It goes without saying that contracts should always be read before they are signed, as a written contract creates a legal instrument which binds the parties who execute it. Sometimes it is not always that simple, and if one party claims that the contract does not reflect the deal that was made, a court may look into the circumstances that gave rise to the agreement itself.
However, as a recent decision from the British Columbia Court of Appeal has shown, where a contract is clear and unambiguous, a party cannot escape its obligation by claiming that the agreement deviated from the underlying deal.
In 1001790 BC Ltd. v. 0996530 BC Ltd., 2021 BCCA 321 the British Columbia Court of Appeal ruled that a failure to read a contract was not a reason to go beyond the “four corners” of the agreement. In doing so, the court shed light on important principles of contractual interpretation.
1001790 BC Ltd. (the “Lender”) agreed to lend money to 0996530 BC Ltd. and Chia Hwei Lin (the “Borrowers”), secured by a mortgage. When the Borrowers failed to pay all amounts owing, the parties met without their lawyers to try and resolve the issue. The Borrowers were represented by their general manager Mr. Chen, and the Lender was represented by Ms. Parmar, a mortgage broker and the daughter of the Lender’s principal.
There was no dispute that the principal balance owed was $250,000, which the Borrowers then paid. The question became how much interest was owed and how it was to be calculated. The parties agreed on $325,721.50 to settle but had fundamentally different understandings of what they believed the terms of that settlement were.
Ms. Parmar believed that the Borrower would pay an additional $325,721.50. Mr. Chen believed this was the total amount owing, and subtracting the payment of $250,000, he understood the balance owing to be $75,721.50. Ms. Parmar summarized the settlement in an ambiguous email which stated:
“…Our final figure as of February 22, 2019, the amount outstanding would be $325721.50. We would like to settle at that amount which is $325721.50 and will eliminate the legal cost…”
The Borrowers’ lawyer drafted a settlement agreement based on Mr. Chen’s understanding and the settlement agreement unambiguously set out that the Borrower only owed an additional $75,721.50.
The settlement agreement was sent to the Lender. Neither their lawyer, Ms. Parmar, or the Lender’s principal read it before it was signed and returned to the Borrowers. When the Borrowers then forwarded a cheque for $250,000 less than they anticipated, the Lenders started an action seeking rectification of the contract.
At trial, the judge found that there was no agreement. While the written contract was clear, the email by Ms. Parmar was ambiguous, and indicated a misunderstanding between the parties on a material element of the contract. As such, there was no “meeting of the minds”, and thus no valid agreement was ever formed.
The Borrowers appealed this decision, and the Court of Appeal allowed the appeal. The Court emphasized the well-settled principle that a signing party is bound by the contract it signs, regardless of whether it was aware of the terms of the contract. In the absence of fraud or misrepresentation, the court is not to interpret a contract outside of the “four corners of the agreement” – that is, a judge cannot look at the surrounding circumstances leading to the signing, it can only consider the document itself. In this case, the written contract was clear and unambiguous, and thus there was a valid agreement between the parties.
With that determined, the Court of Appeal looked to see if any remedies were available. Having agreed with the trial judge that rectification was not available, the Court then considered the remedy of rescission of the contract due to unilateral mistake. This remedy is available where it would be unconscionable to enforce a contract, where a party was mistaken on a material term of the agreement, and the error was actually or constructively known by the non-mistaken party. The Court found that this was not an appropriate remedy in the circumstances. There was no evidence that the Borrowers knew, or ought to have known, of any mistaken understanding by the Lenders. The Court also found that the Lenders’ failure to read the contract weighed against any potential finding of unconscionability.
The Court also looked at the remedy of non est factum, which if found would have the result of voiding the contract. Non est factum requires the party arguing it to show that the document they signed was fundamentally different in nature than what they believed it to be, that there was misrepresentation that led them to sign the agreement, and that they were not careless in doing so. The Court found that the Lenders’ carelessness was not a result of any fault on the part of the Borrowers, and thus the Lenders could not rely on non est factum to void the contract. Please see our recent article for more information on non est factum.
Where a written agreement is not ambiguous, a court will not look outside of the four corners of the agreement in its interpretation. The main takeaway from this case is to always take the time to read a contract before signing it, regardless of your purported understanding of the terms. This may sound obvious, and it is an indeed a well-worn rule, but the fact that cases like this are still being argued in 2021 shows that many have still not learned this important lesson.
Author: Daniel Waldman, Lawyer
The author would like to thank Cassie Wasserman, Student-at-Law, for her assistance with this article.