The Supreme Court of Canada Issues New Guidance in Contractual Interpretation
November 3, 2014
By Teresa MacLean
The Supreme Court of Canada's (SCC) decision in Sattva Capital Corp. v. Creston Moly Corp.1 established that contractual interpretation will no longer be considered a question of law, but rather a question of mixed fact and law, wherein the principles of contractual interpretation are applied to the words of the written contract in light of the factual context of the contract. The SCC also established that in the context of commercial arbitration, a question of law on review will be considered on a reasonableness standard unless it is a constitutional question or a question of law of central importance to the legal system as a whole and outside the adjudicator’s expertise, which will attract a correctness standard.
In this case, by agreement, Creston was required to pay Sattva a finder’s fee in relation to the acquisition of a molybdenum mining property. The agreement stipulated the finder’s fee was to be capped at a maximum value of U.S. $1.5 million. Payment would be given in Creston’s shares since Sattva had not elected to be paid in cash. A dispute arose as to the date used to price the shares and therefore to the number of shares to which Sattva was entitled. Sattva asserted that the date was set out in the "Market Price" definition in the agreement. This definition would use the value of the shares as of the close of the business day before the press release announcing the acquisition was made. However, the value of the shares substantially increased thereafter, and Creston argued the agreement’s "maximum amount" proviso prevented Sattva from receiving shares valued at more than U.S. $1.5 million on the payout date.
The parties entered into arbitration pursuant to B.C.’s Arbitration Act ("AA"). The arbitrator found in favour of Sattva based on the definition of "Market Price" in the agreement. After a series of appeals – notably, under the AA, leave to appeal an arbitrator’s decision is generally available only for questions of law – the B.C. Court of Appeal (BCCA) allowed Creston’s appeal, holding the arbitrator’s interpretation absurd. Sattva appealed the decisions of the BCCA.
In allowing the appeal and reinstating the arbitrator’s decision, the SCC fundamentally changed how contractual interpretation is to be approached. The SCC stated the historical approach to contractual interpretation, which was considered a question of law, should be abandoned as the aim of contractual interpretation is to "ascertain the objective intent of the parties — a fact-specific goal — through the application of legal principles of interpretation"2. "Contractual interpretation involves issues of mixed fact and law as it is an exercise in which the principles of contractual interpretation are applied to the words of the written contract, considered in light of the factual matrix."3 Further, "the parol evidence rule does not apply to preclude evidence of surrounding circumstances when interpreting the words of a written contract"4.
It may be possible to identify extricable questions of law from questions that are characterized as mixed fact and law, including “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” in addition to “the requirements for the formation of the contract, the capacity of the parties, the requirement that certain contracts be evidenced in writing, and so on”5.
The standard of review will nearly always be reasonableness for commercial arbitration appeals. To be reasonable, the decision must be justifiable, transparent and intelligible.6 Constitutional questions and questions of law of central importance to the legal system as a whole which are outside an adjudicator’s expertise are reviewable on a correctness standard.
On the facts of the case, the SCC held that Creston’s application for leave to appeal the arbitrator’s decision raised no issue of law. Further, the SCC stated the arbitrator implicitly considered how the “maximum amount” clause interacted with the definition of Market Price in a reasonable manner in his decision. Thus, leave to appeal the arbitrator’s decision should have been denied even if a question of law were identified, as the “requirement that there be arguable merit that the arbitrator’s decision was unreasonable is not met and the miscarriage of justice threshold was not satisfied”7.
1 2014 SCC 53.
2 Ibid at para 49.
3 Ibid at para 50.
4 Ibid at para 61.
5 Ibid at para 53.
6 Ibid at para 119.
7 Ibid at para 84.
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