The Second Opinion: Who needs Lawyers? When Laypeople draft Contracts that are Uncertain, Ambiguous and Incomplete, the Courts must strive for a “Sensible and Businesslike” Interpretation, says the ABCA

When complex commercial contracts have been drafted entirely by laypeople -- without any input or advice from legal counsel -- issues of interpretation can be a challenge.  This is particularly true in circumstances where, years later, the parties themselves disagree as to specific elements of their agreement.  In a recent ruling, Schmidt v. Wood, 2014 ABCA 80, the Alberta Court of Appeal demonstrates the efforts expected of a court in order to find a satisfactory construction of such agreements.

At issue were two interlocking contracts addressing the marketing of current and future products invented by one of the parties.  As acknowledged by the Court, the agreements were not models of perfect drafting:

The original two contracts are obviously not drafted by lawyers. Parts are ambiguous or uncertain, and there are gaps in the topics covered.

As the ABCA went on to explain, however, this lack of clarity did not relieve the Court of its duty, if at all possible, to identify a reasonable interpretation:

Complete certainty as to which is the correct alternative meaning maybe is not possible here. But where business people draft their own contract, without using lawyers, the maxim res magis valeat quam pereat ["let things survive rather than perish"] is especially important. The court should strive to make the contract work, not to upset it. …. The poorer the quality of drafting, the less picky should be the interpretation, and the greater the effort to make the contract sensible and businesslike…

With this noble goal in mind, the Court proceeded to identify, address, and overcome each of the flaws in the parties’ agreements:

  • Although the Court agreed that the two contracts contradicted one another in several important ways, it concluded that this discrepancy could be resolved by characterizing the second and later contract as an amendment  of the first.  As the Court explained, “Lay people tend not to word amending documents, especially amending contracts, the way that lawyers do.”
  • Although one of the parties failed to sign or seal the second (amending) contract, the Court rejected this as a relevant impediment to its effectiveness.  As the Court noted, the party who had failed to sign the agreement now sued to enforce it, thereby ratifying the amendments.
  • Although acknowledging that the contract referred to “present and future products of Giant LLC North America,” a company that had no such products, the Court concluded that this provision “could not be read literally.”  Instead, the words should be given a “looser and more purposive interpretation” that could be reconciled with the actual facts.
  • The ABCA also adopted the so-called “armchair rule” -- traditionally used to identify a testator’s intention when interpreting a will -- by taking into account those facts which the parties knew when they signed the contracts.
  • Finally, in construing the contracts, the Court made use of the parties' own post-contractual conduct, in the form of several additional agreements which they had subsequently negotiated and executed.  As the Court of Appeal explained, the language used by the parties in these later agreements “show[s] the parties’ knowledge when contracting” and also “give[s] evidence of the parties’ contemporary [word] usage and understanding when operating under the original two contracts.”

With the assistance of these lenient interpretative tools, the ABCA was able to identify the meaning which the parties had intended their original agreements to have, thereby resolving the dispute.

One can only hope that these Herculean efforts by the Court of Appeal do not serve to convince other businesspeople that they should continue to draft their own commercial contracts without the assistance of in-house or external counsel….!

The McCarthy Tétrault Opinions Group consists of members of the firm’s litigation department whose practices focus on written advocacy and the provision of strategic advice and opinions in the context of complex business disputes and transactions. The members of the Opinions Group are Anthony Alexander, Martin Boodman, Brandon Kain, Hovsep Afarian and Kirsten Thompson.

Commercial Contracts contracts Interpretation of Contracts


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