2021 MBCA 100, 2021 MBCA 100

Citation: Rosenberg et al v Securtek Monitoring Solutions Inc , Date: 20211208 2021 MBCA 100 Docket: AI21-30-09553 IN THE COURT OF APPEAL OF MANITOBA Coram: Mr. Justice Christopher J. Mainella Madam Justice Karen I. Simonsen Madam Justice Lori T. Spivak BETWEEN : LAURENCE ROSENBERG and THE ) N. Masi ACCURATE TECHNOLOGY GROUP INC. ) for the Appellant carrying on business as ACCURATE ALARM ) SecurTek Monitoring and SYAD INVESTMENTS INC. carrying on ) Solutions Inc. business as STANDARD ALARM SYSTEMS ) (via videoconference) ) (Plaintiffs) Respondents ) R. A.

McFadyen ) for the Appellant - and - ) AAA Alarm Systems Ltd. ) (via videoconference) SECURTEK MONITORING SOLUTIONS ) INC. ) S. F. Vincent ) for the Respondents (Defendant) Appellant ) (via videoconference) ) - and - ) Appeal heard: ) June 11, 2021 AAA ALARM SYSTEMS LTD. ) ) Judgment delivered: (Third Party) Appellant ) December 8, 2021 COVID-19 NOTICE: As a result of the COVID-19 pandemic and pursuant to r 37.2 of the MB, Court of Appeal Rules , MR 555/88R , this appeal was heard remotely by videoconference. On appeal from 2020 MBQB 38 mainella JA Introduction [ 1 ] This appeal arises from a contractual

interpretation dispute. The parties disagreed as to whether similarly worded purchase agreements, in relation to sales of alarm systems accounts, created a contractual right for, or an obligation on, the plaintiffs. [ 2 ] The plaintiffs claimed, and the defendant (SecurTek) denied, that SecurTek was in breach of contract because it interfered with the plaintiffs’ right to service alarm accounts when SecurTek transferred them to the third party (AAA). SecurTek and AAA resolved a third party claim and took a common position in opposition to the plaintiffs’ action. [ 3 ] The trial judge agreed with the plaintiffs.

In the judgment appealed from, SecurTek was found liable for breach of contract. Compensatory damages were set at $1,668,775 with a further $33,667 in pre-judgment interest. The plaintiffs were also awarded $702,101.13 in solicitor and own client costs. [ 4 ] SecurTek/AAA appeal on grounds related to the finding of liability, in respect of part of the calculation of the compensatory damages and on the costs award. [ 5 ] On the question of liability, the key contractual term, clause 5, was worded to be a representation and warranty in favour of the purchaser.

The trial judge acknowledged, while the language appeared to create an obligation on the plaintiffs to provide service, that was not decisive. His

interpretation of the purchase agreements was that what was actually intended was the creation not of a true warranty, which the plaintiffs were obligated to observe, but of a condition giving them a contractual right to provide service which SecurTek could not interfere with. [ 6 ] Central to the trial judge’s contractual

interpretation was his use of alleged admissions made at an examination for discovery and the surrounding circumstances of the purchase agreements.

[ 7 ] For the following reasons, I would allow the appeal. I am persuaded that two palpable and overriding errors were made in the

interpretation of the purchase agreements, namely: (1) characterizing discovery testimony as being formal admissions of the enforceable contractual right alleged, when the record is clear that was not the case; and (2) placing excessive weight on the surrounding circumstances such as to overwhelm the words used in the purchase agreements. [ 8 ] There is one preliminary comment. The costs award is highly unusual.

I have reservations about it as it is based in large part on pre-litigation conduct, which typically is not a sufficient basis, particularly where such conduct could be the subject of other relief, such as compensatory or punitive damages (see Judges of the Provincial Court (Man) v Manitoba et al , 2013 MBCA 74 at paras 178-79 ). My reasons should not be read as an endorsement of the trial judge’s analysis on costs. Given that the judgment must be set aside for other reasons, it is not necessary to say anything more on the costs award or on how compensatory damages were calculated.

Background [ 9 ] In the alarm industry, customer accounts are either “retail accounts” or “wholesale accounts”. A retail account is one where the alarm monitor directly bills the customer. With a wholesale account, the alarm monitor is a subcontractor having no billing relationship with the customer. The alarm monitor charges the party who engages it and that party, based on its contractual relationship with the customer, recoups the cost of monitoring, plus a profit, from the customer. [ 10 ] The plaintiff, Laurence Rosenberg (Rosenberg), is the owner and directing mind of the corporate plaintiffs.

It is unnecessary to make distinctions between him and the corporate plaintiffs. For ease of reference, I generally will refer to them collectively as the plaintiffs. [ 11 ] On June 22, 2009, SecurTek and AAA entered into a transaction wherein they swapped alarm accounts in Alberta, Saskatchewan and Manitoba (the swap transaction). As part of the swap transaction, SecurTek sold to AAA 1,639 retail accounts which had been previously purchased directly or indirectly from the plaintiffs. [ 12 ] The plaintiffs are in the business of selling, installing and servicing commercial and residential alarm systems.

Servicing an alarm system means repairs, maintenance and upgrades to the hardware, but not monitoring.

The plaintiffs do not monitor alarm systems; their customer accounts are wholesale accounts governed by agreements known as security alarm monitoring agreements (SAMAs) or customer service agreements (CSAs). [ 13 ] Nothing turns on the wording of the SAMAs and CSAs other than, as Rosenberg explained in his evidence, these contracts were not a “service agreement.” While the plaintiffs were obligated to service newly installed alarm systems during a warranty period, the customers were not obligated to have the plaintiffs physically service their alarm systems at any time.

If a customer requested that another party service their alarm system, the only legal recourse for the plaintiffs under the SAMAs and CSAs was the right to cancel monitoring. [ 14 ] The plaintiffs used Metropol Emergency Response Centre (MERC) for alarm monitoring until July 2000, when SecurTek purchased MERC and a related partnership, MERC Financial Services (MFS). Thereafter, SecurTek provided alarm monitoring to the plaintiffs.

SecurTek, like MERC and MFS, was not in the business of servicing alarm systems. [ 15 ] Over the course of several transactions between 1997 and 2004, the plaintiffs sold wholesale accounts to MFS and later SecurTek. The purchase agreements with MFS were called Portfolio Acquisition Agreements (PAAs) and the last agreement, which was with SecurTek, was called an Asset Purchase Agreement (APA) (collectively known as the purchase agreements).

These sales turned the “wholesale accounts” of the plaintiffs into the “retail accounts” of MFS/SecurTek, which AAA ultimately acquired in the swap transaction. [ 16 ] A reference in the purchase agreements or my reasons to “the vendor” means the plaintiffs and a reference to “the purchaser” means MFS or SecurTek. [ 17 ] The purchase agreements were negotiated by Rosenberg and David Thompson (Thompson), an employee of MERC/MFS and later a consultant for SecurTek.

The written purchase agreements reflected the entire agreement between the vendor and purchaser. [ 18 ] There were two types of purchase prices used in the purchase agreements. In most of the sales, the purchase price was (1) an upfront payment, calculated using a price multiple of a monthly revenue formula of what customers paid for alarm monitoring pursuant to the SAMAs or CSAs (the price multiple); and (2) a 15% share of that revenue going forward as of a time set in each purchase agreement (the 15% residual).

For the remaining sales, the purchase price was the price multiple with no residual. [ 19 ] The price multiple gave the plaintiffs a lump-sum equivalent to a period of between 26 and 36 months of monitoring revenue. According to Rosenberg, this arrangement provided an alternative to “traditional bank financing” to give his business the financial resources to grow while still keeping a relationship with the customer.

In return, the purchaser received the revenue stream of monthly monitoring from the alarm accounts sold with a guarantee of service from the plaintiffs to protect the upfront investment. [ 20 ] The wording of the various purchase agreements is not identical but little turns on the differences. I will discuss only those differences that are of substance. [ 21 ] According to the wording of clause 3 of the purchase agreements, in exchange for the purchase price, the vendor sold to the purchaser the SAMAs/CSAs.

With one exception that is unimportant, another part of each purchase agreement stated that the vendor assigned “all of its right, title and interest” in the SAMAs/CSAs to the purchaser (save for the right to receive the 15% residual, when applicable). [ 22 ] The other important terms of the purchase agreements were clause 5 (vendor’s representations and warranties); clause 8 (non-solicitation); clause 12 (survival of assignment); and a clause, numbered differently in the PAAs and APA, regarding residual rights

(the residual rights clause). The meaning of clauses 8 and 12 and the residual rights clause is not in dispute and will be summarized later. It is, however, necessary to set out all of the text of the relevant parts of clause 5 of the PAAs and the APA given their importance to this case. [ 23 ] Clauses 5(vi) and 5(vii) of the PAAs read as follows: 5.

