Business Contracts: The «Entire Agreement» Provision, a New Breach?

Article #2009-1, by Me Gilles Thibault on Dimanche, octobre 11th, 2009
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If you thought the «entire agreement» provision closed the door on the right of a contracting party to refer to previous documents to establish the intent of the parties, a recent decision of the Superior Court of Quebec ruled otherwise.

The vast majority of business agreements contain an « entire agreement » or « precedence » provision indicating that such writing is the only document to be used in determining the intent of the contracting parties, to the exclusion of any other written or oral agreement entered into prior to its execution. What is the value of such provision? Does it really supersede all written or oral agreements contradicting it which predates it? In an earlier newsletter, we reported on a decision of the Court of Appeal, which rejected the rule stating that the content of a contract may not be contradicted by testimony, thereby compromising the concept of the precedence of written agreements. A recent decision of the Superior Court, Ihag-Holding AG c. Intrawest Corporation1 appears to widen this gap by setting aside the traditional precedence provision found in many business agreements, which states that only the contract between the parties must be taken into account in determining the parties’ intent to the exclusion of any other writing.

Facts:

The corporation Ihag-Holding AG (Ihag) is a holding corporation owned by a Swiss family, and operates the ski resort Mont Ste-Marie, located in the Gatineau region. It is a small ski resort that also includes a golf course and is situated on a very large land plot. Between 1992 and 1997, the ski center was operated at a loss.

In 1996, Ihag agreed to sell the ski resort to Intrawest. The parties agreed on a selling price and a mechanism to calculate an additional amount to be paid to the seller if the ski center performed better than expected (essentially an earn-out scheme). This additional amount was called the Resort Operation Payment Amount (ROPA). The parties recorded their agreement in a letter of intent.

The transaction was structured as follows:

1 – Intrawest was to buy the shares of Mont Ste. Marie (1994) inc. for ONE DOLLAR (1.00 $);
2 – Intrawest also had to advance ONE MILLION DOLLARS (1,000,000.00 $) to Mont Ste. Marie (1994) inc., which would use the money in partial repayment of a debt owed to Ihag;
3 – The conditions on the remaining debt owed by Mont Ste. Marie (1994) inc. would be modified.

Intrawest entrusted the mandate to draft the new loan agreement (Loan Agreement) to their legal counsel, Mrs Donna Cooke. When drafting the contract, Mrs Cooke mistakenly changed the wording of a provision used to calculate the ROPA adjustment amount. This error was not spotted by any of the persons involved in the drafting of the loan agreement. The contract included a provision titled ‘Complete Agreement’ which read as follows:

« Complete Agreement.

There are no representations, warranties, covenants or agreements between the parties in connection with the subject matter hereof other than those expressed herein. »

The agreement was executed on January 29, 1997, following which Intrawest operated the Mont Ste-Marie ski resort before selling it to another corporation. During the reference period used to calculate the ROPA adjustment amount, the results generated by the operation of the Mont Ste-Marie ski resort were not sufficient to cause an additional amount to be owed to Ihag-Holding AG pursuant to the mechanism established in the letter of intent.

However, due to the error made when drafting the contract, if the mechanism is applied as provided in the Loan Agreement, an amount of SIX MILLIONS TWO HUNDRED THREE THOUSAND SIX HUNDRED THIRTY TWO DOLLARS (6,203,632.00 $) is due to Ihag

Evidence

The evidence shows that the parties never wished to make changes to the ROPA adjustment mechanism between the signing of the letter of intent and the execution of the Loan Agreement. Mrs Donna Cooke admits that the error was hers. The mechanism was not discussed between the time of signing of the letter agreement and the execution of the final contract.

Contention of the parties:

Ihag contends that the clause as written in the contract must be applied. In particular, it objects to the introduction of the letter of intent as evidence of the parties’ intent, as the « Complete agreement » provision explicitly states that only the content of the loan agreement represents the parties’ intent .

Intrawest argues instead that an error has crept into the loan agreement, and therefore it does not represent the common intent of the parties. The judge must examine all the evidence to determine the intent of the parties and interpret the contract.

