It Goes Without Saying: Recent Appellate Case Law On Implied Contractual Terms

Introduction

A judge can only imply a contractual term if it is a reasonable and contextual reflection of what the parties must have intended.

Two recent appellate decisions show how this test is applied in practice. Most recently, the Court of Appeal for Ontario in Energy Fundamentals Group Inc v Veresen Inc, 2015 ONCA 514 upheld an application judge's decision to imply a term governing one party's disclosure obligations. In Moulton Contracting Ltd v British Columbia, 2015 BCCA 89, released earlier this year, the BC Court of Appeal overturned a trial judge's finding that the province had breached an implied term in a timber sale agreement.

Despite these different results on the facts, both courts took a similarly balanced legal approach, one that generally preserves freedom of contract, but still leaves room for judicial intervention if necessary. In doing so, they confirmed that the latest Supreme Court of Canada cases on contract interpretation, Sattva Capital Corp v Creston Moly Corp, 2014 SCC 53 and Bhasin v Hrynew, 2014 SCC 71 (which established the new cause of action for breach of the duty of honest contractual performance) have not changed the test for implying terms.

The test

The courts in both Energy Fundamentals and Moulton Contracting followed the "presumed intention" test from Supreme Court cases like M.J.B. Enterprises Ltd v Defence Construction (1951) Ltd, [1999] 1 SCR 619 at para 27. As Justice Levine summarized in Moulton Contracting:

[55] The key element is that the implied term is more than just reasonable; it is necessary to make the contract as the parties intended. That is, without the term, the contract, as intended by the parties, would not be effective.

A term can be implied to "fill a gap" and to give "business efficacy" to the agreement, but not to change the substantive meaning of the bargain (see e.g. Energy Fundamentals at paras 30- 35).

Applying Sattva

Both courts of appeal referenced Sattva on the proper standard of review in contractual interpretation appeals. We know from Sattva that most issues of contractual interpretation are questions of mixed fact and law, meaning a court of appeal has to defer to the lower court's conclusion unless it made a palpable and overriding error of fact. But if the court of appeal finds an extricable issue of law, that can be reviewed for correctness and replaced with the court of appeal's own conclusion if the trial judge erred (Energy Fundamentals at para 29; Moulton...