First Reference company logo

Inside Internal Controls

News and discussion on implementing risk management

machine cogs image

Wade-ing into the limits on post-contractual conduct: BC Court of Appeal confirms post-contractual conduct may be considered only if contract contains ambiguity

post-contractual conductThe central objective of contractual interpretation is to discover the parties’ objective intentions as they existed at the time of the agreement. But under what circumstances, if any, can a court look to the parties’ post-contractual conduct in divining those intentions? The B.C. Court of Appeal’s recent decision in Wade v. Duck[1] offers insight. There, the Court confirmed that when interpreting a contract, courts may consider post-contractual conduct only if the contract is found to contain an ambiguity after considering its text and the surrounding circumstances at the time of contract formation. Accordingly, post-contractual conduct is strictly “off limits” in the absence of ambiguity.

Background

In April 2005, Lloyd Wade and his common-law spouse, Francesca Duck, signed a conditional sales contract to purchase a motorhome for some $146,000, inclusive of a $20,000 down payment. Under that same contract, a bank agreed to provide a loan for the balance. The contract listed Mr. Wade as “Buyer” and both Ms. Duck and Mr. Wade’s company, Spring Cove, as “Second Buyer”. The contract provided that the Buyer and Second Buyer were joint purchasers and that their obligations were joint and several.

Mr. Wade passed away in June 2011, and Ms. Duck became administrator and trustee of his estate. Until Mr. Wade’s passing, all payments on the loan had been made from Spring Cove’s accounts. Ms. Duck continued this practice after Mr. Wade’s passing by causing the estate to draw funds from Spring Cove’s accounts until those accounts were exhausted in August 2013, at which point she used estate funds to pay off the balance. The total amount paid by Spring Cove and the estate on the loan was approximately $123,571. Ms. Duck did not contribute any of her own funds towards the loan. Eventually, Ms. Duck transferred the motorhome to a family friend for no consideration.

In June 2014, Robena Wade, Mr. Wade’s daughter from his first marriage, succeeded in having Ms. Duck removed as administrator, and Robena took her place. Robena then brought an application on behalf of Mr. Wade’s estate alleging, among other things, that Ms. Duck was obliged to reimburse the estate for all or a portion of the loan.[2]

Chambers judge’s decision

The chambers judge concluded that Ms. Duck was not liable to the estate for any part of the loan. He found that Ms. Duck’s signature on the contract did not, in itself, create an inference that the parties intended she would be responsible for one-half of the loan. Noting that, prior to Mr. Wade’s death, all payments had been made from Spring Cove’s accounts and the motorhome had been used primarily to support Mr. Wade’s gold mining business, the judge concluded that the debt was intended to be Mr. Wade’s, and it was therefore appropriate for Ms. Duck to use funds from Spring Cove’s accounts to make payments on the loan and eventually to use estate proceeds to pay out the balance.

Robena appealed.

B.C. Court of Appeal’s decision

On appeal, Robena argued that the terms of the contract were crystal clear: they provided that Ms. Duck would be jointly and severally liable for the loan. Further, she argued, Ms. Duck had signed the agreement and thereby accepted its terms. Robena maintained that the chambers judge erred in departing from the clear terms of the contract by considering the parties’ post-contractual conduct despite the absence of any ambiguity in the contract.

The Court of Appeal observed that Canadian law draws a distinction between (a) the “surrounding circumstances” and (b) the parties’ “post-contractual conduct”:

  • Surrounding Circumstances. The surrounding circumstances encompass the “objective evidence of the background facts at the time of the execution of the contract …, that is, knowledge that was or reasonably ought to have been within the knowledge of both parties at or before the date of contracting”.[3] Courts are entitled to consider the surrounding circumstances when interpreting a contract, though the surrounding circumstances “must never be allowed to overwhelm the words of that agreement”.[4] The purpose of considering the surrounding circumstances is to deepen the interpreting court’s “understanding of the mutual and objective intentions of the parties as expressed in the words of the contract.”[5]
  • Post-Contractual Conduct. Post-contractual conduct refers to what the parties did after they entered into their agreement. While a court is always entitled to consider the surrounding circumstances, the conditions under which the court may consider post-contractual conduct are strictly limited: “evidence of subsequent conduct should only be admitted if the contract is found to be ambiguous after one has considered its text and the factual matrix surrounding the creation of the contract”.[6] There are several policy rationales for limiting interpreters’ recourse to post-contractual conduct, including:
    • the parties’ conduct may change over time, leading to fluctuating interpretations;
    • the parties’ conduct may itself be ambiguous; and
    • over-reliance on post-contractual conduct may reward self-serving conduct (i.e., conduct that supports a favourable interpretation).[7]

