Contract interpretation is no longer a question of law

The standard of appellate review for contract interpretation has been redefined by the Supreme Court of Canada. Buried in the depths of summer and delivered in the context of an appeal from an arbitral award, Justice Marshall Rothstein’s decision in Sattva Capital Corp. v. Creston Moly Corp. may have gone unnoticed by many, so I am taking this opportunity to focus the spotlight on it. The decision is of seminal importance, not just for appeals in the arbitration context, but also for all common law proceedings where the interpretation of a contract is under appeal.

In this case, the SCC has expressly abandoned the historical approach, which held the interpretation of a contract was a question of law to be reviewed on a correctness standard. Rather, the Supreme Court acknowledges the practical reality that contract interpretation has long since evolved from its pedantic historical roots.

Now, when a trier of fact is interpreting a contract, the goal is to ascertain the objective intent of the parties. That analysis includes consideration of the context and the factual matrix surrounding the making of the bargain, i.e. fact-finding, as well as looking at the words as used within the four corners of the agreement.

Hence, for the purposes of the standard of review on an appeal, the issue of whether a contract was correctly interpreted will generally be reviewed as an appeal on a question of mixed fact and law. Accordingly, the original fact-finder’s decision will be assessed on a reasonableness standard, and not correctness.

In reaching this conclusion, Rothstein recognized courts have moved away from a technical and literal reading of the words used in the contract. Instead, the “goal of the exercise is to ascertain the objective intent of the parties,” which is fact specific.

As in so many other areas of the law, the courts have embraced a “practical, common-sense approach” to contract interpretation, the overriding purpose of which “is to determine ‘the intent of the parties and the scope of their understanding.’” To do so, the courts have regard to the factual matrix in which the contract was made, which gives context to the words of the agreement, including its purpose, and the nature of the relationship it creates.

This interpretive exercise is distinct from answering a question of law, which is about determining the correct legal test, and leads to the conclusion that contract interpretation is an issue of mixed fact and law as defined in Housen v. Nikolaisen, and not a question of law.

In this decision, Rothstein provided guidance to the courts on the interpretive exercise. The purpose of reviewing the court the surrounding circumstances is not to rewrite the contract, but rather “to deepen a decision-maker’s understanding of the mutual and objective intentions of the parties as expressed in the words of the contract.”

Acceptable evidence of the factual matrix should be limited to objective evidence of the background facts that reasonably ought to have been known by both parties to the agreement at the time of the execution of the contract. Subjective intent and one-sided information are of no probative value for the purposes of determining the mutual intent of the parties.

This definitive eradication of contract interpretation being a question of law will be of particular importance in the context of appeals from an arbitral award. Under many arbitration agreements, and most arbitration statutes, an appeal from the arbitral award is only allowed in respect of questions of law. Now, the right of appeal will be considerably foreshortened where the issue is the interpretation of the terms of a contract.

Unless the appellant can establish “an extricable question of law,” i.e. a legal error made in the course of interpreting the contract, there will be no appeal from the award. Examples of extricable questions of law are errors in principle, such as applying the wrong legal principle, failing to apply or misapplying a legal test, or failure to consider a relevant factor.

Rothstein has emphasized appellate courts must apply extra diligence in identifying whether the appeal is based on a true legal error, as cases in which there are extricable questions of law will be rare, given that contract interpretation is inherently a fact specific exercise.

In Sattva, the Supreme Court sends a strong message that appellate courts should be engaged in resolving matters of general importance, and there should be limited intervention in cases where the results of the appeal will have little or no impact beyond the immediate parties to the dispute.

Citing Housen, Rothstein reminded that deference to fact-finders promotes “the goals of limiting the number, length, and cost of appeals, and of promoting the autonomy and integrity of trial proceedings.” This, he says, applies equally in the context of interpretation of contracts, which is inherently an individualistic and idiosyncratic exercise.

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