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Contracts - Interpretation - Sattva
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. Sattva Capital Corp. v. Creston Moly Corp.
In this leading case, Sattva Capital Corp. v. Creston Moly Corp. (SCC, 2014), the Supreme Court of Canada re-states the doctrine of contractual interpretation, clarifying that for appeal purposes it is a question of mixed fact and law [paras 42-58], and that 'surrounding circumstances' may be taken into account for interpretation without offending the parol evidence rule [paras 59-61]:(a) When Is Contractual Interpretation a Question of Law?
[42] Under s. 31 of the AA, the issue upon which leave is sought must be a question of law. For the purpose of identifying the appropriate standard of review or, as is the case here, determining whether the requirements for leave to appeal are met, reviewing courts are regularly required to determine whether an issue decided at first instance is a question of law, fact, or mixed fact and law.
[43] Historically, determining the legal rights and obligations of the parties under a written contract was considered a question of law (King v. Operating Engineers Training Institute of Manitoba Inc., 2011 MBCA 80, 270 Man. R. (2d) 63, at para. 20, per Steel J.A.; K. Lewison, The Interpretation of Contracts (5th ed. 2011 & Supp. 2013), at pp. 173-76; and G. R. Hall, Canadian Contractual Interpretation Law (2nd ed. 2012), at pp. 125-26). This rule originated in England at a time when there were frequent civil jury trials and widespread illiteracy. Under those circumstances, the interpretation of written documents had to be considered questions of law because only the judge could be assured to be literate and therefore capable of reading the contract (Hall, at p. 126; and Lewison, at pp. 173-74).
[44] This historical rationale no longer applies. Nevertheless, courts in the United Kingdom continue to treat the interpretation of a written contract as always being a question of law (Thorner v. Major, [2009] UKHL 18, [2009] 3 All E.R. 945, at paras. 58 and 82-83; and Lewison, at pp. 173-77). They do this despite the fact that U.K. courts consider the surrounding circumstances, a concept addressed further below, when interpreting a written contract (Prenn v. Simmonds, [1971] 3 All E.R. 237 (H.L.); and Reardon Smith Line Ltd. v. Hansen-Tangen, [1976] 3 All E.R. 570 (H.L.)).
[45] In Canada, there remains some support for the historical approach. See for example Jiro Enterprises Ltd. v. Spencer, 2008 ABCA 87 (CanLII), at para. 10; QK Investments Inc. v. Crocus Investment Fund, 2008 MBCA 21, 290 D.L.R. (4th) 84, at para. 26; Dow Chemical Canada Inc. v. Shell Chemicals Canada Ltd., 2010 ABCA 126, 25 Alta. L.R. (5th) 221, at paras. 11-12; and Minister of National Revenue v. Costco Wholesale Canada Ltd., 2012 FCA 160, 431 N.R. 78, at para. 34. However, some Canadian courts have abandoned the historical approach and now treat the interpretation of written contracts as an exercise involving either a question of law or a question of mixed fact and law. See for example WCI Waste Conversion Inc. v. ADI International Inc., 2011 PECA 14, 309 Nfld. & P.E.I.R. 1, at para. 11; 269893 Alberta Ltd. v. Otter Bay Developments Ltd., 2009 BCCA 37, 266 B.C.A.C. 98, at para. 13; Hayes Forest Services Ltd. v. Weyerhaeuser Co., 2008 BCCA 31, 289 D.L.R. (4th) 230, at para. 44; Bell Canada v. The Plan Group, 2009 ONCA 548, 96 O.R. (3d) 81, at paras. 22-23 (majority reasons, per Blair J.A.) and paras. 133-35 (per Gillese J.A., in dissent, but not on this point); and King, at paras. 20-23.
[46] The shift away from the historical approach in Canada appears to be based on two developments. The first is the adoption of an approach to contractual interpretation which directs courts to have regard for the surrounding circumstances of the contract — often referred to as the factual matrix — when interpreting a written contract (Hall, at pp. 13, 21-25 and 127; and J. D. McCamus, The Law of Contracts (2nd ed. 2012), at pp. 749-51). The second is the explanation of the difference between questions of law and questions of mixed fact and law provided in Canada (Director of Investigation and Research) v. Southam Inc., 1997 CanLII 385 (SCC), [1997] 1 S.C.R. 748, at para. 35, and Housen v. Nikolaisen, 2002 SCC 33, [2002] 2 S.C.R. 235, at paras. 26 and 31-36.
