Every lawyer knows that, when interpreting a contract, one is permitted to take into account the ”factual matrix” that surrounded the execution of the agreement. A question that is far less clear is the meaning of this concept — i.e., in construing the contract, what contemporaneous evidence is a court permitted to consider under the rubric of the factual matrix, and what evidence is it forbidden to consider?
Useful guidance on these matters has recently been provided by the Alberta Court of Appeal in Nexxtep Resources Ltd. v. Talisman Energy Inc., 2013 ABCA 40. At issue was the proper interpretation of a sale agreement conveying petroleum and natural gas leasehold interests.
Even before the agreement was signed, the parties’ relationship had become contentious. The contract had only been finalized after extensive negotiations, giving rise to two separate letter agreements, multiple demand letters and a pre-contractual lawsuit brought by the proposed purchaser against the proposed vendor. A term of the final sale agreement was a release of all claims arising from these pre-contractual dealings. The contract also contained an “entire agreement” clause.
Regrettably, the parties’ relationship did not improve following the execution of the sale agreement. The vendor of the leasehold rights continued to extract natural gas from immediately adjacent sites, and the purchaser claimed that the vendor was improperly taking gas from the very deposit that had been sold to the purchaser.
The purchaser brought a suit in trespass and conversion, and the key issue for the courts was the proper interpretation of the parties’ sale agreement — i.e., based on the description in the agreement, what exactly had been sold by the vendor to the purchaser?
The Court of Appeal confirmed that “contracts should be enforced in accordance with the intention of the parties, which is to be gleaned from the words used in their agreements.” The court’s goal is to establish the objective meaning of the words, and of the parties’ intention. As part of this interpretative exercise, consideration must be given to “[c]ontextual evidence of surrounding circumstances, disclosing facts known to the parties at the time the contract was made” (at para. 20).
Applying these principles, the Court of Appeal affirmed the approach of the trial judge in assessing the factual matrix:
- Evidence of the parties’ pre-contractual negotiations was not part of the factual matrix, and therefore should not be admitted (at para. 32).
- However, because the sale agreement made explicit reference to the purchaser’s release of its claims under the previous letter agreements, it was legitimate for the court to consider those precursor documents. This was not inconsistent with the “entire agreement” clause, because the earlier documents were considered in an effort to understand the parties’ intention, as distinct from adding terms to their final contract (at paras. 29-32).
- The Court of Appeal also expressed approval of the admission of expert and regulatory evidence in order to establish the commercial context within which the sale agreement was made (at paras. 33-35).
- Lastly, the Court focused on the principle that the “factual matrix” was limited to “facts known to the parties at the time of the making of the contract.” It had been established that, when negotiating their agreement, the parties had shared a mutual mistake regarding the physical attributes of the deposit which had been sold. Knowledge of the true facts supported a different interpretation of the parties’ agreement. However, because these facts were not known to the parties at the time of execution, they could not be relied upon to assist in construing the terms of the agreement (at paras. 3, 18 & 37)
The Court of Appeal concluded that the trial judge’s approach was correct, as he had “relied upon the evidence admitted before him only to construct the background factual matrix, which shows the facts known to the parties at the time the Agreement was made, as well as their commercial object from an objective standpoint” (at para. 37).
The McCarthy Tétrault Opinions Group consists of members of the firm’s litigation department whose practices focus on written advocacy and the provision of strategic advice and opinions in the context of complex business disputes and transactions. The members of the Opinions Group are Anthony Alexander, Martin Boodman, Brandon Kain, Hovsep Afarian and Kirsten Thompson.