Barrister and Solicitor
Legal Writing and Research
Contracts - Interpretation - Subsequent Conduct
Shewchuk v. Blackmont Capital Inc. (Ont CA, 2016)
In this case the Court of Appeal states as follows on the use of evidence of post-execution party behaviour on the interpretation of ambiguous contracts:
 Having found ambiguity in the contract, the trial judge considered what he described at para. 84 as the “surrounding circumstances of the April 11 Agreement and what happened afterwards in its implementation.” He looked at the surrounding circumstances to see whether the parties intended the April 11 Agreement to apply to the disputed transactions involving Capital Markets. He looked to the parties’ subsequent conduct, he said at para. 85, to determine “their intentions and understanding of the agreement.”
 I will conduct my analysis of this issue by addressing three questions:
1) When is evidence of the subsequent conduct of the parties admissible to interpret their contract?
2) How should courts assess the weight or cogency of that evidence?
3) Did the trial judge make appropriate use of the evidence of subsequent conduct?
(1) The admissibility of evidence of subsequent conduct
 In Sattva, the Supreme Court held that evidence of the “factual matrix” or “surrounding circumstances” of a contract is admissible to interpret the contract and ought to be considered at the outset of the interpretive exercise. This approach contrasts with the earlier view that such evidence is admissible only if the contract is ambiguous on its face: see Eli Lilly & Co. v. Novopharm Ltd., 1998 CanLII 791 (SCC),  2 S.C.R. 129, at paras. 55-56; and Seven Oaks Inn Partnership (c.o.b. Best Western Seven Oaks) v. Directcash Management Inc., 2014 SKCA 106 (CanLII), 446 Sask. R. 89, at para. 13.
 The issue addressed in this appeal is whether evidence of the contracting parties’ conduct subsequent to the execution of their agreement is part of the factual matrix such that it too is admissible at the outset, or whether a finding of ambiguity is a condition precedent to its admissibility.
 In my view, subsequent conduct must be distinguished from the factual matrix. In Sattva, the Supreme Court stated at para. 58 that the factual matrix “consist[s] only of objective evidence of the background facts at the time of the execution of the contract, that is, knowledge that was or reasonably ought to have been within the knowledge of both parties at or before the date of contracting” (citation omitted and emphasis added). Thus, the scope of the factual matrix is temporally limited to evidence of facts known to the contracting parties contemporaneously with the execution of the contract. It follows that subsequent conduct, or evidence of the behaviour of the parties after the execution of the contract, is not part of the factual matrix: see Eco-Zone Engineering Ltd. v. Grand Falls – Windsor (Town), 2000 NFCA 21 (CanLII), 2000 NFCA 21, 5 C.L.R. (3d) 55, at para. 11; and King v. Operating Engineers Training Institute of Manitoba, 2011 MBCA 80 (CanLII), 270 Man. R. (2d) 63, at para. 72.
 There is an additional reason to distinguish subsequent conduct from the factual matrix – a reason rooted in the reliability of the evidence. In Sattva, the Supreme Court stated at para. 60 that consideration of the factual matrix enhances the finality and certainty of contractual interpretation. It sheds light on the meaning of a contract’s written language by illuminating the facts known to the parties at the date of contracting. By contrast, as I will explain, evidence of subsequent conduct has greater potential to undermine certainty in contractual interpretation and override the meaning of a contract’s written language.
 There are some dangers associated with reliance on evidence of subsequent conduct. One danger, recognized in England where such evidence is inadmissible, is that the parties’ behaviour in performing their contract may change over time. Using their subsequent conduct as evidence of their intentions at the time of execution could permit the interpretation of the contract to fluctuate over time. Thus, in James Miller & Partners Ltd. v. Whitworth Street Estates (Manchester Ltd.),  A.C. 583 (H.L.), Lord Reid observed, at p. 603:
I must say that I had thought that it is now well settled that it is not legitimate to use as an aid in the construction of the contract anything which the parties said or did after it was made. Otherwise one might have the result that a contract meant one thing the day it was signed, but by reasons of subsequent events meant something different a month or a year later.Indeed, in F.L. Schuler A.G. v. Wickman Machine Tool Sales Ltd.,  A.C. 235 (H.L.), at p. 261, Lord Wilberforce described reliance on subsequent conduct as “nothing but the refuge of the desperate.”