Applying these principles, the Court of Appeal concluded that the chambers judge erred in interpreting the contract by using the parties’ post-contractual conduct (namely, “the uses to which the parties put the motorhome and the manner in which the Loan was paid”[8]) to create an ambiguity (namely, whether the parties intended Ms. Duck would be responsible for one-half of the loan) despite the clear terms of the contract. The contract contained no such ambiguity: it “unambiguously fixed Ms. Duck with joint and several liability for the Loan.”[9] Accordingly, there was no basis on which to resort to the parties’ post-contractual conduct.

Having concluded that Ms. Duck was jointly and severally liable for the loan, the Court turned to the question of whether – and, if so, to what extent – Ms. Duck could be required to contribute funds. Robena maintained that Ms. Duck was liable to contribute 50 per cent of the funds taken from Spring Cove’s accounts and the estate to satisfy the loan. The Court agreed. It saw nothing on the facts to justify a departure from the general rule that “[w]here a surety pays more than his or her rateable proportion of the debt of the principal, the surety is entitled (independent of contract) to recover contribution from his or her fellow sureties”.[10]

In the result, Ms. Duck was ordered to pay to the estate 50 per cent of the monies paid towards the loan by Spring Cove and the estate.[11]

Implications

Attempts by litigants to rely on post-contractual conduct are not uncommon in commercial litigation involving contractual interpretation. However, Wade offers an important reminder that Canadian contract law places strict limits on the circumstances in which courts may have recourse to post-contractual conduct when interpreting a contract. Post-contractual conduct may be considered only if the contract is found to contain an ambiguity after considering its text and the surrounding circumstances. Otherwise, the clear language of the contract will govern.

Case Information

Wade v. Duck, 2018 BCCA 176

Docket: CA44670

Date of Decision: May 8, 2018

By Miranda Lam and Connor Bildfell
_______________________________________

[1] 2018 BCCA 176 [Wade].

[2] Robena also argued that Ms. Duck had breached her duties as estate administrator by failing to preserve the value of the motorhome, which had suffered significant damage as a result of neglect between 2010 and 2012 and which was then transferred for no consideration. This aspect of the claim, which found success before the Court of Appeal, will not be considered here.

[3] Wade at para. 29, citing Shewchuk v. Blackmont Capital Inc., 2016 ONCA 912 at para. 58 [Shewchuk].

[4] Wade at para. 27, citing Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53 at para. 57 [Sattva].

[5] Wade at para. 27, citing Sattva at para. 57.

[6] Wade at para. 28, citing Re Canadian National Railways and Canadian Pacific Ltd. (1978), 95 D.L.R. (3d) 252 (B.C.C.A.), aff’d [1979] 2 S.C.R. 668.

[7] Wade at para. 30, citing Shewchuk.

[8] Wade at para. 35.

[9] Wade at para. 36.

[10] Wade at para. 41, citing Halsbury’s Laws of Canada, Guarantee and Indemnity, 1st ed. (Markham, Ont.: LexisNexis Canada, 2014 Reissue) at HGI-249, citing Deering v. Earl of Winchelsea (1787), 2 Bos. & P. 270 at 272.

[11] The Court also ordered her to pay $30,000 to the estate for breach of her obligations as estate administrator in failing to preserve the value of the motorhome.

Follow us

McCarthy Tétrault LLP

McCarthy Tétrault is a Canadian law firm that delivers integrated business law, litigation services, tax law, real property law, labour and employment law nationally and globally.McCarthy publishes a series of blogs to share information with companies to help them comply and manage their businesses. On the Inside Internal Controls blog we will share some of those blog posts sharing their expertise among others, in the areas of Competition/Anti-trust, Corporate and Commercial Law, Intellectual Property, Privacy, Environmental Law, Technology and Litigation. Read more here
Follow us
Send to Kindle

, ,

Leave a Reply

Your email address will not be published. Required fields are marked *

Time limit is exhausted. Please reload CAPTCHA.

This site uses Akismet to reduce spam. Learn how your comment data is processed.