Incentive Compensation Plans: Court Considers Evidence of the Parties’ Conduct After a Contract is Signed to Assist in Contractual Interpretation

Jan 31, 2017

From time to time, employers change their incentive compensation plans for some of their employees – especially sales and marketing personnel. It may be the result of a change in market conditions. It may be in response to the organization’s growth rate or as a result of a reorganization. And sometimes these written agreements are not particularly well drafted. These poorly drafted agreements can and do result in litigation.

The Case

Shewchuk v. Blackmont Capital Inc., 2016 ONCA 912 

The Contractual Language

The Ontario Court of Appeal (“OCA”) was asked to interpret the following contractual language:

With respect to the broker warrants attributable to you for the transactions listed in Schedule “A” … and for all transactions … that are sourced directly by you … Blackmont shall pay to you an additional 10% over and above that which is payable under (another agreement) (the “Finder’s Fee”).

Schedule A to the agreement listed a number of qualified options and non-qualified options that were eligible for the Finder’s Fee as were new positions garnered. These new positions were added to Schedule A as they arose. The qualified options listed in Schedule A related to Retail Group transactions.

The Issue

The central issue at trial was whether this agreement applied to Capital Markets transactions which were not explicitly referenced in the agreement.

The Findings

The judge concluded that the above-noted contractual language was ambiguous.

The trial judge looked at the factual matrix, or the surrounding circumstances, to determine the intentions of the parties at the time of formation of the contract. The factual matrix sheds light on the meaning of a contract’s written language by illuminating the facts known to the parties at the date of contracting.

The trial judge also considered events occurring after the execution of the agreement. The trial judge found that this course of conduct supported the inference that the agreement was not intended to apply to transactions involving Capital Markets.

The Admissibility of Conduct that takes Place After a Contract is Signed

The OCA noted there are a number of dangers associated with admitting evidence of the parties’ subsequent conduct. One danger is that the over-reliance on subsequent conduct may reward self-serving conduct whereby a party deliberately conducts itself in a way that would lend support to its preferred interpretation of the contract.

Despite these dangers, the OCA concluded that “evidence of the parties’ subsequent conduct is admissible to assist in contractual interpretation only if a court concludes, after considering the contract’s written text and its factual matrix, that the contract is ambiguous. The court may then make retrospectant use of the evidence, giving it appropriate weight having regard to the extent to which its inherent dangers are mitigated in the circumstances of the case at hand, to infer the parties’ intentions at the time of the contract’s execution.”

Lessons to be Learned

  1. Poorly drafted or ambiguous contractual language can lead to litigation.
  2. Sometimes parties to a contract intentionally negotiate ambiguous language. It is important to document discussions that take place when contractual language is being negotiated since courts will hear evidence of the factual matrix when determining the parties’ intentions.
  3. After signing a contract, it is extremely important to act consistently with your understanding of the contract and if possible, document subsequent conduct which reinforces your interpretation of the contract. This self-serving conduct could result in any ambiguity being decided in your favour.

For over 25 years, Doug MacLeod of the MacLeod Law Firm has been advising employers on all aspects of the employment relationship. If you have any questions, you can contact him at 416 317-9894 or at [email protected]

The material and information in this blog and this website are for general information only. They should not be relied on as legal advice or opinion. The authors make no claims, promises, or guarantees about the accuracy, completeness, or adequacy of any information referred to in this blog or its links. No person should act or refrain from acting in reliance on any information found on this website or blog. Readers should obtain appropriate professional advice from a lawyer duly licensed in the relevant jurisdiction. These materials do not create a lawyer-client relationship between you and any of the authors or the MacLeod Law Firm.

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