King v. Operating Engineers Training Date:, 2011 MBCA 80

Citation: King v. Operating Engineers Training Date: 20110927 Institute of Manitoba Inc., 2011 MBCA 80 Docket: AI 10-30-07356 IN THE COURT OF APPEAL OF MANITOBA Coram: Mr. Justice Michel A. Monnin Madam Justice Freda M. Steel Madam Justice Barbara M. Hamilton BETWEEN : ) M. T. Green ROBERT KING ) for the Appellant (Plaintiff) Respondent ) ) G. M. Fleetwood - and - ) for the Respondent ) OPERATING ENGINEERS TRAINING ) Appeal heard: INSTITUTE OF MANITOBA INC. ) December 17, 2010 ) (Defendant) Appellant ) Judgment delivered: ) September 27, 2011 STEEL J.A. Introduction 1 This appeal raises the difficult, and often confusing, issue of the “parol evidence rule” and contractual

interpretation. 2 The case involves the

interpretation of a contract between Robert King and the Operating Engineers Training Institute of Manitoba Inc. (OETIM). King was hired as an instructor for a heavy equipment operator course being offered by OETIM. The parties disagree on whether the remuneration referred to in the written contract was to be “net” of income taxes and other deductions, or “gross.” 3 King did not claim the above remuneration as income and, as events transpired, he was later assessed back taxes by Canada Revenue Agency (CRA).

He sued the defendant, claiming that the remuneration specified in the contract was to be “clear of tax.” 4 The trial judge found that the language of the written contract was clear, but also found, as a result of considering the evidence of prior oral discussions and written memoranda, that the written contract was not intended to be the complete agreement between the parties.

He accepted the plaintiff’s position that the evidence of prior discussions and memoranda was admissible to determine the question of whether the pay was to be “gross” or “net.” 5 OETIM appeals, taking the position that the trial judge erred in his

interpretation and application of the “parol evidence” rule. Background 6 OETIM is a joint labour/management, non-profit organization. One of its main purposes is to train hoisting and heavy equipment operators. It does so primarily through the holding of periodic training courses which are conducted by qualified heavy equipment operators. Funding for the courses comes mainly from the federal government. 7 King is a heavy equipment operator. He has been operating heavy equipment for 20 years and can run multiple pieces of equipment. He works for several companies in the oil and gas industry building pipelines; some in his personal capacity and

some through his personal business, B.K. Inspections. 8 When working through his business, he would negotiate a fee agreement and collect GST on the amount. When working in his personal capacity, he would be offered jobs through the union and be paid in accordance with the National Pipeline Agreement (the NPA). During the period in question (1997-1999), when working through the union, he would earn approximately $2,500 per week, net. 9 King served as an instructor for three separate pipeline courses given during the years in question.

Written contracts were entered into between the parties in each of the three years for each of the training courses. The portion relating to remuneration in the 1997 contract read, in part: 1. The Institute agrees to pay the Instructor a sum of TWO THOUSAND DOLLARS ($2000.00) per week as remuneration for the position of Instructor for the purpose of training approximately 12 adults in the occupation of Pipeline Backhoe Operator for a period of 180-200 hours commencing April 14th to May 10th, 1997.

This 4 week period will include course preparation and follow-up as determined by the Operating Engineers Training Institute of Manitoba. The sum total remuneration per Instructor for the entire project will be a maximum of TWELVE THOUSAND DOLLARS ($12,000.00) should the period of employment be up to six weeks. That is, $1,500.00 per week plus $500.00 per week living allowance.

Except for the amount of remuneration, the contracts for 1998 and 1999 contained the same wording. 10 Before the 1998 written contract was entered into, the Director of the Educational Programs for OETIM, Kathy Milne- Watts, sent a written memorandum to King on April 3, 1998, offering him the position as Chief Instructor on the Backhoe Course.

In the memorandum, she stated, “Your rate per week will be $3,000.00 per week over a four week period clear after taxes .” The next year, she sent him another memo dated March 16, 1999, offering him the same position, once again stating “Your rate per week will be $3,500.00 per week over a six-week period clear after taxes .” (Emphases added.) 11 Four other heavy equipment operators hired by OETIM to act as instructors during various years testified at trial.

Each gave evidence that it is common in the oil industry to speak in reference to “clear pay,” that the NPA rates were such that employees would take home between $2,000 and $3,000 per week, that Milne-Watts advised them over the phone and/or during the instructor’s meeting that the pay would be net and that they would not have taken the job if the pay was gross, as there was other work available at the NPA rates. 12 King alleged that the amount stated in the written contract was to be an amount net of taxes, which taxes were to be paid by the defendant. 13 OETIM alleged that all instructors were clearly informed that they were being hired as independent consultants and that they would not be receiving T4 slips as they were not being treated as employees by OETIM.

