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What happens in Ontario if a contract is missing essential terms?
In Ontario, when a contract lacks clarity on essential terms, a court may interpret the agreement to insert implied terms only where needed for business efficacy or where the ‘officious bystander test’ is met, rather than adding entirely new terms; M.J.B. Enterprises Ltd. v. Defence Construction (1951) Ltd., 1999 CanLII 677 (SCC) sets out that implied terms can be presumed from the parties’ intentions, and courts will not imply a term that contradicts the express language or is unreasonable; this is often where a paralegal can help you understand risk, preserve your position, and gather the right evidence before the dispute escalates. For practical guidance with contract interpretation and implied terms, call (416) 906-6663 or contact DK Legal Practice today.
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What Happens When a Contract Lacks Clarity On Terms That Are Necessary to Give a Contract a Reasonably Meaning?
When a Contract Lacks Certain Details a Court May Be Called Upon to Insert Implied Terms Within the Agreement As a Means to Determine the Intentions of the Parties. Inserting Implied Terms Differs From Adding Absent Terms.
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Understanding the Officious Bystander Test As Relating to the Interpretation of Implied Terms to a Contract
A perfectly written contract often fails to exist whereas the parties to a contract, generally, lack the foresight to draft an agreement that contains every possible term to the agreement. In circumstances where a dispute subsequently arises as to what the full extent of the contract terms were, a court may be called upon to determine the unwritten terms.
The Law
An implied term is an unstated term that is intellectually interpreted as existing within the contractual intention rather than an express term which is a stated, written or verbal, term to a contract. An explanation of what constitutes an implied term was well stated within Energy Fundamentals Group Inc. v. Veresen Inc., 2015 ONCA 514 where it was said:
[30] As observed by the application judge, a contractual term may be implied “on the basis of the presumed intentions of the parties where necessary to give business efficacy to the contract or where it meets the ‘officious bystander test.’” (M.J.B. Enterprises Ltd. v. Defence Construction (1951) Ltd., 1999 CanLII 677 (SCC), [1999] 1 S.C.R. 619).
[31] The officious bystander test was most famously articulated in Shirlaw v. Southern Foundries (1926) Ltd., [1939] 2 K.B. 206 at 227, [1939] 2 All E.R. 113 at 124 (C.A.):
Prima facie that which in any contract is left to be implied and need not be expressed is something so obvious that it goes without saying. Thus, if while the parties were making their bargain, an officious bystander were to suggest some express provision for it in their agreement, they would testily suppress him with a common: “Oh, of course.”
[32] The business efficacy test in its modern form originated in The Moorcock (1889) 14 P.D. 64, [1886-90] All E.R. Rep. 530 (C.A.) at 68:
In business transactions such as this, what the law desires to effect by the implication is to give such business efficacy to the transaction as must have been intended at all events by both parties…
[33] The Moorcock concerned a contract between a wharf operator and a ship owner; the court implied a warranty that the ship could be safely moored at the wharf with “the object of giving to the transaction such efficacy as both parties must have intended” (p. 68, 70).
[34] The business efficacy test was reviewed more recently by the Privy Council in Attorney General of Belize v. Belize Telecom Ltd., [2009] UKPC 10, [2009] 2 All E.R. 1127, at para. 22:
Take, for example, the question of whether the implied term is "necessary to give business efficacy" to the contract. That formulation serves to underline two important points. The first, conveyed by the use of the word "business", is that in considering what the instrument would have meant to a reasonable person who had knowledge of the relevant background, one assumes the notional reader will take into account the practical consequences of deciding that it means one thing or the other. In the case of an instrument such as a commercial contract, he will consider whether a different construction would frustrate the apparent business purpose of the parties. …
[35] Implication of a contractual term does not require a finding that a party actually thought about a term or expressly agreed to it. Often terms are implied to fill gaps to which the parties did not turn their minds (Belize Telecom, para. 31).
[36] On the other hand, a court will not imply a term that contradicts the express language of the contract, or is unreasonable: G. Ford Homes Ltd. v. Draft Masonry (York) Co. Ltd. (1984), 1983 CanLII 1719 (ON CA), 43 O.R. (2d) 401 (C.A.).
As per the Energy Fundamentals case, an implied term arises from what an "officious bystander" would perceive as the meaning or intent when reviewing the sensible purpose of a contract within the confines of what gives the contract "business efficacy".
Interestingly, and at first seeming paradoxical, the interpretation and insertion of an implied term occurs without suggesting the addition of an absent term. Again, this may seem paradoxical; however, understanding implied terms principles requires a fundamental appreciation for the difference between an implied term which was intended, consciously or unconsciously, and an additional term, which would be supplemental and beyond the conscious or unconscious intentions of the contracting parties. Courts will interpret and insert implied terms; however, courts will refrain from inserting additional terms. As an example, where a loan contract states that "twelve (12) payments, each due on the 1st" is required, a court may interpret the "1st" as meaning the first day of each month, rather than first day of a week, or the seemingly absurd first day of the next twelve centuries. In this manner, a court recognizes that a payment schedule was intended and that an "officious bystander" would likely view "twelve (12) payments" as meaning monthly.
Conclusion
An implied term is a term that was left unstated in the creation of a contract; and yet, the presence of the term is necessary to give "business efficacy" to the contract. There is a significant distinction between what would be inserting an implied term and what would be inserting an additional term. Appreciating this difference is necessary to the interpretation of contracts.
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