The Vendor represents and warrants to and in favour of MFS that : (vi) The Vendor shall maintain or cause to be maintained the security alarm systems as necessary and perform all warranty work, keyholder and other services called for by the SAMAs on the customer, all at no cost to MFS and in a manner satisfactory to MFS, UNLESS and until MFS otherwise directs the Vendor. (vii) For the five (5) year period ending on . . ., the Vendor will be responsible for service on the SAMAs as described in [clause] 5, sub [clause] (VI) in order to be eligible to receive the revenue sharing described in [clause] 15.

After this five (5) year period, the Vendor at its sole discretion may or may not service the SAMAs. In any event, the Vendor or designate will be entitled to continue the revenue sharing as long as the SAMAs remain a customer of MFS. It is further understood between both parties that the Vendor intends to charge the customers for service performed or for any upgrades once the SAMAs are out of the original warranty period stated in the original SAMAs between the Vendor and customer. [emphasis added] [ 24 ] In the APA, the wording of clauses 5(vi) and 5(vii) of the PAAs was altered. Clause 5(

v) of the APA stated: 5. The Vendor represents and warrants Conforming Accounts to and in favour of Purchaser that : (

v) The Vendor shall maintain or cause to be maintained the security alarm systems as necessary and perform all warranty work, keyholder and other services called for by the CSAs on the customer, all at no cost to Purchaser and in a manner satisfactory to Purchaser. [emphasis added] [ 25 ] Until the swap transaction, the plaintiffs serviced the alarm accounts they had sold to MFS/SecurTek without issue. The plaintiffs were good service providers; there was a low attrition rate of customers leaving.

Servicing the alarm accounts provided the plaintiffs with incidental, but lucrative, business in the form of capturing moving customers as new wholesale accounts and obtaining referrals from the customers they serviced.

It is accepted that these practices did not conflict with the terms of clause 8 on non- solicitation in the purchase agreements. [ 26 ] Clause 12 of the purchase agreements explicitly stated that the “agreements” contained in the purchase agreements “shall survive any assignment”, which included SecurTek’s purchase of MERC/MFS and the swap transaction. [ 27 ] According to the residual rights clause, the “revenue sharing arrangement” (i.e., the 15% residual) would continue indefinitely so long as the customer remained and, among other terms, that “the Vendor abide[d] by the applicable terms of this Agreement and, in particular, [clause] 5.” [ 28 ] Several letters between Rosenberg and Thompson as to the negotiations of the purchase agreements were admitted at trial.

The trial judge placed significance on the letter of November 15, 2000, from Thompson to Rosenberg (the November 2000 letter). [ 29 ] The background to the November 2000 letter is that Rosenberg had been approached by AAA. It wanted to buy wholesale accounts at a price multiple higher than had been previously paid by MFS. Rosenberg provided AAA’s offer to Thompson. SecurTek agreed to match AAA’s offer. In the November 2000 letter, Thompson stated: . . . Further to the financial issues, MERC is a non-competing monitoring station.

We do not sell, service or install alarm systems and accordingly, do not compete directly with [the plaintiffs]. Our arrangements today and in the future will focus on mutually beneficial initiatives. This may not be the case with AAA/MTS, who are in direct competition with [the plaintiffs]. MERC’s purchase of SAMAs allows [the plaintiffs] to continue to service accounts/customers and obtain upgrades and referrals, as well as to participate in the Move Program. Again, this may not be the case with AAA/MTS. . . .

[ 30 ] As part of the swap transaction, the plaintiffs were advised that they would no longer be needed to service those alarm accounts which had been previously sold by the plaintiffs, but still were customers paying SecurTek for monitoring. SecurTek/AAA contacted the customers of those 1,639 alarm accounts and encouraged them to use AAA for service. Unlike SecurTek, AAA was a competitor of the plaintiffs as it was in the business of selling, installing and servicing alarm systems.

This development negatively affected the revenues of the plaintiffs; they lost, to AAA, the business of servicing the 1,639 alarm accounts and the incidental economic benefits from moving customers and referrals. These losses were part of the damages sought by the plaintiffs in the action commenced against SecurTek in 2010. [ 31 ] Barry Rogers (Rogers) was the representative put forward for examination on behalf of SecurTek at discovery. Rogers did not become an employee of SecurTek until 2007, several years after the purchase agreements had been signed.

In closing argument, the plaintiffs characterized him as a witness who had no “personal knowledge” as to the “surrounding circumstances” about the execution of the purchase agreements. [ 32 ] At the discovery, and also at the trial, Rogers was asked a series of questions about the plaintiffs’ contractual rights under the purchase agreements and, in particular, whether the plaintiffs had the “right” or “exclusive right” to service the alarm accounts sold to MFS/SecurTek.

One of the discovery read-ins illustrates what occurred: . . . 2472 Q But you’d acknowledge, would you not, that SecurTek was obliged with respect to those contracts to not interfere with the plaintiffs’ exclusive right to service those customers; right?

A Yes. . . . [ 33 ] In their closing argument, the plaintiffs said that 11 of the read-ins at trial from the discovery of Rogers, similar to the above-noted reference, and two statements made by counsel for SecurTek at the discovery, were “formal admissions” that it was a condition of the purchase agreements that the plaintiffs had a contractual right to service the alarm accounts which SecurTek could not interfere with.

The plaintiffs submitted that, based on these admissions of Rogers and counsel for SecurTek, it “could be safely decided” that SecurTek breached the terms of the purchase agreements with the swap transaction. The plaintiffs characterized these admissions as so significant that it “hardly matter[ed]” that the purchase agreements did not explicitly set out that the plaintiffs had a right to service the alarm accounts that could not be interfered with. [ 34 ] The discovery of Rogers took place in two parts over more than a three-year period.

Counsel for the plaintiffs questioned Rogers in October 2017, but different counsel for the plaintiffs questioned Rogers in January 2014. SecurTek/AAA brought to the trial judge’s attention that, at the 2014 discovery of Rogers, counsel for SecurTek had pointed out that Rogers was being asked questions about legal rights which were “question[s] of law that the Court will, ultimately, determine.” Previous counsel for the plaintiffs agreed and said, “I’ll leave it to the Court”.

At the 2014 examination for discovery, counsel for SecurTek stated that Rogers was only giving his lay understanding of the concept of a right. [ 35 ] In his evidence, Rosenberg said that the legal relationship between the plaintiffs and MFS/SecurTek was that the purchaser “had the right to monitor, [and he] had the right for everything else.” At the trial, the plaintiffs said that, when the wholesale accounts were sold, on the bases of clauses 5, 8 and 12 of the purchase agreements, they had a contractual right to service those alarm accounts so long as the customers continued to pay for monitoring.

In particular, they submitted that, under the PAAs, they had to service the accounts sold for five years and, thereafter, service was “at its sole discretion” (clause 5(vii) of the PAAs). They described clause 5(

v) of the APA as an “indefinite obligation and right to service these retail customers.” They argued that SecurTek could not interfere with this right to service and certainly could not, as it did, take active steps to direct customers to AAA for service. [ 36 ] The surrounding circumstances relied on by the plaintiffs were that the purchaser had no capacity to service customers; reliable service of customers was important, as explained in the November 2000 letter; and the plaintiffs did the servicing, without issue, until the swap transaction and, in doing so, obtained significant incidental economic benefits from moving customers and referrals. [ 37 ] SecurTek/AAA denied the existence of an enforceable contractual right to service in the purchase agreements.

They explained that, according to the language of the purchase agreements, the plaintiffs sold all their rights associated with the wholesale accounts with the exception in the residual clause of the right to receive the 15% residual in most cases. Also, the SAMAs and CSAs did not give the plaintiffs any service rights; customers were free to hire anyone to service their alarm systems.

SecurTek/AAA underscored that the purchase agreements did not explicitly state that the plaintiffs had a contractual right to service the customers; service was described in clause 5 as being a warranty obligating the plaintiffs to service the alarm accounts.

Finally, they noted that the mere fact that SecurTek allowed the plaintiffs to service the alarm accounts and generate incidental economic benefits did not mean that the plaintiffs had an enforceable contractual right of service and to incidental economic benefits. [ 38 ] SecurTek/AAA agreed with the plaintiffs that it was a relevant surrounding circumstance that the purchaser had no capacity to service the customer.

