Canada: Contract Law Update: Developments Of Note 2014

Last Updated: November 13 2014
Article by Lisa Peters

The target audience for this paper is comprised of commercial litigators and commercial solicitors. For that reason, the cases I selected from those decided over the last year (post- October 2013) are primarily those in which contract law principles are discussed in a commercial context.

I have attached as an appendix a list of topics covered in prior updates. Those updates are all available on Lawson Lundell LLP's website under my profile.

This year's topics are:1

  • The standard of review on contract issues – Sattva Capital Corp. v. Creston Moly Corp. in the Supreme Court of Canada
  • Efficient breach – what is it and why does it matter?
  • Restrictive covenants – commercial context vs. employment context
  • Exclusion clause update
  • Intersection of contract law and conflicts of law – non-signatories and forum selection clauses
  • Interaction of entire agreement, arbitration and attornment clauses
  • Contractual duties of good faith (to be continued...)

1. The Standard of Review on Contract Interpretation Issues – The SCC Speaks

In my 2013 paper, I dealt at length with the adjudicative history of the dispute between Sattva Capital Corporation and Creston Moly Corporation, which, prior to leave being granted to the Supreme Court of Canada, was comprised of an arbitration hearing, two hearings in the B.C. Supreme Court and two appeals before the B.C. Court of Appeal. In August, the Supreme Court of Canada released its judgment in this case: Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53.

The issue arbitrated was the appropriate date on which to value Creston shares to be provided to Sattva as consideration under a finder's fee agreement and the number of shares to which Sattva was therefore entitled as representing the finder's fee of $1.5 million.

The issue arose after Sattva introduced Creston to a mining deposit in Mexico. Creston's subsequent purchase of the mining interest triggered a finder's fee to be paid in shares of the company (Sattva had the contractual option of taking any combination of cash and shares). The Finder's Fee Agreement set an agreed maximum for the finder's fee of $1.5 million under the TSX Venture Exchange policy – Sattva earned the maximum on this transaction.

Shares of Creston rose between the agreed "Market Price" date under the Agreement and the agreed date of payment. A dispute arose, therefore, as to how the shares comprising the payment of the finder's fee should be valued. Creston argued the shares should have been valued at $0.70 per share because that was the value after the agreement had been announced, whereas Sattva contended the shares were to be valued at $0.15 each because that was the market price of the shares at closing on the last day before the press release (which would result in Sattva receiving the benefit of the increased share value and therefore much more than $1.5 million should it sell the shares).

I provided details of the decisions at each level in my last year's paper, where I used this case as an illustration of how inclusion of an arbitration clause in a commercial agreement may not lead to a single-stage, final and binding resolution of a dispute. The decision of the Supreme Court of Canada informs that issue: one of the questions the Court asks and answers is how the balance between reviewability and finality of commercial arbitration awards under the B.C. Arbitration Act, R.S.B.C. 1996, c. 55, is to be determined.2

The decision is also significant, however, based on two other issues it addresses:

  • The standard of review for contract interpretation questions; and
  • The role and nature of "surrounding circumstances" in the contract interpretation exercise.

I will discuss the ruling on these latter two issues first.

The standard of review issue arose because under s. 31 of the Arbitration Act, appeals from an arbitration awards are limited to questions of law (with leave being necessary if the parties do not consent to the appeal). The Court dealt with standard of review both in terms of characterization of the question and the standard to be applied to the appellate review of the decision.

After noting significant historical precedent for treating contract interpretation issues as questions of law, Mr. Justice Rothstein outlined the historical reason for that approach, namely the widespread illiteracy of English juries centuries ago. He tracked the shift away from this approach in Canada, informed in part by courts having regard to the surrounding circumstances of the contract they are interpreting, and concluded that the historical approach should be abandoned. Contract interpretation issues, he held, are questions of mixed fact and law.

Rothstein J. left the door slightly ajar for those who seek to characterize a specific contract interpretation error as a question of law. He explained that it may be possible to identify an extricable question of law from what was initially characterized as a question of mixed fact and law, such as 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, while advising courts to be cautious in identifying such "extricable issues" going forward.

The second part of the analysis had the Court assessing the standard of review (as a form of alternative reasoning, since it had already found that leave to appeal the arbitrator's award should not have been granted). Mr. Justice Rothstein conceded that consensual nature of the arbitration process and the applicable legislative regime governing appeals from arbitrations were different from the factual and legislative framework underpinning judicial review. Nonetheless, he held that judicial review of administrative tribunal decisions and appeals of arbitration awards are analogous in some respects, such that aspects of the framework developed by the Court in Dunsmuir v. New Brunswick, 2008 SCC 9, "were helpful" in determining the standard of review for appeals from arbitration awards.