[47] Regarding the first development, the interpretation of contracts has evolved towards a practical, common-sense approach not dominated by technical rules of construction. The overriding concern is to determine “the intent of the parties and the scope of their understanding” (Jesuit Fathers of Upper Canada v. Guardian Insurance Co. of Canada, 2006 SCC 21, [2006] 1 S.C.R. 744, at para. 27, per LeBel J.; see also Tercon Contractors Ltd. v. British Columbia (Transportation and Highways), 2010 SCC 4, [2010] 1 S.C.R. 69, at paras. 64-65, per Cromwell J.). To do so, a decision-maker must read the contract as a whole, giving the words used their ordinary and grammatical meaning, consistent with the surrounding circumstances known to the parties at the time of formation of the contract. Consideration of the surrounding circumstances recognizes that ascertaining contractual intention can be difficult when looking at words on their own, because words alone do not have an immutable or absolute meaning:No contracts are made in a vacuum: there is always a setting in which they have to be placed. . . . In a commercial contract it is certainly right that the court should know the commercial purpose of the contract and this in turn presupposes knowledge of the genesis of the transaction, the background, the context, the market in which the parties are operating.
(Reardon Smith Line, at p. 574, per Lord Wilberforce) [48] The meaning of words is often derived from a number of contextual factors, including the purpose of the agreement and the nature of the relationship created by the agreement (see Moore Realty Inc. v. Manitoba Motor League, 2003 MBCA 71, 173 Man. R. (2d) 300, at para. 15, per Hamilton J.A.; see also Hall, at p. 22; and McCamus, at pp. 749-50). As stated by Lord Hoffmann in Investors Compensation Scheme Ltd. v. West Bromwich Building Society, [1998] 1 All E.R. 98 (H.L.):
The meaning which a document (or any other utterance) would convey to a reasonable man is not the same thing as the meaning of its words. The meaning of words is a matter of dictionaries and grammars; the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean. [p. 115]
[49] As to the second development, the historical approach to contractual interpretation does not fit well with the definition of a pure question of law identified in Housen and Southam. Questions of law “are questions about what the correct legal test is” (Southam, at para. 35). Yet in contractual interpretation, the goal of the exercise is to ascertain the objective intent of the parties — a fact-specific goal — through the application of legal principles of interpretation. This appears closer to a question of mixed fact and law, defined in Housen as “applying a legal standard to a set of facts” (para. 26; see also Southam, at para. 35). However, some courts have questioned whether this definition, which was developed in the context of a negligence action, can be readily applied to questions of contractual interpretation, and suggest that contractual interpretation is primarily a legal affair (see for example Bell Canada, at para. 25).
[50] With respect for the contrary view, I am of the opinion that the historical approach should be abandoned. Contractual interpretation involves issues of mixed fact and law as it is an exercise in which the principles of contractual interpretation are applied to the words of the written contract, considered in light of the factual matrix.
[51] The purpose of the distinction between questions of law and those of mixed fact and law further supports this conclusion. One central purpose of drawing a distinction between questions of law and those of mixed fact and law is to limit the intervention of appellate courts to cases where the results can be expected to have an impact beyond the parties to the particular dispute. It reflects the role of courts of appeal in ensuring the consistency of the law, rather than in providing a new forum for parties to continue their private litigation. For this reason, Southam identified the degree of generality (or “precedential value”) as the key difference between a question of law and a question of mixed fact and law. The more narrow the rule, the less useful will be the intervention of the court of appeal:If a court were to decide that driving at a certain speed on a certain road under certain conditions was negligent, its decision would not have any great value as a precedent. In short, as the level of generality of the challenged proposition approaches utter particularity, the matter approaches pure application, and hence draws nigh to being an unqualified question of mixed law and fact. See R. P. Kerans, Standards of Review Employed by Appellate Courts (1994), at pp. 103-108. Of course, it is not easy to say precisely where the line should be drawn; though in most cases it should be sufficiently clear whether the dispute is over a general proposition that might qualify as a principle of law or over a very particular set of circumstances that is not apt to be of much interest to judges and lawyers in the future. [para. 37] [52] Similarly, this Court in Housen found that deference to fact-finders promoted the goals of limiting the number, length, and cost of appeals, and of promoting the autonomy and integrity of trial proceedings (paras. 16-17). These principles also weigh in favour of deference to first instance decision-makers on points of contractual interpretation. The legal obligations arising from a contract are, in most cases, limited to the interest of the particular parties. Given that our legal system leaves broad scope to tribunals of first instance to resolve issues of limited application, this supports treating contractual interpretation as a question of mixed fact and law.
