It is not every day that the Supreme Court of Canada considers fundamental principles of contract interpretation, and with its decision in Sattva Capital Corp. v. Creston Moly Corp.1 those occasions could become even more rare.

The Court reversed its historical position that contractual interpretation was a pure question of law, and re-characterized it as a question of mixed fact and law. The Court also considered the degree to which courts can consider the “surrounding circumstances” or “factual matrix” when interpreting contractual provisions.

While those two issues may be of interest to commercial lawyers, of more interest to clients in the construction industry are the implications for arbitration clauses, specifically considered in Sattva Capital under British Columbia’s arbitration legislation. The result is that tribunals of first-instance, whether trial courts or arbitrators, will be given more deference for their interpretation of contracts, and avenues of appeal may be more limited.

Facts of Sattva Capital

The decision in Sattva Capital arose out of an arbitrated dispute over a finder’s fee that the Creston Moly Corporation was obliged to pay the Sattva Capital Corporation when Creston purchased a $30 million molybdenum mining property in Mexico. The price of the finder’s fee was tied to the TSX Venture Exchange Policy Manual. The agreement and the policy manual entitled Sattva to a finder’s fee of $1.5 million. Sattva was entitled to collect its fee in Creston shares at market price. The parties disagreed on the valuation date, and thus the number of Creston shares to which Sattva would be entitled under the agreement.

The arbitrator found in favour of Sattva, choosing a date that gave Sattva approximately 11.5 million shares of Creston rather than the 2.5 million shares advocated by Creston. Creston sought, and was granted, leave to appeal pursuant to s. 31(2) of the B.C. Arbitration Act. [the “B.C. Act”]. 2 On appeal the B.C. Court of Appeal, that Court held that the arbitrator’s decision was “absurd” and amounted to valuing the shares at $8 million rather than $1.5 million, contrary to the contract’s $1.5 million maximum.

The over-arching issue before the Supreme Court of Canada was whether the B.C. Court of Appeal erred in granting leave to appeal under s. 31(2) of the B.C. Act, which permitted leave if the decision (a) involved a question of law; and (b) determination of that question of law would prevent a miscarriage of justice between the parties, was of general importance to a class of persons of which the applicant was a member, or of general public importance. The Supreme Court held that the B.C. Court of Appeal erred in finding that the arbitrator’s decision interpreting the agreement raised a question of law.

Question of Law?

The Sattva Capital decision squarely raises the question of “when is contractual interpretation a question of law?”3 Historically, the court noted, contractual interpretation was a question of law because juries were largely illiterate and judges literate, requiring the literate judge to read and interpret the written document for the jury. This historical rationale no longer applies.

Further, courts have shifted away from technical rules of construction in favour of a more common sense, grammatical interpretation of contracts, a development that has paralleled the clarification of the definition of a “pure question of law” and questions of “mixed fact and law” in the context of negligence and public law appeals. Yet, as Rothstien J. notes, “in contractual interpretation, the goal of the exercise is to ascertain the objective intent of the parties –– a factspecific goal –– through the application of legal principles.”4 Thus, the Supreme Court of Canada held that contractual interpretation “involves issues of mixed fact and law” requiring the application of legal principles to the words of the written contract, in light of the “factual matrix”.

Part of the express rationale for this change in the law is to limit the intervention of appellate courts unless the issues at stake are expected to have an impact beyond the parties to the particular dispute. But this raises the question of what, exactly, are the “surrounding circumstances” or the “factual matrix” in which the interpretative exercise is to take place?

Surrounding Circumstances/Factual Matrix

In its determination what constituted ‘surrounding circumstances’ the Court first re-iterated certain fundamental contractual interpretation principles:

  • the goal is to ascertain the objective intentions of the parties as expressed in the words of the contract;
  • the interpretation must always be grounded in the interpretation of the written contractual provisions and read in light of the entire contract; and
  • the surrounding circumstances cannot be used to permit courts to deviate from the text such that the court essentially creates a new agreement.

Rothstein J., on behalf of the Court, concluded that surrounding circumstances consist only of “objective evidence of the background facts at the time of the execution of the contract”, that is, “knowledge that was or reasonably ought to have been within the knowledge of both parties at or before the date of contracting”. 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.” 5

The Court confirmed that the parol evidence rule (which precludes evidence of the subjective intentions of the parties) does not exclude evidence of the surrounding circumstances. Since the surrounding circumstances are facts that objectively were known or reasonably ought to have been known at the time of contracting the concerns about using unreliable evidence to attack the contract or hamper contractual certainty of obligations do not arise, according to Sattva Capital.