King received a T4 slip in 1999 because the accountants for OETIM advised that inasmuch as the courses were being held on a more regular basis, the instructors should be given T4 slips containing a statement of earnings, which would also be provided to the CRA. 14 Damages were agreed to as between the parties at $34,295.81 plus interest. Trial Decision 15 The trial judge held that even though he found the wording of the written contracts clear and unambiguous, he was still entitled to refer to extrinsic evidence to assist him in the

interpretation of the written contract so long as that evidence was not used to contradict anything contained in the written contract. 16 Referring to the other evidence adduced by King, the trial judge found that the parties intended the remuneration referred to in the contract to be net of income taxes. 17 The trial judge also noted that Milne-Watts admitted that by the time the instructors came to the meeting and signed the memoranda, they had already discussed and accepted the offer to teach the course.

She also agreed that it would not be possible to understand the entire agreement between the parties on the basis of the memorandum of agreement alone. 18 OETIM produced another copy of the April 1998 memorandum, which stated that the remuneration was to be “clear of taxes.” However, this copy had a handwritten note by Milne-Watts at the end of which it states “Note – for Bob’s purpose only – regular wages as last year.” Milne-Watts testified that this was her note to herself to indicate and confirm that the memo was not accurate, and that she provided it only at King’s request to get out of a previous job commitment.

However, the trial judge rejected her evidence in this respect and found it not to be credible. Instead, he accepted the evidence of King and the other four course instructors. Standard of Review 19 The parties disagree on the standard of review in this case, and therefore, some comment should be made on this point. 20 Until recently, the standard of review in contractual

interpretation matters was always considered to be a question of law reviewable by an appellate court on a standard of correctness (Geoff R. Hall, Canadian Contractual

Interpretation Law (Markham: LexisNexis Canada Inc., 2007) at 106-7). 21 At present, the standard of review is dependent on the nature of the question. The appropriate standard will depend upon the degree to which the trial judge made factual findings based on the particular case in question to come to his decision. So, for example, errors of law reviewable on a standard of correctness, in the area of contractual

interpretation, include the application of an

incorrect principle, the failure to consider a required element of a legal test, or the failure to consider a relevant factor. See PrairiePetroleum Products Ltd. v. Husky Oil Ltd. et al., 2008 MBCA 87 at para. 36, 231 Man.R. (2d) 1; Bell Canada v. The Plan Group, 2009ONCA 548 at para. 135, 96 O.R. (3d) 81, Gillesse J.A., dissenting; and Midnight Marine Ltd. v.

Oppenheim, 2010 NLCA 64 at para. 44,325 D.L.R. (4th) 254. 22 A trial judge’s determination of the factual matrix or surrounding circumstances, drawing inferences from a finding offact, findings as to credibility or good faith, consideration of extrinsic evidence and consideration of the evidence as a whole, arequestions of fact and reviewable on a standard of palpable and overriding error (Hall at p. 109), or the functional equivalent of “palpableand overriding error” such as, “clearly wrong,” “unreasonable” or “not reasonably supported by the evidence.” See H.L. v.

Canada(Attorney General), 2005 SCC 25 at para. 110, [2005] 1 S.C.R. 401. And see Castledowns Law Office Management Ltd. v. 1131102Alberta Ltd., 2009 ABCA 148 at para. 61, 78 R.P.R. (4th) 1, by Slatter J.A. 23 Most commonly, issues of contractual

interpretation raise questions of mixed fact and law. Generally, a question ofmixed fact and law arises when the trial judge applies the legal principles to the language of the specific contract in the context of therelevant facts and inferences. Such questions are generally reviewable on the palpable and overriding error standard (Hall at p. 109). 24 It is not always easy to identify a question of mixed fact and law and distinguish it from a pure question of law or one ofpure fact. In fact, Blair J.A. in the case of Bell Canada, questions whether the leading case on the standard of appellate review, Housenv. Nikolaisen, 2002 SCC 33, [2002] 2 S.C.R. 235, is totally applicable to contract

interpretation. He states (at para. 27): Where the matter referred to is more a matter of legal principle and sits towards the error of law end of the spectrum, the standard iscorrectness. Where the matter is one in which the legal principle and the facts are inextricably intertwined – where the facts dominate,as it were – it falls more towards the factual end of the spectrum, and significant deference must be accorded. Contractual

interpretation,in my opinion, is generally the type of case that falls within the former category, negligence one that generally falls into the latter. 25 Most appellate courts accept, as do I, that the Housen principles, despite arising from a negligence case, inform thestandard of review to be applied by appellate courts when reviewing contract cases as well, and moreover, that

interpretation of thelanguage of a contract in the context of the factual matrix is a question of mixed fact and law. See Hayes Forest Services Ltd. v.Weyerhaeuser Co., 2008 BCCA 31 at para. 44, 289 D.L.R. (4th) 230; Casurina Ltd. Partnership v. Rio Algom Ltd. (2004), (ON CA), 40 B.L.R. (3d) 112 at para. 34 (Ont. C.A.), leave to appeal to S.C.C. refused, [2004] S.C.C.A. No. 105 (QL);MacDougall v. MacDougall (2005), (ON CA), 262 D.L.R. (4th) 120 at para. 32 (Ont.

