Factors to Consider When Contracting in Canada: Context Matters

In many respects, Canadian common law should look familiar to American lawyers and businesses. Canadian courts grapple with the same issues of contract interpretation as U.S. courts and sometimes adopt the reasons of leading U.S. authorities. However, parties entering the Canadian market should be mindful of subtle but important differences between Canadian and U.S. law. One is the role of the “factual matrix” in contract interpretation.

The Contextual Approach

In a seminal 2014 decision, Sattva Capital Corp. v Creston Moly Corp., 2014 SCC 53, the Supreme Court of Canada summarized a long evolution of contract interpretation principles under Canadian common law. Canadian law takes a “practical, common-sense approach not dominated by technical rules of construction”. The ultimate goal when interpreting a contract is to determine the intent of the parties. To accomplish that goal, a contract must be read as a whole, consistent with the surrounding circumstances known to the parties at the time the contract was formed. Courts must have regard to the “factual matrix” in which the contract was formed. This should not overwhelm the words of the agreement, but it is an essential consideration when determining the parties’ intentions at the time of contracting. The court in Sattva noted that ascertaining intention can be difficult when looking at words on their own, because words alone do not have an immutable or absolute meaning. Id., 2014 SCC 53, paras 47–51.

Litigating Contract Disputes

The Canadian “contextual approach” has some important implications. First, it is a departure from contract interpretation in U.S. jurisdictions, where the law typically requires a court to construe the text of an agreement without reference to extrinsic evidence unless there is an ambiguity in the text (for example, see GMG Capital Investments, LLC v. Athenian Venture Partners I, LP, 36 A.3d 776 (Del. 2012)). The requirement in Canada to consider a contract’s factual matrix is not dependent on ambiguity. With very limited exceptions, the factual matrix must be considered in every case. Second, reviewing the factual matrix means that contract interpretation is largely a fact-finding exercise. Litigation counsel must give due consideration to surrounding circumstances when preparing their case and any evidence (including expert evidence) that might show the court the relevant context for the contract language that the parties chose.

Crucially, contract interpretation is usually a matter of “mixed fact and law,” which attracts a high degree of appellate deference to a trial judge’s decision. See Housen v. Nikolaisen, 2002 SCC 33, paras 1, 33 and 37. An appellate court will only interfere in the judge’s factual determinations where it finds a “palpable and overriding error” in the trial judge’s decision, which is a notoriously difficult standard for an appellant to meet. For this reason, appellants will often try to find an “extricable legal error” in the trial judge’s reasons that is not tied up with their fact-finding exercise, reviewable on the easier standard of “correctness”.

Conclusion

Canada is a friendly place to do business. U.S. business parties can have faith that their contracts will be upheld in Canada. However, the interpretation process might be different from what they are accustomed to. Above all, parties doing business in Canada should understand that the context of their written agreement is inseparable from its meaning.