Contracts - Interpretation - Implied Terms. Obolus Ltd. v. International Seniors Community Care Inc.
In Obolus Ltd. v. International Seniors Community Care Inc. (Ont CA, 2023) the Court of Appeal considered a contractual interpretation issue of 'implied terms' [SS: my term]. These quotes are from the majority which dismissed the appeal:
(2) The application judge did not err in her interpretation of the APS. Canada v. Witchekan Lake First Nation
 The appellant has not raised an extricable question of law concerning the application judge’s interpretation of the contract. As such, a review of the application judge’s interpretation involves mixed fact and law and an appeal will only be allowed if there is palpable and overriding error: Deslaurier Custom Cabinets Inc. v. 1728106 Ontario Inc., 2017 ONCA 293, 135 O.R. (3d) 241, at para. 49, leave to appeal to S.C.C. refused, 37039 (October 19, 2017); Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53,  2 S.C.R. 633, at paras. 50, 52.
 The appellant argues that the pre-consultation meeting condition was met by the meeting held on February 26, 2021, and therefore that the application judge committed a palpable and overriding error in finding that the respondent could trigger the Milestone Termination Option in the APS.
 The application judge referred to the language in the Milestone Termination Option as “grammatically awkward,” but nonetheless was able to conclude that the “clear intention of the parties” was to hold the pre-consultation meeting within four weeks after executing the APS.
 While the application judge does not elaborate on what, in her view, was “grammatically awkward” in the provision, it is clear from her interpretation that she was referring to the missing word “to” in the first subclause. If that missing word is inserted, the Milestone Termination Option reads as follows:
Buyer and Seller mutually agree that the Seller will have its sole option to terminate the purchase and sale agreement, and the buyer’s deposit shall be returned without penalty following the two conditions: (i) the buyer has not completed a pre consultation meeting with the Municipality of Lakeshore prior [to] four (4) weeks after the signing of this Purchase Agreement, and (ii) a site plan application has not be submitted to the Municipality of Lakeshore prior to (3) months after the signing of this Purchase Agreement for the proposed developments of parts 8,9,10,11. [Emphasis added.] Support for this understanding of the grammar of the provision may also be found in the second subclause dealing with the site plan, which enabled the Milestone Termination Option to be triggered if the site plan was not submitted to Lakeshore “prior to (3) months after the signing of this Purchase Agreement …” (emphasis added). Adding “to” in the first subclause would provide a natural and logical symmetry between the grammar of the two clauses and supports the application judge’s reading of the text.
 Therefore, the application judge was able to resolve the dispute before her based on the wording of the Milestone Termination Option alone, which reflected an intent to hold a pre-consultation meeting within 4 weeks after executing the APS.
 The application judge characterized the meeting held before the execution of the APS on February 26, 2021, as “simply an initial or introductory meeting” but she need not have done so. Whether it was in fact understood to be a “pre-consultation” meeting or something else, it occurred prior to the execution of the APS on March 14, 2021 and therefore its characterization had no bearing on her conclusion. The application judge reasoned that it would make no sense to include a condition in the APS that had already been satisfied.
 The undisputed fact the parties took no steps to revise that wording of the Milestone Termination Option after the February 26, 2021 meeting and prior to executing the APS, and the undisputed fact that no further meetings with Lakeshore occurred, constituted objective evidence on which the application judge relied in reaching her conclusion.
 In my view, it was open to the application judge to reach this finding on the record before her. The fact that other evidence in the record about the February 26, 2021 meeting might support a different finding does not lead to a conclusion that the application judge erred in preferring the evidence on which she relied. The application judge’s finding is entitled to deference.
In Canada v. Witchekan Lake First Nation (Fed CA, 2023) the Federal Court of Appeal considered a lawsuit by Witchekan Lake First Nation (WLFN) against Canada and Saskatchewan under the 1992 'Saskatchewan Treaty Land Entitlement Framework Agreement' (Framework Agreement), alleging that the Framework Agreement included "an implied term requiring Saskatchewan to provide notice of any impending auction and a reasonable opportunity to purchase lands before they were put up for auction". Saskatchewan moved for summary judgment under Rule 215 of the Federal Court Rules (FCR), maintaining that the matter was essentially one of contractual interpretation. This motion was dismissed at the Federal Court level, but allowed at the Federal Court of Appeal.
