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Contract - Interpretation - Earthco Soil Mixtures (SCC, 2024). Earthco Soil Mixtures Inc. v. Pine Valley Enterprises Inc. [objectivity]
In Earthco Soil Mixtures Inc. v. Pine Valley Enterprises Inc. (SCC, 2024) the Supreme Court of Canada allows an appeal on the contractual and statutory interpretation of the exclusion provision [SGA s.53] in the Sales of Goods Act.
Here the court overviews modern contractual interpretation:(2) The Modern Principles of Contractual Interpretation
[61] The principles governing the interpretation of contracts, including the enforceability of exclusion clauses, have undergone significant change over the years, and the SGA requires the use of common law principles as they exist from time to time. Technical and legalistic formulations and complex doctrines have been softened in favour of an interpretive approach that focuses on the objective intention of the parties, how the words used were reasonably understood by the parties, and how, subject to limits such as unconscionability, the parties sought to allocate contractual risk.
[62] In Sattva, which concerned a dispute over an agreement to pay a finder’s fee, this Court clearly stated how agreements should be interpreted and reviewed. The Court explained how the jurisprudence has shifted towards a more flexible, “practical, common-sense approach” to contractual interpretation and has retreated from an archaic approach dominated by technical rules of construction (para. 47). Such changes reflect and reinforce the overriding concern of contractual interpretation, which is to determine the parties’ intention and the scope of their understanding (para. 47, citing Jesuit Fathers, at para. 27).
[63] The actual words chosen are central to the analysis because this is how the parties chose to capture and convey their contractual objectives. To determine their true intent, decision-makers “must read the contract as a whole, giving the words used their ordinary and grammatical meaning, consistent with the surrounding circumstances known to the parties at the time of formation of the contract” (Sattva, at para. 47). While “[t]he facts surrounding the formation of a contract are relevant to its interpretation” (Corner Brook, at para. 19), they “must never be allowed to overwhelm the words of that agreement” or cause courts to create brand new agreements (para. 20; Sattva, at para. 57; see also D. Bertolini, “Unmixing the Mixed Questions: A Framework for Distinguishing Between Questions of Fact and Questions of Law in Contractual Interpretation” (2019), 52 U.B.C. L. Rev. 345, at pp. 402-3; D. Bertolini, “Releasing the Unknown: Theoretical and Evidentiary Challenges in Interpreting the Release of Unanticipated Claims” (2023), 48:2 Queen’s L.J. 61, at p. 65; D. Bertolini, “Unpacking Entire Agreement Clauses: On the (Elusive) Search for Contractually Induced Formalism in Contractual Adjudication” (2021), 66 McGill L.J. 465, at p. 500).
[64] While the language used is central, courts recognize that words are not ends in themselves: they are a means to demonstrate, discern and determine the true intention of the parties. The jurisprudence seeks certainty but acknowledges the limits of language. This Court recognized how “words alone do not have an immutable or absolute meaning” and cannot, by themselves, convey the commercial purpose of a contract (Sattva, at para. 47). When seeking the meaning of a document, the focus of the court is properly on what the parties objectively intended and what they reasonably understood their words to mean. This is because the “meaning of words is a matter of dictionaries and grammars; the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean” (Sattva, at para. 48, citing Investors Compensation Scheme Ltd. v. West Bromwich Building Society, [1998] 1 All E.R. 98 (H.L.), at p. 115).
[65] Courts are therefore directed “to have regard for the surrounding circumstances of the contract — often referred to as the factual matrix — when interpreting a written contract” (Sattva, at para. 46). The meaning of the words of a contract can be derived from reference to various contextual factors, which include the purpose of the agreement and the nature of the relationship created by the agreement (para. 48). Sattva allows courts to interpret contractual terms in light of the contract as a whole and with reference to objective evidence that illustrates what was within the parties’ knowledge at or before the time of their contract’s formation (para. 58). Ultimately, ascertaining the objective intent of the parties involves not only a consideration of the actual words used in a contract but also a consideration of the factual matrix surrounding the contract.
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