Sattva – 2014
The Supreme Court of Canada in its August 2014 decision of Sattva Capital Corp. v Creston Moly Corp set new rules relating to the interpretation of written contracts.
Perhaps the most dramatic consequence of this case is that the Court determined that the issue of contractual interpretation generally will involve a question of mixed fact and law and not one of law alone. This has significant impact on the appeals taken from a trial or other first level finding, which will thus need to pass the higher test for appellate review on a question of mixed fact and law, as discussed below.
Factual and Judicial Background
The case arose from a dispute between the parties as to the timing of the determination of a finder’s fee to Sattva, which effected the market value, and hence the quantum of, the shares which he was to receive. Also an issue was raised as to whether the policy of the Toronto Stock Exchange capped the fee at a set dollar sum of U$ 1.5 million, as this policy was specifically incorporated into the contract.
The dispute went to arbitration as agreed, which resulted in an award in favour of Sattva. The legal issue presented was whether there was an appeal possible, given the provision of the overriding statue which limited judicial review to a question of law with leave.
On first instance leave to appeal was denied, a decision which was reversed by the B.C. Court of Appeal.
On the first hearing of the subsequent merits appeal, the arbitral award was upheld. Creston successfully appealed this decision to the Court of Appeal. Sattva then brought the issues of both the initial granting of leave to appeal and the later substantive decision of the Court of Appeal to the Supreme Court of Canada.
The payment to Sattva required the approval of the TSX Venture Exchange, which Creston was obliged to obtain. The arbitrator found that it had an implied or direct obligation to do so by its best efforts and did not do so and, in fact, misrepresented to the Exchange the terms by which the fee was payable.
The agreement defined the number of shares allotted to Sattva to be determined by the price of the shares “as calculated on close of business day before the issuance of the press release announcing the Acquisition”.
The operative date of the press release was March 26, 2007. Because the trading in the stock was halted on January 31, 2007 due to a pending press release, the last active trading price was $0.15, which would have allowed an award of roughly 11.5 million shares.
The shares were to be delivered 5 days following this event, at which time the stock traded at $0.70, which would have resulted in 9 million fewer shares allowed to Sattva, had this valuation date been the correct point in time to do so.
The determination of the number of shares was subject to the approval of TSXV. The arbitrator found that Creston did not properly advise TSXV of the terms of the agreement and had it done so, TSXV would likely have approved the grant of shares at $0.15, not $0.70. The risk factor attached to this was set at 15%, by which the award was hence discounted.
The actual award was set at the average trading price four months later, this being on the conclusion of the hold period.
Creston had argued that the agreement stipulated a maximum fee was set at U$1.5 million, as the contract stated the fee was capped at the maximum amount that could be paid in accordance with the Policy Manual of the TSVX which defined this sum. It submitted that it was this sum that was to be translated into shares based on the trading value set at $.070.
The initial application for leave to appeal was denied as the court found the issue was a question of mixed fact and law, given the need to interpret the workings of the TSVX, its policies on the maximum finder’s fee payable and the use of its discretionary powers in setting this sum. This was referred to as “the factual matrix”.
The Court of Appeal allowed the appeal on the issue of leave, as it found the question of the maximum fee payable was a question of law alone.
The Pivotal Question in SCC
The Supreme Court decision hence presented the threshold issue as to whether the decision appealed from involved a pure question of law, as required by the statute, or a question of mixed fact and law.
Should the latter finding have been made, it would have been a walk off in the bottom of the ninth for Sattva, as leave could not be granted and the arbitrator’s award would stand, as it could not then have been challenged on its merits. This was hence the pivotal issue.
In answering this question, the Court noted the trend in recent years of courts to drift away from the traditional historical model of contract interpretation to look only at the words of the documents to arrive at the intent of the parties.
This was done, the Court reasoned for two reasons. The first is the need to examine the “true intent of the parties and the scope of their understanding”:
Regarding the first development, the interpretation of contracts has evolved towards a practical, common-sense approach not dominated by technical rules of construction. The overriding concern is to determine “the intent of the parties and the scope of their understanding” (Jesuit Fathers of Upper Canada v. Guardian Insurance Co. of Canada, 2006 SCC 21 (CanLII), 2006 SCC 21, [2006] 1 S.C.R. 744, at para. 27 per LeBel J.; see also Tercon Contractors Ltd. v. British Columbia (Transportation and Highways), 2010 SCC 4 (CanLII), 2010 SCC 4, [2010] 1 S.C.R. 69, at paras. 64-65 per Cromwell J.). To do so, a decision-maker must read the contract as a whole, giving the words used their ordinary and grammatical meaning, consistent with the surrounding circumstances known to the parties at the time of formation of the contract. Consideration of the surrounding circumstances recognizes that ascertaining contractual intention can be difficult when looking at words on their own, because words alone do not have an immutable or absolute meaning:
No contracts are made in a vacuum: there is always a setting in which they have to be placed. . . . In a commercial contract it is certainly right that the court should know the commercial purpose of the contract and this in turn presupposes knowledge of the genesis of the transaction, the background, the context, the market in which the parties are operating.
