• Two (Or More) Can Play At That Game!
  • September 21, 2012
  • Law Firm: Stewart McKelvey - Halifax Office
  • Introduction

    The interrelated contracts principle continues to gain momentum in Canadian contract law. Simply put, the courts favour an interpretive approach that looks beyond the four corners of a single contract and will often consider a series of contracts to give effect to a transaction; all of the contracts in a series of contracts must be considered in interpreting any one of them. The recent Ontario Court of Appeal decision of Downey v. Ecore International Inc., contains a strong reaffirmation that the privity of contract principle erodes when interrelated contracts are at play.

    The facts

    Paul Downey, an engineer, was lured away by a competitor of his previous employer to work at the competitor's Pennsylvania based manufacturing company (Ecore International Inc.). For tax purposes, Mr. Downey wanted his employment relationship to be structured as a consulting agreement with his own company, CSR Industries ("CSR"), rather than the traditional employer-employee structure. Ecore agreed and entered into a consulting agreement between CSR as well as a confidentiality agreement between Mr. Downey personally. In other words, Mr. Downey was not a party to the consulting agreement, and CSR was not a party to the confidentiality agreement.

    The confidentiality agreement contained a clause that gave Pennsylvania courts jurisdiction to try any action "that arises out of or in any way relates to the company's [Ecore's] business relations with employee [Mr. Downey]." Eventually, Mr. Downey brought an action against Ecore in Ontario over intellectual property rights created while Downey worked with Ecore. Ecore moved to stay the Ontario proceedings on he basis that Pennsylvania courts had jurisdiction (per the confidentiality agreement).

    The decision

    At first instance, the stay was denied on the basis that the confidentiality agreement failed for lack of consideration, since it was CSR (not a party to the confidentiality agreement) not Mr. Downey who received confidential information from Ecore. The Ontario Court of Appeal reversed this decision, finding the confidentiality agreement and its jurisdiction clause to be effective. The Court of Appeal found that the confidentiality agreement formed part of a single transaction between Ecore, Downey and CSR. The court said

    "[i]t is only when the two agreements are read together ... that the intentions of the parties and the true business reality of their relationship emerge."

    It also concluded that the company's permission to Downey to access Ecore's proprietary information in order to perform services under the consulting agreement, was independent consideration for signing the agreement.

    Thus, the actual relationship was between Ecore and Mr. Downey. The presence of CSR was simply a tax conduit and as such, it was irrelevant that CSR had not signed the confidentiality agreement.

    The Court of Appeal bolstered its reasoning with the use of the commercial efficacy principle (without the need of an ambiguity in the contract). The Court of Appeal held that the approach of the motions judge (which would have led to a commercially unviable result: Mr. Downey nor CSR being bound to protect Ecore's intellectual property) violated the commercial efficacy principle by stripping the confidentiality agreement of any purpose.

    What this means for you

    This case has not created any new law. Rather, it simply reiterates and strengthens the principle of interrelated contracts. It's a welcome decision that offers courts more authority to give effect to the real intentions of the parties at play and that intention can be unearthed notwithstanding old and burdensome doctrinal barriers.