ONTARIO – Where a Small Court judge rewrites the agreements between the parties without consideration for the words the parties used and fails to follow proper principles of contract construction, the judge commits an extricable error of law, for which the standard of appellate review is correctness. Even though only $25,000 was involved, the Divisional Court directed a new trial.
Winfund Software Corp. v Progressive Strategy Capital Group Corp
2021 ONSC 6588
Ricchetti, RSJ, Divisional Court, October 2, 2021
Appeal from the judgments of a Deputy Judge of the Small Claims Court heard by Ricchetti, RSJ, which produced an unusually long appeal judgment. As recognized by the Court, the result was an unhappy one, given that the case involved at most $25,000 and costs of $15,000 were incurred in the appeal. Ricchetti RSJ set aside the judgment of the Deputy Judge and directed a new trial: paras. 114-118
The case is important, however, because of the Court’s review of principles of interpretation of contracts.
The parties entered into an agreement, (“License Agreement”) in which Winfund, was to supply software to Progressive. The License Agreement automatically renewed. It also contained a termination clause that required upon termination that all license fees be paid to the end of the term as an “administration” charge.
The key dispute between the parties was that Progressive did not want to pay for additional installation, support and training related to Winfund’s software updates.
The parties negotiated a price reduction, but no amended agreement was signed. Subsequently, the parties entered into a second written agreement (“Addendum’) establishing a new term and a new price.
In December 2016, Progressive advised Winfund it would be terminating the License Agreement as soon as a new software provider was found and stopped making payments under the Licensing Agreement/Addendum. On March 31,2017 Progressive formally terminated the Licensing Agreement/Addendum.
The issues on appeal were:
- The standard of review; and
- Contract interpretation.
On the first issue the Court was clear that the appeal was not a new trial, and that the court was not to interfere unless the trial judge made an error of law or a palpable and overriding error of mixed law and fact.
On the second issue the Court referred to the leading case on contract interpretation, Creston Moly Corp. v Sattva Capital Corp., 2014 SCC 53 para.50-55 (CANLII) in which the SCC held that contractual interpretation generally involves “issues of mixed fact and law and is an exercise in which the principles of contractual interpretation are applied to the words of the contract, considered in light of the factual matrix.”
Ricchetti RSJ held that the trial judge committed several extricable errors of law in the application of the legal principles of contract interpretation. When interpreting a contract, the court should first look at the plain and ordinary meaning of the words and then if there is ambiguity, the court can look to surrounding circumstances to resolve the ambiguity. When looking at the surrounding circumstances the court is to look at the objective intentions of the parties and considering the subjective intention or expectations of a party to a contract “is not a proper principle of contractual interpretation”. (para.50).
Ricchetti RSJ held the trial judge failed to consider the plain and ordinary meaning of the words in the written agreements, failed to determine if there was ambiguity and allowed the subjective belief, intentions, and expectations of one party circumvent the clear and unambiguous language of the agreement.
In addition, the trial judge erred by relying on the parties, prior conduct, before the Addendum was reached to determine party intentions. Ricchetti. RSJ. referred to Shelanu Inc. Print Tree Franchising Corp., [2003] O.J. No 1919,para.48 which held that subsequent conduct of the parties to a contract may amend the terms of a written contract.
Ricchetti RSJ held that the trial judge essentially rewrote the written agreements of the parties with little or no consideration of the words in the written agreements, which amounted to an “extricable error of law.” para.65. In addition, Ricchetti held that the trial judge found that there was a third agreement (that neither party alleged in their pleadings) without an evidentiary basis and this finding was a palpable and overriding error.
The trial judge should have reviewed whether or not the parties’ actions constituted a repudiatory breach and whether or not the repudiation had been accepted as set out in the dissent in Tercon Construction Ltd.v British Columbia (Transportation and Highways) 2010 SCC 4 (CANLII) paras. 62,68 and 82.
Ricchetti RSJ held that where one party deprives the other of “substantially the whole benefit of the contract” it entitles the innocent party, upon acceptance of that breach, to treat the contract at an end”. para.108. The Court indicated there were serious question about whether or not Progressive was deprived of the whole benefit of the contract as Progressive wanted to continue to use the software until it found another provider. As the trial judge did not determine whether or not the repudiary breach had been accepted, Ricchetti decided, it was not necessary to determine if this was an error.
The Court allowed the appeal, set aside the judgments, and ordered a new trial.