Entire Agreement Clauses May Not Always Apply

The recent Ontario Court of Appeal decision in Bank of Montreal v. Barber Glass Industries Inc. contains some interesting observations on entire agreement clauses.

In this case, Grant Thornton Limited, a court appointed receiver, entered into an Auction Service Agreement (“ASA”) with a well-known liquidator, Danbury Industrial.  The agreement concerned the sale of assets of a debtor. 

The ASA provided that Danbury would be entitled to a 12% Buyer’s Premium on the sale of the debtor’s assets and envisioned an auction sale.

Where a strict technical construction will produce an unfair result, more often than not the court will find a way around it.

Prior to the auction taking place, Danbury was able to find a purchaser for almost all of the assets by means of a private purchase for $8.5 million.  Danbury entered into an agreement of purchase and sale with the purchaser accordingly.  The agreement made no reference to a Buyer’s Premium.

However, the parties also entered into a bill of sale which was later amended to include a handwritten amendment stating that the purchase price was “inclusive of the Buyer’s Premium”.

After the transaction was completed, Danbury claimed a Buyer’s Premium from the receiver.  The receiver refused to pay and this action started. 

The receiver brought a motion for directions on the question of Danbury’s entitlement to the Buyer’s Premium.  The motion court judge determined that the Buyer’s Premium was not payable.  He found that while the ASA referred to a Buyer’s Premium, the agreement of purchase and sale did not contain any such premium.  What the agreement did contain was an entire agreement clause.  As the agreement of purchase and sale was found to represent the entire agreement between the parties to the sale transaction, and it contained no provision for a Buyer’s Premium, none was payable.  The judge concluded that the purchase was completed in accordance with the terms of the agreement of purchase and sale, not the ASA.

Danbury appealed from the motion court judge’s decision. 

The Court of Appeal had a different view of the matter.  It concluded that Danbury had an unqualified entitlement to a Buyer’s Premium pursuant to the ASA.  It felt that the motion judge had placed too much emphasis on the provisions of the agreement of purchase and sale to the extent that it completely obscured the receiver’s obligations under the ASA.  As the true intent of Danbury and the receiver had been to have a Buyer’s Premium paid upon sale, that should have prevailed.  In fact, in open court, the receiver’s lawyer fairly and appropriately acknowledged that if the Buyer’s Premium had been written into the agreement of purchase and sale, the receiver would have had to pay it. 

The Court also noted the handwritten amendment in the revised Bill of Sale making reference to a Buyer’s Premium.  To the Court of Appeal, that documented the agreement that the purchase price included the Buyer’s Premium and was not caught by the scope of the entire agreement clause in the agreement of purchase and sale.  Indeed, the enforcement of the entire agreement clause in this case had the effect of making the subsequent amendment meaningless. 

The Court of Appeal pointed out that “negotiated commercial documents are to be interpreted so as to accord with sound, commercial principles and good business sense and avoid commercial absurdity”.  But for the mistake of not including a reference to the Buyer’s Premium entitlement in the agreement of purchase and sale, Danbury expected to receive one, and the receiver was obliged to pay one.

To the Court of Appeal, the award of a Buyer’s Premium would not produce an unfair result particularly given the spectacular success achieved by Danbury in the sale of the assets at a very high price.  The Court also felt that denying Danbury a Buyer’s Premium would produce an unfair result. 

This case is a good illustration of the fact that generally speaking, our courts will approach matters of the interpretation of parties’ rights and obligations under commercial agreements with a sense of fairness and common sense.  Where a strict technical construction will produce an unfair result, more often than not the court will find a way around it. 

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