In these quotes the court addresses principles of contractual interpretation, particularly respecting 'implied terms':
 The clear language of a contract must always prevail over the surrounding circumstances when interpreting contractual obligations (Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53,  2 S.C.R. 633 at para. 57 [Sattva]; Toronto Real Estate Board v. Canada (Commissioner of Competition), 2017 FCA 236,  3 F.C.R. 563 at paras. 168-169; Canada (Office of the Information Commissioner) v. Calian Ltd., 2017 FCA 135, 414 D.L.R. (4th) 165 at para. 59).. First National Financial GP Corporation v. Golden
 While evidence of surrounding circumstances can be helpful, it cannot be used to rewrite the express terms of an agreement such as the Framework Agreement (Sattva at para. 57):
The interpretation of a written contractual provision must always be grounded in the text and read in light of the entire contract (Hall, at pp. 15 and 30-32). 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 (Glaswegian Enterprises Inc. v. B.C. Tel Mobility Cellular Inc. (1997), 1997 CanLII 4085 (BC CA), 101 B.C.A.C. 62). A party may show that an implied term exists within a contract by establishing that the term is necessary "“to give business efficacy to a contract or [by] otherwise meeting the ‘officious bystander’ test [by describing] a term which the parties would say, if questioned, that they had obviously assumed”" (M.J.B. Enterprises Ltd. v. Defence Construction (1951) Ltd.,  1 S.C.R. 619, 1999 CanLII 677 (SCC) at para. 27 [Defence Construction], citing Canadian Pacific Hotels Ltd. v. Bank of Montreal,  1 S.C.R. 711, 1987 CanLII 55 (SCC) at 775). WLFN relies on this principle, along with the doctrine of frustration.
 The law will imply a term into an agreement where it is necessary to ensure a result that accords with the intention of the parties. It does so where an "“officious bystander”" would assume that the term was understood and necessary to render the agreement efficacious. These principles are equally relevant to the interpretation of the Crown’s obligations to Indigenous peoples (R. v. Marshall,  3 S.C.R. 456, 1999 CanLII 665 (SCC) at para. 43). Here, the question of the implied term is necessarily interwoven with the question of whether the contract is efficacious or frustrated in its absence.
 A term will not be read into an agreement where the matter has been expressly addressed elsewhere by the parties. Here, the implied term sought is inconsistent with and would defeat express provisions of the Agreement. ...
In First National Financial GP Corporation v. Golden (Ont CA, 2022) the Court of Appeal considered contract interpretation by implication:
 The standard of appellate review on this issue was stated by this court in Energy Fundamentals Group Inc. v. Veresen Inc., 2015 ONCA 514, 388 D.L.R. (4th) 672, at para. 29: “The issue of implication of contractual terms raises questions of mixed law and fact, as would interpretation of the contract, and the same standard of review should apply, palpable and overriding error, unless extricable errors of law are evident.” Here, the trial judge erred in principle.. Coffee Time Donuts Incorporated v. 2197938 Ontario Inc.
 First, implied terms cannot contradict express provisions of an agreement or be unreasonable: Energy Fundamentals Group Inc., at para. 36; G. Ford Homes Ltd. v. Draft Masonry (York) Co. Ltd. (1984), 1983 CanLII 1719 (ON CA), 43 O.R. (2d) 401 (C.A.), at p. 403. ...
In Coffee Time Donuts Incorporated v. 2197938 Ontario Inc. (Ont CA, 2022) the Court of Appeal considered the variation of a contract (here, to extend it's operation after the intended termination date):
 We see no error in the motion judge’s finding that the agreement between the appellants and the respondent was continued by the conduct of both parties after the term of the written agreement expired. The motion judge found that the appellants continued to buy products from the exclusive suppliers under the franchise agreement after the end of the term of the written agreement, continued to use “Coffee Time” branding, and continued to pay franchise royalties to the respondent until February 16, 2016. Even after the appellants ceased paying the franchise royalties, they continued to use the “Coffee Time” branding for their business and to purchase products from authorized suppliers. In the circumstances, we see no basis to interfere with the finding by the motion judge that the agreement was continued by the conduct of the parties after the expiration of the written agreement: Saint John Tug Boat Co. Ltd. v. Irving Refining Ltd., 1964 CanLII 88 (SCC),  S.C.R. 614, at pp. 621-22.. Conseil Scolaire Catholique Franco-Nord v. Nipissing
In Conseil Scolaire Catholique Franco-Nord v. Nipissing (Ont CA, 2021) the Court of Appeal considered the use of implied terms in contractual interpretation:
 In this case the court must determine whether, in the absence of any stipulation as to the duration of the contract or the parties’ rights of termination, the contract should be treated as either perpetual in nature or as an indefinite term contract into which the court implies a provision of unilateral termination on reasonable notice. The inquiry focuses on the specific parties to the contract in issue. As the Supreme Court specified in M.J.B. Enterprises Ltd. v. Defence Construction (1951) Ltd., 1999 CanLII 677 (SCC),  1 S.C.R. 619, at para. 29: “A court, when dealing with terms implied in fact, must be careful not to slide into determining the intentions of reasonable parties” (emphasis in original).. M.J.B. Enterprises Ltd. v. Defence Construction (1951) Ltd.