They said that the wording of clause 5 of the purchase agreements ensured the purchaser’s upfront investment would not be jeopardized because the plaintiffs were under an obligation to service the accounts. [ 39 ] Much effort was expended during the litigation as to the nature of the plaintiffs’ claim and whether it was an “exclusive” right to service or not. A lack of clarity in the pleadings contributed to this debate. Ultimately, the trial judge was of the

view that the plaintiffs were not alleging an exclusive right to service the alarm accounts against everyone. That could not be the case because, as said earlier, they had no such right under the SAMAs and CSAs. Rather, the right to service claimed was created by the purchase agreements and meant that the purchaser (and a successor) was obligated not to interfere with the plaintiffs servicing the alarm accounts (see paras 21-23).

The parties agree that the trial judge correctly characterized the contractual claim asserted by the plaintiffs. [ 40 ] According to the trial judge, the key issue on liability for breach of contract that he had to decide was “whether the plaintiffs had contractual rights to service the 1,639 customers who were the subject of the [swap transaction]” (at para 20). The trial judge framed the contractual

interpretation question as follows (at para 28): . . . (

a) Did the PAAs and APA give the plaintiffs a right to service the retail customers of the SAMAs and CSAs and a right to the related benefits of generating new customers by referral and capturing new wholesale customers from moves? Put another way, did those agreements obligate [SecurTek] and [AAA] not to interfere with the right of the plaintiffs to service the customers and obtain the related benefits? . . . . . . [ 41 ] After a lengthy review of the principles of contractual

interpretation, the trial judge discussed the events surrounding the execution of the purchase agreements and their wording. As previously mentioned, he came to the conclusion that, despite the fact that the wording of clause 5 of both the PAAs and APA appeared to be an obligation on the plaintiffs, it was actually an enforceable contractual “right to service the customers” (at para 62). He stated (at para 64): While the

preamble set out in clause 5 of the PAAs suggests that servicing by [the plaintiffs] was an obligation in favour of MFS, a closer examination of 5(vi) and (viii) together with clause 15, considered in light of the surrounding circumstances, reveals that it was intended by the parties that [the plaintiffs were] contractually entitled to provide services to the customers.

From the perspective of both parties, maintaining the customer was important. (See also para 74.) [ 42 ] The trial judge supported his conclusion by referring to what he described as a concession of SecurTek/AAA in closing argument (see para 67), the admissions of Rogers at the examination for discovery (see paras 68-69) and 16 surrounding circumstances regarding the purchase agreements (see para 70).

I will discuss these matters in more detail later. [ 43 ] SecurTek/AAA attempted to advance an alternative submission of the purchaser having a right to terminate the PAAs based on the wording in clause 5(vi): “ UNLESS and until MFS otherwise directs the Vendor.” The trial judge refused to consider the argument based on what he considered to be defective pleadings (see paras 26-27).

While his refusal to consider the termination submission is a ground of appeal, given the result, nothing need be said on that point. [ 44 ] One aspect of the plaintiffs’ action that is not part of the judgment appealed from requires mention. After the swap transaction, SecurTek/AAA refused to pay the plaintiffs the 15% residual. Just prior to the trial commencing in 2019, SecurTek admitted full liability for failing to pay the 15% residual after the swap transaction on the portion of the 1,639 accounts on which there was a residual payment owing.

Pursuant to the settlement reached, the plaintiffs received $490,509.43, plus party and party costs to the date of payment (the settlement). The settlement is unaffected by the results of this appeal. Discussion Standard of Review [ 45 ] The parties agree that, given the nature of the purchase agreements, the trial judge’s

interpretation of them raises a question of mixed fact and law and, accordingly, the standard of review of his decision is that of palpable and overriding error (see Sattva Capital Corp v Creston Moly Corp , 2014 SCC 53 at para 50 ; Ledcor Construction Ltd v Northbridge Indemnity Insurance Co , 2016 SCC 37 at paras 24-26 , 46; and Corner Brook (City) v Bailey , 2021 SCC 29 at para 44 ).

SecurTek/AAA are not making a submission that the trial judge made an extricable error of law. [ 46 ] The standard of palpable and overriding error is well-known; it “is an obvious error that can be plainly identified in a judge’s reasons that is determinative of the outcome of the case” ( Albo v The Winnipeg Free Press et al , 2020 MBCA 50 at para 19 ).

The standard is satisfied where a factual determination that affected the result is “clearly wrong”, “unreasonable” or “not reasonably supported by the evidence” ( HL v Canada (Attorney General) , 2005 SCC 25 at paras 55-56 , 110). [ 47 ] In Hydro-Québec v Matta , 2020 SCC 37 , Côté J said that proper respect for the deferential standard of review makes it “desirable for an appellate court to precisely identify the palpable and overriding errors in respect of which it is intervening” (at para 34).

Issue One—The Purported Admissions of Rogers at the Examination for Discovery The Trial Judge’s Reasons [ 48 ] The trial judge stated that SecurTek was “bound by the admissions of Rogers” (at para 69) at his examination for discovery that SecurTek could not interfere with the plaintiffs’ right under the purchase agreements to service the alarm accounts. His reasons make clear that these admissions supported his contractual

interpretation—in particular, that the meaning of clause 5 of the

purchase agreements was actually not an obligation against the plaintiffs but, in fact, was an enforceable contractual right in theirfavour. [49] The trial judge did not specify the legal nature of Rogers’s admissions. However, that is not a concern. When I readhis reasons in context, I am satisfied that he accepted the plaintiffs’ argument that Rogers had made “formal admissions”. In particular,his statement that SecurTek was “bound” (at para 69) by the admissions of Rogers can, as I will explain, only mean that he was referringto the admissions being formal, as opposed to informal.

The Submissions [50] SecurTek/AAA say that no formal admission was ever made during the litigation that the plaintiffs had a contractualright under the purchase agreements to service the alarm accounts which SecurTek could not interfere with.

SecurTek/AAA submit thatthe trial judge fell into error by ignoring the pleadings and the statement by counsel for SecurTek at Rogers’s examination for discoveryin 2014 that the nature of the plaintiffs’ contractual rights under the purchase agreements was at issue and would be for the Court todecide regardless of Rogers’s lay understanding of the purchase agreements. [51] The plaintiffs assert that Rogers made formal admissions at the examination for discovery that they had a contractualright under the purchase agreements to service the alarm accounts which SecurTek could not interfere with.

They go on to argue that“[i]t is trite law that a party is bound by admissions made in the course of discovery particularly where, as here, the answers were notcorrected before trial.” They submit that the qualification statement made by SecurTek’s counsel at Rogers’s examination for discoveryin 2014 did not apply to questions asked when the discovery was completed in 2017 and, in closing argument, SecurTek/AAA admittedthat the plaintiffs “had the right to service the customer, had the right to obtain referrals off of the customer base or to re-sign priorclientele”.

The Law [52] Professor Wigmore explained that the term “admission” is a notable example of a common problem in the law ofevidence, the “confusion of nomenclature” (John Henry Wigmore, Evidence in Trials at Common Law, revised by James H Chadbourn(Boston & Toronto: Little, Brown and Company, 1972) vol 4 at 26). In actuality, there are two distinct forms of admissions which, inthe modern era, are called informal admissions and formal admissions (see R v Korski (CT), 2009 MBCA 37 at paras 121-23).

Despitetheir similar sounding names, the two are conceptually distinct. [53] An informal admission is an “item of evidence” (John Henry Wigmore, Evidence in Trials at Common Law, revised byJames H Chadbourn (Boston & Toronto: Little, Brown and Company, 1981) vol 9 at 822). A party may offer any relevant words or actsof the opposing party (or their authorized agent or representative) as proof of the facts admitted. Often, an informal admission has the“quality of inconsistency” with the maker’s current assertion of the facts (Wigmore, vol 4 at p 4). An informal admission is notconclusive.

The weight of an informal admission depends on the circumstances of its making and is subject to contradiction orexplanation by other evidence (see pp 26-27; see also Kenneth S Broun, ed, with the contributions of George E Dix et al, McCormick onEvidence, 7th ed (Thomson Reuters, 2013) vol 2 at 259-64; Sidney N Lederman, Alan W Bryant & Michelle K Fuerst, The Law ofEvidence in Canada, 5th ed (Toronto: LexisNexis, 2018) at 493-95, 1387-90; and David M Paciocco, Palma Paciocco & Lee Stuesser,The Law of Evidence, 8th ed (Toronto: Irwin Law, 2020) at 191-95). [54] A formal admission is not evidence; it is an express and intentional waiver done by a party, or their counsel, during thecourse of litigation (see Wigmore, vol 9 at p 821).

