SCC issues ‘big change’ to contract law

Arbitrators and trial judges should have the last word in most cases that turn on the interpretation of contracts, the Supreme Court of Canada has found.

That’s the clear message from the top court’s recent landmark decision in Sattva Capital Corp. v. Creston Moly Corp. or it’s at least what many people will get from the ruling.

For lawyers, it’s a bit more technical. In rejecting the traditional view that contractual interpretation involves pure questions of law, the court ruled the exercise engaged questions of mixed fact and law.

At the core of the decision is the court’s reaffirmation of a modern and contextual approach to contract interpretation, one that involves a consideration of the “surrounding circumstances” in giving meaning to an agreement.

“The idea that contract interpretation is more a factual than a legal exercise is a big change, especially in Ontario,” says David Quayat, an associate at Toronto’s Lenczner Slaght Royce Smith Griffin LLP.

“It sends the message that appeal courts need to give more deference to arbitrators and trial judges as to what parties meant to achieve in their commercial dealings.”

According to Mary Paterson of Osler Hoskin & Harcourt LLP’s Toronto office, treating contractual interpretation as a matter of mixed fact and law is “more intellectually honest” than regarding the exercise as a pure question of law.

“The pure question of law approach assumes that all words mean the same thing to everyone and that a judge — even one unfamiliar with the industry or the context involved — can tell you what the parties meant,” she says.

“At the very least, the SCC’s approach acknowledges that interpreting a contract can be a complicated thing and that we all come to agreements from different perspectives and with different objectives.”

In other words, the top court’s approach accords with commercial reality and the way the courts have been approaching contractual interpretation in recent years.

“These days, courts are always asking what parties are trying to do,” says Paterson.

Sattva turned on the meaning of a finder’s fee agreement. The parties disagreed on the valuation date for the shares on which the fee was based. Sattva Capital’s interpretation, which the arbitrator ultimately accepted, entitled the company to some 11.4 million shares. That was almost five times as many as the interpretation sought by Creston Moly would have yielded.

Creston Moly sought leave to appeal under the B.C. Arbitration Act that allows leave only on questions of law. The B.C. Supreme Court denied leave, holding that there was no such question. On further appeal, the Court of Appeal reversed that decision. It ruled the court should have granted leave.

It then fell back to the Supreme Court to hear the appeal on the merits. It dismissed the appeal and upheld the arbitrator’s decision. Creston Moly appealed again and was successful. The Court of Appeal, which reviewed the arbitrator’s decision on a standard of correctness, ruled the initial decision was wrong.

The Supreme Court granted leave on both the Court of Appeal’s leave-to-appeal and merits rulings.

Ultimately, the top court ruled that reasonableness, not correctness, was the appropriate standard for a review of an arbitrator’s decision on contractual interpretation (except on constitutional questions or matters of general importance to the legal system.) According to Paterson, the same standard should apply to a review of a trial judge’s decisions regarding contractual interpretation.

“It wouldn’t make sense to give arbitrators more deference [by reviewing on the basis of reasonableness rather than correctness] than first-level judges,” says Paterson.

“But what this means is that even when leave is not required, the threshold for success on an appeal from a trial judgment involving contractual interpretation is higher than it was before.”

To be sure, the top court didn’t go so far as to state that contractual interpretation could never be a pure question of law.

“That occurs when the issue engages what’s called an inextricable principle of law,” says Quayat.

“But that approach can make the scope of pure matters of law very narrow.”

In terms of access to justice, Sattva does lend itself to more certainty and finality in the sense that parties can have greater confidence in first-instance judgments.

“The window for success on appeal has become smaller indeed,” says Quayat.

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