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Tenancies - Commercial - Interpretation

Contracts - Commercial - Interpretation

Evidence - Parole Evidence - Contracts

2249778 Ontario Inc. v Smith (Fratburger) (Ont CA, 2014)

In this case the Court of Appeal, without comment, applied principles of contractual interpretation to the interpretation of a commercial lease, thus confirming that it was treating real estate leases as a form of contract. This is a variation from traditional law which viewed contracts and real estate leases as qualitatively distinct types of legal obligations [paras 16-18].

The Court also restated principles of interpretation applicable to commercial contracts, with particular attention to the role of 'surrounding circumstances' in interpretation (aka parole evidence), and the principle of contra proferentum:
[19] As stated in Ventas, Inc. v. Sunrise Senior Living Real Estate Investment Trust, 2007 ONCA 205 (CanLII), 85 O.R. (3d) 254 (C.A.), at para. 24, a commercial contract is to be interpreted:
(a) as a whole, in a manner that gives meaning to all of its terms and avoids an interpretation that would render one or more of its terms ineffective;

(b) by determining the intention of the parties in accordance with the language they have used in the written document and based upon the “cardinal presumption” that they have intended what they have said;

(c) with regard to objective evidence of the factual matrix underlying the negotiation of the contract, but without reference to the subjective intention of the parties; and (to the extent there is any ambiguity in the contract),

(d) in a fashion that accords with sound commercial principles and good business sense, and that avoids a commercial absurdity.
[20] In Sattva, the Supreme Court addressed the issue of surrounding circumstances. Rothstein J. wrote, at para. 57:
While the surrounding circumstances will be considered in interpreting the terms of a contract, they must never be allowed to overwhelm the words of that agreement. The goal of examining such evidence is to deepen a decision-maker’s understanding of the mutual and objective intentions of the parties as expressed in the words of the contract. The interpretation of a written contractual provision must always be grounded in the text and read in light of the entire contract. While the surrounding circumstances are relied upon in the interpretive process, courts cannot use them to deviate from the text such that the court effectively creates a new agreement. [Citations omitted.]
[21] Evidence of surrounding circumstances should consist only of objective evidence of the background facts at the time of execution of the contract: knowledge that was or reasonably ought to have been within the knowledge of both parties at or before the date of contracting: Sattva, at para. 58.

[22] Finally, the rule of contra proferentum applies in cases where the contractual terms are ambiguous: Consolidated-Bathurst Export Ltd. v. Mutual Boiler and Machinery Insurance Co., 1979 CanLII 10 (SCC), [1980] 1 S.C.R. 888, at p. 900 and Manulife Bank of Canada v. Conlin, 1996 CanLII 182 (SCC), [1996] 3 S.C.R. 415, at pp. 425-426.

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