[53] Nonetheless, it may be possible to identify an extricable question of law from within what was initially characterized as a question of mixed fact and law (Housen, at paras. 31 and 34-35). Legal errors made in the course of contractual interpretation include “the application of an incorrect principle, the failure to consider a required element of a legal test, or the failure to consider a relevant factor” (King, at para. 21). Moreover, there is no question that many other issues in contract law do engage substantive rules of law: the requirements for the formation of the contract, the capacity of the parties, the requirement that certain contracts be evidenced in writing, and so on.
[54] However, courts should be cautious in identifying extricable questions of law in disputes over contractual interpretation. Given the statutory requirement to identify a question of law in a leave application pursuant to s. 31(2) of the AA, the applicant for leave and its counsel will seek to frame any alleged errors as questions of law. The legislature has sought to restrict such appeals, however, and courts must be careful to ensure that the proposed ground of appeal has been properly characterized. The warning expressed in Housen to exercise caution in attempting to extricate a question of law is relevant here:Appellate courts must be cautious, however, in finding that a trial judge erred in law in his or her determination of negligence, as it is often difficult to extricate the legal questions from the factual. It is for this reason that these matters are referred to as questions of “mixed law and fact”. Where the legal principle is not readily extricable, then the matter is one of “mixed law and fact” . . . . [para. 36] [55] Although that caution was expressed in the context of a negligence case, it applies, in my opinion, to contractual interpretation as well. As mentioned above, the goal of contractual interpretation, to ascertain the objective intentions of the parties, is inherently fact specific. The close relationship between the selection and application of principles of contractual interpretation and the construction ultimately given to the instrument means that the circumstances in which a question of law can be extricated from the interpretation process will be rare. In the absence of a legal error of the type described above, no appeal lies under the AA from an arbitrator’s interpretation of a contract.
(b) The Role and Nature of the “Surrounding Circumstances”
[56] I now turn to the role of the surrounding circumstances in contractual interpretation and the nature of the evidence that can be considered. The discussion here is limited to the common law approach to contractual interpretation; it does not seek to apply to or alter the law of contractual interpretation governed by the Civil Code of Québec.
[57] While the surrounding circumstances will be considered in interpreting the terms of a contract, they must never be allowed to overwhelm the words of that agreement (Hayes Forest Services, at para. 14; and Hall, at p. 30). The goal of examining such evidence is to deepen a decision-maker’s understanding of the mutual and objective intentions of the parties as expressed in the words of the contract. The interpretation of a written contractual provision must always be grounded in the text and read in 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), 1997 CanLII 4085 (BC CA), 101 B.C.A.C. 62).
[58] The nature of the evidence that can be relied upon under the rubric of “surrounding circumstances” will necessarily vary from case to case. It does, however, have its limits. It should consist only of objective evidence of the background facts at the time of the execution of the contract (King, at paras. 66 and 70), that is, knowledge that was or reasonably ought to have been within the knowledge of both parties at or before the date of contracting. Subject to these requirements and the parol evidence rule discussed below, this includes, in the words of Lord Hoffmann, “absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man” (Investors Compensation Scheme, at p. 114). Whether something was or reasonably ought to have been within the common knowledge of the parties at the time of execution of the contract is a question of fact.
