The Supreme Court of Canada's recent decision in Sattva
Capital Corp. v. Creston Moly Corp
("Sattva")1 articulates how and when
extrinsic evidence can be utilized to interpret contracts,
including policies of insurance. The case arose from a dispute over
the correct interpretation of contractual terms setting out the
method of valuation for a finder's fee. The contract stipulated
that Sattva Capital Corp. was entitled to a finder's fee of US$
1.5 million, payable in the form of an allotment of shares in
Creston Moly Corp. Sattva argued that since the contract date the
shares had increased in value, so they were now entitled to 8-9
million. Creston's position was that the agreement's
"maximum amount" proviso prevented Sattva from receiving
more than US$1.5 million worth of shares. An arbitrator found in
favour of Sattva, but the decision was reversed by the B.C. Court
of Appeal. In a unanimous decision, the Supreme Court reinstated
the arbitrator's decision.
In its decision, the Supreme Court found that, while
historically contractual interpretation may have been a question of
law, it now considered it to be a question of mixed fact and law.
The historical approach was complimentary to the parol evidence
rule, which precluded the 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.2 The parol evidence rule is not absolute and it
had long been understood that there are circumstances where
contracts are vague or ambiguous and extrinsic evidence can be
analyzed, although the relaxation of the parol evidence rule had
not always been applied consistently.
The Supreme Court explained that the goal of contractual
interpretation is to ascertain the objective intentions of the
parties, which, is inherently fact specific. The Court confirmed
that the parol evidence rule still exists, but it was not offended
by considering surrounding circumstances. The Court was unequivocal
that the terms of a written contract are to be considered in light
of a factual matrix, stating:
 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.,  2 S.C.R.
129, at paras. 54-59, per Iacobucci J.). The purpose of the
parol evidence rule is primarily to achieve finality and certainty
in contractual obligations, and secondarily to hamper a party's
ability to use fabricated or unreliable evidence to attack a
written contract (United Brotherhood of Carpenters and
Joiners of America, Local 579 v. Bradco Construction Ltd.,
 2 S.C.R. 316, at pp. 341-42, per Sopinka J.).
 The parol evidence rule does not
apply to preclude evidence of the surrounding
circumstances. Such evidence is consistent with the
objectives of finality and certainty because 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. The surrounding circumstances are facts known
or facts that reasonably ought to have been known to both parties
at or before the date of contracting; therefore, the concern of
unreliability does not arise.
 Some authorities and commentators
suggest that the parol evidence rule is an anachronism,
or, at the very least, of limited application in view of the myriad
of exceptions to it (see for example Gutierrez v. Tropic
International Ltd. (2002), 63 O.R. (3d) 63 (C.A.), at paras.
19-20; and Hall, at pp. 53-64). For the purposes of
this appeal, it is sufficient to say that the parol evidence rule
does not apply to preclude evidence of surrounding circumstances
when interpreting the words of a written contract.
Sattva is relevant to insurers who wish to use
extrinsic evidence to contextualize the intentions behind insurance
policies, typically in cases where there may have been negotiations
over the policy wording that provide assistance in interpreting the
final policy wording. The case confirms that the parol evidence
rule does not prevent an insurer from providing evidence of
surrounding circumstances to assist in policy interpretation.
1 Sattva Capital Corp. v. Creston Moly Corp.,
2014 SCC 53.
2 King v. Operating Engineers Training Institute of
Manitoba Inc., 2011 MBCA 80, 270 Man. R. (2d) 63
3 Thanks to intern student Rod McLennan for his
assistance in drafting this post
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