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Interpreting a Contract: When is it Solely a Question of Law?
The primary question which the Court addressed in this decision is whether and in what circumstances is the interpretation of a contract solely a question of law as opposed to a question of mixed fact and law. The answer was – rarely.
Pursuant to a contract between the parties, the appellant was entitled to receive from the Respondent a finder’s fee resulting from the appellant identifying for the respondent an investment opportunity in a mining venture. The agreement stipulated that the fee was to be in the amount of $1.5 Million. The agreement gave the appellant the option of receiving the fee in cash or shares. The appellant chose the share option.
A dispute arose as to the correct valuation date with respect to the shares. The appellant suggested the contract called for an earlier date. The respondent said it called for a later date. The value of the shares had increased significantly between those two dates. As such, if the date urged by the appellant was selected, the value of the shares at the time of transfer would have been significantly more than $1.5 Million.
The matter was initially ruled on by an arbitrator. He ruled in favour of the appellant. The respondent appealed. Under the British Columbia arbitration legislation, appeals could only proceed with leave of the Court and leave was only to be granted on questions of law. The British Columbia Supreme Court ruled
that the question in issue was not solely a question of law and as such, leave was denied. The Court of Appeal overturned that decision. When the matter came back before the Supreme Court on the merits, the Court ruled in favour of the Appellant. The Respondent appealed and was successful. The Appellant was granted leave for the matter to be heard by the Supreme Court of Canada.
Justice Rothstein rendered a judgement on August 1, 2014.
Substance of Decision
The decision contains a comprehensive overview of the development of the law of contractual interpretation. It reviews the earlier approach pursuant to which interpreting the terms of a contract was generally deemed to be a question of law. Justice Rothstein then reviewed how this “historical approach” has evolved through the years to the current more contextual approach. Justice Rothstein concluded at paragraph 50:
“With respect to 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.”
Justice Rothstein confirmed that while it may be possible to identify “an extricable question of law” when approaching the contractual interpretation exercise, such circumstances would very much be the exception.
Justice Rothstein then went on to consider what “surrounding circumstances” could properly be taken into account to assist in the interpretative exercise of ascertaining the objective intention of the parties. He confirmed that the goal of examining such circumstances was to “deepen a decision maker’s understanding of the mutual and objective intentions of the parties as expressed in the words of the contract.”
He described the evidence that could be relied upon under the rubric “surrounding circumstances” as consisting 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. Subject to these requirements and the parol evidence rule discussed below, this includes, in the words of Lord Hoffmann, ‘absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man’”.
In the result, Justice Rothstein ruled that the contractual interpretation question at issue was not solely a question of law and as such leave to appeal the initial arbitrator’s decision should not have been granted. The Court nonetheless assessed the merits of the case and ruled that the initial arbitrator’s decision should stand.
The comments and guidance of the Court on contractual interpretation are of broad and general application. They reinforce the importance of clarity and completeness in defining or identifying the “factual matrix” within which a contract is negotiated and executed. It is now all the more critical that when acting for a party drafting a contract, you are aware of what facts and background circumstances the client is taking into account in its decision- making and equally importantly that this background is known to the other party. Justice Rothstein makes clear that only surrounding circumstances known by both parties or which reasonably ought to have been known by both parties can properly be taken into account when a contract requires interpretation.