On September 10, 2014, the Court of Appeal for Ontario released a decision1 applying the Supreme Court of Canada’s recent ruling dealing with contractual interpretation and the standard of review for contractual disputes.

The principal issue in Martenfeld was how to interpret a provision in a partnership agreement that required, in certain circumstances, that withdrawing partners pay liquidated damages to the partnership in an amount equal to two times a partner’s “Permanent Capital.”2 The appellants argued that the trial judge erred by failing to consider financial documents pertaining to the partnership and a related management company, how the partnership’s executive committee treated “Permanent Capital” and the circumstances surrounding the formation of the partnership agreement.

Standard of review

Citing the Supreme Court of Canada’s decision in Sattva Capital Corp. v Creston Moly Corp, Justice Cronk held that contractual interpretation involves issues of mixed fact and law and the words of a written contract must be considered in light of the “factual matrix.”3

The court recognized that when interpreting contracts, it may be possible to isolate issues that appear to be questions of law - thus attracting the standard of correctness on appeal. However, the goal of contractual interpretation is to ascertain the objective intentions of contracting parties - an inherently fact-specific exercise. Accordingly, courts should be hesitant to identify extricable questions of law in disputes concerning contractual interpretation.

In Martenfeld, Justice Cronk held that the issues in dispute were ones of fact and mixed law and fact. On the authority of Sattva, Justice Cronk concluded the court was precluded from intervening in this instance given that the trial judge had not made any palpable and overriding errors in interpreting the partnership agreement.

Contractual interpretation

The court then considered the proper approach to contractual interpretation. Justice Cronk began by reiterating the well-established principle that courts are to interpret contracts 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 the formation of the contract.”4

However, citing Sattva, Justice Cronk emphasized that using “surrounding circumstances” to interpret a contract must be limited. Although surrounding circumstances may be relevant insofar as they help determine the intentions of contracting parties, the disputed contractual provision must always be grounded in the language of the contract read as a whole.

The court emphasized that the circumstances surrounding the formation of a disputed contract must not overtake the written words adopted by the parties. Moreover, the court held that the decision in Sattva did not alter the principle that subjective intention is irrelevant to interpreting the contract language. Accordingly, it was unnecessary to consider supplementary financial documents and the surrounding circumstances prior to formation of the partnership agreement as evidence of the parties’ contractual intent.   

Takeaway

The Martenfeld decision emphasizes the proper approach to the standard of review and contractual interpretation for disputes among commercial parties. While the circumstances surrounding the formation of a contract may help to establish the objective intentions of contracting parties, the court will not use this evidence to overtake the explicit language contained in a contract. Moreover, Martenfeld makes clear that appellate courts should be hesitant to isolate issues of law in contractual disputes and apply the correctness standard. In contractual disputes that concern issues of fact and mixed law and fact, courts should not intervene in the absence of a palpable and overriding error.

The respondents were successfully represented by Norton Rose Fulbright Canada LLP both at trial and on the appeal.5

Jonathan Preece