



COURT OF APPEAL FOR ONTARIO

CITATION: Energy
    Fundamentals Group Inc. v. Veresen Inc., 2015 ONCA 514

DATE: 20150708

DOCKET: C60196

Simmons, Epstein and Pardu JJ.A.

BETWEEN

Energy Fundamentals Group Inc.

Applicant

(Respondent)

and

Veresen Inc.

Respondent

(Appellant)

Mark A. Gelowitz and Eric Morgan, for the appellant

Orestes Pasparakis, Rahool P. Agarwal, and Stephen
    Taylor, for the respondent

Heard: May 27, 2015

On appeal from the order of Justice Michael A. Penny of
    the Superior Court of Justice, dated February 26, 2015, with reasons reported
    at 2015 ONSC 692.

Pardu J.A.:

[1]

When can a court imply terms into a commercial contract, terms upon
    which the parties have not expressly agreed? Veresen Inc. appeals from the
    decision of an application judge implying a contractual obligation on its part
    to disclose information to enable Energy Fundamentals Group Inc. (EFG) to
    determine whether to exercise an option to acquire up to 20% of a limited
    partnership, the Jordan Cove Energy Project.

[2]

EFG, an investment bank, introduced Veresen to the project, the
    development of a liquid natural gas terminal on the coast of Oregon.

[3]

Between April and July 2005, EFG provided investment banking services
    pursuant to a non-binding letter agreement dated April 1, 2005 documenting
    the parties understanding that:

(a) the Jordan Cove development offered an attractive
    investment opportunity, subject to our collective due diligence review of the
    project;

(b) the nature of [the] proposal is to work with [Veresen]
    through to project commissioning on a basis that aligns EFGs and [Veresens]
    respective interests and objectives;

(c) EFG would offer certain services and, in exchange, EFG
    would be compensated with a right to invest in the Project; and

(d) the parties would continue to work together to develop an
    arrangement which fits both parties [sic] mutual objectives.

[4]

Veresen completed its acquisition of the project and on July 12, 2005
    executed a limited partnership agreement, (LPA) through which it controlled
    the project.

[5]

Two weeks later, Veresen and EFG executed a two-and-a-half page letter
    agreement. The letter agreement was not comprehensive and reference had to be
    made to the LPA to understand the scope of the letter agreement.

[6]

Under the letter agreement, EFG was to provide assistance to Veresens
    exercise of due diligence in development of the project and financial model
    development. The letter agreement expressly stated that the parties were to
    work together to obtain financing for the project.

[7]

The letter contemplated a continuing relationship. The letter agreement
    gave EFG an option to acquire up to a 20% interest in the project, contingent
    on successful financing. The letter agreement expressly recognized that EFGs
    compensation was an opportunity to realize value over time related to the
    successful development of the Project through the investment of capital into
    the Project.

[8]

In order to exercise the option, EFG had to pay a proportionate share of
    all development equity contributed by Veresen, plus a return on Veresens
    development equity, as that return was defined in the LPA. If EFG became a
    partner, it would also be obliged to pay a proportionate share of future
    project costs. All told, EFG would be required to contribute several hundred
    million dollars in order to exercise the option.

[9]

The letter agreement expressly provides that Veresen shall assign to
    EFG an interest in the project pursuant to the terms of the [LPA] Limited
    Partnership agreement.

[10]

The
    LPA expressly provides for the reasonable disclosure of confidential
    information to prospective transferees:

any Partner may disclose Confidential Information to the extent
    reasonably necessary, to  prospective transferees of such Partners interests
    in the Partnership as a Partner thereof; provided however that such Person or
    Persons shall be informed at the time of such disclosure of its confidential
    nature and provided with the confidentiality terms of this Agreement, and that
    such Person or Persons shall first agree in writing to comply with and be bound
    by all the terms and conditions of this Section 13.2.

[11]

As
    Veresens financial advisor in 2005, EFG was at that time privy to confidential
    information about the project. This financial information was provided to EFG
    under the terms of a 2005 confidentiality agreement that seems to have expired.
    An EFG representative was also on the board of the general partner, but this
    position was terminated when EFG signaled an intention to explore exercise of
    the option and this litigation resulted.

