Canada: The Supreme Court Of Canada Addresses Contractual Interpretation And The Availability Of Appeal From Commercial Arbitration Decisions

In Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53 ("Sattva"), the Supreme Court of Canada ("SCC") considered the law surrounding contractual interpretation in Canada and the availability of appeal from commercial arbitration decisions under British Columbia's Arbitration Act, RSBC 1996, c 55 (the "Act"). In summary, the SCC found contractual interpretation to involve questions of mixed fact and law, as opposed to the historical position of a pure question of law. As a result, the SCC held that the British Columbia Court of Appeal ("BCCA") incorrectly granted leave to appeal in Sattva, and moving forward, appeals dealing with commercial contractual interpretation will rarely be granted under the Act. The SCC has taken the position of greatly strengthening the finality of arbitration decisions regarding commercial contractual interpretation.

The Facts and Case Progression

The issues in Sattva arise out of an agreed-upon obligation of Creston to pay a finder's fee to Sattva in the form of shares. The parties disagreed on the date that was to be used to value the Creston shares, and therefore the number of shares Sattva was entitled to receive. In reliance upon differing provisions in the contract, Sattva argued it was entitled to 11,460,000 shares based on a price of $0.15 per share while Creston argued Sattva was entitled to 2,454,000 shares based on a later price of $0.70 per share. The parties entered arbitration and the arbitrator, in considering the provisions and contract in dispute as well as the conduct of the parties, found in favour of Sattva. Leave to appeal was originally denied by the BC Supreme Court ("BCSC"), then allowed by the BCCA, returning the dispute to the BCSC. The BCSC dismissed the appeal, finding the arbitrator's decision to be correct on a standard of review of correctness. Further appealed to the BCCA, the panel found the arbitrator's decision to be incorrect on the same standard of review.

On appeal to the SCC, the SCC considered both the issue of the BC Court of Appeal's decision to grant leave as well as the court's decision on the merits of the case.

The SCC's Findings

The SCC addressed several areas of law in this case, including:

  1. the availability of granting leave pursuant to the Act,
  2. whether contractual interpretation is a question of law, and the approach to be taken in undertaking contractual interpretation,
  3. the standard of review on appeals under the Act, and
  4. whether a court is bound by comments regarding the merits of an appeal as made by an earlier court granting leave.

Each will be addressed in turn.

1. Availability of Leave under the Act

Section 31(1) of the Act limits the availability of appeal on commercial arbitrations to a) questions of law where the parties consent to the appeal, or b) questions of law where the parties do not consent but where leave to appeal is granted by the court. Similar provisions are found in other arbitration legislation across Canada. Under Alberta's Arbitration Act, RSA 2000, c A-43, s.44 outlines that appeals are limited to questions of law where the arbitration agreement entered by the parties does not provide for an appeal. This brings the SCC's attention to the question of if and when contractual interpretation is a question of law.

2. Contractual Interpretation

Historically, determining the legal rights and obligations of parties under a written contract was considered to be a question of law. In Sattva, the SCC held that it should be considered to be a question of mixed fact and law, outlining two developments that have brought about the shift in contractual interpretation. Firstly, the courts now consider the "factual matrix" when interpreting a written contract. The SCC states that this involves taking

"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, at para. 27)...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." (para 47, emphasis added)

The SCC addressed the nature of evidence to be relied upon in assessing the "factual matrix". In considering the "surrounding circumstances," the evidence considered should be objective evidence of background facts at the time the contract was executed. This includes a consideration of the knowledge both parties had, and ought to have had, at the time the contract was entered (para 58). This assessment is inherently a question of fact.

The SCC outlined that considering the surrounding circumstances in interpreting a contract does not offend the parol evidence rule. As per the SCC, 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." (para 59)

Although the parol evidence rule precludes evidence of the subjective intention of parties, it does not preclude evidence of the surrounding circumstances to a contract (paras 59, 60). Evidence pertaining to the surrounding circumstances known to the parties at the time of contract formation is consistent with the objectives and purpose of the parol evidence rule, that being to achieve finality and certainty in contractual obligations (paras 59, 60), as it is used as an

"interpretive aid for determining the meaning of the written words chosen by the parties, not to change or overrule the meaning of those words." (para 60)

The second development leading to the shift in culture regarding contractual interpretation is the meaning of a question of mixed fact and law as provided in Housen v. Nikolaisen, 2002 SCC 33, where the court defined such as "applying a legal standard to a set of facts" (para 26). This definition is consistent with the "factual matrix" approach as outlined above. The SCC identified a central purpose to drawing a distinction between questions of law and those of mixed fact and law as limiting the intervention of appellate courts to cases where the results can be expected to have an impact beyond the parties to the particular dispute.

It is important to note that the SCC still recognizes the possibility of identifying an extricable question of law from a dispute initially characterized as being of mixed fact and law. However, the SCC warns that courts should take caution in identifying such in contractual interpretation disputes, as such a finding will be rare.

3. Standard of Review on Appeals under the Act

The SCC outlined that the standard of review in the context of commercial arbitration decisions is to be reasonableness, unless the question of law is one that would necessarily attract the correctness standard, such as constitutional questions or questions of central importance to the legal system as a whole.

4. Is a Court Bound by the Leave Courts Comments in Deciding an Appeal?

The SCC clarified that a court, in granting or denying leave, decides only whether the matter on appeal warrants granting leave and not whether the appeal will ultimately be successful. As such, the SCC stated that "a grant of leave cannot bind or limit the powers of the court hearing the actual appeal (para 122)."

The Bottom Line

Contractual interpretation is a question of mixed fact and law and should engage a consideration of the surrounding circumstances to contract formation. As such, appeals from arbitration decisions regarding commercial contract interpretation will be significantly limited to situations in which a question of law can be extricated from the dispute. Where appeals are rarely allowed in this context, the standard of review is reasonableness, further empowering the decision staying-power of arbitrators in commercial arbitration decisions.

The tangible application of this decision for commercial parties is three-fold.

Parties must be extremely diligent in documenting the surrounding circumstances when drafting a contract. Contracts will be assessed in their entirety should any disputes arise, and a factual analysis of the knowledge the parties had or ought to have had will be considered.

Parties should carefully consider the arbitration agreements they enter. Specifically, any provisions between the parties relating to the appeal of arbitration awards, as this may affect the availability of appeal under the arbitration legislation.

In entering arbitration, parties should be aware of the arbitrator appointed, and his or her experience with the particular industry or dispute at issue, as the decisions awarded under the Act will likely be final after the SCC's holding in this case. Although this decision was in the context of BC's Act, it is clear that the SCC favors finality in arbitration where a broad question of law relevant to more than just the parties in dispute is not present.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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