(c) Considering the Surrounding Circumstances Does Not Offend the Parol Evidence Rule
[59] It is necessary to say a word about consideration of the surrounding circumstances and the parol evidence rule. The parol evidence rule precludes admission of evidence outside the words of the written contract that would add to, subtract from, vary, or contradict a contract that has been wholly reduced to writing (King, at para. 35; and Hall, at p. 53). To this end, the rule precludes, among other things, evidence of the subjective intentions of the parties (Hall, at pp. 64-65; and Eli Lilly & Co. v. Novopharm Ltd., 1998 CanLII 791 (SCC), [1998] 2 S.C.R. 129, at paras. 54-59, per Iacobucci J.). The purpose of the parol evidence rule is primarily to achieve finality and certainty in contractual obligations, and secondarily to hamper a party’s ability to use fabricated or unreliable evidence to attack a written contract (United Brotherhood of Carpenters and Joiners of America, Local 579 v. Bradco Construction Ltd., 1993 CanLII 88 (SCC), [1993] 2 S.C.R. 316, at pp. 341-42, per Sopinka J.).
[60] The parol evidence rule does not apply to preclude evidence of the surrounding circumstances. Such evidence is consistent with the objectives of finality and certainty because it is used as an interpretive aid for determining the meaning of the written words chosen by the parties, not to change or overrule the meaning of those words. The surrounding circumstances are facts known or facts that reasonably ought to have been known to both parties at or before the date of contracting; therefore, the concern of unreliability does not arise.
[61] Some authorities and commentators suggest that the parol evidence rule is an anachronism, or, at the very least, of limited application in view of the myriad of exceptions to it (see for example Gutierrez v. Tropic International Ltd. (2002), 2002 CanLII 45017 (ON CA), 63 O.R. (3d) 63 (C.A.), at paras. 19-20; and Hall, at pp. 53-64). For the purposes of this appeal, it is sufficient to say that the parol evidence rule does not apply to preclude evidence of surrounding circumstances when interpreting the words of a written contract. . Dunbar et al v. Ontario Gaming West GTA Limited Partnership
In Dunbar et al v. Ontario Gaming West GTA Limited Partnership (Div Ct, 2022) the Divisional Court quoted extensively from Sattva for points of contractual interpretation, including the relationship of the applicable standards of review as it relates to customized contracts:[21] With respect to the interpretation of contract, the Supreme Court of Canada in Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, [2014] 2 S.C.R. 633, commencing at para. 46, states:[46] The shift away from the historical approach in Canada appears to be based on two developments. The first is the adoption of an approach to contractual interpretation which directs courts to have regard for the surrounding circumstances of the contract — often referred to as the factual matrix — when interpreting a written contract (Hall, at pp. 13, 21-25 and 127; and J. D. McCamus, The Law of Contracts (2nd ed. 2012), at pp. 749-51). The second is the explanation of the difference between questions of law and questions of mixed fact and law provided in Canada (Director of Investigation and Research) v. Southam Inc., 1997 CanLII 385 (SCC), [1997] 1 S.C.R. 748, at para. 35, and Housen v. Nikolaisen, 2002 SCC 33, [2002] 2 S.C.R. 235, at paras. 26 and 31-36.
[47] Regarding the first development, the interpretation of contracts has evolved towards a practical, common-sense approach not dominated by technical rules of construction. The overriding concern is to determine “the intent of the parties and the scope of their understanding” (Jesuit Fathers of Upper Canada v. Guardian Insurance Co. of Canada, 2006 SCC 21, [2006] 1 S.C.R. 744, at para. 27, per LeBel J.; see also Tercon Contractors Ltd. v. British Columbia (Transportation and Highways), 2010 SCC 4, [2010] 1 S.C.R. 69, at paras. 64-65, per Cromwell J.). To do so, a decision-maker must read the contract as a whole, giving the words used their ordinary and grammatical meaning, consistent with the surrounding circumstances known to the parties at the time of formation of the contract. Consideration of the surrounding circumstances recognizes that ascertaining contractual intention can be difficult when looking at words on their own, because words alone do not have an immutable or absolute meaning:No contracts are made in a vacuum: there is always a setting in which they have to be placed. . . . In a commercial contract it is certainly right that the court should know the commercial purpose of the contract and this in turn presupposes knowledge of the genesis of the transaction, the background, the context, the market in which the parties are operating. [48] The meaning of words is often derived from a number of contextual factors, including the purpose of the agreement and the nature of the relationship created by the agreement (see Moore Realty Inc. v. Manitoba Motor League, 2003 MBCA 71, 173 Man. R. (2d) 300, at para. 15, per Hamilton J.A.; see also Hall, at p. 22; and McCamus, at pp. 749-50). As stated by Lord Hoffmann in Investors Compensation Scheme Ltd. v. West Bromwich Building Society, [1998] 1 All E.R. 98 (H.L.):The meaning which a document (or any other utterance) would convey to a reasonable man is not the same thing as the meaning of its words. The meaning of words is a matter of dictionaries and grammars; the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean. [p. 115] [49] As to the second development, the historical approach to contractual interpretation does not fit well with the definition of a pure question of law identified in Housen and Southam. Questions of law “are questions about what the correct legal test is” (Southam, at para. 35). Yet in contractual interpretation, the goal of the exercise is to ascertain the objective intent of the parties — a fact-specific goal — through the application of legal principles of interpretation. This appears closer to a question of mixed fact and law, defined in Housen as “applying a legal standard to a set of facts” (para. 26; see also Southam, at para. 35). However, some courts have questioned whether this definition, which was developed in the context of a negligence action, can be readily applied to questions of contractual interpretation, and suggest that contractual interpretation is primarily a legal affair (see for example Bell Canada, at para. 25).