C.A.). 26 However, the palpable and overriding error standard is applicable to questions of mixed fact and law only where theyare inextricably intertwined. If the question of law can be separated or “extricated” from the factual considerations involved and the taskof

interpretation is to put meaning to the words, then it can be treated as a question of law and evaluated on the standard of correctness. See Prairie Petroleum at para. 36; Bell Mobility Inc. v. MTS Allstream Inc., 2009 MBCA 28 at paras. 30-35, 236 Man.R. (2d) 167;Barcode Systems Inc. v.

Symbol Technologies Canada Inc. et al., 2008 MBCA 47 at para. 29, 225 Man.R. (2d) 312. 27 If the question of law cannot be separated out because the factual determinations and the law are inextricablyintertwined, such as where the court has to make factual findings in order to determine the essential terms of a contract, then the questioncan be said to be one of mixed fact and law and subject to review on the standard of palpable and overriding error. See McGarry v. Co-operators Life Insurance Co., 2011 BCCA 214 at para. 79, 333 D.L.R. (4th) 533; Roorda v. MacIntyre, 2010 ABCA 156 at para. 12, 26Alta.

L.R. (5th) 110; Thorburn Wharf Fisheries Ltd. v. ING Insurance Co. of Canada, 2010 NSCA 96 at para. 10, 92 C.C.L.I. (4th) 27;Double N Earthmovers Ltd. v. Edmonton (City), 2005 ABCA 104 at para. 17, 6 M.P.L.R. (4th) 25; and 885704 Alberta Ltd. v. OxfordProperties Group Inc., 2005 ABCA 274 at para. 18, 34 R.P.R. (4th) 159. 28 The majority of the Supreme Court of Canada in Housen and Canada (Director of Investigation and Research) v.Southam Inc., (SCC), [1997] 1 S.C.R. 748, recognized the difficulty of determining the level of deference in relation toquestions of mixed law and fact.

They offered the following advice, as quoted with approval in Midnight Marine Ltd. (at para. 30): …. …[W]hether a purely legal question may be extricated from what appears to be a question of mixed fact and law often comes downto “whether the dispute is over a general proposition that might qualify as a principle of law or over a very particular set of circumstancesthat is not apt to be of much interest to judges and lawyers in the future.” 29 Thus, determining the legal principles related to the parol evidence rule raises a question of law reviewable on astandard of correctness.

Determinations of the factual matrix, the essential terms of the contract in this case, and findings as tocredibility, are findings of fact reviewable on a standard of palpable and overriding error. Application of the parol evidence rule to thedisputed facts as determined by the trial judge is a question of mixed fact and law to be reviewed on a standard of palpable andoverriding error. Analysis and Decision 30 OETIM argues that the trial judge erred in his application of the parol evidence rule. That rule, it submits, is simplystated.

If the language of the written contract is clear and unambiguous, no extrinsic evidence (i.e. no evidence outside of the fourcorners of the written document) may be considered. 31 In this case, it is submitted, since the trial judge held the words of the contract to be unambiguous, he erred when heconsidered extrinsic evidence, such as the other memoranda or the testimony of other witnesses, in coming to his conclusion as to the

nature of the remuneration to be paid to King. 32 As well, OETIM points out that the parol evidence rule has been a part of the common law for good reason in that it isdesirable, from both a legal and a commercial standpoint, to have finality and certainty in contractual obligations. 33 King submits that the parol evidence rule does not apply here because: - the written document does not represent the entire agreement between the parties. The agreement was actually partly oral and partlywritten; - the evidence explains or qualifies the written document.

It is not inconsistent with it; and, as well, - evidence of the circumstances surrounding the contract (the factual matrix) is admissible and must be considered when interpretingthe written contract. What is the parol evidence rule? 34 Some authors have suggested that it is misleading to refer to this principle of law as the “parol evidence rule.” It isneither limited to oral evidence nor is it a rule of evidence. The rule encompasses all types of evidence and it is a rule of substantivelaw. S. M. Waddams, “Do We Need A Parol Evidence Rule” (1991) 19 Can. Bus. L.J. 385, states (at p. 387): ….

