Contractual Interpretation Update

Introduction

On December 3, 2015, in MacDonald v. Chicago Title Insurance Company of Canada, 2015 ONCA 842 the Ontario Court of Appeal addressed the issue of the standard of review to be applied on an appeal from a lower court decision involving interpretation of a contract.

This issue had recently been canvassed by the Supreme Court of Canada in Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, 2 S.C.R. 633. In that decision, the Supreme Court of Canada abandoned the traditional view that the standard of review in contractual interpretation was "correctness" and substituted a standard of review of  "palpable and overriding error". See the Fernandes Hearn LLP article on Sattva in the August 2014 newsletter. In Sattva, the Supreme Court of Canada also affirmed the contextual approach to contractual interpretation and explained the role of surrounding circumstances in contractual interpretation. The contract must be read as a whole and the words in the contract must be given their plain and ordinary meaning, consistent with the surrounding circumstances at the time of contracting.

The surrounding circumstances – such as the genesis of the transaction, the background, the context and the market in which the parties operate – combine to aid a decision maker (the arbitrator, the judge or jury) in ascertaining intention, since words do not have an immutable or absolute meaning. The Court in Sattva cautioned, however, that “while the surrounding circumstances will be considered in interpreting the terms of a contract, they must never be allowed to overwhelm the words of that agreement,” and “the goal of examining such evidence is to deepen a decision maker’s understanding of the mutual and objective intentions of the parties as expressed in the words of the contract. The interpretation of a written contractual provision must always be grounded in the text and read in light of the entire contract.”  The Court noted “while the surrounding circumstances are relied upon in the interpretive process, courts cannot use them to deviate from the text such that the court effectively creates a new agreement.” (at para. 57). The Court added that the nature of the evidence, that can be relied upon under the rubric of “surrounding circumstances”, will necessarily vary from case to case.  It does, however, have its limits. It should consist only of objective evidence of the background facts at the time of the execution of the contract; that is, knowledge that was or reasonably ought to have been within the knowledge of both parties at or before the date of contracting.  (at para. 58).

Earlier this Year

In a subsequent decision earlier this year (see Fernandes Hearn Article on UPS in the May 2014 newsletter), in UPS Supply Chain Solutions, Inc. v. Airon HVAC Service Ltd., 2015 ONSC 1734, the defendant relied upon Sattva Capital Corp. v. Creston Moly Corp. to submit that it is appropriate for a court, when interpreting a contract, to have regard for the surrounding circumstances. However, Justice Matheson limited the “surrounding circumstances”. Justice Matheson commented on this issue at paragraphs 67 to 69:

[67] To the extent that the service contract, as amended by the change order, is incorporated by reference into the insurance policy, it forms part of the insurance policy.  It is the insurance policy that must be interpreted to reach a conclusion about whether there is the mere possibility of coverage under that policy.  While I appreciate that there is an overlap between the two in the circumstances where the policy incorporates the scope of work in this way, I conclude that it does not change the essential task.  The task is to analyze the pleadings, assuming the alleged facts are true, and determine whether there is the mere possibility of coverage under the policy. 

[68] In considering the nature and scope of Honeywell’s “commitments” I have regard for relevant surrounding circumstances.  However, I note that the nature and extent of evidence of the surrounding circumstances that may be considered in interpreting a contract is not unlimited.  As set out in Sattva, at para. 50, 58:

The nature of the evidence that can be relied upon under the rubric of “surrounding circumstances” will necessarily vary from case to case. It does, however, have its limits. It should consist only of objective evidence of the background facts at the time of the execution of the contract…, That is, knowledge that was reasonably ought to have been within the knowledge of both parties at or before the date of contracting… [Emphasis added.]

[69] Some of the evidence in the Honeywell affidavit could properly be described as objective evidence of the background facts at the time of the execution of the service contract that was within the knowledge of both parties on or before that time.  One significant example is the evidence that the reference in the contract to cooler #2 is Cooler B and cooler #3 is Cooler C.

However, the Honeywell affidavit also describes how the work was actually done after the change order was made, and whether or not that work, in the view of the affiant, could have caused the problem with the Sanofi vaccines.  That evidence is not permitted under the rubric of “surrounding circumstances”.  And it is that evidence that leads to the conclusion that Honeywell and ACE argue for.

