In this case the Supreme Court of Canada decides that contractual interpretation is a question of mixed fact and law – not simply a question of law.
Practically, the result is that contracts cannot be interpreted on their face alone, and decisions by trial courts regarding the meaning of a contract are not likely to be readily overturned on appeal.
A question of law deals with the correct legal test to determine an issue. A question of mixed fact and law considers what facts are necessary to satisfy a legal test. Questions of law may be overturned on appeal if incorrect. Questions of mixed fact and law are not to be overturned on appeal absent a legal or palpable and overriding error.
This case regards a dispute over the date to evaluate a share price in determining a finder’s fee. The parties agreed on the value of the finder’s fee, but could not agree on the evaluation date and so disagreed on the number of shares to be distributed in payment.
An arbitrator agreed with the claimant’s interpretation of the contract. The Court of Appeal overturned that decision, saying the issue was legal and not correctly decided.
The Supreme Court determined otherwise – stating that contractual interpretation is not simply a matter of law, but one of mixed fact and law. In so doing, the Supreme Court has largely settled the question, as there were two lines of judicial authority on the point.
Historically, the question of contract interpretation was considered a legal one, as members of a jury were considered incapable of understanding a contract. More recently, some courts abandoned that approach and treated contractual interpretation as an exercise in determining a question of mixed fact and law.
In Sattva, the Supreme Court recognized contractual interpretation is inherently fact specific, and also is often limited to the obligations between the parties. Interpretation was recognized as requiring consideration of each term in the contract, surrounding circumstances, the purpose of the agreement, the nature of the relationship, and the ordinary meaning of each word.
The meaning which a document (or any other utterance) would convey to a reasonable man is not the same thing as the meaning of its words. The meaning of words is a matter of dictionaries and grammars; the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean.
Therefore, courts have an obligation to consider the “intent of the parties and the scope of their understanding”. However, the Supreme Court cautioned that those considerations cannot “overwhelm the words of [the] agreement”.
The parole evidence rule – which precludes evidence of subjective intent – does not prohibit evidence of surrounding circumstances.
In the result, the words of a contract alone should not determine a case, the context must be considered. And because that is a factual inquiry, absent an extricable question of law, appeal courts should give deference to the trial judge.
More recently, the Alberta Court of Appeal considered the application of Sattva in Vallieres v Vozniak, 2014 ABCA 290, limiting its restrictive application in circumstances involving a standard form contract. Distinguishing Sattva, the Alberta Court of Appeal held that the interpretation of a standard form contract, in this case an agreement to purchase real estate, is a question of law as its interpretation goes beyond the dispute at hand and requires consistency.
In the case of a pro forma standard real estate purchase contract, the court found that it must interpret the intention of the drafting committee that adopted the form, rather than the intention of the individual parties or the surrounding circumstances relevant to the contract’s formation.
This reasoning is consistent with the Alberta Court of Appeal’s decision in Access Mortgage Corporation (2004) Limited v Arres Capital Inc., 2014 ABCA 280, which draws a distinction between bilateral and unilateral commercial instruments. In this decision, the court utilizes the reasoning of Sattva to interpret a bilateral commercial instrument, which the court held requires an objective interpretation to ascertain the intent of independent parties to the contract.