It has, indeed, evidentiary consequences in that it makes evidence of such extrinsic statements irrelevant, and for that reasoninadmissible, but this does not make it a rule of evidence. …. There is no shortage of articles and reports examining the “parol evidence rule.” See, for example, Arnie Herschorn, “The ParolEvidence Rule” (1998) 20 Advocates’ Q. 176; Paul M. Perell, “A Riddle Inside an Enigma: The Entire Agreement Clause” (1998) 20Advocates’ Q. 287; Paul M. Perell, “The Ambiguity Exception to the Parol Evidence Rule” (2001) 36 Can. Bus.

L.J. 21 and ManitobaLaw Reform Commission, The Parol Evidence Rule (Manitoba Library and Archives Canada, 2010). 35 Basically, the rule can be stated as follows: where the whole of a contract has been reduced to writing, extrinsicevidence is not admissible to add to, subtract from, vary or contradict that written contract.

Extrinsic statements and promises cannotaffect the parties’ obligations as stated in the written agreement. 36 However, there are a myriad of exceptions to the rule, or circumstances where the rule is inapplicable. (Someacademics have suggested that there is a subtle distinction to be drawn between exceptions to the parol evidence rule and theinapplicability of the parol evidence rule. See Waddams at p. 390 and Angela Swan, Canadian Contract Law, 2d ed. (Markham:LexisNexis Canada Inc., 2009) at para. 8.47.

In my opinion, it matters little.) OETIM’s position that because the language of thecontract is unambiguous, no extrinsic evidence is admissible, is an oversimplification of the rule. Ambiguity in the written contract isonly one exception to the application of the parol evidence rule. 37 In the often cited decision of Gallen et al. v. Allstate Grain Co. Ltd. et al. (1984), (BC CA), 9 D.L.R.(4th) 496 (B.C.C.A.), Lambert J.A. identified a long list of circumstances to which the rule does not apply.

For our purposes, inparticular, he mentioned two examples of exceptions to the rule; evidence that demonstrates the written document does not represent thewhole agreement, and evidence that goes to the surrounding circumstances or factual matrix of the agreement (at p. 506): So the rule does not extend to cases where the document may not embody all the terms of the agreement. And even in cases where thedocument seems to embody all the terms of the agreement, there is a myriad of exceptions to the rule. I will set out some of them.

Evidence of an oral statement is relevant and may be admitted, even where its effect may be to add to, subtract from, vary or contradictthe document: …. (

b) to dispel ambiguities, to establish a term implied by custom, or to demonstrate the factual matrix of the agreement; …. (

e) to establish a collateral agreement; (

f) in support of an allegation that the document itself was not intended by the parties to constitute the whole agreement; …. The Rule Does Not Apply Where the Written Document is Not the Complete Agreement or Where There is a Collateral

Agreement 38 The first task of a judge in contractual

interpretation matters is to determine the terms of the contract. If the court finds,as it did in this case, that the contract is partly in writing and partly oral, the problem of the parol evidence rule does not arise because therule is not applicable. The rule only comes into operation when the court is satisfied that it was the parties’ intention that the writingrepresents the exclusive record of the parties’ agreement. 39 The oral and written parts of the contract must then be considered together and interpreted as one inclusive contract.

Hall states at pp. 44-45: Except where the terms of a written agreement would be contradicted, the parol evidence rule does not apply where the parties did notintend to encompass all contractual terms in their written agreement, or where they have entered into a collateral agreement (which isoften, but not necessarily, oral). Taken together, these circumstances create a broad exception to the operation of the parole evidencerule. …. 40 Therefore, all relevant evidence will be admissible if there is an allegation that the written document was not intendedto be a complete reflection of the terms of the contract.

See Gallen (at p. 507): So, if it is said that an oral representation, that was made before the contract document was signed, contains a warranty giving rise to aclaim for damages, evidence can be given of the representation, even if the representation adds to, subtracts from, varies or contradictsthe document, if the pleadings are appropriate, and if the party on whose behalf the evidence is tendered asserts that from the factualmatrix it can be shown that the document does not contain the whole agreement.

The oral representation may be part of a singleagreement, other parts of which appear in the document. (The one-contract theory.) Alternatively, the document may record a completeagreement, but there may be a separate collateral agreement with different terms, one of which is the oral representation. (The two-contract theory.) 41 For example, in the Gallen case, the Allstate Grain Company made an oral representation to Gallen that weeds wouldnot be a problem in the growing of a new type of buckwheat seed.

Gallen signed Allstate’s standard buckwheat marketing agreement,which contained a clause that Allstate gave no warranty as to the productiveness of the seed. The weeds destroyed the buckwheat crop. The British Columbia Court of Appeal held that evidence of the statement was admissible to show that it was a part of the contract, orthat it constituted a collateral contract. 42 Another example arises in the case of Nevin v. British Columbia Hazardous Waste Management Corp. (1995), (BC CA), 129 D.L.R. (4th) 569, where the British Columbia Court of Appeal dealt with a wrongful dismissal.

