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Parole Evidence

. 2249778 Ontario Inc. v Smith (Fratburger)

In 2249778 Ontario Inc. v Smith (Fratburger) (Ont CA, 2014) the Court of Appeal restated principles of interpretation applicable to commercial contracts, with particular attention to the role of 'surrounding circumstances' in interpretation (aka parole evidence):
[20] In Sattva, the Supreme Court addressed the issue of surrounding circumstances. Rothstein J. wrote, at para. 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. 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. 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. [Citations omitted.]
[21] Evidence of surrounding circumstances should consist only of objective evidence of the background facts at the time of execution of the contract: knowledge that was or reasonably ought to have been within the knowledge of both parties at or before the date of contracting: Sattva, at para. 58.
. Sattva Capital Corp. v. Creston Moly Corp.

In Sattva Capital Corp. v. Creston Moly Corp. (SCC, 2014) the Supreme Court of Canada re-states the law that 'surrounding circumstances' may be taken into account for interpretation without offending the parol evidence rule:
(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.



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