[12]

Due
    to fluctuations in the price of natural gas, the type of facility that would be
    built by Veresen changed from an LNG importation facility to a LNG export
    facility. Before the application judge, Veresen maintained that this change was
    so drastic that the original option no longer applied, since an export terminal
    was essentially different in nature from an import terminal.

[13]

In
    the negotiations that preceded this litigation, Veresen repeatedly told EFG
    that the option was out of the money or severely underwater  in other
    words, Veresen represented to EFG that the cost of exercising the option would
    far outweigh the economic benefit of doing so. Despite making these express
    representations, Veresen refused to provide EFG with the documentation to
    verify either the pricing of the option or its likely economic value.

Application judges decision

[14]

The
    application judge rejected Veresens argument that the option no longer existed
    because the originally contemplated LNG import facility had been changed into
    an LNG export operation. No appeal is taken from that finding.

[15]

The
    application judge ordered Veresen to provide sufficient information to enable
    EFG:

(i)      to confirm Veresens calculation of the Option
    exercise price (the price information); and

(ii)      to make a reasonable determination of what an equity
    stake of up to 20% in the Project is currently worth (the value information) .

[16]

Veresen
    agreed before the application judge that it would provide the price information,
    but argues on appeal that it is not legally obliged to provide either the value
    or the price information.

[17]

The
    application judge correctly articulated the test for determining whether to
    imply terms in a contract and concluded that the option right would be illusory
    without the implied terms. The application judge noted that terms may be
    implied where necessary to give business efficacy to a contract, or where the
    terms were such that the parties would have considered too obvious to need
    express inclusion, citing
M.J.B. Enterprises Ltd. v. Defence Construction
    (1951) Ltd.,
[1999] 1 S.C.R. 619. He found that it was clear beyond
    peradventure that a potential 20% investor in the project would require access
    to financial documents before making an investment that could amount to several
    hundred million dollars. In the application judges opinion, the obligation to
    disclose the valuation information was a necessary incident to the existence
    of the Option right itself as, without it, the Option right is really no right
    at all.

Veresens argument

[18]

Veresen
    says that the application judge should not have implied terms requiring value
    and price disclosure. These were sophisticated parties; EFG chose not to bargain
    for a contractual right to disclosure even though it had done so in another
    context when it wanted that right. Implication of these terms rewrites and
    improves the contract for EFGs benefit. Veresen submits that the context here is
    different from one where a vendor is wooing a prospective buyer, and anxious to
    entice the prospect with a promise of disclosure.

[19]

Veresen
    argues that the application judge did not give sufficient weight to the
    evidence of a Veresen executive who said the company would never have agreed to
    such undefined disclosure terms.

[20]

Veresen
    supports its position that the application judge erred in implying the term he
    did by pointing out that it has no idea what it is required to disclose. Veresen
    submits that to order reasonable disclosure when a trial may be necessary to
    define what must be disclosed and the scope of any undertaking as to
    confidentiality, goes beyond the limits of available court imposed contractual
    terms. Veresen contends that although the application judge correctly
    articulated the legal test, he refashioned the test to imply a term to which
    reasonable parties in general would have agreed, without regard for the actual
    intentions in this case.

[21]

Finally,
    Veresen submits that the application judge erred in using a good faith basis to
    imply the terms.
Bhasin v. Hrynew
, 2014 SCC 71, [2014] 3 S.C.R. 495

speaks to good faith performance of a contract, not to implication of
    terms.

[22]

If
    this court upholds the implication of the disclosure term, Veresen does not object
    to the means chosen by the application judge to implement that proviso.

EFGs arguments

[23]

EFG
    submits that it and Veresen were allied in pursuit of a common goal,
    development of the LNG project. They contemplated that they could become
    partners. EFG was intimately familiar with Veresens finances and sat on the
    board of the corporation acting as general partner of the limited partnership
    managing the LNG project. It would have been obvious to the parties that EFG
    would not have invested hundreds of millions of dollars without verifying both
    Veresens calculation of the option price and reviewing Veresens records to
    assess the value of the option.

[24]

The
    application judge was correct to conclude that the option right would have been
    illusory without the right to information, and that implication of the terms
    was necessary to give business efficacy to the letter agreement. The
    application judge concluded on the whole of the evidence that the parties must
    have intended that EFG would have the right to this disclosure. There is no
    suggestion on the evidence that anyone other than EFG would become a limited
    partner.