The plaintiffwas offered a position as a communications expert for the defendant and signed a one-page offer letter setting out her position, salary andbenefits. Evidence was adduced that she was told that her position would last for at least three and one-half years. The Court of Appeal,reversing the trial judge in Nevin ([1994] B.C.J. No. 524 (SC)(QL)), held that the parol evidence rule did not apply in the circumstancesas it does not exclude evidence of oral terms of a contract unless a written document is intended by the parties to be a complete reflectionof all the terms of the contract.

Commenting on the judge’s rejection of the evidence based on the parol evidence rule, the court stated(at paras. 10-11): With respect, this would appear to be a case in which one of the exceptions to the rule – or perhaps more correctly, an instance of theinapplicability of the rule – can be invoked. Even if the letter had some contractual force, the rule does not exclude evidence of oralterms unless the written document was intended as a complete reflection of the terms of the contract. ….

In my view, the letter quoted above was not intended as a complete statement of the terms under which Ms Nevin was hired, and whetherit had contractual force or not – that is, whether the parties’ agreement was an oral one or partly written and partly oral – the evidence ofthe parties’ oral discussions would allow the reasonable observer to conclude that Ms Nevin was hired for a fixed term ending August31, 1995. This objective conclusion must prevail over any subjective intentions that Dr.

Woznow may have had. 43 The point is that appropriate allegations in the pleadings that the written document does not represent the entire contractbetween the parties will require that relevant and material evidence be admitted. It may eventually be rejected by the judge, but it mustat least be admitted for consideration. 44 However, OETIM argues that the statement of claim did not plead collateral contract, and therefore, there were noappropriate allegations in the pleadings. 45 OETIM is technically correct that there is no specific reference to a collateral contract in the originating statement ofclaim.

Instead, the pleading alleges that there was “an express and/or implied term of the employment contract between the parties.” The term “written” is not mentioned in the statement of claim. 46 Therefore, since King has denied the fact that the written document represents the final expression of the party’sintention, this opens the door to evidence that is relevant to the determination of that issue.

Moreover, the evidence led in this case, toprove either that a collateral contract existed or that the contract was partially oral and partially written, was significant and sufficient forthe trial judge to come to the decision that he did. 47 In fact, Milne-Watts admitted that the written memorandum was not intended to be a complete reflection of the terms ofthe agreement between the parties. She acknowledged that by the time the instructors came to the meeting and signed the memoranda,

they had already accepted the offer to teach the course. She also agreed that it would not be possible to understand the entire agreement between the parties on the basis of the memorandum of agreement alone. 48 In particular, Milne-Watts was cross-examined at trial as follows: Q And [the written contract] doesn’t say whether the pay is gross or net? A No. Q So, when somebody signed a contract on April the 14th, 1997, how would they know? A They would know because they were told. Q Because of the discussions that you say you had with them? A Yes.

Q Okay. 49 As well, four other instructors each gave evidence, which the trial judge accepted to the effect that: - It was common in the oil industry to speak in reference to clear pay. - At the material times, the NPA rates were such that employee would take home between $2,000 to $3,000 net per week. - Instructors were contacted by phone and advised of the terms of the retainer verbally which they accepted prior to attending the instructors meeting. - Milne-Watts advised them over the phone and/or during the instructors meeting that the pay would be net. - They would not have taken the job if the pay was gross, as there was other work available at the NPA rates. 50 In addition, the written memoranda sent by Milne-Watts to King in 1998 and 1999 – which are the only documents evidencing an agreement which were signed on behalf of OETIM – clearly state that compensation is to be “clear of taxes.” The trial judge specifically found Ms Milne-Watts not to be credible when she testified that the phrase “clear of taxes” was added just as a favour to King.

Accordingly, while the memorandum constitutes part of the agreement between the parties, there was evidence to show that it was not intended by the parties to represent the entire agreement. 51 In his reasons, the trial judge does not mention the phrase “collateral contract” nor does he make it clear that he believes the agreement is partly oral and partly written. Instead, he speaks of evidence that does not contradict the contract, but qualifies or explains it (at paras. 42-43): ….

However, failing an express stipulation that this is the total payment, a modification or explanation of the amount is not precluded as being contradictory and I quote the learned author [G.H.L. Fridman, The Law of Contract in Canada , 4th ed. (Toronto: Thomson Canada Limited, 1999)] at p. 484 where he says as follows: Third, there are situations in which evidence may be given of some oral agreement between the parties which does not contradict the written agreement that is being construed, but modifies or qualifies it, or explains its true application.

Since the contract did not explicitly stipulate that the amount was “gross”, evidence of a commitment to a “net” payment does not

contradict the contract but qualifies or explains it. …. While collateral contracts are not mentioned in the extract from G.H.L.