A formal admission is, as Jeremy Bentham described, “a powerful instrument ofspeedier justice” (at p 852). Formal admissions are important to the integrity of litigation as they improve the efficiency of theadministration of justice, advance fairness interests, and promote reliable fact finding and legal reasoning (see Patterson v Scherloski(1971), (ON SC), 21 DLR (3d) 641 at 645 (Ont H Ct); and S Casey Hill, Louis P Strezos & David M Tanovich,McWilliams Canadian Criminal Evidence, 5th ed (Toronto: Thomson Reuters, 2013) (loose-leaf updated 2021, release 4), pt IV, ch 25at

section 25:1 (online: WL Can (date accessed 25 November 2021)). [55] Formal admissions can be made in relation to facts or issues. Once made, a formal admission is conclusive on the partymaking it; there is a prohibition against any further dispute of the fact or issue in that litigation. [56] A formal admission of a fact is a substitute for evidence; a party waives the necessity for proof of a fact and accepts itto be true for the purposes of that litigation.

It cannot be withdrawn without leave of the Court (usually on terms) or the consent of theother party in whose favour it was made (see Patterson at p 645). [57] The formal admission of an issue is a concession that a point of law or mixed fact and law is not in dispute. Suchadmissions, however, cannot bind the Court on matters of law (see La Congrégation du Très Saint Rédempteur v The School Trustees forthe Town of Aylmer, (SCC), [1945] SCR 685 at 711; R v Loscerbo (1994), (MB CA), 89 CCC (3d)203 at 214 (Man CA); W (

V) v S (D), (SCC), [1996] 2 SCR 108 at para 17; M v H, (SCC), [1999] 2SCR 3 at para 45; and R v Sappier; R v Gray, 2006 SCC 54 at para 62) or where it would be contrary to the interests of justice (see Serrav Serra, 2009 ONCA 105 at paras 111-12, 115). Formal admission of an issue also requires either leave or consent to be withdrawn,although leave of the Court is more likely to be granted than with a formal admission of fact (see, generally, Wigmore, vol 9 at pp 821,827-29; Broun at p 262; Lederman at pp 1387-90; and Hill at

section 25:3). [58] Because the rationale for a formal admission as to a fact or issue rests on the idea of an express and intentional waiver,which brings with it the consequence of a restriction of legal rights a party would otherwise enjoy, it must be “unequivocal” (ChenenResources Ltd v EnCana Corporation, 2006 ABQB 931 at para 26) or, as Hamilton JA put it in Canadian National Railway Co vHuntingdon Real Estate Investment Trust et al, 2013 MBCA 3, “clear and unambiguous” (at para 107).

Analysis [59] Formal admissions can arise from the pleadings; by operation of law, such as situations set out in rules of court orgenerally in criminal cases pursuant to

section 655 of the Criminal Code; by a statement of counsel during the course of litigation; or byan agreed statement filed at the trial (see Copp v Clancy (1957), (NB CA), 16 DLR (2d) 415 at 425 (NBSC (AD));Patterson at p 645; Canadian National Railway Co at paras 93-95; Lederman at pp 1387-88; Wigmore, vol 9 at p 822; and Paciocco at p194). [60] Extreme care and clarity is required before describing discovery evidence as a formal admission.

Typically, use ofdiscovery evidence as part of a party’s case at trial takes the form of an informal admission of the other party (see Marchand (LitigationGuardian of) v Public General Hospital Society of Chatham, (ON CA), 2000 CarswellOnt 4362 at paras 77-78 (CA),leave to appeal to SCC refused, 28379 (27 September 2001); Vancouver Art Metal Works Ltd v Canada, 2001 FCT 265 at paras 13-19;and Dabrowski v Robertson, 2007 ABQB 680 at para 47, rev’d in part on other grounds 2009 ABCA 105). [61] The cases relied on by the plaintiffs and the trial judge in support of SecurTek being bound by the formal admissions ofRogers are distinguishable (see Kensington Homes Ltd v Marwal Holdings Ltd, (MB KB), 1985 CarswellMan 127(QB); and Cholakis v Cholakis et al, 2005 MBQB 105).

Cholakis is a decision where two of the defendants unsuccessfully attempted toread in the discovery evidence of the other defendant who was not adverse in interest.

Kensington Homes Ltd is a case about the “risk”(at para 21) to a party undermining its case by reading in discovery evidence that may advance or corroborate the case of the opposingparty. [62] In my respectful view, the trial judge was clearly wrong when he decided that Rogers had made formal admissions,binding on SecurTek, that the plaintiffs had a contractual right under the purchase agreements to service the alarm accounts whichSecurTek could not interfere with. [63] In its pleadings, SecurTek explicitly denied that the plaintiffs had a contractual right to service the alarm accounts whichSecurTek could not interfere with. [64] To understand the nuances of what happened at the 2014 examination for discovery of Rogers, a little needs to be saidabout examinations for discovery generally. [65] An oral examination for discovery is not a wild-west-style shootout without rules.

As there is no neutral third partypresent with power to rule on disputes, as officers of the Court, the professionalism expected of counsel requires treating each other withmutual respect and reasonably cooperating, mindful of the principle of proportionality and the rules of court regarding an examination fordiscovery (see Kay v Posluns, (ON SC), 1989 CarswellOnt 917 at paras 21-24 (SC); and Kendall v Sun LifeAssurance Company of Canada, 2010 BCSC 1556 at paras 11-12, 14-17). [66] It is self-evident from the record before the trial judge that, in accordance with their professional duties, at the 2014discovery of Rogers, counsel identified and reached a reasonable accommodation in relation to the questioning of Rogers as to thepurchase agreements despite him having no personal knowledge of them.

Counsel for SecurTek was concerned that Rogers was beingasked “question[s] of law” about the meaning of the purchase agreements.

Prior counsel for the plaintiffs acknowledged the concern andsaid “interpretation” of the purchase agreements was a “secondary issue” that he would “leave . . . to the Court”; his focus was whatconduct SecurTek “endorsed after having completed that transaction and how they treated it.” [67] Further constant objections by counsel for SecurTek about questions that might have called for legal conclusions wouldhave served no purpose, undoubtedly interrupted the proper flow of the examination and added to the costs of what was already a lengthyexamination for discovery (see Kay at paras 23-24; and Kendall at paras 17-18).

I see no reason why what occurred at the 2014discovery could later prejudice SecurTek’s legal position. [68] There is also no merit to the submission that SecurTek should have reasserted its 2014 objection when the examinationfor discovery recommenced in 2017. It would be odd, to put it mildly, if SecurTek had to prove it did not change its mind when Rogers’sdiscovery resumed in 2017. [69] The statements of counsel for SecurTek at trial further make clear there were no formal admissions.

According toSecurTek, if engaged by an alarm customer, the plaintiffs had the right to provide service and earn incidental economic benefits inrelation to moving customers and referrals without offending the terms of the purchase agreements.

That, however, is a distinct legalarrangement from the one claimed by the plaintiffs that they had acquired a contractual right from the purchaser in the purchaseagreements that it, and a successor, could not prevent competition or interfere with the plaintiffs servicing the alarm accounts. [70] In my judgment, it can plainly be seen from the record that at no point during the course of the litigation did anyone onbehalf of SecurTek unequivocally admit to the contractual right to service the alarm accounts that the plaintiffs claimed.

I am satisfiedthat the trial judge’s error as to there being formal admissions affected the result of the trial given the reliance the plaintiffs placed onthat submission in their closing arguments. The trial judge’s reasons make clear that he agreed with the plaintiffs that the putativeformal admissions were significant to resolving the contractual dispute.

For example, when he dealt with costs, he described theimportance of Rogers’s admissions as to the plaintiffs’ contractual rights this way: “Rogers admitted another core right asserted by theplaintiffs – the right to service the customers” (at para 189) (emphasis added). [71] While I am persuaded that the trial judge made a palpable and overriding error in characterizing Rogers’s discoverytestimony as being formal admissions of the enforceable contractual right alleged, I would be remiss if that ended the discussion. [72] At the hearing of the appeal, my colleagues each raised a concern with counsel about the relevance and admissibility ofRogers’s discovery evidence to the

interpretation of the purchase agreements because he was a witness with no personal knowledge ofthe purchase agreements and he was being asked legal opinions about their meaning. My colleagues’ concerns are not a new issue as thepoint they raise is rooted in the question of the proper use of discovery evidence in contractual

interpretation which is an important

aspect of this appeal (see R v Mian, 2014 SCC 54 at para 33). [73] In addition to their able responses to my colleagues’ questions at the hearing of the appeal, counsel provided the Courtwith post-hearing materials on the point pursuant to r 39.1 of the MB, Court of Appeal Rules, MR 555/88R. [74] The mere fact something is said by or on behalf of an adverse party at an examination for discovery is not sufficient forit to be read into evidence at trial and used by a party as part of their case.

