: June 13, 2013
ancillary agreements asset purchase agreement breach of contract entire agreement clauses good faith interpret multiple contracts