June 9, 2020
In 2014, the Supreme Court of Canada officially did away with the historical approach to interpreting contracts in the decision of Sattva Capital Corp. v Creston Moly Corp. (Sattva). Instead, the Supreme Court endorsed a “practical, common-sense approach” to contractual interpretation based on the plain words of the written contract: “considered in light of the factual matrix,” This marked a departure from prior decisions like Eli Lily & Co. v Novopharm Ltd., in which the Court stated that it may be unnecessary to consider any extrinsic evidence at all where a contract is clear and unambiguous on its face.
In the six years since Sattva, the Courts across Canada have embraced the “modern” approach to contractual interpretation and emphasized the importance of considering the surrounding circumstances in reading and understanding contracts. Appellate courts in Alberta, British Columbia, Saskatchewan and Ontario have all held that the surrounding circumstances are relevant and must be considered, even where there is no ambiguity in the contract.
What are the “surrounding circumstances?”
They are “objective evidence of the background facts at the time of the execution of the contract,” which reasonably should have been known by both parties at the time of contracting. The surrounding circumstances will “necessarily vary from case to case,” and cannot be used to “second guess […] what could have been included in the contract” or “change or overrule the meaning of the words in the contract.” Since Sattva, Courts have defined the boundaries of surrounding circumstances and whether they include negotiations and prior drafts, or conduct after the execution of the agreement.
In IFP Technologies (Canada) Inc. v EnCana Midstream and Marketing, the Alberta Court of Appeal held that negotiations and prior drafts of an agreement are not admissible as part of the factual matrix, but may be relevant to the extent “that evidence shows the factual matrix, for example by helping to explain the genesis and aim of the contract.” Written evidence of negotiations is far more objective evidence than after-the-fact evidence from opposing parties about oral statements made during negotiations, so it may be more likely to shed light on the factual matrix in some circumstances.
One thing is clear: evidence of the parties’ subjective intentions “always remains inadmissible.”
As the Alberta Court of Appeal recently observed in Alberta Union of Provincial Employees v Alberta Health Services, “it is possible to interpret Sattva as defining surrounding circumstances so broadly as to include all pre-contractual negotiations, so long as evidence of subjective intentions is excluded.” However, the Court declined to do so because: (1) Sattva did not go so far; (2) some members of the Supreme Court have said this remains to be addressed; (3) in the commercial context, if pre-contract negotiation evidence is not evidence of the surrounding circumstances, then admission requires an ambiguity; and (4):
[…] some discipline is required when considering evidence extrinsic to a contract. Not only are courts concerned with such evidence ‘overwhelming’ the written words in a contract, but we are also concerned about overwhelming the hearing process with irrelevant extrinsic evidence.
Similarly, the parties’ conduct after the execution of the agreement is generally excluded from the surrounding circumstances and is only admissible if the contract is found to be ambiguous. As the Ontario Court of Appeal explained in Shewchuk v Blackmont Capital Inc.:
[…] the scope of the factual matrix is temporally limited to evidence of facts known to the contracting parties contemporaneously with the execution of the contract. It follows that subsequent conduct, or evidence of the parties after the execution of the contract, is not part of the factual matrix.
The Ontario Court of Appeal further explained that reliance on “evidence of subsequent conduct has greater potential to undermine certainty in contractual interpretation and override the meaning of a contract’s written language,” because: (1) the parties’ behaviour in performing their contract may change over time and could permit the interpretation of the contract to fluctuate; (2) evidence of subsequent conduct may itself be ambiguous; or (3) “over-reliance on subsequent conduct may reward self-serving conduct whereby a party deliberately conducts itself in a way that would lend support to its preferred interpretation of the contract.”
Although it may be tempting to attempt to adduce evidence of pre-contractual negotiations, one party’s subjective understanding of a contract, or the parties’ subsequent conduct under the umbrella of “surrounding circumstances,” such evidence is typically inadmissible - but may be admitted where the contract is ambiguous, or where pre-contractual negotiations shed light on the surrounding circumstances.
The lawyers at JSS Barristers have significant experience in litigating contractual disputes between sophisticated commercial parties. If you would like advice regarding the interpretation of contracts, please contact us.
Ryan Phillips is a partner at JSS Barristers. Click here for Ryan’s bio.
Kaila Eadie is an associate at JSS Barristers. Click here for Kaila’s bio.
 Sattva Capital Corp. v Creston Moly Corp, 2014 SCC 53, paras 48 and 50 [Sattva]
 Eli Lilly & Co. v Novopharm Ltd.,  2 SCR 120, para 55
 IFP Technologies (Canada) Inc. v EnCana Midstream and Marketing, 2017 ABCA 157, paras 58, 81, and 82 [IFP]; British Columbia (Minister of Technology Innovation and Citizens’ Services) v Columbus Real Estate Inc., 2016 BCCA 283, paras 40-43; Starrcoll Inc. v 2281927 Ontario Ltd., 2016 ONCA 275, paras 16-18; Directcash Management Inc. v Seven Oaks Inn Partnership, 2014 SKCA 106, para 13
 Canlin Resources Partnership v Husky Oil Operations Limited, 2018 ABQB 24, para 10 [Canlin]
 Sattva, para 57
 IFP, para 89
 Canlin, para 10, with reference to Sattva, para 60
 IFP, para 85 [original emphasis]
 IFP, para 85
 Alberta Union of Provincial Employees v Alberta Health Services, 2020 ABCA 4, para 27 [AUPE]
 AUPE, para 32
 Resolute FP Canada Inc v Ontario (Attorney General), 2019 SCC 60, paras 99-100
 AUPE, para 32
 Shewchuk v Blackmont Capital Inc., 2016 ONCA 912, para 41 [Shewchuk]
 Shewchuk, para 42
 Shewchuk, para 43
 Shewchuk, para 44
 Shewchuk, para 45
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