Common Sense for Contracts but not for Statutes

The Supreme Court of Canada has reaffirmed an integral principle of contract law: the interpretation of contracts should be based on the text of the agreement, not the subjective intentions of the parties.

Sattva Capital Corp. v. Creston Moly Corp.¹ involved the interpretation of a finder’s fee agreement in a mining property acquisition, and specifically what date ought to determine the price of the finder’s fee shares. The issue for the Supreme Court was whether it could properly review the decision of the Arbitrator who had found in favour of the finder. Writing for a unanimous court, Justice Rothstein emphasized that the interpretation of a contract involves questions of mixed fact and law and that the Arbitrator’s decision was therefore final since only questions of pure law could properly form the subject of an appeal.

Contract interpretation had traditionally been viewed solely as a technical legal task, but, as the Court indicated, “the interpretation of contracts has evolved towards a practical, common-sense approach”² in which the Court must consider the “surrounding circumstances” or the “factual matrix” that gave rise to the formation of the contract. The surrounding circumstances are facts that were reasonably known to both parties at or before the date of contracting and “should consist only of objective evidence of the background facts at the time of the execution of the contract.”³

The Court explained that the purpose of considering the surrounding circumstances is to better understand the text, not to override it. Words, taken on their own, “do not have an immutable or absolute meaning”⁴ and by utilizing the factual matrix that gave rise to the contract, a court will be in a better position to decipher the meaning of its terms. However, these surrounding circumstances “must never be allowed to overwhelm the words of that agreement.”⁵ Rothstein J. cogently clarified the point at paragraph 57 of the decision:

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… 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.⁶

Rothstein J.’s decision properly distinguishes the consideration of the narrow and objective surrounding circumstances from what has long been known as “parol evidence,” meaning extrinsic evidence that would add to, subtract from, vary, or contradict the written instrument. The common law “parol evidence rule” precludes, with certain exceptions, the admission of extrinsic evidence – usually the subjective intentions of the parties – since this evidence is notoriously unreliable and would undermine the principles of finality and certainty. The surrounding circumstances, by contrast, are “used as an interpretive aid for determining the meaning of the written words chosen by the parties, not to change or overrule the meaning of those words”⁷ and are therefore consistent with the objectives of finality and certainty.

In sum, the decision in Sattva Capital offers a common-sense practical method of contractual interpretation that maintains fidelity to the text while ensuring that the words are not interpreted in a vacuum. Essentially, it is a rejection of what is often referred to as ‘strict constructionism’ in favour of a fair-reading textualism. Sattva Capital reaffirms that contractual interpretation must serve the twin objectives of certainty and finality, and thereby promote a more predictable and efficient commercial landscape in Canada.

In the wake of the Supreme Court’s decision, the question we should be asking is if textualism remains good for the contractual goose, why is it no longer good for the statutory gander? For the majority of Canadian jurisprudential history, judges interpreted contracts and statutes in the same way: they adopted the ordinary, grammatical meaning of the words, and were precluded from considering an alleged extra-textual “intent.”

All of that changed with the advent of the “purposive approach” a generation ago. The Courts must still look to the ordinary meaning of the words used, but they are now encouraged, and perhaps mandated, also to consider a mystical purpose underlying the statute, other than what the legislature committed to law. The purpose or intent of a statute has always been important; but it was traditionally determined by a fair reading of the text in its entire context (much as the objective purpose or intention of a contract is determined by the text of the agreement in its full context).⁸ The purposive approach, on the other hand, views intent as something separate from the text itself; and while the purpose is supposed to be read “harmoniously” with the text, there are countless cases where the ordinary meaning of the words is effectively disregarded and the supposed purpose is given precedence.

It is understandable that statutory terms may sometimes merit a more generous interpretation than contractual ones since statutes affect the lives of so many people; but that is hardly a justification for subordinating the text. Evidence of the drafters’ subjective intent is no more reliable in the statutory context, and relying on this evidence undermines finality and certainty just as it does in the contractual realm. In fact, there is arguably a far greater danger in adopting an extra-textual intent where statutes are concerned. There are usually only two parties to a contract, and even where an agreement concerns large corporations, each corporation constitutes a single legal entity with the capacity to speak with one voice (and there are usually only a handful of individuals who have the authority to represent the corporation as its legal agent). A legislature, by contrast, is an incorporeal body. It cannot express an intent aside from its statutory enactments. Only individual legislators may possess an intent separate and apart from the statute itself, but in most cases we only hear from a few of these individuals, none of whom have the authority or competency to speak on behalf of the legislature. It would indeed be wholly contrary to the rule of law to impute the will of several legislators onto the legislature itself, lest ours cease to be government of laws and become a government of men.

Proponents of the purposive approach would undoubtedly argue that the fundamental distinction between a contract and a statute is that the former only affects the rights of the parties who have agreed to be bound by its terms, whereas legislation affects the rights of the people as a whole. Yet it is precisely for this reason that purposivism is even more menacing in the statutory context. Abolishing the parol evidence rule would undoubtedly lead to business uncertainty and increased transaction costs, but at least judges would remain disinterested adjudicators with no incentive to substitute their own intentions or agendas for the intent of the contracting parties. Conversely, the very nature of statutory interpretation is that judges are empowered to determine the meaning of laws that almost always affect them as private citizens, whether financially, morally, or otherwise. Add to the fact that the “true” purpose of a statutory provision is usually impossible to demonstrate with any level of certainty,⁹ and there becomes a grave concern that judges will, intentionally or accidentally, interpret laws based on their own subjective preferences and justify the interpretation by appeal to some elusive underlying purpose.

This is not to argue that extrinsic evidence has no place whatsoever in the interpretation of statutes. Judges should certainly be allowed to consider the surrounding circumstances of the statute to decipher the meaning of ambiguous terms or phrases. The basic point is that the interpretation of statutes should, to adopt the words of Rothstein J., “always be grounded in the text.”

The Supreme Court has eloquently reiterated the underlying rationale for contractual textualism. It would be wise to heed its own words in the context of statutory interpretation.

Notes