Interpretation Clarified

In a decision released August 1, 2014, the Supreme Court of Canada in Sattva Capital Corp. v. Creston Moly Corp., which involves a commercial arbitration, held that contractual interpretation is a question of mixed fact and law – and not a question of law only.

There are “rare” circumstances, nonetheless, where questions of law can be extricated from the factual matrix and have importance beyond the particular dispute. Questions of mixed fact and law are subject to the reasonableness standard for appellate review, which is more stringent than the correctness standard for questions of law.

The findings in Sattva are consistent with a larger cultural shift recognized earlier this year by the high court in Hryniak v. Mauldin, as reported in the March 2014 edition of Canadian Underwriter, where trial judges are expected to have wider discretion and enhanced powers to summarily decide cases in the interests of justice. The Sattva decision will have far-reaching effects on legal culture and civil actions across Canada, other than in Quebec where the Civil Code applies.

THE FACTS

Sattva Capital entered into a finder’s fee agreement with Creston Moly regarding the purchase of a molybdenum mining property. Sattva Capital located a suitable mining property, subsequently purchased by Creston Moly, and the former then sought to be paid its finder’s fee.

The agreement provided for a maximum payment of $1.5 million, or a number of shares worth the same amount. Upon the news of its prospective purchase, Creston Moly’s shares increased significantly in value. At issue between the parties was the date of valuation for the shares.

The parties went to binding arbitration under Section 31(2) of British Columbia’s Arbitration Act, which allows appeals on questions of law, subject to the leave requirements that the result is important to the parties and the determination may prevent a miscarriage of justice.

Under the act, the court may yet exercise discretion and deny leave after consideration of the following factors: the conduct of the parties; alternative remedies; undue delay; and the urgent need for a final answer.

Sattva Capital argued that the share price was determined by the “market price” definition for shares in the agreement, and, therefore, the share price of 15 cents on the day before the announcement of the acquisition applied for a total of about 11.5 million shares.

On the other hand, Creston Moly argued a share price of 70 cents applied based upon the end of the five-day period stipulated in the agreement for the election of either the maximum amount to be paid ($1.5 million) or the equivalent number of shares, for a total of approximately 2.5 million shares.

Sattva Capital’s election was also subject to the regulatory approval of the TSX Venture Exchange.

The arbitrator interpreted the finder’s fee agreement in favour of Sattva Capital, and found that Creston Moly failed to take reasonable, timely steps in seeking regulatory approval for the agreement.

The arbitrator determined the value lost to Sattva Capital, based on an average price over a minimum period and discounting the amount of shares by the risk of 15% that regulatory approval would not be received, and the company was awarded more than $4 million in damages.

Creston Moly appealed the arbitrator’s decision to the Supreme Court of British Columbia, but leave was denied. The Court of Appeal then granted leave and the matter was then sent back to the supreme court, which subsequently affirmed the arbitrator’s decision on the merits. Creston Moly then appealed to British Columbia’s high court, which held it was bound by its earlier decision on the leave application and, as such, reversed the trial findings and the arbitrator’s award.

Sattva Capital then further appealed on the merits and leave application. The Supreme Court of Canada overturned the Court of Appeal decision and reinstated the arbitrator’s decision.

SUPREME COURT OF CANADA DECISION

In Sattva, Justice Marshall Rothstein for the unanimous Supreme Court of Canada dismissed as anachronistic the historical concerns that jurors tried civil cases, but were often illiterate, and that only a judge had capacity to read and understand a contract. Justice Rothstein embraced a contextual approach, stating the following:

“With respect for the contrary view, I am of the opinion that the historical approach should be abandoned. 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.”

The goal of contractual interpretation is to determine the objective intentions of the parties – a fact-specific exercise of applying legal principles of interpretation. It requires consideration of the meaning of each word, the parties’ relationship, the purpose of the contract, and the surrounding circumstances.

Since words in the contract are not immutable or have absolute meaning, they are considered in context. The contract is read as a whole and the words are given their plain and ordinary meaning, consistent with the surrounding circumstances in the formation of a contract, or the “factual matrix.”

Evidence of the factual matrix will vary depending upon each case.