[50] With respect for the contrary view, I am of the opinion that the historical approach should be abandoned. Contractual interpretation involves issues of mixed fact and law as it is an exercise in which the principles of contractual interpretation are applied to the words of the written contract, considered in light of the factual matrix. [22] However, the legal pathway for contractual interpretation does not end there. This is made clear from the Court of Appeal for Ontario in Fuller v. Aphria Inc., 2020 ONCA 403. The Court stated the following, commencing at para. 48:(a) The Standard of Review
[48] As the application judge correctly noted, the issue of whether the Options had expired at the time of their exercise is a question of contractual interpretation. The interpretation of a non-standard form contract by a judge at first instance is generally subject to a deferential standard of review on appeal, as it involves matters of mixed fact and law: Sattva, at paras. 50-52. It is “an exercise in which the principles of contractual interpretation are applied to the words of the written contract, considered in light of the factual matrix”: Sattva, at para. 50.
[49] However, where errors made in the course of contractual interpretation give rise to extricable questions of law, deference will not be owed. Such legal errors include the application of an incorrect principle, the failure to consider a required element of a legal test, or a failure to consider a relevant factor: Sattva, at para. 53. Appellate courts should be cautious before characterizing something as an extricable question of law in disputes over contractual interpretation: Sattva, at para. 54. Nevertheless, the failure to apply the appropriate principles of contractual interpretation, especially where it results in an interpretation inconsistent with the wording of the relevant provisions, can give rise to an extricable error of law and displace deference: MacDonald v. Chicago Title Insurance Company of Canada, 2015 ONCA 842, 127 O.R. (3d) 663, leave to appeal refused, [2016] S.C.C.A. No. 39, at paras. 64-66, 72. [bold emphasis added]
[50] In Resolute FP, the majority of the Supreme Court agreed with the dissenting reasons in this court of Laskin J.A. in concluding that there were reversible errors in the motion judge’s interpretation of the scope of a contractual indemnity: Resolute FP, at para. 26. Laskin J.A. found the following errors to justify appellate intervention: palpable and overriding errors of fact that affect the interpretation; a failure to properly, accurately, and fully consider the context in which a contract was made, which is an error of law; and a failure to consider the contract as a whole, by focussing on one provision without giving proper consideration to other relevant provisions, which is also an error of law: Weyerhaeuser, at para. 211 (Laskin J.A. dissenting reasons); Resolute FP, at paras. 26-27, 30 and 32-34. [23] Put another way, the Court of Appeal for Ontario stated in Deslaurier Custom Cabinets Inc. v. 1728106 Ontario Inc., 2017 ONCA 293, 135 O.R. (3d) 241 at para. 19:[19] First, Sattva holds, at para. 53, that in rare cases the correctness standard of review will apply to questions of contractual [page 247] interpretation where it is "possible to identify an extricable question of law from within what was initially characterized as a question of mixed fact and law" (citation omitted). Justice Rothstein, writing for the Supreme Court, explained in Sattva, at para. 53, that "extricable questions of law" include legal errors involving "the application of an incorrect principle, the failure to consider a required element of a legal test, or the failure to consider a relevant factor" (citation omitted).
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