Basic Principles of Contract Interpretation, post-Sattva
This post sets out the traditional principles of contractual interpretation, and how those principles have evolved, in consideration of the recent developments in the law.
The 2014 Supreme Court of Canada decision in Creston Moly Corp. v. Sattva Capital Corp., 2014 SCC 53 ("Sattva") emphasized that the proper approach to contractual interpretation is a "practical, common-sense approach not dominated by technical rules of construction". The ultimate goal is to determine the intent of the parties, and to accomplish that goal, a contract must be read as a whole, in light of the surrounding circumstances known to the parties at the time the contract was formed.
Since 2014, the Sattva approach has been reaffirmed in the courts of Alberta, and was further clarified in the 2017 decision of IFP Technologies (Canada) Inc. v. EnCana Midstream and Marketing, 2017 ABCA 157 ("IFP Technologies"), where the Court of Appeal held that, to interpret a contract, a trial judge must consider the surrounding circumstances, even in the absence of any ambiguity.
The Goal – Reflect Intention of the Parties
To help the court find "an interpretation that reflects and promotes the intention of the parties at the time they entered into the contract." [Consolidated Bathurst Export Ltd. v. Mutual Boiler and Machinery Insurance Co.,  1 S.C.R. 888]
The Goal has not changed. In Sattva, the Court stated that the overriding goal of contractual interpretation is to determine the intent of the parties. The Court also stated that the goal is inherently fact specific.
Give Effect to Entire Contract
A court must, if possible, give effect to all of the provisions in a contract. [BG Checo International Ltd. v. British Columbia Hydro & Power Authority,  1 S.C.R. 12]
A court cannot "simply pick and choose clauses – or parts of clauses – without considering the contract as a whole." [ATCO Electric Ltd. v. Alberta (Energy and Utilities Board), 2004 ABCA 215]
Sattva does not purport to clarify this principle. It remains a fundamental principle of contractual interpretation that a contract must be considered as a whole.
The Cardinal Rule – Intentions are as Expressed in Written Document
"The court should give effect to the intentions of parties as expressed in their written document." [Manulife Bank of Canada v. Conlin,  3 S.C.R. 415]
The intent of the parties is determined by the words they used in the contract. The court focuses on the written contract and the words used by the parties in that contract. [Eli Lilly & Co. v. Novopharm Ltd.,  2 S.C.R. 129]
Under the Sattva approach, although primacy must be given to the written words of a contract, an examination of the surrounding circumstances will inform what those words mean.
However, Sattva also instructed that the surrounding circumstances should never "overwhelm the words of the agreement", or be used to deviate from the written agreement. The goal of examining such evidence is only to deepen the understanding of the parties' objective intentions.
Court May Consider Background
The court may also consider the surrounding circumstances or the relevant background against which the contract was concluded. [ATCO.]
In IFP Technologies, the Court held that the written words of a contract should not be "looked at in isolation or divorced from the background context against which the words were chosen". In other words, the background should be examined in every case.
The "Parol Evidence Rule" – Do not Consider Extrinsic Evidence If Words are Unambiguous
The court does not consider evidence extrinsic to the words used by the parties to the written contract if that document is clear and unambiguous on its face. [Eli Lilly]
In Sattva, the Court held that the parol evidence rule does not apply to preclude evidence of the surrounding circumstances.
Further, in IFP Technologies, the Court held that the surrounding circumstances should be considered even in the absence of any ambiguity.
However, the type of evidence which falls under this exception is limited. According to Sattva, evidence of "surrounding circumstances" should only be objective evidence of facts that the parties knew or reasonably ought to have known at the time the parties formed the contract.
If Ambiguous, Courts May Apply Consider Extrinsic Evidence - Exception to Parol Evidence Rule
One exception to the parol evidence rule arises in the event of ambiguity in the language of the contract. In such instances, extrinsic evidence is admitted to clarify the meaning of the ambiguous words or phrases. [United Brotherhood of Carpenters and Joiners of America, Local 579 v. Bradco Construction Ltd.,  2 S.C.R. 316]
Under the Sattva approach, and affirmed by IFP Technologies¸ objective evidence of background facts known to the parties at the time of the execution of the contract should always be considered, even in the absence of ambiguity.
Further, IFP Technologies held that, in addition to considering the surrounding circumstances, if a contract is ambiguous, then extrinsic evidence (that is parol evidence) may be admitted.
Invitation for Discussion:
If you would like to discuss this article in greater detail, or any other business law matter, please do not hesitate to contact one of the lawyers in the Business Law group at Shea Nerland LLP.
Note that the foregoing is for general discussion purposes only and should not be construed as legal advice to any one person or company. If the issues discussed herein affect you or your company, you are encouraged to seek proper legal advice.
Joe Brennan would like to acknowledge the assistance of Jocelyn Arnason in the preparation of this material. Jocelyn is a summer student of Shea Nerland LLP and will be returning to the firm in the summer of 2018.