Contract law development hurt by ruling, says lawyer

The development of contract law has been stunted by a Supreme Court of Canada ruling that effectively prevents appeal court judges from weighing in on contract interpretation, according to a Toronto litigator.

However, the nation’s top court will get an opportunity to row back on its earlier judgment when it hears arguments later this month on a case from Alberta, where that province’s appeal court found a way around the new rule in certain circumstances.

In Sattva Capital Corp. v. Creston Moly Corp., decided in August 2014, the Supreme Court changed the traditional standard of review applicable to matters of contractual interpretation from one of correctness to one of reasonableness.

“It has eviscerated the right of the appeal court to hear appeals involving contractual interpretation, because unless the trial judge has gone off on a complete tangent, they have to show deference,” says Harvin Pitch, a lawyer with Toronto civil litigation boutique Teplitsky Colson LLP.

“That is a large part of appellate work that is going to simply dry up, and it is also going to stop the law of contracts from evolving and growing,” he adds.

And appeal court judges aren’t happy with the new way of the world, according to Pitch.

“You wouldn’t be either if your hands were tied like theirs are. It’s going to be upsetting to appeal court judges, because to a large extent, contractual interpretation is what commercial litigation is all about,” he says.

Now-retired Supreme Court justice Marshall Rothstein wrote the court’s unanimous decision in Sattva, which parted from the historical approach to contractual interpretation as a question of law which must be reviewed on the correctness standard. Rothstein explained that the reason for the traditional view was rooted in pre-20th century England, where pervasive illiteracy in the general population led to the fear that civil juries could not be relied upon to interpret written documents.

“This historical rationale no longer applies,” Rothstein wrote, before going on to conclude that the old approach should be abandoned.

“Contractual interpretation involves issues of mixed fact and law as it is an exercise in which the principles of contractual interpretation are applied to the words of the written contract, considered in light of the factual matrix,” the judge added.

In the pre-Sattva era, Pitch says appeal courts were much more likely to step into the shoes of trial judges and decide whether they would have ruled the same way. He says it was particularly useful for appeal court judges to set the tone in the interpretation of contracts relating to the sale of real estate and securities, since many of the terms and clauses used are similar across agreements.

“The law grew by judges interpreting clauses, and giving their guidance on how they should work. That guidance would change over time, but the profession could follow the changes as new decisions built on old ones,” Pitch says.

“There can be no more of that judicial creativity” thanks to the new standard of review, which requires the appeal court to identify a palpable and overriding error before interfering in the lower court decision, says Pitch. That sets an extremely high bar for intervention, and denies lawyers the benefit of appeal court judges’ knowledge and experience of contracts law. He also worries about inconsistency in decisions, due to the possibility that two judges could interpret similar contractual clauses differently, yet both decisions could still stand because each was arrived at reasonably.

However, Geoff Hall, a partner in the litigation group at McCarthy Tétrault LLP’s Toronto office, believes Pitch’s fears are overblown.

“I don’t think that Sattva has stunted the development of contracts law at all, because it actually forces courts to focus on legal questions. Appeal courts are focusing in on the law governing the interpretation, and identifying the specific legal errors that warrant intervention,” Hall says.

“It is certainly more difficult to win a case on contractual interpretation, but it’s not impossible. If you look at the cases since Sattva, there have been a number that have reversed lower court decisions, even on the more deferential standard of review.”

According to Hall, the Supreme Court decision had a particularly profound effect in Ontario because the province’s appeal court was the longtime standard bearer for the historical approach to contractual interpretation as a question of law. It held out in this view right up until the ruling came down in Sattva, even as other provincial appeal courts changed their approach.  However, Hall says a judicial pushback started almost immediately.

“It started in the west, where the Alberta Court of Appeal has had several cases that are critical of Sattva.
And the rebellion, if I can put it that way, has since moved east,” Hall says.

On Dec. 3, in its decision in the case of MacDonald v. Chicago Title Insurance Company of Canada, the Court of Appeal for Ontario joined the rebels, concluding that the case could be distinguished from Sattva because the contract at issue was a standard form one sold widely to customers without negotiation. On March 30, the Supreme Court of Canada will hear arguments on a similarly reasoned Alberta case; Ledcor Construction Limited v. Northbridge Indemnity Insurance Co.