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Context is King: BCCA Reaffirms Importance of Circumstantial, Whole-Contract Approach to Interpretation

By Allison Sproule + Myles Brown - February 4, 2022 under Business Advisory

Case in Brief: Sutter Hill Management Corporation v Mpire Capital Corporation, 2022 BCCA 13

How does one interpret a clause that requires “commercially reasonable best efforts”? In the recent decision of Sutter Hill Management Corporation v Mpire Capital Corporation, 2022 BCCA 13, the BCCA has spoken loud and clear: it all depends on the context. Here, in the face of a deal that hinged on a slow-moving regulatory approvals process, it required the purchaser to pursue all necessary approvals without any delay attributable to their own—or their counsel’s—(in)actions.

The ruling emphasizes three key points:

  • Sattva stands firm: contractual interpretation should focus squarely on the parties’ intentions, and the clauses can’t be interpreted in a contextual vacuum.
  • Counsel should strive for precision when drafting. Short of an obvious error, the courts will strive to give meaning to every word.
  • A party can be held liable for their counsel’s delay—clients should be careful who they hire, and lawyers should be careful how they act.

Background

The contract at issue in Sutter was for the sale of a care home in Abbotsford, for which the purchaser put down a $300,000 deposit. The original agreement was signed in January 2016. It was subject to ongoing amendments, including a May 5, 2016 addition requiring the purchaser to “use best efforts” to make a licencing application to Fraser Health Authority (“FHA”) within 10 business days. The final version of the contract—dated July 31, 2017—required the purchaser to use “commercially reasonable best efforts” to obtain regulatory approvals and funding contracts from the FHA “as soon as possible”.

The purchaser submitted its first application to the FHA in May 2016, spurring a year and a half of correspondence. On November 8, 2017, the FHA provided three agreements for the purchaser to review as part of the final approvals process. On November 20, after two weeks of silence, the purchaser’s counsel directed the purchaser to seek outside help, as he felt out of his depth.

The purchaser retained Vancouver counsel to assist. However, as of November 27, the purchaser still hadn’t reviewed the agreements or returned them to the FHA. The vendors took the position that the purchaser had breached the agreement and gave notice of default, demanding they submit a completed application to the FHA by December 12, 2017 in order to keep the contract alive. When the purchaser was unable to do so, the vendors called the deal off and sought the court’s approval to keep the $300,000 deposit.

On summary trial at the BCSC, the chambers judge ordered the deposit returned to the purchaser, finding they had used both “commercially reasonable efforts” and their own best efforts to obtain the approvals.

The vendors appealed.

Issues

There were three points on appeal dealing with the interpretation of “commercially reasonable best efforts”:

  1. What was the correct legal test for interpreting the “best efforts” clause?
  2. Applying the correct test, what was the correct interpretation, ie. what standard did the “best efforts” clause require?
  3. On the facts, did the purchaser meet that requirement?

The Legal Test: Contracts must be Interpreted Contextually

The Court of Appeal found that the chambers judge took the wrong approach to contract interpretation, which amounted to an error of law. Specifically, the judge erred by:

  1. interpreting the phrases “commercially reasonable best efforts” and “as soon as possible” separately, when they were part of the same clause; and
  2. interpreting the clause based on previous case law and his own view of the words, instead of viewing the contract through the parties’ eyes.

Justice Grauer, writing for the Court, took pains to emphasize the contextual nature of contract interpretation. The point is to discern the parties’ intentions at the time they entered into the contract. Per Sattva Capital Corp v Creston Moly Corp, 2014 SCC 53, “to do so, a decision-maker must read the contract as a whole, giving the words used their ordinary and grammatical meaning, consistent with the surrounding circumstances known to the parties at the time of formation of the contract.”

Justice Grauer noted that the piecemeal approach to interpretation taken by the chambers judge—splitting the clause up into its component parts or phrases—ignores the requirement to view the contract as a whole. This approach is also contrary to the principle in Sattva, as it focuses on “dictionary meanings and the treatment of similar words in different contracts by different judges” (at para. 36). Though it may be useful to consider prior interpretations of similar words or clauses, the ultimate question is the intention of the particular parties to the particular agreement at issue. As Grauer J. says, “[c]ontext is key” (para. 36).

So What Did the Parties intend?

In discerning the parties’ intentions, the Court of Appeal highlighted the following facts:

  • The FHA approvals were obviously necessary to complete the transaction.
  • The situation pending FHA approval was not ideal—the vendors were obliged to continue running the business in a manner that maintained the status quo at the time the contract was signed, and risked the deal falling through if there was any “material adverse change” in the business. On the flipside, the purchasers had no say in the operation of a business they were imminently purchasing.
  • The slow pace of the FHA’s approval process rendered the parties’ swift action on this front especially important, as evidenced in the May 2016 amendment requiring the purchaser to submit a licence application within 10 days of signing.
  • With knowledge of the foregoing, the parties specifically amended the agreement in July 2017 to require “commercially reasonable best efforts” to obtain the approvals “as soon as possible”.

As the Court concluded, the parties must have known that their only control over this situation lay in their own expediency. Unlike the chambers judge, the Court of Appeal disagreed that the phrase “commercially reasonable best efforts” was the result of “overdrafting”, such that the word “best” had essentially no meaning. The Court came to an interpretation that gave meaning to each of the words, noting that the combination of “commercially reasonable” with “best efforts” must be taken to mean something between the two standards—more than simply “commercial reasonableness”, but less than the no-stone-unturned approach required by “best efforts”.

In context, this meant that “the parties intended that the purchaser would do everything it reasonably could to obtain the necessary approvals as soon as possible, excepting only such steps as would be commercially unreasonable. If there was delay on the part of FHA, so be it. But there should be no delay on the part of either party” (para. 41).

The Purchaser’s Breach

On the facts, the Court found the purchaser had breached the contract by failing to use commercially reasonable best efforts to obtain the FHA approvals.

The critical period was November to December 2017, between the purchaser receiving the FHA agreements and the vendors terminating the deal. The Court held that the chambers judge erroneously found that, in advising the purchaser to find another lawyer to review the agreements on November 20, the purchaser’s counsel had withdrawn. In the chambers judge’s view, any delay attributable to the purchaser’s counsel and his subsequent withdrawal was no fault of the purchaser. The Court disagreed, noting that the purchaser’s counsel otherwise continued to act as their solicitor. As such, his delays—at least from a legal perspective—lay at the purchaser’s feet.

Moreover, the purchaser allowed the FHA agreements to languish on their lawyer’s desk for two weeks without follow-up, from November 8–20. Though the need to obtain additional counsel may have justified some delay, a further two and a half weeks passed without progress after November 27, when the vendors delivered their notice of default. The purchaser’s attempts to pin the delays on counsel were roundly rejected.

In the Court’s view, by November 2017, “matters were coming to a head”. The deal was close to closing, and the FHA approvals were absolutely necessary to proceed with the sale. In this context, the Court found it was a breach of the “commercially reasonable best efforts” clause for the purchasers not to proceed through the approvals process as quickly as possible.

Conclusion

Sutter may not have advanced the law, but it has made three things eminently clear. First, context is critical in interpreting a party’s contractual obligations, as it speaks to the parties’ intentions at the time they entered into the bargain. Second, counsel must choose their words carefully when drafting a contract, as the court will strive to give meaning to every word.

Finally, clients should pick their counsel carefully as counsel’s “best efforts” are the client’s best efforts, and clients may be held responsible if counsel drags their feet.

Want More?

If you have any questions or comments relating to what we discussed above, feel free to reach out to Myles Brown from our Litigation Group.



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