Contract Interpretation: Now a Question of Mixed Fact and Law

October 30th, 2014 by

Historically, the exercise of interpreting a contract has been treated by the courts as a question of law. This meant courts and adjudicators were primarily concerned with the legal meaning of the words, and the effect of the words used in a strict sense. Other contextual information was deemed irrelevant.

One narrow exception to this rule was the “parol evidence rule”. This exception meant that extrinsic relevant evidence could be admitted to assist the court in interpreting a contract if the contract was ambiguous in its words or in its practical application. The parol evidence rule acted to prohibit evidence of what the parties intended the contract to say, but did not actually say.

Yet, in the recent Supreme Court of Canada decision, Sattva Capital Corp v Creston Moly Corp, 2014 (“Sattva”)  the Court addressed three main issues:

  1. The proper approach to contract interpretation, the relationship between the words of an agreement and the context in which those words should be understood;
  2. Whether contract interpretation is a question of law, or a question of mixed fact and law; and
  3. The correct approach to be taken by the courts when reviewing decisions of arbitrators in the area of contract interpretation.

In terms of contractual interpretation, the court rejected the historical approach, and described the proper approach as a “practical, common-sense approach not dominated by the technical rules of construction.”

In all contractual interpretation cases, evidence of surrounding circumstances should be used. Courts must consider both the words of the contract and the circumstances in which they were made in order to ascertain the intent of the parties. Furthermore, the Court clarified that the goal of examining evidence of surrounding circumstances is not to “overwhelm” the words of the agreement, but rather to better understand “the mutual and objective intentions of the parties as expressed in the words of the contract.”

What constitutes “surrounding circumstances” will vary from case to case. In terms of the parol evidence rule, the Court clarified that the rule should preclude evidence of subjective intent of the parties, but evidence that would affect what a reasonable person would perceive, is acceptable and should be included.

The Court ultimately found that the modern approach of contractual interpretation is not a question of law, but rather a question of mixed fact and law, as the interpretive process is not one of giving words their plain and ordinary meaning, but rather a matter of ascertaining “the objective intent of the parties.” This made the exercise one of mixed fact and law.

Finally, regarding the standard of review of arbitrators’ decisions in interpretation cases, the courts generally take a deferential approach. The decisions will only be overturned when they lack justifiability, intelligibility and transparency.

This decision confirms that contract interpretation is not a mechanical task. There is now greater room in interpretation and therefore there will likely be greater uncertainty in contractual relations. Finally, because the issue is now one of mixed fact and law, the courts will continue to defer to arbitrators’ decisions which not only encourages parties to place confidence in those decisions, but if parties wish for their decision to be reviewed and possibly overruled, there is a high threshold to pass.

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