In M.J.B. Enterprises Ltd. v. Defence Construction (1951) Ltd. (SCC, 1999) the Supreme Court of Canada stated the 'officious bystander' test for implying contractual terms:
27 The second argument of the appellant is that there is an implied term in Contract A such that the lowest compliant bid must be accepted. The general principles for finding an implied contractual term were outlined by this Court in Canadian Pacific Hotels Ltd. v. Bank of Montreal, 1987 CanLII 55 (SCC),  1 S.C.R. 711. Le Dain J., for the majority, held that terms may be implied in a contract: (1) based on custom or usage; (2) as the legal incidents of a particular class or kind of contract; or (3) based on the presumed intention of the parties where the implied term must be necessary “to give business efficacy to a contract or as otherwise meeting the ‘officious bystander’ test as a term which the parties would say, if questioned, that they had obviously assumed” (p. 775). See also Wallace v. United Grain Growers Ltd., 1997 CanLII 332 (SCC),  3 S.C.R. 701, at para. 137, per McLachlin J., and Machtinger v. HOJ Industries Ltd., 1992 CanLII 102 (SCC),  1 S.C.R. 986, at p. 1008, per McLachlin J.. 2484234 Ontario Inc. v. Hanley Park Developments Inc.
In 2484234 Ontario Inc. v. Hanley Park Developments Inc. (Ont CA, 2020) the Court of Appeal cited factors for implying terms into a contract:
 Second, and more importantly, what a vendor must do under an agreement to transfer or create an easement over land is a function of both the agreement’s express terms and its implied terms, including terms implied to give an agreement business efficacy: Dynamic Transport Ltd. v. O.K. Detailing Ltd., 1978 CanLII 215 (SCC),  2 S.C.R. 1072, at pp. 1084-1085. As noted in M.J.B. Enterprises Ltd. v. Defence Construction (1951) Ltd., 1999 CanLII 677 (SCC),  1 S.C.R. 619, at para. 27, quoting Canadian Pacific Hotels Ltd. v. Bank of Montreal, 1987 CanLII 55 (SCC),  1 S.C.R. 711, a term will be implied into an agreement:. Reaction Distributing Inc. v. Algonquin Highlands (Township)
based on the presumed intention of the parties where the implied term must be necessary “to give business efficacy to a contract or as otherwise meeting the ‘officious bystander’ test as a term which the parties would say, if questioned, that they had obviously assumed”.
In Reaction Distributing Inc. v. Algonquin Highlands (Township) (Ont CA, 2019) the Court of Appeal made the following comments on implying terms to a contract:
 Terms may be implied in a contract based on: (1) custom or usage; (2) legal incidents of a class or type of contract; or (3) the presumed intention of the parties, where the term is necessary “to give business efficacy to a contract or as otherwise meeting the ‘officious bystander’ test as a term which the parties would say, if questioned, that they had obviously assumed”: Canadian Pacific Hotels Ltd. v. Bank of Montreal, 1987 CanLII 55 (SCC),  1 S.C.R. 711, at p. 775; see also M.J.B. Enterprises, at para. 27; Double N Earthmovers, at para. 30; Martel, at para. 81. Any implied terms must fit and be the necessary implication of the express terms; if there is any evidence against the proposed term, it cannot be implied: M.J.B. Enterprises, at para. 29. In my view, none of the criteria for an implied term prohibiting investigation of allegedly non-compliant bids is made out in this case.. Energy Fundamentals Group Inc. v. Veresen Inc.