[25]

The
    application judge did not rely on a requirement of good faith to imply the
    contractual terms, but observed the doctrinal link between the implication of
    contractual terms and good faith performance of contracts.

[26]

Although
    a proposed term may require interpretation, EFG submits that a court may
    nonetheless imply such a term where it satisfies the necessary criteria for the
    implication of terms. Interpretation of a contractual term of reasonableness
    arises in many different contexts. Veresen itself has expressly agreed to
    reasonable disclosure to prospective investors in the LPA. The LPA also
    provides for reasonable and just disclosure to limited partners.

[27]

The
    letter agreement does not purport to exhaustively define the relationship
    between the parties: the LPA is a necessary part of the context.

Analysis

(1)

Did the application judge err in implying the term?

[28]

The
    application judges largely factual conclusion that the right to value and
    price disclosure was necessary to give business efficacy of the agreement is
    owed deference. This flows from
Olympic Industries Inc. v. McNeil
, 86
    B.C.L.R. (2d) 273, [1993] B.C.J. No. 2565 (C.A.), at para. 31, cited more
    recently by
Moulton Contracting Ltd v. British Columbia
, 2015 BCCA 89,
    381 D.L.R. (4th) 263, at para. 56, which held that [t]he question as to what
    the parties must have intended as a matter of necessity
is a question of
    fact to be decided in the circumstances of each case
. [Emphasis added]

[29]

The issue of implication of contractual terms raises
    questions of mixed law and fact, as would interpretation of the contract, and
    the same standard of review should apply, palpable and overriding error, unless
    extricable errors of law are evident. (
Sattva Capital Corp. v. Creston Moly
    Corp. 2014 SCC 53)

[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] 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), 43 O.R. (2d) 401 (C.A.).

[37]

The
    conclusions drawn by the application judge were reasonably available to him on
    the evidence. Here, it is apparent that the letter agreement was not intended
    to comprehensively define the relationship between the parties. In a commercial
    setting, there may be contracts where the parties to a contract may have been
    content to express only the most important terms of their agreement, leaving
    the remaining details to be understood (H.G. Beale, ed.,
Chitty on
    Contracts
, 31st ed. (London UK: Sweet & Maxwell, 2012) vol. 1 at
    13-002).

[38]

The
    application judge did not err in failing to give the evidence of the Veresen
    executive the conclusive weight urged upon this court on appeal. The subjective
    evidence of a party, often given years later, as to whether or not it would
    have agreed to the proposed implied term is of little value, amounting to a
    barren argument over how the actual parties would have reacted to the proposed
    amendment. (
Belize Telecom
, at para. 25) The analysis of whether to
    imply a term must be done on an objective basis, but having regard to the
    specific parties and specific contractual context.

[39]

The
    application judges conclusions that the option was illusory unless a right to
    disclosure was implied, and that an implied term of disclosure was necessary to
    give business efficacy to the agreement are not tainted by reviewable error.

[40]

In
    this context, the implication of the terms requiring disclosure is not rendered
    unnecessary because EFG could blindly exercise the option without knowing
    whether it would make economic sense to do so. Such an interpretation would
    frustrate the business purpose of the agreements. As Lord Hoffman observed in
Belize
    Telecom
, at para. 23:

The danger lies, however in detaching the phrase necessary to
    give business efficacy from the basic process of construction of the
    instrument.
It is frequently the case that a contract may work perfectly
    well in the sense that both parties can perform their express obligations, but
    the consequences would contradict what a reasonable person would understand the
    contract to mean
. [Emphasis added]

(2)

Did the application judge depart from the correct test by determining
    the intentions of reasonable parties rather than the actual parties?

[41]

Veresens
    argument that the application judge departed from the correct test for implication
    of a term (which requires analysis of the actual intentions of the parties) and
    instead used a test of what reasonable parties would have agreed is based on
    para. 85 of his reasons:

If Veresen was looking for a 20% equity partner in the Project,
    it is clear beyond peradventure that it would have to provide access to
    confidential financial information about the Project. No one would ever invest
    several hundred million dollars in this Project without performing detailed due
    diligence on the value of the stake in the Project being acquired.