As Griffin J (as she then was) noted in Kendall, “it has to bekept in mind that what might be a permissible question on discovery, without objection, is not a concession that the question, andevidence it adduces, is admissible at trial” (at para 10). For discovery evidence to form part of the evidence at trial, it must be“otherwise admissible” (MB, Court of Queen’s Bench Rules, MR 553/88 at r 31.11(1); see also Aviaco International Leasing Inc vBoeing Canada Inc, 2000 CarswellOnt 4279 at para 13 (Sup Ct J)).

This means that the discovery evidence is relevant to a fact in issue;it is not the subject of an exclusionary rule; and, even if relevant and seemingly admissible, its probative value outweighs its prejudicialeffect. [75] The opening words in Playfair v Cormack (1913), (ON SC), 9 DLR 455 (Ont SC), are as true today asthey were more than a century ago: “It is a cardinal rule that discovery is limited by the pleadings” (at p 455).

Whether a particular typeof extrinsic evidence in a contract dispute is relevant and admissible will turn on the wording of the pleadings. [76] Here, according to the pleadings, the plaintiffs’ claim for breach of contract involved a narrow issue of contractualinterpretation as to the objective meaning of the purchase agreements when they were executed.

As Martin J of the Alberta Court ofQueen’s Bench (as she then was) explained in Wesley First Nation (Stoney Nakoda First Nation) v Alberta, 2013 ABQB 344, aff’d 2015ABCA 76, when a witness is asked to explain the meaning of a contract, they are being asked to provide “an opinion about the effect of alegal provision: the traditional domain of legal argument and judicial

interpretation and determination” (at para 73; see also DonaldsonTravel v Murphy et al, 2014 ONSC 5 at para 12). [77] The case of Ashmore v Corpn of Lloyd’s, [1992] 1 WLR 446 (HL (Eng)), is instructive. There, as part of their claim,the plaintiffs sought to rely on “informal comments” (at p 452) made in 1981 by representatives of the defendant to prove the existenceof an alleged implied term of a contract executed in 1971. Templeman LJ called the submission “strange” (ibid).

He said that theinformal admissions were “neither relevant nor admissible” to the determination of the terms of the legal relationship when it came intoexistence (at p 453). [78] The approach of not considering the opinions of witnesses about the meaning of a written contract, at the time of itsexecution, accords with the general principles of contractual

interpretation as to what extrinsic evidence can and cannot be considered, asdiscussed in Sattva (see paras 58-59). [79] The evidence of Rogers at his examination for discovery does not assist the plaintiffs, even if counsel for SecurTek hadnot raised a concern at the 2014 discovery. With respect, Rogers’s views on the meaning of the purchase agreements at the discovery,and later at the trial (despite objections of counsel for SecurTek/AAA), were neither relevant nor admissible to resolving the contractualdispute as framed by the pleadings.

The same could be said with respect to significant parts of the evidence at trial of Rosenberg andThompson as to their views of the meaning of the SAMAs, the CSAs and the purchase agreements (see, for example, para 59). [80] Ideally, in a case that involves the objective meaning of a contract when entered into, counsel will not succumb to thetemptation of polling witnesses for their personal views on what the words of a contract mean or, if that occurs, trial judges willresolutely put an end to such questioning as their evidentiary gatekeeping obligation requires.

As this case demonstrates, the approach oflet it all in and sort it out later is perilous to interpretative accuracy and results in unnecessary expense to the litigants and the inefficientuse of judicial resources. Issue Two—The Trial Judge’s Use of the Surrounding Circumstances Introduction [81] There is no need to expend much ink on the general principles of contractual

interpretation. The parties agree as towhat those principles are and they have been neatly summarized by my colleague, Spivak JA, in Vesturland Development Ltd et al vGimli (Rural Municipality) et al, 2021 MBCA 45 at paras 37-42. [82] The specific contractual

interpretation issue here is whether the trial judge erred by using the surroundingcircumstances to “overwhelm the words” of the purchase agreements (Sattva at para 57). This error was described in Teal CedarProducts Ltd v British Columbia, 2017 SCC 32, as the “‘overwhelming’ principle” (at para 62). [83] There are two manifestations of the overwhelming principle. The first is where the surrounding circumstances aregiven excessive weight so as to overwhelm the words of the contract; this is a question of mixed fact and law.

The second is where thesurrounding circumstances are interpreted in isolation from the words of the contract, effectively creating a new agreement; this is aquestion of law (see Teal Cedar at paras 55-56, 62). [84] The nature of the error alleged by SecurTek/AAA is the first formulation of the overwhelming principle; the trial judgeallocated excessive weight to the surrounding circumstances so as to overwhelm the words of the purchase agreements. SecurTek/AAAsay that the trial judge’s departure from the ordinary meaning of clause 5 was unreasonable.

The Trial Judge’s Reasons [85] Because of the importance the trial judge placed on the surrounding circumstances of the purchase agreements, it isnecessary to set out parts of his reasons at length (at para 70): There are several surrounding circumstances which assist the court in determining whether the PAAs and APA gave the plaintiffs a right

to service the retail customers of the SAMAs and CSAs and the related benefits of generating new customers by referrals and following moves: (a) [The plaintiffs] sold alarm systems to [their] wholesale clients, installed those systems and arranged for monitoring of the systems by MFS and SecurTek; (b) [The plaintiffs] attended to all necessary service work for those customers. [The plaintiffs were] the first point of contact for these customers; (

c) MFS and SecurTek were non-competing monitoring stations. They did not sell, install or service systems and [the plaintiffs] did not monitor alarms; (

d) It was understood by both MFS and [the plaintiffs] that [the plaintiffs were] to service the customers in order to better secure customer retention – the 15% residual was intended to secure that obligation of [the plaintiffs]; (

e) When MFS and SecurTek purchased [the plaintiffs’] wholesale accounts, converting them to retail accounts, both MFS and SecurTek made a significant investment to purchase a stream of recurring revenue. The investment was protected to some extent by the guarantee provided by [the plaintiffs], and the return on the investments was a function of how long the customer remained a paying customer; (

f) It was critical to the return anticipated by both MFS and SecurTek to have a competent servicing dealer to attend to warranty and post warranty service, and to upgrade when necessary. Continuity of that service was also important to ensure loyalty; (

g) Thompson testified that it was intended that [the plaintiffs] do all of the service work for all of the SAMA customers sold to MFS; (h) [The plaintiffs were] a good “dealer”, in the top five percent, and had a low attrition rate; (

i) Both Thompson and Rosenberg were aware that [the plaintiffs] took good care of [their] customers, resulting in a low attrition rate; (

j) A low attrition rate was important to [the plaintiffs], MFS and SecurTek; (

k) Both Thompson and Rosenberg expected that [the plaintiffs] would service the customers that [the plaintiffs] brought to MFS; (

l) When SecurTek acquired the PAAs as a result of purchasing the MFS partnership shares, Thompson explained the relationship with [the plaintiffs] to Rogers of SecurTek; (

m) The MFS PAAs were not drafted by lawyers. The PAA was a form agreement of MFS. Rosenberg suggested changes and Thompson drafted them. (

n) The 620 accounts purchased by SecurTek between 2000 to 2002 were purchased in accordance with the terms and conditions as the MFS PAAs; (

o) The SecurTek APA was based on the MFS PAAs, with changes negotiated by Rosenberg of [the plaintiffs] and Irwin of SecurTek, and vetted by SecurTek legal counsel. Clause 5(

v) required [the plaintiffs] to perform warranty and other service work;

(

p) On November 15, 2000, in response to the proposal received by Rosenberg from AAA, Thompson sent a letter to Rosenberg inwhich he assured Rosenberg that MERC/MFS (now owned by SecurTek]) “is a non-competing monitoring station. We do not sell,service or install alarm systems and accordingly, do not compete directly with [the plaintiffs]. Our arrangements today and in the futurewill focus on mutually beneficial initiatives. That may not be the case with AAA/MTS, who are in direct competition with [theplaintiffs].

MERC’s purchase of [the] SAMAs allows [the plaintiffs] to continue to service accounts/customers and obtain upgrades andreferrals, as well as to participate in the Move Program. Again, this may not be the case with AAA/MTS.” [86] The trial judge found that the legal relationship created by the purchase agreements generated “mutual benefits” (atpara 71): the plaintiffs would service and MFS (via MERC) and, later, SecurTek, would monitor.

In order to protect their investmentand maximize the long-term return on it, MFS/SecurTek needed “reliable . . . service” (at para 72) to retain customers despite not havingthe capacity to do so.

He stated that the plaintiffs “wanted [their] customers to be monitored by a non-competing monitoring firm” (atpara 73). [87] As said earlier, despite the apparent wording of clause 5 of the purchase agreements creating an obligation on theplaintiffs to provide service, the trial judge was of the view that, because of the surrounding circumstances, in actuality, “it was intendedby the parties that [the plaintiffs were] contractually entitled to provide services to the customers” (at para 64; see also para 74).

