Read Carefully: Surrounding Circumstances Cannot Be Used to Contradict the Words of an Unambiguous Written Agreement

Contractual interpretation involves a search for the parties’ shared intentions. In carrying out this search, courts look not only to the words of the written agreement, but also to the surrounding circumstances known to the parties at the time of the agreement. The B.C. Court of Appeal’s recent decision in 1001790 BC Ltd. v. 0996530 BC Ltd.[1] cautions, however, that the surrounding circumstances cannot be used to contradict the words of an unambiguous written agreement. It further cautions that a contracting party who fails to read those terms carefully before signing does so at their peril.

Background

1001790 BC Ltd. (the “Lender”) advanced a loan to 0996530 BC Ltd. and Chia Hwei Lin (together, the “Borrowers”), who then defaulted. Since the parties agreed on the principal outstanding ($250,000) and the Borrowers had already paid this amount, the only issue in dispute was the interest owing.

The parties believed that they had reached an oral agreement on payment of the interest owing, but their respective understandings of the terms of this agreement differed. Although the parties agreed that the total settlement amount would be $325,721, the Borrowers believed that they would receive a deduction for the $250,000 already paid and would pay only $75,721 to settle the interest owing, while the Lender believed that the Borrowers had agreed to pay an additional $325,721, with no deduction for the $250,000 already paid.

The parties then signed a written agreement, which neither the Lender nor their counsel read before signing. This agreement, which the Borrowers had prepared, reflected the Borrowers’ understanding: it stated that the Lender “agrees that the Initial Payment of $250,000 has been received and shall be deducted from the total Payment”, and that the Lender would “pay an additional $75,721” to reach the total of $325,721.

The Lender later challenged this written agreement, arguing that it was inconsistent with the prior oral agreement it was intended to record, and seeking court-ordered rectification. The Borrowers sought an order enforcing the written agreement.

The Chambers Judge’s Decision

The chambers judge concluded that there was no meeting of the minds, and therefore no valid contract. She found that although the parties believed that they had reached an agreement, they had not agreed on an essential term: price. She emphasized that this was not an “end run” around the bargain because, “[q]uite simply, there was no enforceable bargain”.[2]

The Court of Appeal’s Decision

The Court of Appeal allowed the Borrowers’ appeal, concluding that the parties had reached a valid and enforceable written agreement.  

The Written Agreement Was Valid

The Court of Appeal held that the chambers judge had erred by permitting what she termed “surrounding circumstances” to overwhelm the words of the parties’ unambiguous written agreement. The court emphasized that where, as here, the parties’ agreement is unambiguous and wholly reduced to writing, the parties’ intentions must be determined based on “the contract itself, not the subjective views of the parties”.[3] Further, the court held that although evidence of the surrounding circumstances is admissible to assist in contractual interpretation, the chambers judge had used this evidence “not to aid in interpretation, but to contradict the words of the written agreement altogether”,[4] contrary to the parole evidence rule. The court held that the written agreement was valid.

No Equitable or Legal Impediment to Enforcing the Written Agreement

The Court of Appeal further concluded that there was no equitable or legal impediment to enforcing the written agreement:

  • Non Est Factum. This doctrine voids a written agreement if a party can show “that the document they signed was fundamentally different in nature from what they believed it to be, that they signed it as a result of a misrepresentation, and that they were not careless in doing so”.[5] The court declined to apply this doctrine, however, based on the Lender’s lack of due diligence in failing to read the written agreement before signing it.
     
  • Unilateral Mistake. This doctrine permits a court to refuse to enforce a written agreement where it would be unconscionable to do so because a party was mistaken about a material term and the non-mistaken party, aware of the mistake, allowed the mistaken party to continue under this misapprehension. The court declined to apply this doctrine, however, because there was no evidence that the Borrowers were aware of the Lender’s mistake, and in any event the Lender’s failure to read the written agreement before signing it weighed against the doctrine’s application.

Takeaways

  1. Although evidence of the surrounding circumstances is admissible to assist in contractual interpretation, it cannot be used to contradict the words of an unambiguous written agreement. The interpretation of a written agreement is grounded in the written agreement itself, and any prior oral agreement cannot be used to overwhelm its terms.
     
  2. Parties who fail to read a written agreement before signing it do so at their peril.


Case Information

1001790 BC Ltd. v. 0996530 BC Ltd, 2021 BCCA 321

Docket: CA46855

Date of Decision: August 30, 2021

________________________________________

[1] 2021 BCCA 321 [100 v. 099].

[2] 100 v. 099, at para. 27.

[3] 100 v. 099, at para. 41.

[4] 100 v. 099, at para. 43.

[5] 100 v. 099, at para. 49.

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