A further reason for this development, Rothstein J. stated for the unanimous bench, was to allow the court to understand the meaning of the words used by understanding the context, the purpose and the nature of the relationship between the parties:
The meaning of words is often derived from a number of contextual factors, including the purpose of the agreement and the nature of the relationship created by the agreement (see Moore Realty Inc. v. Manitoba Motor League, 2003 MBCA 71 (CanLII), 2003 MBCA 71, 173 Man. R. (2d) 300, at para. 15, per Hamilton J.A.; see also Hall, at p. 22; and McCamus, at pp. 749-50). As stated by Lord Hoffmann in Investors Compensation Scheme Ltd. v. West Bromwich Building Society, [1998] 1 All E.R. 98 (H.L.):
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. [p. 115]
The Conclusion – Mixed Fact and Law
By this stroke of the pen, rather by the click of the keyboard, the Supreme Court decided that the historical approach was no more and that the issue of contract interpretation was hereafter to be one of mixed fact and law:
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.
Extricable Issue
The door to issues arising on a contract of a question of pure law shows, however, one slight crack that remains visible. Should the issue be confined to one of law alone, as may be present when there is an “extricable” issue, a matter on which caution must prevail in its determination, life remains, albeit with a faint pulse, on questions of pure law:
Nonetheless, it may be possible to identify an extricable question of law from within what was initially characterized as a question of mixed fact and law (Housen, at paras. 31 and 34-35). Legal errors made in the course of contractual interpretation include “the application of an incorrect principle, the failure to consider a required element of a legal test, or the failure to consider a relevant factor” (King, at para. 21). Moreover, there is no question that many other issues in contract law do engage substantive rules of law: the requirements for the formation of the contract, the capacity of the parties, the requirement that certain contracts be evidenced in writing, and so on.
[54] However, courts should be cautious in identifying extricable questions of law in disputes over contractual interpretation. Given the statutory requirement to identify a question of law in a leave application pursuant to s. 31(2) of the AA, the applicant for leave and its counsel will seek to frame any alleged errors as questions of law. The legislature has sought to restrict such appeals, however, and courts must be careful to ensure that the proposed ground of appeal has been properly characterized. The warning expressed in Housen to exercise caution in attempting to extricate a question of law is relevant here:
Appellate courts must be cautious, however, in finding that a trial judge erred in law in his or her determination of negligence, as it is often difficult to extricate the legal questions from the factual. It is for this reason that these matters are referred to as questions of “mixed law and fact”. Where the legal principle is not readily extricable, then the matter is one of “mixed law and fact” . . . . [para. 36]
What This Means to Those at Ground Level
Rothstein J. gave these directions for those engaged in hand to hand combat as to what all this means for day to day practitioners.
“Surrounding circumstances” may be used to interpret the provisions of the contract, yet cannot “overwhelm” the agreement. The mission is to heighten the adjudicator’s comprehension of the “mutual and objective intentions” of the parties. Such evidence cannot deviate from or contradict the words of the document:
While the surrounding circumstances will be considered in interpreting the terms of a contract, they must never be allowed to overwhelm the words of that agreement (Hayes Forest Services, at para. 14; and Hall, at p. 30). The goal of examining such evidence is to deepen a decision-maker’s understanding of the mutual and objective intentions of the parties as expressed in the words of the contract. The interpretation of a written contractual provision must always be grounded in the text and read in light of the entire contract (Hall, at pp. 15 and 30-32). While the surrounding circumstances are relied upon in the interpretive process, courts cannot use them to deviate from the text such that the court effectively creates a new agreement (Glaswegian Enterprises Inc. v. B.C. Tel Mobility Cellular Inc. (1997), 101 B.C.A.C. 62).
These surrounding facts, the Court added, should be limited to “objective evidence of background facts” which were in existence at the time the contract was formed. This is limited to “knowledge that was or reasonably ought to have been within the knowledge of both parties at or before the date of contracting”.
This includes “absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man”.
Keeping the Parole Evidence Rule a Rule
This rule does not prohibit the admissibility of “surrounding circumstances” evidence, the Court stated. The intent is to allow for such evidence to interpret the true intent of the parties, not to alter or overrule the meaning of the words on the page.
It was noted that rule against parole evidence prohibits evidence relating to the subjective intent of the parties, one which remains protected and not caught by the “surrounding circumstances”:
It is necessary to say a word about consideration of the surrounding circumstances and the parol evidence rule. The parol evidence rule precludes admission of evidence outside the words of the written contract that would add to, subtract from, vary, or contradict a contract that has been wholly reduced to writing (King, at para. 35; and Hall, at p. 53). To this end, the rule precludes, among other things, evidence of the subjective intentions of the parties (Hall, at pp. 64-65; and Eli Lilly & Co. v. Novopharm Ltd., 1998 CanLII 791 (SCC), [1998] 2 S.C.R. 129, at paras. 54-59, per Iacobucci J.)….
Significance for Appellate Review of Trial Court Decisions
This decision will make the barrier facing an appellate review of trial court rulings involving contractual interpretation an onerous one. The standard for a review of a finding of mixed fact and law is palpable and overriding error, which reflects considerable deference being shown to the first decider. All this, again, presumes no “extricable issue” of law alone.