Issues:

1 – Does the « Complete agreement » provision precludes the court from considering certain evidence that might help determine the presence or absence of an error in drafting the contract?
2 – Were any errors made in the drafting of the contract?
3 – If there are such errors, are those errors excusable?
4 – If so, what is the appropriate remedy?
5 – Is the wording of the ROPA adjustment provision in the letter of intent enforceable?

Ruling:

1- Does the « Complete agreement » provision precludes the court from considering certain evidence that might help determine the presence or absence of an error in drafting the contract?

The judge determines that the « Complete agreement » provision is valid. However, it does not apply in this case because Intrawest does not wish to enforce the performance of an obligation and does not claim the existence of a representation not found in the contract. It is only seeking to prove that an error found its way in the provision establishing the ROPA adjustment mechanism.

The Civil Code of Québec provides that the court should seek the common intent of the parties to interpret a contract (1425 CCQ) and that evidence of any fact relevant to a dispute is admissible and may be made by any means (2857 CCQ). Moreover, the Court of Appeal ruled that the search for the parties’ intent outweighs the language employed by the parties in the case Sobeys Québec inc. c. Coopérative des consommateurs de Sainte-Foy2.

Therefore, to establish the common intent of the parties, the court may review the documents used prior to the execution of the agreement to determine whether an error was made in the contract. Moreover, the judge states that the use of the « Complete agreement » provision to prevent the court from reviewing all the documentation to establish the common intent of the parties infringed on Ihag’s duty to act in good faith.

2- Were any errors made in the drafting of the contract?

The judge determines that a mistake was made in the drafting of the contract, because no discussion on this issue took place between the signing of the letter of intent and the execution of the contract. The judge states that the facts show that nobody had realized that a change had been made to the mechanism. Moreover, accepting such a change would make the transaction completely unreasonable. The application of the provision as written in the contract assigns a value out of proportion to the possible results a ski resort such as Mont Ste-Marie can generate, as appears from an expert report filed by Intrawest. Given this assessment of the evidence, the judge concludes that there was a drafting error.

3- If there are such errors, are those errors excusable?

An inexcusable error is not a defect of consent (1400 CCQ). If the error is inexcusable, the contractual provision should be applied as written. In this case, the judge concludes that the error is excusable as it is a very small change in a very complex document.

4-If so, what is the appropriate remedy?

Normally, as the consent of the parties was not validly given, the appropriate remedy would be the termination of the contract and restitution by the parties of the benefits received. Considering the situation at the time of the ruling, the judge concludes that it is better to simply give effect to the intent of the parties as regards the application of the ROPA adjustment mechanism as described in the letter of intent. Restitution of benefits would confer an unfair advantage to Ihag (1699 CCQ).

5- Is the wording of the ROPA adjustment provision in the letter of intent enforceable?

The judge concludes that in itself, the letter of intent is not binding. However, it establishes the parties’ intent and can be used to properly interpret the contract.

The judge finally rules that the loan agreement should be interpreted as if the ROPA adjustment provision was drafted in the same manner as in the letter of intent.

Conclusion:

Although the narrow wording of the precedence provision3 may have played an important role in the judge’s ruling, it is fair to argue that the presence of such a provision will not stop the courts from seeking evidence, outside the agreement, of the parties’ real intent. This decision once again highlights the importance of good drafting and review techniques to avoid the occurrence of such a situation.

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  1. 2009 QCCS 2699
  2. 2005 QCCA 1172
  3. As an example of a precedence provision, see this provision of our Contractual Drafting Template: Le Contrat constitue la totalité et l’intégralité de l’entente intervenue entre les PARTIES se rapportant au même objet. Il a préséance sur toute autre entente verbale ou écrite intervenue avant sa signature, sur toute annexe s’y rattachant et sur toute modification ultérieure convenue entre les PARTIES qui ne se conforme pas à la section 12.05 du Contrat. S’il y a conflit entre les dispositions du Contrat et les dispositions d’une quelconque entente subordonnée, le Contrat a préséance.
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