October 9, 2014
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Nelligan O'Brien Payne gratefully acknowledges the contribution of Alessia Petricone-Westwood, Student-at-Law in writing this article.

The Supreme Court has clarified the rules of contractual interpretation in its recent decision, Sattva Capital Corp v. Creston Moly Corp. This decision, which centers on the interpretation of a finder’s fee clause in a commercial contract, affirmed the contextual approach to contractual interpretation, which allows decision-makers to take ‘surrounding circumstances’ into account when attempting to determine the parties’ intentions. The Court also confirmed that the standard of review for commercial arbitration decisions was reasonableness and that appellate courts must pay considerable deference to commercial arbitrators.

Creston Moly Corporation entered into an agreement with Sattva Capital Corporation on January 12, 2007, which required Creston to pay a finder’s fee to Sattva in relation to Creston acquiring a mining property. Under the Agreement, the parties decided that Sattva was entitled to a finder’s fee of US$1.5 million, to be paid in shares of Creston, cash or a combination of both. The dispute at the center of this case concerned which date should be used to determine the price of the Creston shares, as this would determine the number of shares Sattva was entitled to.

Sattva’s position was that the Market Price definition found in the Agreement should dictate the share price, which would entitle them to shares priced at $0.15, resulting in the acquisition of 11,460,000 shares. Creston’s position was that the Agreement’s ‘maximum amount’ clause meant that Sattva could not receive shares valued at more than US$1.5 million on the date the fee was payable. The price of the shares on the date the fee was payable was $0.70, which entitled Sattva to approximately 2,454,000 shares – approximately 9 million fewer shares than if they were priced according to Sattva’s interpretation of the Agreement.

The parties arbitrated the dispute pursuant to the Arbitration Act. The arbitrator found in favour of Sattva. The British Columbia Supreme Court (‘BCSC’) denied Creston leave to appeal the decision. The BCSC stated that under the Arbitration Act, leave to appeal an arbitrator’s decision could only be granted on questions of law, and the question under appeal was not a question of law. Creston was granted leave to appeal the arbitrator’s decision by the British Columbia Court of Appeal (‘BCCA’). The appeal was sent back to the British Columbia Supreme Court to be heard on the merits. The BCSC judge who heard the merits of the appeal upheld the arbitrator’s award. Creston appealed the merits decision to the BCCA, which found in favour of Creston. Sattva appealed to the Supreme Court of Canada (‘SCC’), which granted leave to appeal both the BCCA decision to grant Creston leave to appeal as well as its decision on the merits.

New Approach to Contractual Interpretation

The SCC confirmed the modern approach to contractual interpretation, in which the overriding objective is to determine the intent of the parties and the scope of their understanding of the terms of the agreement. In order to do so, the courts must turn their attention to the surrounding circumstances (or factual matrix) in which the contract was concluded. Context is necessary in order to determine the mutual and objective intentions of the parties. Contracts are not created in a vacuum; the motivations of the parties, background to the agreement and existing relationships give meaning to the terms of the contract. The courts should only examine the objective evidence of the background facts at the time of the execution of the contract. This approach involves applying the legal principles of contractual interpretation, such as reading the document as a whole and giving words their ordinary meaning, to the facts surrounding the formation of a contract. Given this, the Court held that contractual interpretation should no longer be considered a question of law, but rather, a question of mixed fact and law.

The Court left open the possibility of identifying a question of law within contractual interpretation. Legal errors that can arise in contractual interpretation include ‘the application of an incorrect principle, the failure to consider a required element of a legal test, or a failure to consider a relevant factor’. However, the Court noted that ‘circumstances in which a question of law can be extricated from the interpretation process will be rare’.

When Should Leave to Appeal a Commercial Arbitration Award be Granted?

The threshold requirement for appealing a commercial arbitration award is that leave must be sought on a question of law. As discussed above, the Court has narrowed the circumstances in which there will be an extricable question of law in contractual interpretation. If a question of law has been identified, then the court granting leave must be satisfied that failure to grant leave would amount to a miscarriage of justice, under section 31(2)(a) of the Arbitration Act. The Court explains that in order to rise to the level of miscarriage of justice under the Arbitration Act, the legal error must relate to a material issue in the dispute, which if it was decided differently, would affect the outcome of the case. There must be a genuine possibility that the result of the case would change if the point of law were decided differently. An arguable point would not be sufficient to warrant leave to appeal.

Moreover, even if there is a question of law at issue, the answer to which may change the outcome of the case, under the Arbitration Act, the court still has residual discretion to deny leave to appeal. This significantly narrows the scope of appealing a commercial arbitration award.

Standard of Review for Commercial Arbitration

The Court also addressed the standard of review to be applied to commercial arbitration appeals. A greater degree of deference is owed to any arbitral decision, given that parties engage in commercial arbitration by mutual choice and are able to select the number and identity of the arbitrators based on their expertise in a given area. As such, the judicial review framework developed in the 2008 SCC decision, Dunsmuir v New Brunswick [Dunsmuir] and subsequent cases 'is not entirely applicable to the commercial arbitration context’. One key difference is that the Arbitration Act absolutely prohibits review of an arbitrator’s factual finding, whereas a privative clause within a statute does not preclude a court from reviewing a decision under the Dunsmuir framework, but rather, signals that deference should be paid to the decision-maker.

However, judicial review under the Dunsmuir framework is analogous to appeals of arbitration awards. Both processes focus on ‘the nature of the question at issue’. As discussed above, in the context of commercial arbitration, ‘appeals are restricted to questions of law,’ and so, the standard of review will be reasonableness. However, constitutional questions or questions of law of central importance to the legal system as a whole and outside the adjudicator’s expertise are questions of law that would attract the correctness standard of review.

Takeaway

The new rules governing contractual interpretation acknowledge the sophistication of the parties that enter into these agreements. Words are given particular meaning depending on the objective and intentions of the parties. A reviewing court will now look at the factual circumstances that lead to the creation of the contract when discerning the parties’ intent.

Companies engaging in contract negotiations will want to keep in mind that factors outside the contract itself may be used as interpretation guidelines if debates arise. As such, companies will want to make efforts to ensure that most terms are as unambiguous as possible.

The Supreme Court has narrowed the circumstances under which commercial arbitration decisions may be appealed. Even if leave to appeal is granted, the courts will accord considerable deference to the arbitrator’s decision. This will likely result in greater finality of commercial arbitration decisions regarding contractual interpretation. Companies will therefore want to carefully consider their choice of arbitrator, as that individual will likely be resolving the matter in its entirety. When contemplating an appeal of a commercial arbitrator’s decision, companies will also want to ensure that the question they are appealing is a question of law. If it is more a question of mixed fact and law, it is unlikely that leave to appeal will be granted.

This content is not intended to provide legal advice or opinion as neither can be given without reference to specific events and situations. © 2017 Nelligan O’Brien Payne LLP.