Fridman, The Law of Contract in Canada, 4th ed. (Toronto: Thomson Canada Limited, 1999) reproduced by the trial judge, a full examination of the text itself shows that the author was indeedtalking about collateral contracts (at p. 484). 52 OETIM argues further that even if a collateral contract is an exception to the rule, and even if a collateral contractexisted in this case, the trial judge erred in admitting extrinsic evidence that was contradictory to the written words of the contract. 53 In the Gallen case, the written clause was interpreted so as not to contradict the oral statement.

This is consistent withthe principle that arises from the Supreme Court of Canada cases of Hawrish v. Bank of Montreal, (SCC), [1969] S.C.R.515, Bauer v. The Bank of Montreal, (SCC), [1980] 2 S.C.R. 102; and Carman Construction Ltd. v. Canadian PacificRailway Co. et al., (SCC), [1982] 1 S.C.R. 958. Those three leading cases from the Supreme Court of Canada limitedproof of collateral contracts by asserting that no collateral contract can be proven that it is inconsistent with the written document. Seealso River Wind Ventures Ltd. v.

British Columbia, 2011 BCCA 79, 299 B.C.A.C. 310, leave to appeal to the S.C.C. refused, [2011]S.C.C.A. No. 179 (QL). 54 The principle was stated plainly by the Supreme Court of Canada, in Carman Construction, where Mr. Justice Martlandstates that “a collateral agreement cannot be established where it is inconsistent with or contradicts the written agreement” (at p. 969). 55 The principle has been criticized as being difficult to apply.

Waddams, for example, at p. 391 states that “[i]t seemsdoubtful whether inconsistency is a workable criterion in this context.” Moreover, Lambert J.A. in Gallen argues that this principlecannot be an absolute one, but rather is analogous to a presumption, the strength of which varies with the circumstances.

Gallen states(at p. 511): The fifth point is that the rationale of the principle, as discussed in the first point, above, does not apply with equal force where the oralrepresentation adds to, subtracts from, or varies the agreement recorded in the document, as it does where the oral representationcontradicts the document.

As far as “adding to” is concerned, there is nothing inherently unreasonable about two agreements which addto each other. “Subtracting from” and “varying” represent a half-way stage between “adding to”, on the one hand, which is whollyreasonable, and “contradicting”, on the other hand, which is wholly unreasonable. 56 Consistent with the difficulty present in this whole area, it is not always easy to determine whether a term adds to orcontradicts the written document. As Swan stated (at para. 8.72): …. It is very hard to know what evidence will contradict or supplement the terms of an agreement. In Gallen v.

Allstate Grain Co. Ltd.the agreement contained the following clause: 23. Allstate gives no warranty as to the productiveness or any other matter pertaining to the seed sold to the producer and will not in anyway be responsible for the crop.

Nevertheless, a majority of the British Columbia Court of Appeal held that an oral assurance by the defendant’s manager that therewould be no problem with weeds was held not to contradict the written agreement and to be enforceable. 57 I need not enter that debate since in the case at bar, whether one treats it as a collateral contract or a contract partly inwriting and partly oral, the term that payment is to be net of taxes does not contradict the written terms of the contract, which simplyrefer to remuneration. The contract does not explicitly speak of either a gross or net amount. It is silent on this aspect.

I agree with thetrial judge that the evidence as to the defendant’s promise that compensation would be net does not contradict the express written termsof the memorandum, but rather fills the gap in the memorandum.

Extrinsic Evidence Demonstrating the Surrounding Circumstances or Factual Matrix of the Agreement 58 As well, I think that the admission of the extrinsic evidence could be justified as evidence of the circumstancessurrounding the contract at the time of its execution, or evidence of the “factual matrix.” 59 What constitutes the “factual matrix” or what is also sometimes referred to as “the surrounding circumstances” or“contextual evidence” or “background facts,” and whether it may be relied on when interpreting a contract, has been another source ofsignificant confusion in an already confusing area. 60 The cardinal principle of contractual

interpretation is, of course, to give effect to the intention of the parties asexpressed in their written agreement. The goal is to determine the intent of the parties at the time of the execution of the contract. SeeManulife Bank of Canada v. Conlin, (SCC), [1996], 3 S.C.R. 415 at para. 79.

61 I understand that it is important to be careful of admitting parol evidence under the guise of “context,” as wrongfuladmission of such evidence can expand trials on simple issues about written contracts from days to weeks. However, the language of acontract cannot be properly understood outside the context, or factual matrix, in which that language was placed when the contract wasentered into. See Investors Compensation Scheme Ltd. v. West Bromwich Building Society, [1998] 1 All E.R. 98 (H.