[42]

Veresen
    relies on para. 29 of
M.J.B Enterprises Ltd
., where Iacobucci J. said:

What is important in both formulations [the business efficacy
    test and the officious bystander test] is a focus on the intentions of the
actual
parties. A court, when dealing with terms implied in fact, must be careful
    not to slide into determining the intentions of reasonable parties [Emphasis
    in the original]

[43]

As
    observed in John D. McCamus,
The Law of Contracts
, 2nd ed. (Toronto: Irwin
    Law, 2012), at 781, reasonableness is an inescapable part of determining
    whether to imply a contractual term:

Thus, it is plainly the case that the implied terms must
    themselves be reasonable. One would not expect a court to imply terms into an
    agreement that it considered to be unreasonable. Further, keeping in mind that
    the implied in fact term rests on the presumed intentions of the parties,
    courts quite understandably presume intentions of the parties that are
    reasonable. In other words, in attributing to the parties hypothetical
    intentions as to what they would have agreed to if the matter had been raised
    at the time of contracting, courts assume that the parties would behave
    reasonably and would agree to a reasonable term. Indeed, in the absence of actual
    but unexpressed intentions it is inescapable that courts would apply a
    reasonable intentions standard. In other words, although necessity appears to
    be the threshold that must be met before engaging in the exercise of implying
    the term, the formulation of the term to be implied is very much an exercise
    that rests on a concept of reasonableness. At the same time, however, the
    implied term is tailored to the needs of the actual transaction of the actual parties
    rather than to some hypothetical reasonable transaction; accordingly, to the extent
    that relevant actual intentions of the parties are manifest in the transaction,
    they must form a basis for the implied term.

[44]

The
    courts warning in
M.J. B. Enterprises
about the need to be careful
    not to slide into the intentions of reasonable parties, mandated an analysis
    rooted in the actual relationship between the parties and the specific
    contractual context, rather than a detour into an abstract analysis of what in
    general, a reasonable person might have agreed. In
M.J.B. Enterprises
itself
    the court went on to assess the reasonableness of the proposed implied term in
    the specific context, but also relied on the general reasonableness of such a
    term, saying, at para. 30, I find it difficult to accept that the appellant,
    or any of the other contractors, would have submitted a tender unless it was
    understood by all that only a compliant tender would be accepted.

[45]

In
    my view the application judge did not depart from the proper test cited by him
    in the immediately preceding paragraph of his reasons. His analysis is in no
    way abstracted from an analysis of the specific relationship between these
    parties.

[46]

The
    finding that no reasonable person would have embarked on an exercise of the
    option without disclosure, supports a finding of the necessity of the implied
    term for purposes of business efficacy.

(3)

Did the application judge err by confounding the requirement of good
    faith performance of a contract with the test for implying contractual terms?

[47]

In
    my view, the application judges references to good faith do not undermine his
    earlier factual conclusions as to necessity and business efficacy.

[48]

As
    he indicated, in
Bhasin
, the court observed:

The implication of terms plays a functionally similar role in
    common law contract law to the doctrine of good faith in civil law
    jurisdictions
by filling in gaps in the written agreement of the parties
:
Chitty on Contracts,
at para. 1-051 [emphasis added].

[49]

Reference
    to this common doctrinal underpinning, after concluding that implication of the
    term was necessary to give business efficacy to the contract, does not amount
    to error. As explained in Swan & Adamski,
Canadian Contract Law
, 3rd
    ed. (Markham: LexisNexis, 2012) at para.8, p.113:

Like custom and the device of the implied term or the imposed
    or supplied term to fill a gap in the agreement, good faith is a device for
    supplementing the terms of the contract to deal with aspects of the relation
    that have not been specifically dealt with by the parties.

[50]

Given
    Veresens agreement before the application judge that it would provide the
    pricing information, there is no basis to revisit that conclusion on appeal. In
    any event, the same analysis would compel implication of a term requiring
    disclosure of pricing information. No one could have reasonably contemplated
    that EFG would have to blindly accept Veresens calculation of the option
    price.

Disposition

[51]

For
    these reasons, the appeal is dismissed, with costs to EFG in the agreed sum of
    $50,000, inclusive of disbursements and applicable taxes.

Released: July 8, 2015

(GE)

G. Pardu J.A.

I agree Janet Simmons J.A.

I agree Gloria Epstein J.A.