Justice Rothstein notes the Supreme Court of Canada defines the factual matrix as including “absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable [person].”

The factual matrix should involve only objective evidence of background facts at the time of execution of the contract and which concerns “knowledge that was or reasonably ought to have been within the knowledge of both parties at or before the date of contracting.” However, this evidence should not contradict the words of the contract itself.

While it may be possible to extricate a pure question of law in contractual interpretation, the circumstances will be “rare” and courts should exercise caution. For example, questions of law may include application of an incorrect principle, failure to consider an element in a legal test, or failure to consider relevant factors. As Justice Rothstein explains, citing the supreme court’s earlier decision in Canada (Director of Investigation and Research) v. Southam Inc.:

“the degree of generality (or “precedential value”) [is] the key difference between a question of law and a question of mixed fact and law. The more narrow the rule, the less useful will be the intervention of the court of appeal.”

The central purpose of these two different questions is to limit appellate intervention to cases expected to have an impact beyond the parties to the particular dispute.

The extent of “rare circumstances” for extricating a question of law remains unclear. There may be competing goals of avoiding uncertainty from varying interpretations of the same contractual language over different cases by different judges and arbitrators at first instance, and from those between court levels on the same case, like in Sattva.

It remains uncertain whether or not an exception applies to interpretation of standard form or regulated contracts in commercial cases, which may impact future transactions. For these cases, the introduction of the factual matrix into the analysis may be considered more of a “legal fiction.”

For commercial arbitration in British Columbia, at least, the standard of review is reasonableness unless the question attracts 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,” the decision notes. Arbitrators are typically selected because of their expertise in the subject matter, and there should be deference to their fact
finding and “finality” in the arbitration process.

The Supreme Court of Canada drew upon similarities to judicial review of administrative tribunal decisions, finding that the arbitrator’s decision must satisfy the reasonableness threshold of justifiability, transparency and intelligibility. For civil actions, in contrast, the “reasonableness” standard refers to a palpable and overriding error where the findings of fact or inferences drawn are clearly wrong and not properly and reasonably supported by the evidence.

Since its release two months ago, Sattva has been applied to contract cases by various courts across Canada.

In one case, Vallieres v. Vozniak, Manitoba’s Court of Appeal ruled the standard of review set forth in Sattva did not apply to standard form real estate contracts concerning restrictive covenants. The appeal court held the interpretation of the latter covenant was subject to the standard of review of correctness, not reasonableness, since the interpretation had significant implications for real estate transactions in the future, and since it was the intention of the Real Estate Association committee that formed the contract, not those of the parties involved in executing the contract, that are at issue.

The recent decision in Vozniak raises flags and Canadian courts will likely be wary of interpreting contracts and establishing those “rare exceptions.”

IMPLICATIONS FOR THE INSURANCE INDUSTRY

The Sattva decision is significant for three reasons: it emphasizes the surrounding circumstances or factual matrix in making the contract; it clarifies limits to appellate review of contractual issues; and it restricts the reviewability of commercial arbitration awards.

The Sattva decision confirms the modern contextual approach and provides a road map for appeals involving contractual interpretation – while warning courts about the need to exercise caution in determining exceptions in “rare circumstances.”

For the insurance industry, the investigation and adjusting of claims should also encompass the factual matrix for the formation of the contract, including industry practices.

Insurers will also want to keep in mind that legal costs up front may increase to support fact-finding at first instance. They will wish to avoid relying on contractual interpretation as potential grounds on appeal, but instead focus on fact-finding at trial or arbitration.

The aforementioned points also apply to summary judgment motions.

Insurers may also wish to reconsider arbitration for commercial disputes, keeping in mind that the results are more likely binding and “final.” In this regard, the selection of arbitrators becomes even more important, and their expertise and experience should be carefully reviewed.

Alternatively, insurers may also draft or modify any arbitration agreement to include rights of appeal for questions of mixed fact and law, where so permitted under the applicable statute.

In summary, trial judges and arbitrators of first instance have a more enhanced role over contractual interpretation. The standard for appellate review of these contractual issues is more stringent now, except in rare circumstances where questions of law can be extricated and shown to have importance beyond the particular dispute.