Ambiguity in contracts can arise for a variety of reasons, including but not limited to a lack of clarity due to poorly defined terms, multiple interpretations, vagueness, changes in circumstances, and language barriers.

The courts have historically relied on the Parol Evidence Rule, a common law rule of evidence that restricts the admission of extrinsic evidence outside of the written contract. If the Courts are required to intervene to resolve the ambiguity, the 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.

Furthermore, there is a longstanding, traditional rule that evidence of pre-contractual negotiations is inadmissible when interpreting a contract.1

The Landmark Case of Sattva

In the case of Sattva Capital Corp. v Creston Moly Corp., 2014 SCC 53 ("Sattva"), the Supreme Court of Canada clarified the principles of contract interpretation. The case arose from a dispute over the date to evaluate a share price in determining a finder's fee to be paid by Creston Moly to Sattva Capital.

The SCC ruled that the objective of contractual interpretation is to determine the meaning of the contract, not just individual words, or phrases in isolation. It also held that the surrounding circumstances, including the background knowledge of the parties, are important factors in determining the parties' intentions.

Specifically, the Court Stated:

"The 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."2

In addition, the Court found that consideration of the surrounding circumstances does not offend the Parol Evidence Rule:

"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."3

Corner Brook (City) v Bailey: Building Upon Sattva

Fast-forward to 2021, the Supreme Court in Corner Brook (City) v Bailey, 2021 SCC 29 ("Corner Brook"), was charged with the interpretation of a release that was signed by an employee who had been injured on the job.

The decision re-affirmed several principals that came about in Sattva:

" Surrounding circumstances are relevant in interpreting a contract; and
" The nature of the evidence that may be considered will vary from case to case; and
" The purpose of considering surrounding circumstances is to aid in the interpretation of the agreement – not to add to, contradict, dispute or overwhelm the words of the agreement.

The Court also referenced Justices Côté and Brown's dissent in the case of Resolute FP Canada Inc. v Ontario (Attorney General), where they deliberated over the traditional rule that evidence of negotiations is inadmissible with the approach from Sattva which directs courts to consider the surrounding circumstances in interpreting a contract, citing difficulty in drawing a principled distinction between the circumstances surrounding contract formation and negotiations.

In regard to pre-contractual negotiations, Justice Rowe stated:

"I leave for another day the question of whether, and if so, in what circumstances, negotiations will be admissible in interpreting a contract. That issue needs to await a case where it has been fully argued and is necessary in order to decide the appeal."4

The Supreme Court "left the door open" as to the admissibility of pre-contractual negotiations in the interpretation of a contract.

OFNLP: ONCA Considers Pre-Contractual Negotiations in Decision

In Ontario First Nations (2008) Limited Partnership v Ontario Lottery and Gaming Corporation, 2021 ONCA 592 ("ONFLP"), the Court of Appeal reaffirmed the principals in Sattva and clarified Corner Brook.

The Court of Appeal considered an arbitration panel's use of evidence of pre-contractual negotiations as an aid to interpret the financing agreement pertaining to the operation of a casino. The Defendants, Ontario and OLG, asserted that the appeal judge and majority erred in law by admitting the pre-contractual negotiations into evidence.

When determining whether the appeal judge had ignored the entire agreement clause and allowed the extrinsic evidence (including the pre-contractual negotiations) to overwhelm the words of the agreement in question, Justice Jamal stated:

"I do not agree with this submission. An entire agreement clause alone does not prevent a court from considering admissible evidence of the surrounding circumstances at the time of contract formation. As already noted, the surrounding circumstances are relevant in interpreting a contract exactly because "words alone do not have an immutable or absolute meaning": Sattva, at para. 47."5


"...I see no error in how the surrounding circumstances were considered. These circumstances helped to place the Agreement in its proper setting and understand the genesis of the transaction, the background, and the context. They included the parties' history of litigation over revenue sharing; their shared objective of locking-in three identified revenue streams to ensure stable, predictable, long-term funds for First Nations' communities; and Ontario's commitment not to convert revenues received to the final account of the Province into revenues that were not. Such evidence was admissible to show the parties' objective mutual intention and the background facts leading to the Agreement. In my view, the surrounding circumstances were not used to overwhelm the words of the agreement or to deviate from the text to create a new agreement..."6

ONFLP confirms that pre-contractual negotiations can be an important factor in interpreting a contract, particularly where the contract is ambiguous or where there is uncertainty about the parties' intentions.


The decisions of Corner Brook and OFNLP have built upon the principals established in Sattva and have opened the door to the use of pre-contractual negotiation as surrounding evidence to aid in the interpretation of ambiguous contracts. Regardless of the reason for ambiguity, it is important for parties to carefully review and clarify contract terms before entering into an agreement, to minimize the risk of future disputes or misunderstandings.


1 Resolute FP Canada Inc. v Ontario (Attorney General), 2019 SCC 60 at para 100.

2 Sattva Capital Corp. v Creston Moly Corp., 2014 SCC 53 at para 47.

3 Ibid at para 60.

4 Corner Brook (City) v Bailey, 2021 SCC 29 at para 57.

5 Ontario First Nations (2008) Limited Partnership v Ontario Lottery and Gaming Corporation, 2021 ONCA 592 at para 62.

6 Ibid at para 64.

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