B. Sources

• Author: John D. McCamus
• Profession: Professor of Law. Osgoode Hall Law School, York University
• Pages: 707-716

Contenidos

• 1) Introduction.
• 2) Commercial Setting or Background.
• 3) Prior Negotiations, Drafts and Antecedent Agreements.
• 4) Subsequent Conduct of the Parties.
• 5) Related Agreements.
• 6) The Meaning of Words.

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1) Introduction

The first step in the process of interpretation is to identify the target of interpretation, the communications between the parties that constitute the terms of their agreement. In the typical case, the object of interpretation will be an agreement between the parties that has been recorded in writing. As we have seen, the parties will be bound by the terms of a written agreement that they have signed⁴or, indeed, by the

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terms of an unsigned document that they nonetheless had reason to believe constituted the terms of the agreement being formed.⁵Agreements may also be composed, however, of more than one document or of a document or documents combined with oral communications between the parties. It is at this stage of the analysis - identification of the target of interpretation - that the parol evidence rule becomes relevant. As we have seen,⁶the parol evidence rule holds, essentially, that where a written agreement has been entered into by the parties with an intention that it constitute the exclusive expression of their agreement, evidence that would tend to add, vary, supplement or contradict the terms of the written agreement is inadmissible. In a typical dispute under the parol evidence rule, one party will wish to rely on certain oral undertakings given in addition to the written agreement by the other party. The other party will insist that evidence of those undertakings is inadmissible on the basis of the rule. In such contests, the role of the rule is to assist in determining the identity of the materials that constitute the agreement between the parties. In our discussion of the rule, we noted the existence of numerous exceptions to the principle of inadmissibility. Further, we noted that the parol evidence rule does not preclude the admissibility of evidence used as an aid in interpretation or construction of agreements. The rules concerning the admissibility of evidence that can be relied upon by courts in aid of interpretation of the agreements, which are the focus of discussion here, thus operate independently of the rule. Thus, for example, if a court is entitled under the rule considered below⁷to admit and consider evidence relating to the circumstances surrounding the formation of the transaction, including the "aim" and "genesis" of the transaction, that evidence is admissible whether or not the written agreement entered into by the parties is subject to the parol evidence rule. Against this background, then, we turn to consider the principal sources to which a court is permitted to turn to provide assistance in the interpretation or construction of an agreement.

2) Commercial Setting or Background

In attempting to determine the correct interpretation of contractual provisions, courts may have regard to the surrounding circumstances or commercial context of the agreement. Accordingly, evidence of the

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commercial setting or "factual matrix" of the agreement as opposed to the subjective intentions of the parties is admissible. Lord Wilberforce stated the basic principle in Reardon Smith Line Ltd. v. Yngvar Hansen-Tangen⁸in the following terms:

No contracts are made in a vacuum: there is always a setting in which they have to be placed. The nature of what is legitimate to have regard to is usually described as "the surrounding circumstances" but this phrase is imprecise: it can be illustrated but hardly defined. In a commercial contract it is certainly right that the court should know the commercial purpose of the contract and this in turn presupposes knowledge of the genesis of the transaction, the background, the context, the market in which the parties are operating.⁹

Similarly, in Prenn v. Simmonds,¹⁰Lord Wilberforce stated: "[T]he time has long since passed when agreements ... were isolated from the matrix of facts in which they were set and interpreted purely on internal linguistic considerations."¹¹English law was not to be considered to have been "left behind in some island of literal interpretation."¹²In particular, regard may be had to "evidence of the ‘genesis’ and objectively the ‘aim’ of the transaction."¹³Canadian courts routinely admit evidence of surrounding circumstances on this basis.¹⁴Evidence of surrounding circumstances may obviously have a critical role in the interpretation of particular terms. Words often derive

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their precise meaning from their use in a particular context. Discernment of the particular meaning attributed to words by the parties will often depend on an appreciation of the aims and objectives of the transaction. It has recently been suggested that the concept of surrounding circumstances is not adequately captured by the phrase "factual matrix." In Investors Compensation Scheme Ltd. v. West Bromwich Building Society,¹⁵Lord Hoffmann sought to improve upon Lord Wilberforce’s use of that expression in the following terms: "The background was famously referred to by Lord Wilberforce as the ‘matrix of fact’ but this phrase is, if anything, an understated description of what the background may include. Subject to the requirement that it should have been reasonably available to the parties ... it includes absolutely anything which would have affected the way in which language of the document would have been understood by a reasonable man."¹⁶As a practical matter, it is not clear that this seemingly broader definition of the concept of commercial background or surrounding circumstances would have a dramatic impact on the scope of the admissibility of evidence concerning such matters. The most important limiting factor on the admissibility of such evidence, as Lord Hoffman himself noted in the Investors Compensation Scheme Ltd. v. West Bromwich Building Society case,¹⁷is that evidence of the subjective intentions of a party is inadmissible and must be distinguished from the factual matrix.¹⁸One party’s declaration of subjective intent is not considered material to the determination of the common intention of the parties. Moreover, such evidence is likely to be suspect on the basis that it is self-serving.¹⁹Evidence of the factual matrix is not dependent upon a finding that the agreement is ambiguous in some respect. Evidence concerning the surrounding circumstances of the transaction is always admissible. Indeed, when the words of the agreement are viewed in the light cast by the surrounding circumstances, ambiguity, sometimes referred to

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as a "latent" ambiguity, may be uncovered.²⁰When a latent ambiguity has been revealed, the courts may obviously examine and consider the sources permitted by the ordinary rules of interpretation. In addition, however, it has been held that in the case of a latent ambiguity that a court may examine directly the intentions of the parties.²¹

3) Prior Negotiations, Drafts and Antecedent Agreements

As a general rule, evidence of the prior negotiations of the parties is inadmissible for the purpose of construing the eventual agreement. There are two reasons underlying this general principle. First, as we have seen,²²evidence of the subjective intentions of a party is inadmissible on the ground that it is irrelevant to the task of determining the intentions of both parties and, more particularly, to the task of determining what the other party would reasonably have understood the contract to mean. To the extent that a party may seek to introduce evidence of preliminary negotiations in order to establish the existence of subjective intentions, the evidence would be inadmissible on the same ground. The principal rationale for excluding such evidence, however, is that it is generally irrelevant to the task of determining the nature of the final consensus of the parties. In Prenn v. Simmonds,²³Lord Wilber-force provided the following explanation:

The reason for not admitting evidence of these exchanges is not a technical one or even mainly one of convenience (though the attempt to admit it did greatly prolong the case and add to its expense). It is simply that such evidence is unhelpful. By the nature of things, where negotiations are difficult, the parties’ positions, with each passing letter, are changing and until the final agreement, though converging, still divergent. It is only the final document which records a consensus. If the previous documents use different expressions, how does construction of those expressions, itself a doubtful process, help on

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the construction of the contractual words? If the same expressions are used, nothing is gained by looking back; indeed, something may be lost since the relevant surrounding circumstances may be different. And at this stage there is no consensus of the parties to appeal to.²⁴Lord Wilberforce, however, did concede that...