Determining what should inform the
interpretation of a contract is a little bit like the debate of nature versus
nurture – is the proper interpretation innate in the words and context of the
document, or does it receive its meaning from the commercial environment?
In the recent decision from the Alberta
Court of Appeal, Trico Developments Corporation v El Condor Developments Ltd,
2020 ABCA 132 the majority emphasized the importance of the commercial context
when interpreting an agreement. However, the dissent by Justice Slatter calls
into question the majority’s interpretation and relies more on the words in
their contractual context.
Background
At issue was the definition of the word
‘value’ as it was used in a Settlement Agreement between Trico Homes and El
Condor. The two parties had formed a partnership in 2004 to develop property in
southwest Calgary. They sold their respective interests in the lands to the
partnership and in return they received partnership units equivalent to the
relative market value of their contributions.
Later, El Condor decided to sell some of
the lots to one of its affiliates, which Trico opposed. This resulted in a
couple of civil actions that were eventually settled. One of those settlements resulted
in the Settlement Agreement that was the subject of this litigation.
In their Settlement Agreement, of July
12, 2006, El Condor agreed to purchase Trico’s units in the partnership using
an asset valuation and to pay Trico its share of the profits earned but not
distributed up to June 20, 2006. The Settlement Agreement set out a process on
how to prepare the valuation of Trico’s units, and if the parties disagreed, El
Condor would pay a portion, Trico would transfer its units, and then Trico
could bring an action.
The parties were unable to agree on the
valuation. El Condor and Trico both conducted different valuations effective
June 30, 2006. The main difference
stemmed from how they treated income tax and discount rates, but they were both
considered fair market valuations by the valuation consultants hired by the
parties. Since they could not reach an agreement, Trico filed an action, after
which they both conducted fresh valuations.
In its new valuation, El Condor did a
fair market valuation using a discounted cash flow approach to account for the
risk and time value of money. Trico’s valuation, on the other hand, did not use
the discounted cash flow and did not consider the impact of taxation on value. Trico’s
valuation consultant, Deloitte, acknowledged that it was not a market value
valuation, and it only determined the ‘Partnership Income to be earned’ with no
deduction for income taxes or time value of money. El Condor wanted the
valuation that accounted for the deductions while Trico preferred the one
without. The disagreement went to trial and the valuation method was the
fundamental issue, in particular the interpretation of Clause 1 of the
agreement, which stated the value of the units would be calculated in
accordance to the steps outlined in its subclauses.
At trial, Trico’s valuation was accepted
over El Condor’s. The Trial Judge found that Clause 1 of the Settlement
Agreement created a clear and express formula within the contract for
valuation, thus modifying the definition of the word value. This meant that Trial Judge found the word ‘value’ in the
contract did not mean ‘fair market value’, a definition normally assumed for
that term; rather that it was linked to to the express formula of the contract.
Majority’s Decision
The majority of the Court of Appeal
disagreed with the trial judge. The majority relied on the decisions of Sattva
Capital Corp. v Creston Moly Corp, [2014] 2 SCR 633, IFP Technologies
(Canada) Inc. v EnCanada Midstream and Marketing, 2017 ABCA 157, and
Wickam Tools v Schuler AG, [1974] AC 235 for the following principles:
· In a commercial contract it is
certainly right that the court should know the commercial purpose of the
contract (Sattva, at para. 47);
· Courts ought not to sanction
contractual interpretations disconnected from economic reality (IFP
Technologies, at para 88); and
· The more unreasonable the
result, the more unlikely it is that the parties intended it, and if they do
intend it the more necessary it is that they shall make that intention abundantly
clear (Wickam Tools, at 251).
The majority held that the word “value”
had an ordinary definition consistent with “fair market value”. At para 39, the
majority stated that Canadian courts have “considered the word 'value' when it
is contained in legislation, regulations, contracts and other legal documents
to be synonymous with market value or fair market value”.
Based on the above principles, the
majority held that Clause 1 of the Settlement Agreement did not hold a specific
formula for valuation. There was no clear modification of the word ‘value’ in
the term “value of those units.” As such, the word value gained its meaning
from the commercial context in which it was drafted, which in this case meant
‘fair market value.”
Furthermore, the majority found that
should they have found a formula in Clause 1, it would have led to an absurdity
such as excluding tax considerations. This clearly could not be the case
because in any fair market valuation, there exists the assumption of a nominal
third party, who would always consider the tax liability when determining how
much to pay. Besides, there was nothing in the Settlement Agreement that showed
El Condor was prepared to pay a premium for Trico’s units.
The Dissent
Slatter J.A. took a different approach.
He began by interpreting the word value in the contractual, rather than the
commercial context. He found there was a clear formula in the process set out
in Clause 1.
In contrast to the majority, the dissent
held the Settlement Agreement failed to clearly define the word ‘value’ in the
conventional sense of the word. It was the overall context of the document that
gave it meaning. At para. 60, Slatter J.A. held, “Stating that the word ‘value’
has a fixed legal meaning serves to extract that word from the contract ‘as a
whole’, and gives it a predetermined meaning…” and “any meaning must yield to
the express terms of this contract.”
The dissent did not neglect to apply a
commercial context to the interpretation of the Settlement Agreement. Instead,
he finds the commercial sense that best reflects his interpretation of Clause
1. He notes, at para 63, that the partnership income is not taxed at the
partnership level, rather the income is allocated to the partnership units and
is taxed at the partner level. As such, Trico would have received its
allocation on a pre-tax basis and would then have been assessed tax on those
amounts.
Takeaway
The problem with the majority’s decision
is that it inverted the framework for interpreting contracts, by going outside
the contract first and drawing from the commercial context. Sometimes these
common terms, i.e. ‘value’, used in industry may have variations from one
judicial decision to another. It adds a level of uncertainty where certain
important terms lack definition in the document. Slatter J.A. was right to
point out that the context of the contract should be interpreted first before
considering the commercial context. It could be that in the end the majority would
have reached the same outcome, but by jumping so quickly to the commercial
context, the majority has added a level of uncertainty to commercial
agreements.
Nevertheless, the decision of the
majority reminds us how important it is to define key terms in a contract. The difference
in the interpretation of the term ‘value’ in Clause 1 of the Settlement
Agreement resulted in a difference of several million dollars. Even the dissent
reminds us that we should define terms of art. As Slatter J.A. pointed out, the
term may not have a fixed legal meaning. Parties relying in terms of art for
the industry are well advised to define these regardless of the unspoken
understanding between the parties.
McLennan Ross has a strong reputation in
commercial litigation and is well-positioned to provide you with exceptional
advice and representation. If you have any questions or concerns with respect
to a contractual dispute or any other litigation matter, please do not hesitate
to contact Cesar Agudelo, Peter Major, Q.C., or any member of our CommercialLitigation Team.
