In the world of contractual interpretation, the decision of the Supreme Court of Canada in Sattva Capital Corp. v. Creston Moly Corp. is a blockbuster. Sattva does three significant things. First, it determines that contractual interpretation generally involves a mixed question of fact and law, not a question of law alone. That holding has major implications for appellate review of decisions involving issues of contractual interpretation, and represents the resolution of an issue that had previously divided provincial appellate courts. Second, Sattva emphasizes the importance to contractual interpretation of evidence of the surrounding circumstances or the factual matrix in which a contract is formed. In doing so, Sattva implicitly overrules a 1998 Supreme Court of Canada precedent to the extent that it had downplayed the importance of the factual matrix. Third, Sattva reaffirms a number of principles of contractual interpretation which are well established in Canadian jurisprudence.

Contractual interpretation is a question of mixed fact and law

At issue in Sattva was whether the lower courts in British Columbia should have granted leave to appeal a commercial arbitration award. Under the B.C. Arbitration Act, leave to appeal from an arbitrator to the courts can only be granted on a “point of law”. That requirement squarely raised the issue of whether the issue the arbitrator had decided, namely the proper interpretation of a contract, was a question of law or a question of mixed fact and law. Sattva’s unequivocal answer is that the issue was a question of mixed fact and law, such that the B.C. courts had erred in granting leave to appeal the arbitral award.

In reasons for judgment for a unanimous Court, Justice Rothstein began by noting that historically contractual interpretation had long been considered a question of law, but that the origin of that rule was anachronistic. The rule was developed centuries ago in England, at a time when civil cases were commonly tried by jury but jurors were often illiterate. In those circumstances, it became necessary to categorize contractual interpretation as a question of law to be determined by the judge, for the simple reason that the judge was often the only decision-maker in the courtroom who could actually read the disputed contract.

Justice Rothstein then noted that, for two major reasons, a number of cases had reconsidered the historical rule. The first is the importance in contractual interpretation of the factual matrix. In two seminal cases in the 1970s (Prenn v. Simmonds, [1971] 3 All E.R. 237 (H.L.) and Reardon Smith Line Ltd. v. Hansen Tangen, [1976] 3 All E.R. 570 (H.L.)), the House of Lords recognized that resolving disputes over the meaning of a contract by looking at the contractual language alone is difficult – and fraught with the risk of error – because words do not have fixed and immutable meanings. Resort must therefore be had to evidence of the contract’s surrounding circumstances. Since Prenn v. Simmonds and Reardon Smith Line, the factual matrix has taken on enormous importance in the interpretive exercise. Given that reality, labelling contractual interpretation as a pure question of law was difficult to reconcile with the way the exercise is actually conducted. The second reason is the general law relating to appellate review as expressed in Housen v. Nikolaisen, 2002 SCC 33, [2002] 2 S.C.R. 235, which makes a sharp distinction between questions of law (reviewable on a correctness standard, with no deference paid to the trial judge) and questions of fact or mixed fact and law (generally reviewable on deferential standard, with an appellate court permitted to intervene only if it concludes that the trial judge has made a palpable and overriding error). Given the role of the factual matrix, it appeared to some courts that Housen mandated a deferential standard of appellate review.

As a result, most provincial appellate courts had moved away from the historical rule, adopting a more modern rule that contractual interpretation is generally a question of mixed fact and law subject to a deferential standard of appellate review, but recognizing that if an error of law is extricable – for example the application of an incorrect principle of interpretation – the error is a question of law and reviewable on a correctness standard. However, there was one notable exception: in Bell Canada v. The Plan Group, 2009 ONCA 548, 96 O.R. (3d) 81 the Ontario Court of Appeal reversed itself (after having initially adopted the modern approach) and reiterated the historical rule that contractual interpretation is a pure question of law, subject to appellate review on a correctness standard.

Sattva settled the issue in no uncertain terms:

“With respect for the contrary view, I am of the opinion that the 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 light of the factual matrix.” (para. 50)

Applied to the facts of the cast, this conclusion meant that leave to appeal the arbitrator’s decision had to be denied on the basis that an appeal would not raise a point of law. More generally, the ruling means it is now clear that appellate courts generally owe deference to trial judges in matters of contractual interpretation, and that in most cases an appellate court will only be able to intervene if satisfied that the judge at first instance made a palpable and overriding error.

Re-emphasis of the highly contextual nature of contractual interpretation

Starting with Prenn v. Simmonds and Reardon Smith Line, the factual matrix has become a central focus of the interpretive endeavour. In England, the factual matrix hit its zenith in Investors Compensation Scheme Ltd. v. West Bromwich Building Society, [1998] 1 All E.R. 98 (H.L.), in which the House of Lords held that, subject to two exceptions (namely evidence of subjective intent and evidence of pre-contractual negotiations), there are no conceptual limits to the factual matrix: the factual matrix includes “absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable [person]”.

In Canada, the situation was less clear. Lower courts were generally as enthused about the factual matrix as their English counterparts, but the message from the Supreme Court of Canada was confused by Eli Lilly & Co. v. Novopharm Ltd., [1998] 2 S.C.R. 129. Decided a little more than a year after Investors Compensation Scheme but without even referring to it, Eli Lilly held that contractual interpretation is a highly textualist exercise with a very limited role for the factual matrix. This aspect of Eli Lilly came to be generally ignored by lower courts, who rightly found it impossible to reconcile with the bulk of post-Prenn v. Simmondsjurisprudence that placed considerable weight on the factual matrix.

As a result of Sattva, what has been apparent for some time is now crystal clear: Eli Lilly’s expression of the limited role of the factual matrix is not good law. (Eli Lilly does remain good law on another point: evidence of subjective intention is inadmissible.) Sattva enunciated a very contextualist approach that gives a central role to the factual matrix. It even adopted Investors Compensation Scheme’s “absolutely anything” formulation of the scope of the factual matrix – the first time the Supreme Court of Canada or any Canadian appellate court has done so.

Reiteration of other familiar principles of contractual interpretation

In addition to recognizing the importance of the factual matrix, Sattva also reiterated a number of other familiar principles of contractual interpretation, including the following. The old “canons of construction” are dead: “the interpretation of contracts has evolved towards a practice, common-sense approach not dominated by technical rules of construction” (para. 47). A contract must be read as a whole. Despite the importance of the factual matrix, the interpretation of a contract must always be grounded in the text, and the surrounding circumstances must never be allowed to overwhelm the words of the agreement. The parol evidence rule does not preclude evidence of the surrounding circumstances.

Significance

The Supreme Court of Canada rarely examines questions of contractual interpretation, but when it does the resulting statement tends to be significant. Sattva is no exception. It settles the question of whether contractual interpretation is a question of law or mixed fact and law – an issue which has enormous practical implications for appellate review of decisions interpreting contracts. It clarifies the central role of the factual matrix, effectively overruling Eli Lilly to the extent that it adopted a pre-Prenn v. Simmonds textualist approach. Finally, it reiterates a number of other well-established principles of contractual interpretation. In the world of contractual interpretation, Sattvais a blockbuster.

Case information

Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53

Docket: 35026

Date of Decision: August 1, 2014

In the interest of full disclosure of possible biases – and to brag about the prominent role McCarthy Tétrault played in the case – it should be noted that the counsel for the successful appellant were my colleagues Michael Feder and Tammy Shoranick, and that my book Canadian Contractual Interpretation Law, 2nd ed. (LexisNexis Canada, 2012) was cited by Justice Rothstein multiple times.