Contractual Interpretation Principles Affirmed

If there was doubt following the Supreme Court of Canada’s 2014 decision in Sattva Capital Corp. v. Creston Moly Corp. about the role of the “surrounding circumstances” in the contractual interpretive process, a recent decision of the B.C. Court of Appeal should put that doubt to rest.

In British Columbia (Minister of Technology Innovation and Citizens’ Services) v. Columbus Real Estate Inc., 2016 BCCA 283, the Court confirmed that surrounding circumstances at the time of contract formation are relevant to contractual interpretation regardless of whether there is any uncertainty on a plain reading of an agreement.

The issue before the Court was the interpretation of an option to purchase in a lease of property to the Province. The lease gave the Province an option to purchase for $11 million, subject only to certain encumbrances, including mortgages for vendor’s financing so long as the mortgages did not exceed $11 million.

At trial, the Province argued it was an express or implied term of the option that the price of $11 million could be satisfied by payment of cash, the assumption of existing mortgages, or a combination of both, totalling no more than $11 million.

Columbus argued the purchase price was $11 million cash, subject to existing encumbrances in a maximum amount of $11 million, making the potential consideration for the property $22 million.

The trial court agreed with Columbus’s interpretation of the option, concluding there was no ambiguity in the language of the option.

On appeal, the Court found the trial judge made an error by failing to consider the surrounding circumstances. The Court said Sattva established the surrounding circumstances are always relevant to contractual interpretation, regardless of any ambiguity in the words of the contract.

The Court said that while the surrounding circumstances must not be permitted to overwhelm the words of the contract, they deepen a decision-maker’s understanding of the mutual and objective intentions of the parties. Such evidence, used as an interpretive aid, is consistent with the objectives of finality and certainty, and does not offend the parol evidence rule.

On the strength of that reasoning, the Court overturned the trial decision and ordered a new trial.