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Interpreting ambiguity in commercial contracts

The importance of careful and accurate drafting of business contracts cannot be stressed enough.  However, as careful as a party may be in drafting the contract and as clear as the contractual terms may appear to the parties at the time they are signing the contract, at some point during the operation of the contract, there may arise a dispute between the parties as to the meaning of an ambiguous term in the contract-a term that is open to more than one meaning.  What is the court to do in such case?

The British Columbia Court of Appeal, in a quartet of cases – Grace Residences Ltd. v. Whitewater Concrete Ltd.[1]; Group Eight Investments Ltd. v. Taddei[2], Chuddy v. Merchant Law Group[3], and Gilchrist v. Western Star Trucks Inc.[4]– has delineated instructive principles of contractual interpretation.  These principles may be summarized as follows:

1.     The words of the agreement are the starting point and the most significant tool for interpretation.[5]

2.     The Court must interpret the words objectively, referring to the plain and ordinary meaning, unless it would lead to an absurdity.[6]

3.     The proper “plain and ordinary” meaning must take into consideration the contract as a whole, the intention of the parties expressed within the contract, and the circumstances at the time the contract was entered into[7];

4.     The Court’s will assume that each particular word was selected for a purpose and may reject an interpretation that renders a provision ineffective[8].

5.     Only if the plain and ordinary meaning of the words still results in an ambiguity such that there remain two plausible interpretations, the Court may consider extrinsic evidence regarding the intention of the parties[9].

6.     If extrinsic evidence is relied upon, the Court should interpret the words in a manner consistent with sound commercial principles and good business sense and avoid any commercially absurd meaning[10].

Following these guidelines will assist in avoiding pitfalls when drafting and, if a dispute does arise, in understanding how a Court may decide.

[1] 2009 BCCA 144

[2] 2005 BCCA 489, 57 B.C.L.R. (4th) 278

[3] 2008 BCCA 484, 300 D.L.R. (4th) 56

[4] 2000 BCCA 70

[5] Gilchrist, supra, paragraph 17

[6] Grace Residences Ltd, supra, paragraph 23-25, Group of Eight Investments Ltd., supra, paragraph 20

[7] Chuddy, supra, paragraph 207, Grace Residences Ltd., supra, paragraph 23-25

[8] Grace Residences Ltd, supra, paragraph 23-25, Group of Eight Investments Ltd., supra, paragraph 20

[9] Chuddy, supra, paragraph 207

[10] Chuddy, supra, paragraph 207, Group of Eight Investments Ltd., supra, paragraph 21

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