In Energy Fundamentals Group Inc. v. Veresen Inc. (Ont CA, 2015) the Court of Appeal considered when a court could imply terms into a contract as a means of giving it business efficacy:
 The application judge’s largely factual conclusion that the right to value and price disclosure was necessary to give business efficacy of the agreement is owed deference. This flows from Olympic Industries Inc. v. McNeil, 1993 CanLII 318 (BC CA), 86 B.C.L.R. (2d) 273,  B.C.J. No. 2565 (C.A.), at para. 31, cited more recently by Moulton Contracting Ltd v. British Columbia, 2015 BCCA 89 (CanLII), 381 D.L.R. (4th) 263, at para. 56, which held that “[t]he question as to what the parties must have intended as a matter of necessity is a question of fact to be decided in the circumstances of each case.” [Emphasis added]. First Elgin Mills Developments Inc. v. Romandale Farms Limited
 The issue of implication of contractual terms raises questions of mixed law and fact, as would interpretation of the contract, and the same standard of review should apply, palpable and overriding error, unless extricable errors of law are evident. (Sattva Capital Corp. v. Creston Moly Corp. 2014 SCC 53 (CanLII))
 As observed by the application judge, a contractual term may be implied “on the basis of the presumed intentions of the parties where necessary to give business efficacy to the contract or where it meets the ‘officious bystander test.’” (M.J.B. Enterprises Ltd. v. Defence Construction (1951) Ltd., 1999 CanLII 677 (SCC),  1 S.C.R. 619).
 The officious bystander test was most famously articulated in Shirlaw v. Southern Foundries (1926) Ltd.,  2 K.B. 206 at 227,  2 All E.R. 113 at 124 (C.A.):
Prima facie that which in any contract is left to be implied and need not be expressed is something so obvious that it goes without saying. Thus, if while the parties were making their bargain, an officious bystander were to suggest some express provision for it in their agreement, they would testily suppress him with a common: “Oh, of course.” The business efficacy test in its modern form originated in The Moorcock (1889) 14 P.D. 64, [1886-90] All E.R. Rep. 530 (C.A.) at 68:
In business transactions such as this, what the law desires to effect by the implication is to give such business efficacy to the transaction as must have been intended at all events by both parties… The Moorcock concerned a contract between a wharf operator and a ship owner; the court implied a warranty that the ship could be safely moored at the wharf with “the object of giving to the transaction such efficacy as both parties must have intended” (p. 68, 70).
 The business efficacy test was reviewed more recently by the Privy Council in Attorney General of Belize v. Belize Telecom Ltd.,  UKPC 10,  2 All E.R. 1127, at para. 22:
Take, for example, the question of whether the implied term is "necessary to give business efficacy" to the contract. That formulation serves to underline two important points. The first, conveyed by the use of the word "business", is that in considering what the instrument would have meant to a reasonable person who had knowledge of the relevant background, one assumes the notional reader will take into account the practical consequences of deciding that it means one thing or the other. In the case of an instrument such as a commercial contract, he will consider whether a different construction would frustrate the apparent business purpose of the parties. … Implication of a contractual term does not require a finding that a party actually thought about a term or expressly agreed to it. Often terms are implied to fill gaps to which the parties did not turn their minds (Belize Telecom, para. 31).
 On the other hand, a court will not imply a term that contradicts the express language of the contract, or is unreasonable: G. Ford Homes Ltd. v. Draft Masonry (York) Co. Ltd. (1984), 1983 CanLII 1719 (ON CA), 43 O.R. (2d) 401 (C.A.).
 The conclusions drawn by the application judge were reasonably available to him on the evidence. Here, it is apparent that the letter agreement was not intended to comprehensively define the relationship between the parties. In a commercial setting, there may be contracts “where the parties to a contract may have been content to express only the most important terms of their agreement, leaving the remaining details to be understood” (H.G. Beale, ed., Chitty on Contracts, 31st ed. (London UK: Sweet & Maxwell, 2012) vol. 1 at 13-002).
