Interpreting contracts is a valuable skill. Knowing contractual interpretation techniques allows for better drafting and negotiation of new contracts. It allows you to confidently navigate what may or may not be permissible in a contract and if something does go wrong, it provides an insight into what a decision maker may decide.
The Alberta Court of Appeal recently provided a very helpful case, for the purposes of interpreting contracts. The Court was called upon to review the decision of an arbitrator who had to make a decision about the meaning of a contract. The dispute was between a union and an employer in relation to key phrases including: “Operational Restructuring” and “Operational Best Practices”. These phrases were very important to the parties because the different interpretations meant the difference between whether certain individuals could be laid off or not.
As part of this decision, the Court of Appeal provided commentary and guidance for the interpretation of all contracts, as well as more particular comments about collective agreements. Importantly, the Court provided direct assistance with the application of principles set out by the Supreme Court of Canada in Sattva Capital Corporation (formerly Sattva Capital Inc.) v Creston Moly Corporation (formerly Georgia Ventures Inc.), 2014 SCC 53 (“Sattva”).
Sattva describes contractual interpretation as “giving words used their ordinary and grammatical meaning, consistent with the surrounding circumstances known to the parties at the time of formation of the contract”. An idea simply stated yet difficult and nuanced in application.
The Court of Appeal confirmed that Sattva changed contractual interpretation by requiring decision makers to consider ‘surrounding circumstances’ when interpreting a contract. Helpfully, the Court of Appeal describes “surrounding circumstances” as being:
- background facts;
- which would likely be uncontroversial to the parties;
- likely known to both parties at the relevant time; and
- capable of affecting how a reasonable person would understand the language of the document.
However the Court reminds readers that ‘surrounding circumstances’:
- do not include subjective intentions; and
- cannot add to, detract from, or overwhelm the written words.
The Court of Appeal also discussed an issue that can often arise in a dispute about what a contract means: whether pre-contractual negotiations can constitute part of the surrounding circumstances. It was expressly stated in this case that subjective intentions of the parties are always inadmissible because they are irrelevant. However, excluding subjective intentions, pre-contract negotiations can be used as evidence if there is an ambiguity in the wording of the contract.
When one is considering the requirements of a contract, remember to consider the ‘surrounding circumstances’. For example, the Court of Appeal explained that in a commercial setting this would include “the commercial purpose of the contract and this in turn presupposes knowledge of the genesis of the transaction, the background, the context, the market in which the parties are operating”.
Next time you are negotiating or reading a new contract turn your mind to what a decision maker might consider to be the ‘surrounding circumstance’ if called upon to settle a question of interpretation for the parties.