Canada: Contracts — What’s In A Word? What’s The Standard Of Review?

The Concise Oxford Dictionary, 7th edition defines "contract" as "an agreement enforceable at law," and "word" as "any sound or combination of sounds (or its written or printed symbol) forming a meaningful element of speech, conveying an idea or alternative ideas..."

It has been a long time since the Neanderthals communicated their ideas by speech. Certainly there has been enough time for the legal community to perfect its use of words so as to avoid needless litigation over the meaning of contracts. However, the issue of contract interpretation remains a live one. Two recent cases highlight the fun that one can have with words: the Ontario Court of Appeal's decision in Bell Canada v. The Plan Group, 2009 ONCA 548 (CanLII) and the House of Lords' reasons in Chartbrook Ltd. v. Persimmon Homes Ltd & Ors [2009] UKHL 38.

In Bell Canada, Blair J.A. for the majority noted that there had been considerable debate about the standard of review in contract cases in the recent past:

[20] The historical view is that the interpretation of a contract is a question of law, and reviewable on the standard of correctness. However, the standard of appellate review and matters of contractual interpretation is not as straightforward as it once appeared to be, and there has been considerable debate about it in the jurisprudence since the decision of the Supreme Court of Canada in Housen v. Nikolaisen, 2002 SCC 33 (CanLII).

This has led to an unfortunate diversion of approaches across Canada:

[21] Housen is considered to be the leading authority on the standard of appellate review, directing that the applicable standard of review will depend upon the nature of the question — whether the alleged error is one of law, mixed fact and law, or fact, but it is fair to say that appellate courts across the country have sent mixed signals about standard of review and contract interpretation cases in the post-Housen era. In British Columbia, the general approach seems to treat contractual interpretation as a matter of mixed fact and law, attracting review on a deferential basis. In Alberta, on the other hand, the opposite appears to be the case. Interpretation of contracts is considered to be a question of law, giving rise to a standard of correctness. New Brunswick and Nova Scotia appear to hold the traditional view that standard of review in contractual interpretation is correctness, while recognizing that a trial judge's findings of fact and drawing of factual instances should be accorded deference.

In a short decision, Société de cogénération de St-Félicien c. Industries Piékouagame, inc., 2009 QCCA 1487 (CanLII) (French text only), given a month after Bell Canada and a day after hearing the appeal, the Québec Court of Appeal indicated that the determination of the existence of an ambiguity in a contract is a question of fact that should not be overturned except in the case of manifest and overriding error. This case suggests that the interpretation itself (as contrasted with the legal effect of such interpretation) is subject to the same deferential standard of review. No cases were cited in the decision.

Blair J.A. appropriately went on to point out that the Supreme Court "in Housen did not tackle that subject in the context of contractual interpretation. It did so clearly and explicitly in the context of a negligent action, an entirely different brand of case." He further stated:

[31] In my view, certainty in contract is an important policy value underlying the construction of contracts. This factor alone is sufficient to push the standard of review in such cases toward correctness and away from deference. At the very least, contractual interpretation is an exercise that generally falls much more toward the error of law end of the Housen spectrum, once the factual issues referred to above have been resolved or if — as is the case here — they are not in dispute. The Supreme Court of Canada has yet to consider the standard of review in contractual interpretation cases post-Housen. I am not entirely persuaded that it makes sense to take one type of analysis (the Housen analysis) that is designed to discourage appellate courts from re-trying the factual issues in cases, and apply its analytical paradigm (the facts/mixed fact and law/law spectrum) to what is essentially a legal exercise. (emphasis in original)

This type of analysis, however, results in a standard of review that is fairly murky and uncertain since there is the problem of where exactly the line should be drawn on this spectrum when the approach is so nuanced. "Nuance" is a perfectly good word; it is defined by the Oxford Dictionary as "a delicate difference in or shade of meaning, feeling, opinion, colour, etc." It is not a word that one usually associates with certainty. Unfortunately, it has become a "buzzword" in legal circles.

Blair J.A. went on to state:
[37] ... Broadly speaking, however — as this court noted in Ventas, Inc. v. Sunrise Senior Living Real Estate Investment Trust, 2007 ONCA 205 (CanLII) para. 24 — a commercial contract is to be interpreted (a) as a whole, in a manner that gives meaning to all of its terms and avoids an interpretation that would render one or more of its terms ineffective; (b) by determining the intention of the parties in accordance with the language they have used in the written document and based upon the 'cardinal presumption' that they have intended what they have said; (c) with regard to objective evidence of the factual matrix underlining the negotiation of the contract, but without reference to the subjective intention of the parties; and (to the extent that there is any ambiguity in the contract), (d) in a fashion that accords with sound commercial principles and good business sense, and that avoids a commercial absurdity.

Please note that, as I observed in last edition's " Do Not Ask for Whom the Bell Tolls," the Court of Appeal in the Ventas case did not consider the problem of the sale process not ensuring a level playing field for the bidders in that commercial contract analysis. However, the guidelines indicated are valid aids for interpretation.

At issue in the Bell Canada case was the interpretation of two sentences in an arbitration subclause:

... a single arbitrator will conduct the arbitration under the Arbitration Act, 1991 (Ontario) and the then-current rules of the Arbitration and Mediation Institute of Ontario Inc. [...] Failure to file a notice of arbitration within twelve (12) months after the occurrence supporting a claim constitutes an irrevocable waiver of that claim.

The majority determined that Bell Canada was successful in its position that the then-current rules applied to the whole of the arbitration process (and not to the conduct of the arbitration after the selection of the arbitrator — and then only to the extent the arbitrator decided to apply them, as was advanced by The Plan Group). Further, the application judge was found to have erred in interpreting "filing the notice of arbitration" as being equivalent to "delivering" or "serving" it to or on the other side. The "then-current rules" of the Institute used the word "file" in the context of depositing a document with the Institute.