The Submissions [88] SecurTek/AAA essentially make three points as to the trial judge using the surrounding circumstances to overwhelmthe text of the purchase agreements. First, the plaintiffs sold all their contractual rights (save the right to receive the 15% residual). Ifthe parties intended for the plaintiffs to have a right to service that the purchaser (or a successor) could not interfere with, that easilycould have been expressly stated in the purchase agreements, but was not despite the parties addressing other non-competition issues inclause 8.

Second, the key term of the purchase agreements, clause 5, was worded as a warranty that created an obligation on theplaintiffs, not an enforceable contractual right. Third, the lengthy surrounding circumstances cited by the trial judge equally support thealternative

interpretation that servicing the customers was an obligation of the plaintiffs. It was commercially reasonable, in order toprotect the purchaser’s upfront investment, for the parties to have intended that the purchaser would have a guarantee of reliable serviceof customer accounts because the purchaser did not have that capacity. [89] The plaintiffs make the argument that Sattva endorses an approach that the surrounding circumstances of a contractshould be broadly construed by a decision-maker.

They submit that is what the trial judge did and, accordingly, his factual finding thatthe words of the purchase agreements actually were intended to create a contractual right in their favour, as opposed to an obligation, isowed deference by this Court. The Law [90] Two legal concepts require some elaboration: the role of surrounding circumstances in contractual

interpretation andthe significance of labeling a contractual term as a warranty. The Role of Surrounding Circumstances in Contractual

Interpretation [91] In Sattva, the modern approach to contractual

interpretation was summarized as being that “a decision-maker must readthe contract as a whole, giving the words used their ordinary and grammatical meaning, consistent with the surrounding circumstancesknown to the parties at the time of formation of the contract” (at para 47).

Rothstein J explained the relationship between the text of acontract and the surrounding circumstances which gave rise to it as follows (at para 57): While the surrounding circumstances will be considered in interpreting the terms of a contract, they must never be allowed to overwhelmthe words of that agreement (Hayes Forest Services [Hayes Forest Services Limited v Weyerhaeuser Company Limited, 2008 BCCA 31],at para. 14; and Hall [Geoff R Hall, Canadian Contractual

Interpretation Law, 2nd ed (Markham: LexisNexis, 2012)], at p. 30). Thegoal of examining such evidence is to deepen a decision-maker’s understanding of the mutual and objective intentions of the parties asexpressed in the words of the contract. The

interpretation of a written contractual provision must always be grounded in the text and readin light of the entire contract (Hall, at pp. 15 and 30-32). While the surrounding circumstances are relied upon in the interpretive process,courts cannot use them to deviate from the text such that the court effectively creates a new agreement (Glaswegian Enterprises Inc. v.B.C. Tel Mobility Cellular Inc. (1997), (BC CA), 101 B.C.A.C. 62). [92] The decisions of the Court of Appeal for British Columbia mentioned in this passage of Sattva are of some importance.

The decisions of Glaswegian Enterprises Inc v BC Tel Mobility Cellular Inc, 1997 CarswellBC 2836 at para 19; and Hayes ForestServices Limited v Weyerhaeuser Company Limited, 2008 BCCA 31 at para 14, each refer back to the earlier comments of Donald JA inBlack Swan Gold Mines Ltd v Goldbelt Resources Ltd, 1996 CarswellBC 1445 (CA), where he stated the limits on the reliance ofsurrounding circumstances for contractual

interpretation this way (at para 19): I am unable to give effect to Goldbelt’s contention that the learned trial judge failed to take the relevant surrounding circumstances intoaccount when interpreting this contract. In my respectful opinion, he properly kept the contextual facts in the background and the text ofthe agreement in the foreground as he examined the picture. The words of the contract must not be overwhelmed by a contextualanalysis, otherwise there is little point in writing things down. No certainty could be achieved in choosing words to express a bargain.

Contract disputes would have to be resolved by lengthy inquiries into what was fair in light of what happened before, during and after themaking of a contract. [93] Geoff Hall, whose views were relied on in Sattva, takes a similar approach as Donald JA. He says that the primaryfocus in the endeavour of contractual

interpretation is on the words agreed upon by the parties with the factual matrix being an aid“somewhat in the background” (Geoff R Hall, Canadian Contractual

Interpretation Law, 4th ed (Toronto: LexisNexis, 2020) at 35). He explains that the danger of taking contextual analysis “too far” is the creation of “instability in transactions” (ibid), thus undermining

contractual certainty. (See also Sir Kim Lewison, The

Interpretation of Contracts, 7th ed (London, UK: Thomson Reuters, 2021) at 4-6.) Significance of Labeling a Contractual Term as a “Warranty” [94] Historically, the law of contract in the common law system has divided contractual terms into three possibilities: acondition; a warranty; or one that, due to its complex character in the given circumstances, lies between a condition and a warranty and isthus described as an intermediate or innominate term.

This classification is important to both the construction of the contract and theconsequences and remedy of a breach (see Bunge Corpn v Tradax SA, [1981] 2 All ER 513 at 543-44, 549-50 (HL (Eng)); First CityTrust Company v Triple Five Corporation Ltd, 1989 ABCA 28 at paras 32-49, supplementary reasons, 1989 ABCA 87, leave to appeal toSCC refused, 21439 (7 December 1989); and Hall at pp 166-71). [95] Traditionally, a condition is understood to be a term whose performance is fundamental to achieving the benefitsintended by the contract.

Failure to perform a condition is of such significance that it entitles the innocent party to treat the contract as atan end.

As Professor Waddams puts it, there has been a “substantial failure of performance” (SM Waddams, The Law of Contracts, 7thed (Toronto: Thomson Reuters, 2017) at 414). [96] In contrast, mere warranties are terms of lesser importance to the vitality of the contract whose breaches give rise onlyto a claim in damages (see, generally, Bunge Corpn at pp 549-50; First City Trust Company at paras 32-49; and GHL Fridman, The Lawof Contract in Canada, 6th ed (Toronto: Carswell, 2011) at 477-91). [97] The third possibility—that of an intermediate innominate term—is judicial recognition that contractual terms cannotalways be classified neatly.

Depending on the gravity of the consequences of a breach, such terms may operate either as a condition or awarranty (see Bunge Corpn at pp 541, 543, 549-50; and First City Trust Company at paras 32-49). [98] The labeling of a term as a “condition” or “warranty” in a written contract is a legal term of art. For the purposes ofcontractual

interpretation, such language should be given “its technical meaning in law, unless there is something in the context todisplace the presumption that it was intended to carry its technical meaning” (Lewison at p 284). In Jorian Properties Ltd v Zellenrath(1984), (ON CA), 10 DLR (4th) 458 (Ont CA), Blair JA explained, in his dissent but not on this point (at p 464): . . . At the most, the use of a legal term of art such as “condition” or “warranty” creates a rebuttable presumption that a contractual term is tobe interpreted in that sense.

The presumption will be rebutted, however, if the contract shows that it is intended to be otherwiseinterpreted . . .. In short, the issue depends not on the label chosen by the parties, but on the effect of the contractual term . . .. . . . (See also Table Stake Construction Ltd v Jones (1977), (ON SC), 82 DLR (3d) 113 at 120 (Ont H Ct J); and Hall at pp170-71.) [99] The approach that the use of a legal term of art in the wording of a contract is not decisive, but only presumptive, isconsistent with the comments in Sattva that “the

interpretation of contracts has evolved towards a practical, common-sense approach notdominated by technical rules of construction” (at para 47; see also Lewison at p 287). Analysis [100] In the part of his decision in relation to contractual

interpretation (see paras 42-74), the trial judge made reference topieces of extrinsic evidence which, in my respectful view, he should not have relied on:

i) evidence as to Rosenberg’s and Thompson’s subjective intentions (at paras 56, 59, 70): Rosenberg testified that clause 5(vi) was to ensure continuity and to retain the client long term so MFS would limit their exposure tolosing money and increase the benefit of having the long-term residual. Clause 5(vi) was amended in the APA to delete the phrase “UNLESS and until (MFS) otherwise directs the Vendor.” Rosenbergtestified that he did not want SecurTek to believe that it could cancel his right to service, so he asked for those words in clause 5(vi) to bedeleted. . . . . . .

(

g) Thompson testified that it was intended that [the plaintiffs] do all of the service work for all of the SAMA customers sold to MFS; . . .