 Veresen’s argument that the application judge departed from the correct test for implication of a term (which requires analysis of the actual intentions of the parties) and instead used a test of what reasonable parties would have agreed is based on para. 85 of his reasons:
If Veresen was looking for a 20% equity partner in the Project, it is clear beyond peradventure that it would have to provide access to confidential financial information about the Project. No one would ever invest several hundred million dollars in this Project without performing detailed due diligence on the value of the stake in the Project being acquired. Veresen relies on para. 29 of M.J.B Enterprises Ltd., where Iacobucci J. said:
What is important in both formulations [the business efficacy test and the “officious bystander test”] is a focus on the intentions of the actual parties. A court, when dealing with terms implied in fact, must be careful not to slide into determining the intentions of reasonable parties… [Emphasis in the original] As observed in John D. McCamus, The Law of Contracts, 2nd ed. (Toronto: Irwin Law, 2012), at 781, reasonableness is an inescapable part of determining whether to imply a contractual term:
Thus, it is plainly the case that the implied terms must themselves be reasonable. One would not expect a court to imply terms into an agreement that it considered to be unreasonable. Further, keeping in mind that the implied in fact term rests on the presumed intentions of the parties, courts quite understandably presume intentions of the parties that are reasonable. In other words, in attributing to the parties hypothetical intentions as to what they would have agreed to if the matter had been raised at the time of contracting, courts assume that the parties would behave reasonably and would agree to a reasonable term. Indeed, in the absence of actual but unexpressed intentions it is inescapable that courts would apply a reasonable intentions standard. In other words, although necessity appears to be the threshold that must be met before engaging in the exercise of implying the term, the formulation of the term to be implied is very much an exercise that rests on a concept of reasonableness. At the same time, however, the implied term is tailored to the needs of the actual transaction of the actual parties rather than to some hypothetical reasonable transaction; accordingly, to the extent that relevant actual intentions of the parties are manifest in the transaction, they must form a basis for the implied term. The court’s warning in M.J. B. Enterprises about the need to be “careful not to slide into the intentions of reasonable parties,” mandated an analysis rooted in the actual relationship between the parties and the specific contractual context, rather than a detour into an abstract analysis of what in general, a reasonable person might have agreed. In M.J.B. Enterprises itself the court went on to assess the reasonableness of the proposed implied term in the specific context, but also relied on the general reasonableness of such a term, saying, at para. 30, “…I find it difficult to accept that the appellant, or any of the other contractors, would have submitted a tender unless it was understood by all that only a compliant tender would be accepted.”
 In my view the application judge did not depart from the proper test cited by him in the immediately preceding paragraph of his reasons. His analysis is in no way abstracted from an analysis of the specific relationship between these parties.
 The finding that no reasonable person would have embarked on an exercise of the option without disclosure, supports a finding of the necessity of the implied term for purposes of business efficacy.
(3) Did the application judge err by confounding the requirement of good faith performance of a contract with the test for implying contractual terms?
 In my view, the application judge’s references to good faith do not undermine his earlier factual conclusions as to necessity and business efficacy.
 As he indicated, in Bhasin, the court observed:
The implication of terms plays a functionally similar role in common law contract law to the doctrine of good faith in civil law jurisdictions by filling in gaps in the written agreement of the parties: Chitty on Contracts, at para. 1-051 [emphasis added]. Reference to this common doctrinal underpinning, after concluding that implication of the term was necessary to give business efficacy to the contract, does not amount to error. As explained in Swan & Adamski, Canadian Contract Law, 3rd ed. (Markham: LexisNexis, 2012) at para.8, p.113:
Like custom and the device of the implied term or the imposed or supplied term to fill a gap in the agreement, good faith is a device for supplementing the terms of the contract to deal with aspects of the relation that have not been specifically dealt with by the parties.
In First Elgin Mills Developments Inc. v. Romandale Farms Limited (Ont CA, 2014) the Court of Appeal case the court briefly stated a principle of contract interpretation specific to business contracts:
 ........... A court may imply a term in a contract where doing so is necessary to give effect to the intention of the parties and to give business efficacy to the agreement: see M.J.B. Enterprises Ltd. v. Defence Construction (1951) Ltd., 1999 CanLII 677 (SCC),  1 S.C.R. 619, at paras. 27-29. Further, it must be obvious that the parties intended the contract to include such a term before a court will imply it.
 In my view, the term implied by the application judge, that the price adjustment process had to be completed (or, at least, commenced) by the fifth year of the mortgage, does not make business sense in the context of this case and does not meet this standard for implying a contractual term: see Venture Capital USA Inc. v. Yorkton Securities Inc. 2005 CanLII 15708 (ON CA), (2005), 75 O.R. (3d) 325, leave to appeal to S.C.C. dismissed,  S.C.C.A. No. 334.