It is fair to observe that more deference will be shown to a trial judge's decision when there is actually a trial with live witnesses as opposed to the decision of an application or motion judge who has dealt solely with a written record. However, as La Forest J. discussed in Schwartz c. Canada, 1996 CanLII 217 (S.C.C.), judicial policy concerns warrant against "unlimited intervention by appellate courts [which] would greatly increase the number and length of appeals generally." The theme of this policy reason was picked up on and expanded upon in Equity Waste Management of Canada v. Panorama Investment Group Ltd., 1997 CanLII 2742 (ON C.A.).

The Chartbrook case involved the pricing provision in a property development contract. Lord Hoffmann gave the main judgment. Lord Hope of Craighead gave two valuable observations in his short opinion:

I agree with all his [Lord Hoffman's] reasoning and I share Lord Walker's admiration for the way it has been expressed. [...] One of the strengths of the common law is that it can take a fresh look at itself so that it can keep pace with change in circumstances.

The clause at issue was defining Additional Residential Payment (ARP), which curiously enough was also pointlessly relabelled as the "Balancing Payment," as meaning "23.4% of the price achieved for each residential unit in excess of the Minimum Guaranteed Residential Unit Value less the Costs and Incentives."

Lord Hoffmann indicated that he did not think "that the syntax helped one to decide whether the C&I should be deducted before or after calculating the 23.4%, that is to say whether there is a notional pause for breath after 'MGRUV' represented in the passage I have quoted from the judgment by a comma which does not appear in the contract. That is a grammatical ambiguity which must be resolved by considering the business purpose of providing for a deduction of C&I." He went on to say (while emphasizing that it would clearly take a strong case to persuade a court that "something must have gone wrong with the language"):

[14] There is no dispute that the principles on which a contract (or any other instrument or utterance) should be interpreted are those summarized by the House of Lords in Investor's Compensation Scheme Ltd. v. West Bromwich Building Society [1998] 1 W.L.R. 896, 912-93 [...] it is agreed that the question is what a reasonable person having all the background knowledge which would have been available to the parties would have understood them to be using the language in the contract to mean. The House emphasized that 'we do not easily accept that people have made linguistic mistakes, particularly in formal documents' (...) but said that in some cases the context and background drove a court to the conclusion that 'something must have gone wrong with the language'. In such a case, the law did not require a court to attribute to the parties an intention which a reasonable person would not understood them to have had.

This concept carries with it the familiar resonance of the officious bystander test as to implied terms in a contract as discussed in M.J.B. Enterprises Ltd. v. Defence Construction (1951), 1999 CanLII 677 (S.C.C.). Lord Hoffman went on to state:

[16] ... because I think to interpret the definition of ARP in accordance with ordinary rules of syntax makes no commercial sense. The term 'Minimum Guaranteed Residual Unit Value,' defined by reference to Total Residential Land Value, strongly suggests that this was to be a guaranteed minimum payment for the land value in respect of an individual flat. A guaranteed minimum payment denotes the possibility of a larger payment which, depending upon some contingency may or may not fall due hence the term 'Additional Residential Payment.' The element of contingency is reinforced by paragraph 3.3 of the 6th schedule, which speaks of the 'date of payment if any of the balancing payments.' (emphasis in original)

Without resorting to the doctrine of rectification, Lord Hoffmann stated:

[25] ... there is not, so to speak, a limit to the amount of red ink or verbal rearrangement or correction which the court has allowed. All that is required is that there should be clear that something has gone wrong with the language and that it should be clear what a reasonable person should have understood the parties to have meant. In my opinion, both these requirements are satisfied.

Lord Hoffman did reaffirm the rule from Prenn v. Simmons [1971] 1 WLR 1384 (H.L.), which provides that evidence of the pre-contractual negotiations of the parties is not generally admissible as an aid to the interpretation of a contract. He noted that parties are sometimes held to be bound by an agreement in terms which would not be supported by a full investigation of the course of the negotiations. However he observed on policy grounds: " ... that a system which sometimes allows this to happen may be more justified in the more general interests of the economy and predictability in obtaining advice and adjudicating disputes." However the rule is accompanied by legitimate safeguard devices which do: "... not exclude the use of such evidence for other purposes: for example, to establish that a fact which may be relevant as background was known to the parties, or to support a claim for rectification or estoppel."

Lord Hoffman also commented on the "private dictionary" principle when he stated: " ... it is true that evidence may always be adduced that the parties habitually used words in an unconventional sense in order to support an argument that words in the contract should bear a similar unconventional meaning." However he went on to observe that this principle would not come into play when there was a choice between two perfectly conventional meanings of a word in a particular context.

What's in a word? A word to the wise — it is good policy, and should be a mandatory practice, to completely read over from start to finish a complex contract (certainly if it is a material one) for context and sense before executing it (and not rely merely on a review of the seemingly more important or redrafted sections) — preferably by a team of at least two, one of whom was involved in the negotiating/drafting process, and another who brings fresh eyes to the document. Beware of using two words or terms to mean the same thing. Perhaps it would be helpful when one gets into a drafting situation involving a formula if one were to put in several examples of how the formula would look using different values. Another word, be aware that not all arbitration institutes/organizations have the same rules. Last word: please note that the Continental legal systems seem to have little difficulty in taking pre-contractual negotiations into account recognizing that the philosophy of these civil code jurisdictions on contractual interpretations are very different from that of the common law; this will influence a decision on choice of law and venue. All this will help avoid the undesirable — namely, a trip to the court to see what the judge says the contract means.

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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