Regrettably, despite the objections of counsel for SecurTek/AAA, the trial judge allowed evidence, particularly from Rosenberg, as tothe “intent” behind various provisions in the contracts referred to at the trial. ii) evidence as to conduct subsequent to the execution of the purchase agreements in the absence of ambiguity (at para 67): SecurTek and AAA also concede that “the Plaintiffs clearly did provide service to the customers represented by [the] SAMAs from thetime they were sold to MFS/SecurTek all the way until the end of June 2009, when the transaction between AAA and SecurTek closed,(but) this does not necessarily mean there was a contractual right to exclusively provide this service, and a further exclusive right toobtain the new wholesale customers’ accounts generated from this customer base.” As noted earlier in these reasons, the plaintiffs didnot plead that [they] had an exclusive right to service. (See Vesturland Development Ltd at para 40; and Hall at pp 33-34, 112-14.) [101] The trial judge’s reliance on evidence as to negotiations—notably, the November 2000 letter—is controversial but notnecessarily an error (see Hall at pp 425-28; and Corner Brook (City) at para 56).

That is a matter that need not be commented ondefinitively to decide this case. [102] While these identifiable errors are of concern, I would not allow the appeal on their bases as I am not convinced that theyare material enough to have affected the result.

In my respectful view, there is a larger problem with the trial judge’s approach: hisexcessive use of the surrounding circumstances overwhelmed the words of the purchase agreements (see Sattva at para 57; and TealCedar at para 56). [103] This is not a situation of a mere difference of opinion with the weight that the trial judge assigned to the surroundingcircumstances in interpreting the purchase agreements. If that was all, this Court would be obligated to defer to his decision because, inmost cases, contractual

interpretation is “inherently fact specific” (Sattva at para 55; see also Corner Brook (City) at para 47). As I willexplain, the trial judge’s departure from the ordinary meaning of the purchase agreements was unreasonable. Unfortunately, hisprioritization of the economic interests of one contracting party (the plaintiffs) led to an

interpretation of the purchase agreements thatwas not grounded in the text and was thus contrary to the overwhelming principle. [104] The commercial object (or purpose), or aim and genesis, of a transaction, objectively ascertained, is a surroundingcircumstance to be considered in contractual

interpretation (see Prenn v Simmonds, [1971] 3 All ER 237 at 240 (HL (Eng)); and ReardonSmith Line Ltd v Hansen-Tangen, [1976] 3 All ER 570 at 574-75 (HL (Eng))). [105] Assessment of surrounding circumstances must be done mindful of the interpretative principle of commercial efficacy(also called commercial common sense) (see Hall at pp 63-64; Lewison at pp 51-53; and Vesturland Development Ltd at para 42).

Thisis so because a commercially reasonable result likely more accurately reflects the intention of the contracting parties than one that makeslittle commercial sense (see Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd (1997), AC 749 at 771 (HL (Eng)), followedby this Court in Nickel Developments Ltd v Canada Safeway Ltd, 2001 MBCA 79 at para 34). [106] Assessing commercial efficacy is part of the iterative process of contractual

interpretation. The decision-maker “tests”the rival

interpretations of a contract against their commercial consequences—not to pass commercial judgment but, rather, to check eachmeaning against the other provisions of the contract and to evaluate the commercial consequences with the ultimate objective beinginterpretative accuracy (see Lewison at pp 53-58; Hall at p 65; and Albo at para 20). Sir Kim Lewison explains the analysis this way: “The court looks to see where different constructions lead, how they fit with other provisions in the contract (or other phrases in the sameclause), what obstacles to a particular

interpretation are met upon the way, and what results are reached” (at p 54). [107] There are several principles to keep in mind when assessing commercial efficacy. [108] First, in taking into account the commercial object or purpose of an agreement as a surrounding circumstance,consideration of commercial efficacy is not reserved only for cases of ambiguous wording or where a literal construction would result ina commercial absurdity (see Waddams at p 223; Hall at pp 74-75; and Lewison at pp 53-57). Commercial efficacy must be considered aspart of the evaluation of the surrounding circumstances in every case of contractual

interpretation, but it is not an overriding criterion(see Albo at para 20; Vesturland Development Ltd at para 42; and Lewison at p 59). [109] Second, the relevant perspective for the decision-maker is that of both contracting parties, not just one (see Hall at pp 65-66; and Lewison at p 57). This avoids an unbalanced view of the transaction and ensures an objective

interpretation. In Kentucky FriedChicken Canada v Scott’s Food Services Inc, (ON CA), 1998 CarswellOnt 4170 (CA), Goudge JA explained (atpara 27): Where, as here, the document to be construed is a negotiated commercial document, the court should avoid an

interpretation that wouldresult in a commercial absurdity. Rather, the document should be construed in accordance with sound commercial principles and goodbusiness sense. Care must be taken, however, to do this objectively rather than from the perspective of one contracting party or theother, since what might make good business sense to one party would not necessarily do so for the other. [footnotes omitted]

[ 110 ] Third, the interpretative principle of commercial efficacy is “applied with reference to the entire context, including the language of the contract as a whole and the factual matrix” (Hall at p 66; see also Lewison at p 57). The starting point, however, is always the words used in the contract.

The quality of the drafting is important as to the limits of how far a decision-maker can go with commercial efficacy because the wording of a contract is something that the contracting parties can control (see Arnold v Britton & Ors , [2015] UKSC 36 (BAILII) at para 17 ; Wood v Capita Insurance Services Ltd , [2017] UKSC 24 (BAILII) at para 11; Lewison at pp 68- 75; and Hall at pp 66-67). [ 111 ] Fourth, assessing commercial efficacy should be done cautiously.

A decision-maker should be slow to reject the ordinary meaning of a provision simply because it appears commercially unusual or imprudent to one side (even without the benefit of hindsight) (see Lewison at pp 59-65). Absent some reason to doubt, it should be assumed that business people settled on wording that, in substance, made “a workable commercial deal” ( Humphries v Lufkin Industries Canada Ltd , 2011 ABCA 366 at para 15 ; see also Lewison at p 55).

The words chosen in a contract are important because that is the mechanism by which the reasonable expectations of the contracting parties are protected (see Elias et al v Western Financial Group Inc , 2017 MBCA 110 at paras 76-77 , leave to appeal to SCC refused, 37907 (9 August 2018) ). [ 112 ] Accordingly, the decision-maker must appreciate that contractual language is often the product of compromise. Also, some bargains are one-sided.

Therefore, consideration of commercial efficacy is not a licence to “undervalue the importance of the language of the prov ision to be construed” ( Monsolar IQ v Ltd Woden Park Ltd , [2021] EWCA Civ 961 (BAILII) at para 27; and Arnold at para 17). [ 113 ] Fifth, commercial efficacy cannot be invoked retrospectively ( ibid at para 19). The decision-maker cannot use the benefit of hindsight in the assessment of commercial efficacy.

As was said in Wood , it is not the function of the Court, when interpreting a contract, to “improve” a contracting party’s bargain (at para 41; see also Arnold at para 20; and Prenn at p 241). [ 114 ] The starting point here is that the purchase agreements were reasonably precise and without ambiguity. The ordinary meaning of clause 5 of the purchase agreements is, as the trial judge found, that the plaintiffs had an obligation to service the alarm accounts, not a right to do so which the purchaser (and a successor) could not interfere with.

To reiterate, the clauses begin with the phrase “[t]he Vendor represents and warrants”. [ 115 ] In my respectful view, there are two difficulties with the trial judge’s departure from the ordinary meaning of clause 5 of the purchase agreements. [ 116 ] With respect, the trial judge’s assessment of the commercial efficacy of the arrangement was unbalanced. He did not test the commercial consequences of the rival

interpretation to the one asserted by the plaintiffs. His perspective should not have been to favour the

interpretation that best promoted the plaintiffs’ commercial interests. As stated earlier, he should have looked at the transactions objectively from the perspective of both contracting parties. He failed to recognize that the ordinary meaning of the words in clause 5, when read in context, is not commercially “arbitrary and irrational” ( Chartbrook Ltd v Persimmon Homes Ltd & Ors , [2009] UKHL 38 (BAILII) at para 20 ).

In fact, interpreting the words in clause 5 to mean what they say respects commercial realities at the time the purchase agreements were signed and leads to a sensible commercial result for both contracting parties (see Ledcor at para 78; and Albo at para 38 ). That is apparent in the allocation of economic risk under the purchase agreements. [ 117 ] Once the wholesale accounts were sold, the purchaser—not the plaintiffs—substantially bore the economic risks of the transaction because it had no capacity to service the alarm accounts.

It made commercial common sense for there to be some legal guarantee of service for the purchaser to protect its upfront investment. The corollary to the economic risk being primarily with the purchaser after the sales is the undisputed fact that the plaintiffs received fair compensation for selling the alarm accounts.

The price multiple in each of the purchase agreements gave the plaintiffs substantial capital to reinvest in their business in the form of two to three years of monitoring revenue, plus, in most cases, the right to receive the 15% residual going forward for customers who stayed on with MFS/SecurTek.

