Speaker's Corner: Sattva questioned for contracts of adhesion

Since the release of the Supreme Court of Canada’s decision in Sattva Capital Corp. v. Creston Moly Corp., there has been a lot of discussion about the “factual matrix” mentioned in the decision to be considered in the interpretation of a contract. However, the Court of Appeal for Ontario in MacDonald v. Chicago Title Insurance has recently distinguished Sattva in the context of standard form contracts and other contracts of adhesion.

In a stark move by the Court of Appeal, MacDonald shifts the pendulum back towards the historical approach of interpreting contracts and away from the approach adopted in Sattva.

In fact, the retreat away from Sattva was already apparent in Alberta and British Columbia where provincial appellate courts have cited the unique factual circumstances underpinning the Supreme Court’s decision in limiting its application. It appears that Ontario is now following suit.

In Sattva, Justice Rothstein, writing for a unanimous seven-member panel, departed from the historical view that the standard of review on appeal from a lower court’s decision involving the interpretation of a contract is correctness. Recognizing changes in the Canadian jurisprudence and the emerging trend towards greater emphasis on contextual factors as part of the court’s analysis in interpreting contracts, Justice Rothstein called for the abandonment of the historical approach.

Sattva ruled that as courts must determine the facts surrounding a contract as part of the factual matrix or surrounding circumstances, the question on appeal is closer to a question of mixed fact and law than a question of law. The appropriate standard of review is subject to palpable and overriding error as opposed to correctness.

Sattva carved out that in “rare” occasions a question of law can be extricated from the contractual interpretation process. These circumstances may arise when the courts below applied an incorrect legal principle, failed to consider a required element of a legal test, or to give consideration to a relevant factor.

However, MacDonald outlines yet another area to those listed in Sattva where contractual interpretation will be closer to a question of law and subject to the correctness standard of review. MacDonald may open the door for appeals involving contracts of adhesion and other standard form contracts as they will now be subject to the lower standard of review on appeal.

MacDonald holds that the “importance of the factual matrix is far less significant, if at all in the context of a standard form contract or contract of adhesion where the parties do not negotiate the terms.” For contracts that are presented on a “take-it-or-leave-it” basis, the search to find the intention of the parties in the surrounding circumstances, or factual matrix, is “wholly inapplicable” and illusory. The Court of Appeal stated succinctly in MacDonald that the “rationales in Sattva that support adopting a deferential standard of review do not apply to contracts of this type, as the factual matrix does not meaningfully assist in interpreting them and their construction has broad application.” 

These statements in MacDonald and others seem to illustrate the Court of Appeal’s internal dilemma regarding the “modern approach” to contractual interpretation adopted in Sattva. In certain cases, it appears that the Court of Appeal would advocate for the traditional correctness standard even if there have been changes to the legal landscape. This calls into question whether the traditional approach is nonetheless the better one to take for certain types of contracts despite old concerns over widespread illiteracy and frequent civil jury trials being obsolete.  

The facts in MacDonald illustrate an example where the correctness standard still makes more sense. The Court of Appeal found that the appellants had been presented with pre-printed contracts that the respondent insurer, Chicago Title, had with a wide variety of customers who also purchased the same insurance policy. Since the policy was the same, the interpretation of the title insurance contract at issue would then apply equally to the appellants as with the other customers.

On this basis, in MacDonald, the Court of Appeal held that interpretation of the contract was “of general importance and had precedential value in a way that the interpretation of other contracts may not.” As such, another distinguishing factor between questions of law and mixed fact and law of precedential value did not apply in this case as in others involving interpretation of contracts that have very limited precedential value beyond that of the parties.

Although MacDonald was decided in the insurance context, this decision has significant ramifications for parties that have been found to be subject to standard form contracts or where the essential provisions of a contract were imposed or drawn up by one of the parties and was not negotiable. For example, franchise agreements have been held by the Court of Appeal in Shelanu Inc. v. Print Three Franchising Corp. to be contracts of adhesion where franchisees are disadvantaged by their inability to negotiate more favourable terms with the franchisor.

An earlier 2015 decision from the Court of Appeal in 2176693 Ontario Ltd. v. Cora Franchise Group Inc. held that the interpretation of a franchise agreement in light of the statutory provisions of the Arthur Wishart Act (Franchise Disclosure), 2000, S.O. 2000, c.3 is reviewable on the standard of palpable and overriding error. As a result, it is likely that parties to a franchise agreement will argue for the application of MacDonald for their next appeal if the issues involved in the interpretation of the franchise agreement do not meaningfully engage the statutory scheme.

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Jennifer Pocock is a litigator practising in Toronto at Teplitsky Colson LLP. She has a broad-based commercial litigation practice with an emphasis on franchise disputes and appeals.