Jul 14, 2020

Court rejects absurd contractual interpretation

Reddy v. 1945086 Ontario Inc., 2019 ONSC 2554 (CanLII)

Sometimes, laypeople fear that lawyers and judges give meanings to contracts which are inexplicable. However, as legally trained contract interpreters, lawyers and judges are bound to follow the various rules specifying how to garner meaning from ambiguously written agreements. These rules have developed via the organic growth of the common law over many centuries. When ambiguously worded contracts are entered into by non-legally trained persons, the true meaning of the contract's meaning is sometimes so difficult to determine that a Court, called upon to interpret it has no choice but to hold that it is completely void due to vagueness. Such a holding would - itself - be one of the rules of contractual interpretation slowly developed over many years.

Even lawyers and governments may, on occasion, enter into or otherwise "create" contracts which are either ambiguous or which contain contradictory terms. When subsequently, the parties to the arrangement get into an argument about what the contract means, the Courts may have to attempt to determine that meaning. Broadly speaking, in interpreting the meaning of contracts, the Courts will follow these general principles:

  1. The meaning - or the true meaning - of a provision in a contract is to be based on what were the intentions of the contracting parties at the time they entered into the contract;
  2. If, from the wording of the contract, the parties' intentions are quite clear, that is, there is no ambiguity, then the ordinary meaning of the words used determines the issue; and
  3. When - but only when - there is an ambiguity in the meaning of the words used by the parties to their contract, a Court will admit evidence - other than the wording of the contract itself - as to what the parties' original intentions were. This may include studying the "factual matrix" of the situation(s) in existence at the time that the parties contracted.

As stated, the foregoing are basic or general rules of contractual interpretation. There are other rules of interpretation designed to govern different - and usually not frequently encountered - situations where parties have entered into a contract but the meaning is not entirely clear. One such rule is that where a contract has been drawn by one only of the contracting parties, or more likely, one only of the contracting parties' lawyers, ambiguities will be interpreted against the interests of the contracting party who - or whose lawyer - prepared the agreement. Another rule is that where two or more provisions of a contract contradict each other - or are inconsistent with each other - thus resulting in what amounts to an absurdity - a Court should attempt interpret the contract so as to remove or ignore the absurdity.

These last mentioned contractual interpretation rules were applied in the recent Ontario Superior Court of Justice case of Reddy v. 1945086 Ontario Inc., 2019 ONSC 2554, judgment issued April 29, 2019 (hereinafter, the "Reddy Case"). The Reddy Case involved a purchaser of condominium units in a project in Ontario. Because the parties and the condominium units were situated in Ontario, Ontario (statutory) law required that the purchase and sale agreement (the "Agreement") include an "addendum" which contained certain terms to be included in the contract. One of those required terms provided, in effect, that where the seller - after entering into a purchase and sale agreement - determined that it was unable to obtain appropriate and sufficient financing (from one or more third party lenders) to finance the overall condominium project, the seller was entitled to terminate the contract on a "no fault" basis. "No fault" would, in this context, mean that the purchaser would be able to get its deposit back and neither of the parties would be entitled to enforce compliance by or claim damages from the other of them. In effect, the parties were to be placed back in the positions they were in before they entered into the agreement.

In wording the "no financing termination clause", the seller had added to the statutorily specified termination condition (which provided simply that if the seller was unable to obtain its required financing, the seller could terminate on a "no fault" basis) to the effect that it was to be in the "sole absolute and unfettered discretion" of the seller as to whether or not the seller had taken reasonable efforts to obtain its required financing. After unsuccessfully attempting to get the financing it wanted, the seller notified the buyer that the seller was unable to obtain financing that and accordingly, the contract between the parties was at an end.

The buyer argued that by adding the "sole, absolute and unfettered discretion" concept to the (basic) statutory early termination condition, the entire early termination condition should be held to be invalid and unenforceable. That would have left the seller in the position of being obliged to complete the project (and complete the sale of the purchaser's bargained for condominium units) without adequate financing. The Court observed that there were two possible conflicting interpretations of the early termination clause:

  1. That the seller could terminate in its sole, absolute and unfettered discretion based on - or allegedly based on - the seller's inability to obtain appropriate financing. In this scenario, it wouldn't matter if the seller had exercised any efforts to obtain financing; regardless, the seller could terminate simply based on the fact that it did not have financing for the project.
  2. That the seller could terminate, but only if it had exercised reasonable efforts to obtain the required financing. In this case, the seller would - if challenged - have to show that it had exercised reasonable efforts to at least to have tried to get its financing.

The Court held that with these two possible interpretations in conflict with each other, and, with the purchaser's argument, if accepted, resulting in an absurdity (as above-noted), the proper interpretation of the contract was to ignore the "sole, absolute and unfettered discretion" wording in the clause. Somewhat ironically, if the purchaser's argument had been upheld, it would have resulted, in some cases, in a hardship for purchasers. If a seller could terminate future contractual obligations on a whim (which, in effect, the "sole, absolute and unfettered discretion" wording would permit), buyers could be stripped of their bargains by the unilateral and unjustified decisions of their sellers. Although the purchasers did not get what they wanted in the Reddy Case (which in effect, would have been damages for inappropriate loss of their bargain), the Court observed that where there are two possible but conflicting interpretations of the wording in a contract, the one most favourable to the consumer will be upheld. In most similar contractual arrangements, the purchaser's argument in the Reddy Case would have actually harmed purchasers.