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Dig Out Those MOU's: SCC denies leave in IFP Technologies (Canada) Inc. v. EnCana Midstream and Marketing, et al
Posted in Contracts

Almost a year ago (May 26, 2017), the Alberta Court of Appeal released its 2:1 decision in IFP Technologies (Canada) Inc. v. EnCana Midstream and Marketing (IFP Technologies), 2017 ABCA 157. The decision was of particular significance with respect to the meaning of "working interest" in the oil and gas industry, when consent to a disposition could be reasonably withheld, and the principles of contractual interpretation. In the result, the Court of Appeal held that IFP Technologies (Canada) Inc. (IFP) acquired an undivided 20% working interest in all of PanCanadian Resources' (PCR) working interest in certain oil and gas leases in the Eyehill Creek area of Alberta, contrary to PCR's assertion that IFP's interest was limited to a 20% undivided interest in oil and gas produced only through thermal and other enhanced recovery methods (which was IFP's specialty). PCR was also held to have breached its contract with IFP by disposing of its interest to a third party without IFP's consent, which consent was reasonably withheld.

On April 5, 2018, PCR's application for leave to the Supreme Court of Canada was denied (EnCana Midstream and Marketing, et al. v. IFP Technologies (Canada) Inc.), leaving both IFP's interest intact and the Alberta Court of Appeal's decision as the last word on the type of evidence which may properly be considered as part of the factual matrix when interpreting a contract.

IFP Technologies involved a "decades-long dispute" over the interpretation of a contract along a road that had "been long and twisting." While the Court of Appeal's decision provides a comprehensive overview and summary of the principles of contractual interpretation, of particular note is the Majority's treatment of evidence of pre-contractual negotiations and a Memorandum of Understanding (MOU) preceding the omnibus formal contract entered into by the parties. 

Two of the key issues in the case were the relevance of evidence of the factual matrix absent ambiguity when interpreting a contract and defining what was properly included within such evidence – as opposed to evidence of the parties' actual intent. 

The Supreme Court of Canada clarified the first point in another case decided subsequent to the IFP Technologies trial decision but prior to the appeal – the factual matrix is always relevant when interpreting a contract. In considering that evidence, however, the Court of Appeal in IFP Technologies had to decide whether the Learned Trial Judge had erred in ignoring evidence of the parties' pre-contractual negotiations and a MOU. The Majority held that he had erred. 

The Majority held that the longstanding rule remains intact that evidence of surrounding circumstances is not to add to, contradict, or vary the terms of the agreement. Such evidence must only be used as an interpretive aid to determine the parties' objective intentions when interpreting the contract. However:

  • determining what properly constitutes the surrounding circumstances is a question of fact;
  • those surrounding circumstances can include "absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man" (relying on the SCC decision in Sattva Capital Corp. v. Creston Moly Corp.2014 SCC 53);
  • an antecedent agreement such as a MOU, agreed to in writing by both parties, is objective evidence of the background facts;
  • evidence of negotiations between the parties preceding such a MOU, particularly those in writing, are relevant–not as part of the factual matrix but to "shed light on" or show the factual matrix, such as by helping explain the genesis and aim of the contract; and
  • evidence of those negotiations and the MOU were admissible even though the subsequent, formal agreement contained an "entire agreement" clause.   

As a result, the Majority held that, in not taking into account the MOU and related background negotiations, the Learned Trial Judge erred in failing to consider what ought to have been on the "interpretive scale," leading to an interpretation "disconnected from commercial reality."

With thanks to articling student Grace Kang for her assistance in drafting this article.

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