 Another danger is that evidence of subsequent conduct may itself be ambiguous. For example, as this court observed in Canada Square Corp. v. Versafood Services Ltd. (1981), 1981 CanLII 1893 (ON CA), 34 O.R. (2d) 250 (C.A.), at p. 261 quoting from the writing of Professor Stephen Waddams, “the fact that a party does not enforce his strict legal rights does not mean that he never had them.” As a consequence of the potential ambiguity inherent in subsequent conduct, “some courts have gone so far as to assert that evidence of subsequent conduct will carry little weight unless it is unequivocal”: see Geoff R. Hall, Canadian Contractual Interpretation Law, 3d ed. (Toronto: LexisNexis, 2016), at p. 105.
 A third danger is that over-reliance on subsequent conduct may reward self-serving conduct whereby a party deliberately conducts itself in a way that would lend support to its preferred interpretation of the contract.
 These dangers, together with the circumscription of a contract’s factual matrix to facts known at the time of its execution, militate against admitting evidence of subsequent conduct at the outset of the interpretive exercise. Evidence of subsequent conduct should be admitted only if the contract remains ambiguous after considering its text and its factual matrix.
This approach is consistent with the weight of authority: see Adolph Lumber Co. v. Meadow Creek Lumber Co. (1919), 58 S.C.R. 306, at p. 307; Corporate Properties Ltd. v. Manufacturers Life Insurance Co. (1989), 1989 CanLII 4262 (ON CA), 70 O.R. (2d) 737 (C.A.), at p. 745, leave to appeal to S.C.C. refused,  S.C.C.A. No. 48; Arthur Andersen Inc. v. Toronto-Dominion (1994), 1994 CanLII 729 (ON CA), 17 O.R. (3d) 363 (C.A.), at p. 372; Montreal Trust Co. of Canada v. Birmingham Lodge Ltd. (1995), 1995 CanLII 438 (ON CA), 24 O.R. (3d) 97 (C.A.), at p. 108; and Hall, at p. 103. The leading Canadian case is Re Canadian National Railways and Canadian Pacific Limited (1978), 95 D.L.R. (3d) 242 (B.C. C.A.), aff’d, 1979 CanLII 229 (SCC),  2 S.C.R. 668, in which Lambert J.A. stated, at p. 262:
In Canada the rule with respect to subsequent conduct is that if, after considering the agreement itself, including the particular words used in their immediate context and in the context of the agreement as a whole, there remain two reasonable alternative interpretations, then certain additional evidence may be both admitted and taken to have legal relevance if that additional evidence will help to determine which of the two reasonable alternative interpretations is the correct one. Despite its dangers, evidence of subsequent conduct can be useful in resolving ambiguities. It may help to show the meaning the parties gave to the words of their contract after its execution, and this may support an inference concerning their intentions at the time they made their agreement: see Montreal Trust Co., at p. 108; 3869130 Canada Inc. v. I.C.B. Distribution Inc., 2008 ONCA 396 (CanLII), 239 O.A.C. 137, at para. 55; Whiteside v. Celestica International Inc., 2014 ONCA 420 (CanLII), 321 O.A.C. 132, at para. 58; and Sobocynski v. Beauchamp, 2015 ONCA 282 (CanLII), 125 O.R. (3d) 241, at para. 60 leave to appeal to S.C.C. refused,  S.C.C.A. No. 243.
The types of extrinsic evidence that will be admitted, if they meet the test of relevance and are not excluded by other evidentiary tests, include evidence of the facts leading up to the making of the agreement, evidence of the circumstances as they exist at the time the agreement is made and, in Canada, evidence of subsequent conduct of the parties to the agreement.
 Canadian courts have never adopted the absolute exclusionary rule prevailing in the United Kingdom: see Bank of Montreal v. University of Saskatchewan (1953), 1953 CanLII 166 (SK QB), 9 W.W.R. (N.S.) 193 (Sask. Q.B.), at p. 199; Manitoba Development Corp. v. Columbia Forest Products Ltd. (1973), 43 D.L.R. (3d) 107 (Man. C.A.), at p. 114; Gastel v. Methner,  O.J. No. 1032 (S.C.), at para. 13; and Three Hats Productions Inc. v. RCA Inc., 1987 CarswellOnt 3295 (S.C.), at para. 36.
