Legal Precision: Contracts and the businesses that enter into them

This story was originally published by Canadian SME (canadiansme.ca)

The recent SS&C Technologies Canada Corp. v The Bank of New York Mellon Corporation ruling has significant implications for business contracts. How do you see this decision shaping the way Canadian businesses approach contract drafting and risk management?

Businesses enter into contracts on a frequent basis. These contracts include sales contracts, purchase orders and engagement contracts. Many have standard terms which companies will typically complete with the business particulars (e.g. name of party, product or service description, pricing) without seeking legal advice. Sales personnel or contract managers are often tasked with completing the particulars. However, they may have insufficient training to appreciate the pitfalls of a lack of precision.

Businesses may view themselves and parties with whom they contract each as singular entities. However, often they are organized using multiple entities for a variety of reasons. Sometimes, business people use a trade name rather than the formal legal name(s) to identify the business. Consequently, they fail to turn their attention to the legal distinction between the various entities. The result is that the contracting parties may not be the parties that one or more of the contracting parties intend to include in the contract. To that end, sales personnel or contract managers should consider the corporate structure of all contracting parties. They must enter into contracts using the full legal name of each of the entities that are to be governed by that contract.

Naming conventions for legal entities in contracts can be a source of confusion and risk. What best practices do you recommend to ensure clarity and avoid disputes, especially when dealing with enterprise groups or cross-border transactions?

In short, persons entering into contracts on behalf of a business should always use the full legal name of the entity or entities that are intended to be governed by the contract. In fact, in Ontario the law requires that the full legal name be used. 

Salespeople or contract managers should have a clear understanding that the full legal name relates to that specific entity and does not relate to any affiliated entities. Thus, by being cognizant of the distinction between different entities and being deliberate in the name that is used, sales personnel and contract managers will be triggered to consider which specific entities should actually be governed by the particular contract, and which should not.

For example, imagine a business with the trade name Widgets & Co. Personnel may use “Widgets & Co.” to refer to the business as a whole, including all of the affiliates and subsidiaries. However, under the Widgets & Co. umbrella, there may be an operating company, real estate company and intellectual property company. If the salespeople or contract managers intend for only the operating company to enter into a contract, they should use the operating company’s legal name, not “Widgets & Co.”

Wording in business contracts is often the deciding factor in legal disputes. What are the most common pitfalls you see in contract language, and how can businesses ensure their intentions are clearly reflected and enforceable?

Ambiguity is your worst enemy in a contract. When reviewing contracts, lawyers are always on the lookout for ambiguous clauses, as vague drafting does not favour easy resolution. When a dispute arises under the contract, ambiguity can be exploited by either party and the ultimate outcome of the dispute can be less certain. 

To that end, businesses should first ensure that they have a clear understanding of what their intentions are for the contracting relationship. Businesses should then discuss these intentions with the other party to ensure that all sides are in alignment. When drafting the contract to reflect that agreed upon intention, precise and clear drafting should be deployed to accurately reflect the aligned intentions. The SS&C Technologies Canada Corp. v The Bank of New York Mellon Corporation case is a perfect example of an ambiguity that caused a result so uncertain that it needed to be litigated to the Ontario Court of Appeal.

When contract language is ambiguous, courts may look to the parties’ conduct to interpret intent. What advice do you have for businesses to ensure their performance aligns with commercial expectations and supports their contractual objectives?

As a starting point, businesses should be aware that at law, the parties’ conduct can change a contract. This is known as “Equitable Estoppel”. Typically, contracts will include boilerplate language that overrides this principle, but in any event, courts will also sometimes look to the parties’ conduct to interpret intent nonetheless. To that end businesses should:

(i) at the drafting stage, be cognizant to ensure that the written terms of the contract reflect how they intend the relationship to operate; and

(ii) throughout the term of the contract, if the parties’ conduct or operations change, be deliberate to reflect these changes in writing and amend the contract.

Finally, what key advice would you offer to small and medium-sized businesses looking to strengthen their contracts and legal relationships as they grow and expand?

Businesses of course need to be able to manage day-to-day contracts without always getting lawyers involved – particularly when there are no material provisions to negotiate. To that end, it is essential for standardized contracts to be completed by salespeople or contract managers for smooth operations and client/supplier relationships. 

Returning to the key takeaway from SS&C Technologies Canada Corp. v The Bank of New York Mellon Corporation, to ensure that sales personnel and contract managers can perform this function properly, businesses should ensure that they are sensitive to the ways in which contracts are enforced. To that end, personnel should ensure that:

(i) The contract names the entities which are intended to be governed by the contract. Personnel should use the full legal name of all entities within the business group so that the appropriate entities are governed by and subject to the contract.

(ii) Personnel should ensure that all appropriate entities of the other contracting party are included so that the business has appropriate recourse if it ever needs to enforce upon the contract.