L) Lord Hoffmann. 62 In Hill v. Nova Scotia (Attorney General), (SCC), [1997] 1 S.C.R. 69, the Supreme Court of Canadaapproved of the view that, in interpreting a contract, it need not be looked at in a vacuum. “It is perfectly proper, and indeed may benecessary, to look at the surrounding circumstances in order to ascertain what the parties were really contracting about” (at para. 20). 63 The necessity of interpreting a contract within the appropriate context was also discussed by Iacobucci J. in Eli Lilly &Co. v. Novopharm Ltd., (SCC), [1998] 2 S.C.R. 129, when he stated (at para. 54): ….

The contractual intent of the parties is to be determined by reference to the words they used in drafting the document, possibly read inlight of the surrounding circumstances which were prevalent at the time. …. 64 Since that comment in the Eli Lilly case, many subsequent courts have also made plain that the focus of theinterpretation exercise is to determine, in an objective sense, what the parties would reasonably have been understood to mean using thewords in the contract against the relevant background.

Thus, they have read Eli Lilly as being consistent with the principle that evidenceof surrounding circumstances or context is admissible if it is relevant and material. 65 In Manitoba, in the case of Moore Realty Inc. v. Manitoba Motor League, 2003 MBCA 71 at para. 13, 173 Man.R. (2d)300, Hamilton J.A. accepted that evidence of surrounding circumstances was admissible to assist a court in determining the meaning of aprovision. See also Hall at p. 10 and Paul M.

Perell, “The Ambiguity Exception to the Parol Evidence Rule” at p. 21. 66 The nature of the evidence that constitutes the factual matrix, will, of necessity, vary from case to case and is highlycontextual, but generally it consists of the “background of relevant facts that the parties must clearly have been taken to have known andto have had in mind when they composed the written text of their agreement” (Glaswegian Enterprises Inc. v. BC Tel Mobility CellularInc. (1997), (BC CA), 101 B.C.A.C. 62 at para. 18, Lambert J.A.). 67 More recently, in Water Street Pictures Ltd. v.

Forefront Releasing Inc., 2006 BCCA 459 at para. 24, 26 E.T.R. (3d)197, Lowry J.A. described the scope of the factual matrix (at para. 24): Thus, the court looks first to the words of the agreement, read as a whole, aided, if necessary, by evidence of the circumstances or whatis referred to as the factual matrix existing when the agreement was made. Such evidence is generally restricted to circumstances knownto both parties that illuminate the meaning a reasonable person would give to the words employed: Glaswegian Enterprises Inc. v.

BCTel Mobility Cellular Inc. (1997), (BC CA), 49 B.C.L.R. (3d) 317 (B.C.C.A.) at paras. 18 to 20. …. 68 See also, Eco-Zone Engineering Ltd. v. Grand Falls-Windsor (Town), 2000 NFCA 21 at para. 10, 5 C.L.R. (3d) 55,where the court refers to Lord Wilberforce’s comments on this matter in Reardon Smith Line Ltd. v. Hansen-Tangen, [1976] 3 All E.R.570 (H.L.), where he said (at p. 574): …. No contracts are made in a vacuum: there is always a setting in which they have to be placed.

The nature of what is legitimate tohave regard to is usually described as “the surrounding circumstances” but this phrase is imprecise: it can be illustrated but hardlydefined. In a commercial contract it is certainly right that the court should know the commercial purpose of the contract and this in turnpresupposes knowledge of the genesis of the transaction, the background, the context, the market in which the parties are operating. …. 69 In particular, Cameron J.A., in Eco-Zone Engineering Ltd. (at para. 10), specifically noted that the factual matrix couldbe considered even in the absence of an ambiguity.

In the often cited case of Prenn v. Simmonds, [1971] 3 All E.R. 237 at 239-40 (H.L.),Lord Wilberforce used the phrase “matrix of facts” to describe the circumstances which could, if not should, be considered by a trialjudge in interpreting a contract, even in the absence of ambiguity. Hall makes that point as well when he states (at p. 15): ….

Because language always draws meaning from context, the factual matrix constitutes an essential element of contractualinterpretation in all cases, even when there is no ambiguity in the language. 70 While the surrounding circumstances may be referred to even in the absence of an ambiguity, those circumstances, orfactual matrix, should consist of objective evidence of the background facts at the time of the execution of the contract, not the subjectiveevidence of one party’s intention or of the negotiations leading to the final contract. See Eli Lilly at para. 54, Moore Realty Inc. at para.19, and Prenn v.

Simmonds at p. 240.

71 Doherty J.A. explains this in the case of Dumbrell v. The Regional Group of Companies Inc. (2007), 2007 ONCA 59, 85 O.R. (3d) 616 (C.A.) (at para. 50): In my view, when interpreting written contracts, at least in the context of commercial relationships, it is not helpful to frame the analysisin terms of the subjective intention of the parties at the time the contract was drawn. This is so for at least two reasons. First, emphasison subjective intention denudes the contractual arrangement of the certainty that reducing an arrangement to writing was intended toachieve.