 However, the lesson learned in Canada from the British position is that the parties’ subsequent conduct is relevant only to inferentially establishing their intentions at the time they executed their contract. Like evidence of post-offence conduct in criminal matters, it is a kind of circumstantial evidence that “invokes a retrospectant chain of reasoning”; the trier of fact is invited to infer the parties’ prior intentions from their later conduct: see R. v. Rybak, 2008 ONCA 354 (CanLII), 90 O.R. (3d) 81, at para. 142, leave to appeal to S.C.C. refused,  S.C.C.A. No. 311; and R. v. Vant, 2015 ONCA 481 (CanLII), 324 C.C.C. (3d) 109, at para. 121. As Juriansz J. (as he then was) wrote in Danforth-Woodbine Theatre Ltd. v. Loblaws Inc,  O.J. No. 2059 (Gen. Div.), at para. 55:
[W]here evidence of the conduct of the parties and their method of performance is admissible, it is not admitted so that the contract may be construed to be consonant with the parties' conduct, but rather, it is admitted because the parties’ conduct and method of performance may be of assistance in determining what the signatories intended at the time they entered the contract.(2) The weight or cogency of evidence of subsequent conduct
 In Canadian National Railways, Lambert J.A. suggested, at p. 262, that, once admitted, the weight or cogency of evidence of post-contractual conduct may depend on the circumstances:
However, to say that these types of evidence become admissible where two reasonable interpretations exist is not to say that the evidence, if tendered, must be given weight … In no case is it necessary that weight be given to evidence of subsequent conduct. In some cases it may be most misleading to do so and it is to this danger that allusions are made throughout the recent English cases, particularly L. Schuler A.G. v. Wickman Machine Tool Sales Ltd., and James Miller & Partners Ltd. v. Whitworth Street Estates (Manchester) Ltd. In England the risks have been considered sufficiently grave that the possibility of illumination from the use of subsequent conduct has been ruled out. In Canada, they have not, but those risks must be carefully assessed in each individual case before determining to give weight to subsequent conduct. [Citations omitted.] I agree. The inherent dangers of evidence of subsequent conduct mean that when it is admitted it must be used cautiously and its weight will vary from case to case: see Danforth-Woodbine Theatre, at para. 55; Canada Square Corp., at pp. 260-261; and Water Street Pictures Ltd. v. Forefront Releasing Inc., 2006 BCCA 459 (CanLII), 57 B.C.L.R. (4th) 212, at para. 27. When ascertaining its cogency, a court should evaluate the extent to which its inherent dangers are mitigated in the circumstances of the case.
 In the usual course, evidence of subsequent conduct will be more reliable if the acts it considers are the acts of both parties, are intentional, are consistent over time, and are acts of individuals rather than agents of corporations: see Canadian National Railways, at p. 262. I agree with Kerans J.A. that “subsequent conduct by individual employees in a large corporation are not always reliable indicators of corporate policy, intention, or understanding”: Mesa Operating Ltd. Partnership v. Amoco Canada Resources Ltd. (1994), 1994 ABCA 94 (CanLII), 19 Alta. L.R. (3d) 38 (C.A.), at para. 52.
 Evidence of subsequent conduct will have greater weight if it is unequivocal in the sense of being consistent with only one of the two alternative interpretations of the contract that generated the ambiguity triggering its admissibility: Lewis v. Union of B.C. Performers (1996), 1996 CanLII 661 (BC CA), 18 B.C.L.R. (3d) 382 (C.A.), at para. 14, leave to appeal to S.C.C. refused,  S.C.C.A. No. 182; and Scurry-Rainbow Oil Ltd. v. Kasha, 1996 ABCA 206 (CanLII), 39 Alta. L.R. (3d) 153, at para. 44, leave to appeal to S.C.C. refused,  S.C.C.A. No. 391. For instance, in Chippewas of Mnjikang First Nation v. Ontario (Minister of Native Affairs, 2010 ONCA 47 (CanLII), 265 O.A.C. 247, at para. 162, leave to appeal to S.C.C. refused,  S.C.C.A. No. 91, this court found that the parties’ subsequent conduct was of assistance in determining which of two reasonable interpretations of a contract should be accepted because the conduct in question was “overwhelmingly consistent only with the trial judge’s interpretation.”
 Evidence of subsequent conduct may also be given greater weight in proportion to the proximity of the subsequent conduct to the time of the contract’s execution: see Union Natural Gas Co. v. Chatham Gas Co. (1918), 56 S.C.R. 253, at p. 271; and Hall, at pp. 105-106.
 In summary, evidence of the parties’ subsequent conduct is admissible to assist in contractual interpretation only if a court concludes, after considering the contract’s written text and its factual matrix, that the contract is ambiguous. The court may then make retrospectant use of the evidence, giving it appropriate weight having regard to the extent to which its inherent dangers are mitigated in the circumstances of the case at hand, to infer the parties’ intentions at the time of the contract’s execution.