Helpful guidance on the distinction between impermissible evidence of subjective intention and the surrounding circumstances is given in another molybdenum mining decision, Indian Molybdenum Ltd. v. The King. 6 In Indian Molybdenum both parties adduced evidence of their subjective intentions through the form of pre-contractual negotiations, including discarded drafts of their agreement. Such evidence was held to be inadmissible evidence of the parties’ subjective intentions. The Court held that “all facts are admissible which tend to show the sense the words bear with reference to the surrounding circumstances concerning which the words were used”, except for those that “only” show the subjective intention behind the words used. Estey J. in Indian Molybdenum provided an example of the sort of evidence which is excluded by the parol evidence rule, and the type of evidence that falls within the parameters of the “surrounding circumstances”:

It follows that not only the draft letters, but all expressions of intention made by the respective parties in the course of negotiations would not be admissible. However, the evidence admissible would include the facts in proof of the urgent need of the molybdenum, the acquisition of the mine and the result of the diamond drilling, as known to the parties, as well as the fact that all parties to the negotiations were associated with mining enterprises.7

All of these are objective facts, either generally of the type known to those in the molybdenum mining industry, or specifically known to the parties who knew the test drilling results. These are the very sort of general commercial conditions, and specific site or project conditions (such as geotechnical conditions given to bidders), that are commonly known to those in the construction industry.

After Sattva Capital such objective facts will provide interpretative guidance to courts and reduce the reviewability of tribunals’ decisions interpreting contracts. This is all the more so given Sattva Capital’s endorsement of deference to arbitral tribunal decisions.

Deference to Arbitrators

Courts generally defer to the fact-finding expertise of first-instance tribunals, whether courts, administrative tribunals or arbitrators. This is not new. What is new in Sattva Capital is that contractual interpretation – the bread and butter of contractual disputes – will be a question of mixed fact and law, diminishing appellate and judicial review of lower tribunal interpretations unless an extricable question of law can be found.

Some of those extricable questions of law – such as contract formation, capacity, statutory requirements for writing – will persist and continue to arise in contractual disputes. However, the majority of contractual disputes will continue to be questions of interpretation, not formation.8

In Sattva Capital and under the B.C. Act this meant that because the exercise of contractual interpretation was a question of mixed fact and law there was no basis on which to grant leave to appeal and the arbitrator’s award remained in place. Other jurisdictions will of course have slightly different default rules in their arbitration statutes.

In addition to finding that the exercise of contractual interpretation is a question of mixed fact and law, the Supreme Court of Canada held in Sattva Capital that appellate review of commercial arbitration awards, even where restricted to questions of law, will be conducted on a reasonableness standard, unless the question raises constitutional questions or is of central importance to the legal system as a whole.9

Under the Ontario Arbitration Act 10 [the “Ontario Act”] the appeal provisions allow for appeals of questions of mixed fact and law, “[i]f the arbitration agreement so provides”.11 Court interventions in arbitrations are explicitly limited by the Ontario Act.12 Commercial parties are allowed to contractually modify their rights to appeal under the Ontario Act, but are not allowed to contract out of the judicial review applications to set aside the award on enumerated jurisdictional and fairness grounds.13

Impact on Commercial Parties and Construction Companies

For commercial parties and construction companies doing business in Ontario or choosing Ontario law to govern their contracts, careful thought must be given to the rights of appeal they wish to include or exclude in their contracts. If finality and speed of resolution is desired, an arbitration clause that excludes all appeals or one that only allows for appeals of questions of law will achieve that objective since, after Sattva Capital, even questions of law arising from commercial arbitrations will only be reviewed for reasonableness rather than correctness. Further, most questions of contractual interpretation will not even be appealable under such a clause since they will remain questions of mixed fact and law per Sattva Capital. If parties want to ensure appellate review of an arbitrator’s take on their contract, a clause permitting appeals of questions of mixed fact and law will be necessary, though that may permit broader appeals of issues not contemplated by the parties at the time of agreeing to an arbitration clause.

Reversal of arbitration awards through appellate channels is now all the more difficult. After Sattva Capital parties to commercial arbitration agreements will now have to first (a) identify a question of law, despite questions of contractual interpretation being questions of mixed fact and law, and (b) convince an appellate court that not only was the decision incorrect, but also unreasonable before an arbitrator’s contractual interpretation is reversed. It is unclear whether or not parties in Ontario could contractually agree to a standard of review for their questions of mixed fact and law and thereby permit review of contractual interpretation, but show little deference to a question that traditionally had to be decided correctly.

Another lingering question raised by Sattva Capital is the fate of the parol evidence rule. That rule is likely to persist to exclude evidence of subjective intentions of the parties, if for no other reason than the pragmatic policy limitation on the marginally relevant evidence of what was in the minds of the contracting parties rather than the terms actually agreed to. 14

Regardless, Sattva Capital will make appellate decisions on contractual interpretation – now clearly questions of mixed fact and law - more rare, and appellate review of arbitrators’ contractual interpretation all the rarer, even if an extricable question of law can be found.