One only has to look at the results of the November 2000 letter to see that the plaintiffs were paid fair market value for the wholesale accounts given the rival offer at the time from AAA. [ 118 ] The other problem with the trial judge’s approach is that, in my respectful view, he made the error of applying a retrospective analysis. [ 119 ] The trial judge’s reliance on the fact that the plaintiffs did service the alarm accounts after the purchase agreements were signed and made profits incidentally from moving customers and referrals is of no moment to accurately interpreting the contracts; it is a retrospective analysis.

The relevant time for an objective assessment of commercial efficacy is at the time the contract was made, not what happened later (see Sattva at para 58; and Arnold at para 19). Whether a ba rgain turns out to be a good one or a bad one is not the point.

As was explained in Arnold , “ The mere fact that a contractual arrangement, if interpreted according to its natural language, has worked out badly, or even disastrously, for one of the parties is not a reason for departing from the natural language ” (at para 19). [ 120 ] There is, as Derrington J explained in Pipe Networks Pty Ltd v 148 Brunswick Street Pty Ltd (Trustee) , [2019] FCA 598 (AustLII), “ a danger in inflating the importance of the financial or economic consequences of the competing constructions into a metric of the veracity of a proffered construction ” (at para 63).

In my respectful view, that is exactly the error the trial judge committed here. He did not show appropriate caution in departing from the ord inary meaning of clause 5. Matters were made worse by looking retrospectively at commercial efficacy instead of what the commercial realities were at the time the purchase agreements were executed.

As I said in Albo , when the entire context is looked at objectively at the relevant time, it is not “obvious and necessary” for the commercial efficacy of the transactions for the plaintiffs to have acquired from the purchaser a right to service the alarm accounts which the purchaser (and a successor) could not interfere with (at para 38). [ 121 ] In conclusion, in my respectful view, the trial judge erred by failing to respect the overwhelming principle.

His reasons confirm that his unreasonable use of the surrounding circumstances affected the result of the trial and, thus, the error can be described as palpable and overriding. He made clear that, but for the surrounding circumstances, the ordinary meaning of clause 5 of the purchase agreements was that it was an “obligation” in favour of the purchaser and not a contractual right of the plaintiffs (at para 64).

Interpretation of the Purchase Agreements [122] The record is sufficient to determine the controversy as to the meaning of the purchase agreements. Accordingly, ratherthan ordering a retrial, I will give the judgment that ought to have been pronounced (see The Court of Appeal Act, CCSM c C240 atsections 26(1)-26(2)). [123] It is abundantly clear, on a careful review of the voluminous record, that Rosenberg sincerely believed that thecommercial “divorce” in 2009, after many years of a lucrative relationship between the plaintiffs and MFS/SecurTek, was unfair. However, divining what is fair or unfair in the marketplace is not the goal of contractual

interpretation. Rather, it is to ascertain theobjective meaning of the words the parties chose to express their agreement in light of the relevant background reasonably known tothem at the time the contract was entered into. [124] In order to achieve interpretative accuracy of a contract, the “tension” between textualism and contextualism must beresolved in accordance with the approach set out in Sattva (Corner Brook (City) at para 35). As Geoff Hall explains, where possible,“[a]n ideal

interpretation is one which accords with both” the words and their context (at p 9; see also p 35). [125] I am satisfied that, when the relevant terms used in the purchase agreements are considered objectively in light of theirordinary meaning and with regard to the documentary, factual and commercial context at the time the contracts were entered into, theplaintiffs had no enforceable contractual right against SecurTek to service the alarm accounts, as they claim. [126] The purchase agreements are detailed documents despite not being drafted by lawyers.

They were negotiated bybusinessmen with extensive experience in the alarm industry and its subtleties. The genesis and aim of these contracts was to sellwholesale accounts subject to terms. The purchase agreements do not suffer from poor drafting and resulting ambiguity that may givemore reason to depart from the text, particularly relying on an assessment of commercial efficacy (see Arnold at para 18; Wood at para11; Hall at pp 66-67; and Lewison at pp 19-20). [127] The surrounding circumstances objectively known at the time of execution of the purchase agreements are notcomplicated.

As previously said, the transactions were an attractive form of financing for the plaintiffs to help grow their business andstill have a connection to their customers. Both MFS and SecurTek were interested in acquiring the revenue stream generated bymonitoring the alarm accounts but lacked the capacity to service those accounts. Reliable service was important to the value of the alarmaccounts because long-term monitoring customers are valuable.

Therefore, the purchase agreements acknowledged, in addition to thesale of the alarm accounts, that there would be an ongoing legal relationship between the contracting parties, which included terms as toservicing the alarm accounts and what solicitation the plaintiffs could engage in with respect to the accounts. [128] It is not disputed that the contracts on which the wholesale accounts were based—the SAMAs and CSAs—were not aservice agreement between the plaintiffs and the alarm customers. Alarm customers did not have a legal obligation to have the plaintiffsphysically service their alarm systems.

If a customer went elsewhere for service, the only legal right the plaintiffs had was to cancelmonitoring. Nothing more. [129] In the purchase agreements, the plaintiffs sold all of their legal rights under the SAMAs and CSAs except for the right toreceive the 15% residual.

Therefore, an enforceable contractual right to service the alarm accounts can only have existed if the purchasergave such a right to the plaintiffs in the purchase agreements. [130] The omission in the purchase agreements of a clear and unequivocal right, in favour of the plaintiffs, to service the alarmaccounts that the purchaser (or a successor) would be prohibited from interfering with is compelling (see Controls & Equipment Ltd vRamco Contractors Ltd, 1999 CarswellNB 19 at para 14 (CA); Moore Realty Inc v Manitoba Motor League, 2003 MBCA 71 at para 12;and McCain Produce v PEI Lending Agency, 2010 PECA 4 at para 37).

As was stated in Ryan Mortgage Income Fund Inc v AlpineCredits Limited, 2017 BCCA 206, “It would have been a simple matter to include such language in the agreement” (at para 38; see alsoCoodin v Binsky (1972), (MB CA), 34 DLR (3d) 257 at 262 (Man CA); and Lewison at pp 89-90). This isparticularly true when the overall context is considered. The contracting parties did explicitly address other areas of competitionbetween them in clause 8.

Moreover, in his evidence, Thompson explained that MFS, unlike others who purchased wholesale accounts,was “very flexible” in the terms it was prepared to accept to make a deal happen. [131] Also important is that, although the wording changed somewhat between the PAAs and the APA, in every case, clause 5is labeled as a “warranty” creating an obligation on the plaintiffs in favour of the purchaser to service the accounts sold. [132] While this legal term of art is not decisive, there is a rebuttable presumption that the term should be interpreted in thatsense.

This means that servicing the alarm systems sold was a subsidiary aspect of the purchase agreements as opposed to being a termthat went to the root of the contract. There is no reason to conclude that, without servicing the alarm accounts, the plaintiffs would bedeprived of the benefits of the purchase agreements. They received fair compensation, in the form of the purchase price, for the saleeven if the purchaser decided to direct the customer elsewhere for service. In my view, there is no clear indication to the contrary thatthe term “warranty” was being used in any way but in its technical legal sense.

It would undermine predictability in contractual relationsin these circumstances to give the term “warranty” anything other than its traditional meaning. [133] When each of the purchase agreements is read as a whole, there is further reason to accept that clause 5 was anobligation on the plaintiffs. According to the residual rights clause, the plaintiffs had to “abide” by the terms of clause 5 of the purchaseagreements in order to receive the 15% residual. The language of the residual rights clause affirms the

interpretation that what wasmeant by service was that of an obligation on the plaintiffs. [134] Finally, this is a case where there is “little ground” for the plaintiffs to “erect” an argument as to an alternativeinterpretation to the ordinary meaning of the text of the contract based on commercial efficacy (Atos IT Solutions v Sapient Canada Inc,2018 ONCA 374 at para 61, see also para 60, leave to appeal to SCC refused, 38173 (21 March 2019)). [135] I will not repeat my earlier comments on commercial efficacy other than to say that the rival

interpretation to the one

advanced by the plaintiffs—to treat clause 5 of the purchase agreements to mean what it says—makes commercial common sense if the transactions are examined objectively from the perspective of both contracting parties at the time of execution, mindful of the entire context. Nothing about the transactions is commercially unusual or suspect, let alone sufficiently arbitrary and irrational to justify departing from the ordinary meaning of clause 5 to be an obligation guaranteeing service of the alarm accounts sold to protect the purchaser’s upfront payment to the plaintiffs. It is a common business practice to see a legal guarantee given in relation to a foreseeable ri

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