In Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53 (Sattva), released August 1, 2014, the Supreme Court of Canada overturned the historical approach and held that contractual interpretation involves questions of mixed fact and law rather than pure questions of law. As a result, leave to appeal from an arbitral award interpreting a contract should not have been granted. The Court also reaffirmed the contextual approach to contractual interpretation and explained the role of surrounding circumstances in contractual interpretation.
The Dispute, the Arbitral Award and the Path to the Supreme Court
The parties entered into a finder’s fee agreement. After a finder’s fee in the form of shares became payable to Sattva, the parties disagreed about the date on which the shares should be valued. Sattva argued that an earlier date was appropriate and requested 11,460,000 shares; Creston argued that a later date should be used such that only 2,454,000 shares should be provided. The arbitrator held that Sattva was correct, and the appeals started:
- First, the B.C. Supreme Court denied leave to appeal. Pursuant to the B.C. Arbitration Act, leave to appeal from an arbitrator’s decision is only granted in respect of questions of law. The Court held that there was no extricable question of law.
- The B.C. Court of Appeal disagreed and held that leave ought to have been granted. It therefore sent the appeal back to the B.C. Supreme Court for a decision on the merits.
- The B.C. Supreme Court dismissed the appeal, holding that the arbitrator’s decision was correct.
- The B.C. Court of Appeal again disagreed, reviewed the arbitrator’s decision on the standard of correctness and allowed the appeal, holding that the arbitrator’s decision was not correct.
The Supreme Court of Canada granted leave to appeal from both the B.C. Court of Appeal’s decision on leave and also its decision on the merits. The Supreme Court’s decision contains important comments about a number of topics, including:
- The approach to contractual interpretation, and the use of surrounding circumstances in particular;
- Contractual interpretation involving a question of mixed fact and law (rather than a pure question of law), which reduces the scope for appellate intervention; and
- The standard of review applied to an arbitrator’s decision on a question of law should be reasonableness (not correctness), except in respect of constitutional questions or questions of central importance to the legal system as a whole.
The Test for Contractual Interpretation and Surrounding Circumstances
In its decision, the Supreme Court of Canada confirmed the contextual approach to contractual interpretation, stating that:
- The principal goal of contractual interpretation is to give effect to the intentions of the parties and the scope of their understanding at the time of contracting.
- As such, the contract must be read as a whole and the words in the contract must be given their plain and ordinary meaning, consistent with the surrounding circumstances at the time of contracting.
- The surrounding circumstances – such as the genesis of the transaction, the background, the context and the market in which the parties operate – combine to aid a decision-maker in ascertaining intention, since words do not have an immutable or absolute meaning.
The Court also clarified that although the surrounding circumstances regarding the formation of a contract are important, these circumstances “must never be allowed to overwhelm the words of that agreement” (para. 57). Rather, evidence of the surrounding circumstances serves to deepen an understanding of the mutual and objective intentions of the parties, as expressed in the words of the contract.
The Court noted that the evidence that forms part of the factual matrix will vary, but it must always be limited to the objective evidence of the background facts existing at the time the contract was formed. In other words, the factual matrix is limited to such knowledge that was or reasonably ought to have been within the common knowledge of the parties at the time, which is itself a question of fact (para. 58).
Contractual Interpretation Involves Questions of Mixed Fact and Law
Because contractual interpretation requires the decision-maker to consider the surrounding circumstances and to ascertain the objective intent of the parties, the Court held that interpreting a specific contract is a fact-specific goal. As a result, the Court held that:
[T]he 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 the light of the factual matrix. [para. 50.]
As a result, appellate courts, particularly those whose jurisdiction depends on having an arguable question of law to consider, should be cautious before granting leave to appeal from decisions interpreting contracts.
When Should an Appellate Court Intervene in Contractual Disputes?
The Court explained that appellate intervention on contractual interpretation should be limited to those rare instances where the results can be expected to have an impact beyond the parties arguing the case (i.e., cases that have precedential value). The Court noted that while it is possible to identify extricable questions of law – such as the application of an incorrect principle, the failure to consider an element of a legal test or the failure to consider a relevant factor – such pure questions of law are rare, and courts should exercise caution when attempting to isolate a question of law in a dispute over the proper interpretation of a contract (paras. 53-55).
Appealing Arbitral Decisions: The Standard of Review
The Court also made interesting comments about the standard of review to be applied in appeals from arbitral decisions. If there is an extricable question of law such that leave to appeal is granted, those appeals should generally be conducted using the reasonableness standard of review. Appeals of commercial arbitral decisions take place under “tightly defined regimes specifically tailored to the objectives of commercial arbitration” (para. 104). Arbitrators are specifically selected for their expertise, and should be accorded deference. As a result, the standard of review for their decisions even on questions of law will be reasonableness, unless the question is one that would attract the correctness standard, such as a constitutional question or a question of central importance to the legal system as a whole (para. 106).
Lessons Learned: Choose Your Language and Your Arbitrator Carefully
Given the Supreme Court’s reasons, where leave to appeal is required, parties may face an uphill battle in obtaining leave to appeal from arbitral decisions concerning the proper interpretation of a commercial agreement. If parties want an appeal right, parties should carefully consider their arbitral agreements, and should include express language providing for a right of appeal on questions of fact, mixed fact and law or law, depending on the Arbitration Act governing their agreement.
In addition, arbitrators are more likely to have the final say. Parties must therefore exercise great care in selecting their arbitrator, and should conduct careful diligence on the arbitrator’s experience and expertise.