This is particularly important where, as is often the case, strangers to the contract must rely on its terms. They have no way ofdiscerning the actual intention of the parties, but must rely on the intent expressed in the written words. Second, many contractualdisputes involve issues on which there is no common subjective intention between the parties. Quite simply, the answer to what theparties intended at the time they entered into the contract will often be that they never gave it a moment’s thought until it became aproblem: see Kim Lewison, The

Interpretation of Contracts, 3rd ed. (London: Sweet & Maxwell, 2004) at 18-31. 72 So, generally, the factual matrix will include, among other things: - evidence of the commercial purpose of the contract, its aims and objectives: Langley Lo-Cost Builders Ltd. v. 474835 B.C.Ltd., 2000 BCCA 365 at para. 29, [2000] 7 W.W.R. 46; - evidence of the nature or custom of the market or industry in which the contract was executed: Kentucky Fried ChickenCanada v. Scott’s Food Services Inc. (1998), (ON CA), 41 B.L.R. (2d) 42 (Ont. C.A.); and - evidence of the objective intention of the parties.

But not, - evidence of the subjective intention of the parties; - evidence of the negotiations; and - evidence of the subsequent conduct of the parties after the contract was entered into. 73 In

summary, when interpreting a contract, the court’s search for the intention of the parties is aided by reference to thesurrounding circumstances or factual matrix at the time of the execution of the contract as viewed objectively by a reasonable person atthe time of the signing of the contract. See Fridman at p. 478; MacMillan Bloedel Ltd. v.

British Columbia Hydro & Power Authority, (BC CA), [1993] 2 W.W.R. 127 (B.C.C.A.); and Moore Realty Inc., Hamilton J.A. at para. 18. 74 The trial judge stated that if the wording of the memorandum was considered, failing any other evidence (i.e., absentthe factual matrix), the normal everyday meaning that would be given to a clause which did not specify compensation on a gross or netbasis would be that compensation was intended to be gross. 75 However, the judge was entitled to consider the factual matrix in this case, which included the evidence of otherinstructors who testified as to the usual practice of net pay in the oil patch and/or heavy equipment industry business.

Also, the evidencewas that, at the material times, union rates were such that employees would take home between $2,000 and $3,000 net per week. Assuch, it would not have been objectively commercially reasonable for instructors to accept the job if the pay was gross. 76 In his later “Conclusions of Fact,” the trial judge wrote (at para. 30): … [O]n the core issue their evidence was explicit, adamant and consistent, namely that they were told repeatedly that the amount was anet amount after taxes.

They accepted this because it was consistent with the usual terminology in the heavy equipment industry and thepay earned on other jobs. The only reasonable explanation for this is that they are telling the truth. There is no evidence for analternative theory that they got together and conspired to commit perjury. 77 The trial judge also reviewed the evidence of Milne-Watts and noted that her actions had been misleading. He wrote(at para. 31): ….

She clearly did have a motive to encourage the instructors to come on board since it was her job to set up the education programwhich could not be done without instructors. As to her not telling the truth because of that motive, even on her own evidence, sheparticipated in a misleading exercise in order to get the plaintiff to come. …. 78 Even more damaging from OETIM’s side was that Milne-Watts provided written memoranda to the plaintiff indicatingthat his pay would be “clear after taxes.” 79 The trial judge had no difficulty in preferring King’s evidence and witnesses.

He wrote (at para. 32): I have no hesitation in concluding that the conversations described by the plaintiff and his witnesses did in fact take place both beforeand during the meeting at which the contracts were signed. Given these findings, the issues that remain to be resolved are

the legal issues. [emphasis added] 80 From this review of the evidence, especially the reference to “the practice in the industry” (at para. 37), the trial judge was, in essence, relying on the factual matrix and the custom of the trade in determining that “[t]he agreement was that the amount would be net of taxes” ( ibid .) Misapprehension of Evidence 81 OETIM also argues that the trial judge committed a palpable and overriding error in finding that “[t]he evidence is clear that the parties entered into the written contracts on the understanding that the amount stipulated therein is an amount net of taxes and it was their intention at the time that this understanding form part of the contract” (at para. 44). 82 I do not find such an error justifying appellate intervention.

As described throughout these reasons, there was ample evidence to support the judge’s findings. Conclusion 83 The parol evidence rule does not apply where there is an allegation that the contract is partially in writing and partially oral, or that a collateral contract exists.

In such cases, certain extrinsic evidence is admissible to substantiate those allegations. 84 Also, evidence with respect to the surrounding circumstances or factual matrix is admissible to aid the court in understanding and interpreting the language and meaning of the written contract, even where no collateral contract is alleged. 85 I would dismiss the appeal with costs. J.A. I agree: J.A. I agree: J.A.