The judge only used objective evidence of the background facts at the time of the execution of the contract that was within the knowledge of both parties on or before that time.

Current Decision of the Ontario Court of Appeal

In MacDonald v. Chicago Title Insurance Company of Canada, the Ontario Court of Appeal held that Sattva did not apply to standard form contracts, such as contracts of insurance. The standard of review was not a "palpable and overriding error" but rather “correctness”. The Court also explained why “surrounding circumstances” are not relevant in standard form contracts:

[30] First, Rothstein J. emphasized that determining the objective intentions of the parties to a contract, the goal of contractual interpretation, is a “fact-specific goal”, informed, in part, by a consideration of “the surrounding circumstances known to the parties at the time of formation of the contract”: Sattva, at paras. 47, 49.

[31] There is no question that Sattva reflects the increasing emphasis placed by appellate courts and commentators over the last several years on the factual matrix, or the surrounding circumstances of a contract, as part of the interpretive process: see e.g. Investor’s Compensation Scheme Ltd. v. West Bromwich Building Society, [1998] 1 All E.R. 98 (H.L.), at p. 114; Eli Lilly & Co. v. Novopharm Ltd., [1998] 2 S.C.R. 129, at para. 54; Bell Canada v. The Plan Group, 2009 ONCA 548, 96 O.R. (3d) 81, at para. 37; Geoff R. Hall, Canadian Contractual Interpretation Law, 2d ed. (Markham, ON: LexisNexis, 2012), at p. 22.

[32] However, the relative importance of the surrounding circumstances is largely dependent on the nature of the contract. The circumstances surrounding the formation of a contract negotiated by arms-length parties may be very important in understanding the parties’ objective intent. Similarly, the determination whether the parties are in a special relationship, such as a fiduciary relationship, may also be an important factor in determining the parties’ objectively intended obligations under a contract.

[33] The importance of the factual matrix is far less significant, if at all, in the context of a standard form contract or contract of adhesion where the parties do not negotiate terms and the contract is put to the receiving party as a take-it-or-leave-it proposition. Any search for the intention of the parties in the surrounding circumstances of these contracts “is merely a legal fiction”: Ledcor, at para. 14.

[34] The Title Policy was a pre-printed contract produced by Chicago Title and provided to the appellants on a take-it-or-leave-it basis. Chicago Title did not sit across from the appellants and hammer out the details of their bargain. The terms of the Title Policy were simply not negotiated in any meaningful sense and it would be illusory to suggest that anything could be inferred about the meaning of the contract from the facts surrounding its formation.

The Court of Appeal went on to find that it is untenable for standard form insurance policy wording to be given one meaning by one trial judge and another by a different trial judge. The factual matrix does not meaningfully assist in interpreting standard form contracts and their construction has broad application.

In summary, the Court of Appeal has held that standard form contracts are not subject to the Sattva decision.

Subsequently, the Ontario Court of Appeal reiterated this position on Dec. 23, 2015 in Monk v. Farmer's Mutual Insurance Company (Lindsay), 2015 ONCA 911 and on Dec. 24, 2015 in Daverne v. John Switzer Fuels Ltd., 2015 ONCA 919. In Monk, the Court of Appeal stated, “…we are concerned with the interpretation of a standard form insurance contract. This is not a case in which the circumstances surrounding the contract are important to its interpretation, nor is it a case in which the interpretation of a contract has no impact beyond the parties to it”. In Daverne, the Court of Appeal followed the decision of the Court in MacDonald and did not apply Sattva, stating at paragraph 13,  “In the case of insurance policies, which involve the interpretation of similar if not common language and the application of general principles of insurance law, the high degree of generality and precedential value justifies a departure from the deferential standard of appellate review.”

The question left open is the standard of review of boilerplate clauses in manuscript contracts. For instance, if a typical boilerplate hold harmless clause is inserted into what is otherwise a custom contract, will the “surrounding circumstances” be relevant? What will be the standard of review for the interpretation of the hold harmless clause? We will have to wait for future decisions and lawyers’ innovative arguments.

Rui M. Fernandes