Sophisticated parties held to the words of their bargain; making a credit facility “available” did not create an obligation on borrower to draw on the facility but was an option; parties could have used a “shall” to impose an obligation but did not; no implied term or collateral warranty to draw on facility; entire agreement provisions are high barriers to adding terms to agreements between commercial parties.  Exclusivity for lender under a related term sheet read narrowly to apply only to a similar mezzanine debt arrangement; important to draft exclusivity to deal with result of another transaction and not just what it looks like. 

In this action, the plaintiffs, the Maxam Opportunities Fund Limited Partnership and Maxam Opportunities Fund (International) Limited Partnership (collectively referred to as “Maxam”) claimed that the defendant 893353 Alberta Inc. (“893”) breached an agreement to borrow funds exclusively from Maxam when 893 borrowed funds from 729171 Alberta Inc. (“729”).  The breach is asserted to have occurred under a credit agreement with Maxam, a collateral warranty between Maxam and 893 in relation to the provision of a bridge loan, or an exclusivity provision in a term sheet.  The defendants asserted that there was no breach as there was no obligation to borrow funds from Maxam and that the scope of the exclusivity provision did not cover the transaction between 893 and 729.   The credit agreement and term sheet were in respect of a mezzanine loan.  The term sheet contained an exclusivity period during which 893 was not permitted to enter into any agreement, understanding or other arrangement with any person in respect of any “similar transaction.” The credit agreement did not contain an exclusivity provision. The loan from 729 was short term and was not “mezzanine” in nature.

Interpretation of Written Agreement

The credit agreement stated that the “Credit Facility shall be made available.” It contained no express wording requiring 893 to make a draw on the credit facility. Nevertheless, Maxam argued that based on the plain text of the agreement and the factual matrix that resulted in the credit agreement it was reasonable to conclude that 893 agreed to borrow money from Maxam and that it would be commercially absurd, both in law and on the facts, to interpret the credit agreement as an option for 893. Maxam argued that it would be absurd because it would have Maxam giving up the benefits of its exclusivity under the term sheet and Maxam committing to make available $25 million in financing but receiving (potentially) nothing in return.

The judge noted that:

  • 893 and Maxam were sophisticated business entities,
  • 893 and Maxam were represented by sophisticated business people and experienced solicitors,
  • there was no imbalance in bargaining power - the parties were represented throughout by experienced solicitors,
  • the transactions were highly structured, detailed and document intensive,
  • the terms were negotiated and drafted with considerable care and attention was given to the significance of the overall transaction to the parties, and
  • Maxam had in other circumstances in the course of the parties’ dealings insisted on strict adherence by 893 to the terms of the applicable agreement.

As a result, he was of the opinion that Maxam viewed the relationship between it and 893 to be governed by a strict reading of the language in the documents. There was no express, mandatory obligation upon 893 stated anywhere and Justice Masuhara found no justification to read in an obligation on 893 to draw upon the credit facility. The absence of an express obligation upon 893 was particularly noteworthy, and even on considering the single recital to the credit agreement, the court could find no support for Maxam’s interpretation. The credit agreement was thus found to oblige Maxam to make the credit facility “available” to 893, but 893 was not obliged to do anything, except in a certain instance, that did not arise. Nowhere in the credit agreement is the mandatory language of “shall request” used in relation to the $25 million provided through Maxam. The credit agreement was, in fact, an option.

Implied Term

Maxam argued that, in the alternative, there was an implied term requiring 893 to borrow.  An implied term may be found based on the presumed intention of the parties where the implied term is necessary to give business efficacy to a contract or as a term which the parties would agree that they had obviously assumed. There is a presumption against adding an unexpressed term to a contract by implication unless: “(i) it is necessary to do so in order to give the contract business efficacy (this does not include a test of reasonableness for the contract); (ii) to correct an obvious oversight for which there is “no dispute” that the parties intended to include such a term in the contract (i.e., the implied term “goes without saying”); (iii) the term can be clearly and precisely formulated; and (iv) the term will not conflict or be inconsistent with an express term of the contract.” In interpreting a commercial contract the exercise is to be conducted in accordance with business common sense so as to avoid a commercially absurd result. Resort to construing a term in a contract through the rule against absurdity occurs when an ambiguity exists. A seemingly unreasonable term is not determinative of absurdity, it must be beyond that. When there is no ambiguity, an interpretation that produces a "fair result" or a "sensible commercial result" is not determinative. Interpreting a plainly worded document in accordance with the parties’ true intent is not hard, if it is presumed that the parties intended the legal consequences of their words. As there was no oversight or error asserted the judge did not find it necessary to imply a term to give business efficacy to the credit agreement. Characterization of the credit agreement as giving 893 an option was not absurd in his view. He also noted that there was an entire agreement provision that expressly excluded any prior understandings or agreements relating to the credit agreement.

Collateral Warranty

Maxam argued that it was induced to enter into the credit agreement by virtue of a collateral warranty that the credit facility would be drawn on to pay down 893’s bridge loan.  Justice Masuhara found the care and attention in drafting the documents and the absence of an express term obliging 893 to draw on the credit facility significantly weakened this argument. Further, even if there was a collateral warranty the entire agreement provision stated that the credit agreement “supercedes all prior understandings and agreements, whether written or oral, among the parties relating to the transactions provided herein.” The Court noted that entire agreement provisions are routinely enforced, particularly in the case of commercial contracts, and no circumstances were shown by Maxam to not enforce in this case.

Exclusivity – Similar Transaction

As noted, the term sheet contained an exclusivity period during which 893 was not permitted to enter into any agreement, understanding or other arrangement with any person in respect of any “similar transaction.”  The loan that 893 actually obtained was not a mezzanine loan. It was short term, limited in security and did not have an equity component, while the credit facility had:

  • a longer term,
  • extensive security,
  • equity-like participation, and
  • significant controls over operations.

Maxam argued that “similar” does not mean “identical”, which the court agreed with.  However, the differences noted above led the court to conclude that the loan obtained by 893 from 729 was materially different and thus was not covered by the term sheet. This result was due to fact that the exclusivity provision was drafted so as to require that a competing arrangement would be assessed see if it was similar, rather than on the result of the a competing arrangement, which in this case was that 893 need not draw on the facility.  An exclusivity provision could have been drafted that prohibited any arrangement that would result in 893 no longer needing access to the credit facility, but this was not done.