He concluded that the appropriate standard of review in this context was reasonableness, unless the question was one that would attract the correctness standard, such as constitutional questions or questions of law of central importance to the legal system as a whole and outside the adjudicator's expertise. It would appear that the framework from Dunsmuir (refined by post-Dunsmuir jurisprudence) was more than "helpful" –the approach to standard of review was imported directly into the arbitration award context.

In British Columbia, at least, the Court's ruling on standard of review will limit the availability of appeals from commercial arbitration awards, many of which turn on contract interpretation.3 The Court's ruling has implications beyond appeals from arbitration awards, however. The characterization of contract interpretation issues as questions of mixed fact and law will have implications for appeals from trial court decisions as well. While the characterization of contract interpretation issues will not bar the door to an appeal in that context, it will likely make it harder to obtain leave, where leave is necessary, and harder to succeed on the appeal.

A detailed analysis of the role and nature of "surrounding circumstances" in contract interpretation was not, strictly speaking, necessary to the issues on appeal. Having gone there to explain why contract interpretation issues were questions of mixed fact and law, the Court took the opportunity to discuss the role and nature of surrounding circumstances. Perhaps the justices felt the need to correct the interpretation some lawyers and commentators gave to their prior decision in Eli Lilly & Co. v. Novopharm Ltd., [1998] 2 S.C.R. 129, namely that recourse to surrounding circumstances was inappropriate if the words of the contract were sufficiently unambiguous and the intent of the parties therefore plain "on the face of the agreement".

There is no longer any doubt that the "surrounding circumstances" of a contract are relevant to the interpretative exercise in every case. The key passage from the judgment (at paras. 47-48 and 58) reads as follows:

... the interpretation of contracts has evolved towards a practical, commonsense 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"... 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.

(Reardon Smith Line, at p. 574, per Lord Wilberforce)

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 ...

The nature of the evidence that can be relied upon under the rubric of "surrounding circumstances" will necessarily vary from case to should consist only of objective evidence of the background facts at the time of the execution of the contract...that is, knowledge that was or reasonably ought to have been within the knowledge of both parties at or before the date of contracting.

The Supreme Court also decided to address the interaction between consideration of surrounding circumstances in the interpretative process and the parol evidence rule. As a leading author on contract interpretation points out, the parol evidence rule is more about determination of the contents of a contract and the evidence that is admissible to prove those contents than it is about contract interpretation per se.4 However, the two are often muddled in argument, so I for one welcome the clarification the Court provides. Mr. Justice Rothstein states that the parol evidence rule does not apply to preclude evidence of the surrounding circumstances but does preclude evidence of the subjective intentions of parties (among other things).

The Court's ruling on standard of review answered, in part, the question of how the balance between reviewability and finality of commercial arbitration awards under the B.C. Arbitration Act is to be determined. The Court also answered that question by going through each of the prongs of s. 31(2) of the Arbitration Act (the grounds on which the Court may grant leave) and addressing the court's discretion under this provision. Discussion of this part of the judgment is better suited to a paper on arbitration than a paper on contract law, so I will not engage in that discussion here.

Bottom line: Arbitration awards, particularly in B.C., have become more final and binding where the issue is one of contract interpretation (as often is the case in commercial disputes). At the same time, appeals from lower court decisions, where the issue is one of contract interpretation have become more of an uphill battle. The Sattva decision parallels the SCC's approach to judicial review, with the Court signalling a preference for limiting the availability, or at least the scope, of review from decisions of original decision-makers, be they administrative tribunals, arbitrators or lower courts.

To read this Update in full, please click here.


1. I would like to acknowledge the assistance of Max Walker, summer articled student and UBC Law student, for his help in reviewing this year's crop of cases and choosing likely topics.

2. The Court also ruled that appeal courts are not bound by comments on the merits of the appeal made by the justice or panel granting leave. This is an uncontroversial ruling consistent with prior jurisprudence.

3. Most other jurisdictions permit appeals on questions of fact or mixed fact and law as well, but only where the arbitration agreement so provides: see, for example, Arbitration Act, R.S.A. 2000, c. A-43, s. 44; Arbitration Act, 1991, S.O. 1991, c. 17, s. 45; The Arbitration Act, C.C.S.M., c. A-120, s. 44.

4. Geoff R. Hall, Canadian Contractual Interpretation Law, 2nd ed. (Markham: LexisNexis, 2012) at 55.

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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