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Contracts - Interpretation - Objective Factors Only. Berkel v. Fleischmann
In Berkel v. Fleischmann (Div Ct, 2026) the Divisional Court dismissed a defendant's Small Claims Court appeal, here brought against an order for damages awarded for breach of contract.
The court applied the 'objective' interpretive principle of contract formation - here in a 'verbal contract' context, argued as an unenforceable 'agreement to agree':B. Finding the Existence of an Agreement
[23] The appellant’s central complaint is that the trial judge erred in finding that a contract existed between him and the respondent. He submits that the Document was no more than an “agreement to agree,” and as such unenforceable.
[24] The appellant is correct that courts will not enforce an “agreement to agree”: Gallant v. Johnson, 2024 ONSC 5777, at para. 15. The difficulty for the appellant is that the trial judge did not find that there had been merely an “agreement to agree.” He found that there had been an actual agreement. It was open to him to do so.
[25] The requirements for a finding that a contract existed between parties was explained in Ethiopian Orthodox Tewahedo Church of Canada St. Mary Cathedral v. Aga, 2021 SCC 22, 459 D.L.R. (4th) 425, at paras. 35-38:A contract is formed where there is “an offer by one party accepted by the other with the intention of creating a legal relationship, and supported by consideration”: Scotsburn Co-operative Services Ltd. v. W. T. Goodwin Ltd., 1985 CanLII 57 (SCC), [1985] 1 S.C.R. 54, at p. 63. The common law holds to an objective theory of contract formation. This means that, in determining whether the parties' conduct met the conditions for contract formation, the court is to examine “how each party's conduct would appear to a reasonable person in the position of the other party”: Owners, Strata Plan LMS 3905 v. Crystal Square Parking Corp., 2020 SCC 29, at para. 33.
For present purposes, it will suffice to focus on the requirement of intention to create legal relations. As G.H.L. Fridman explains, “the test of agreement for legal purposes is whether parties have indicated to the outside world, in the form of the objective reasonable bystander, their intention to contract and the terms of such contract”: The Law of Contract in Canada (6th ed. 2011), at p. 15; see also S. M. Waddams, The Law of Contracts (7th ed. 2017), at p. 105. This requirement can be understood as an aspect of valid offer and acceptance, in the sense that a valid offer and acceptance must objectively manifest an intention to be legally bound: Crystal Square, at paras. 49-50.
The test for an intention to create legal relations is objective. The question is not what the parties subjectively had in mind but whether their conduct was such that a reasonable person would conclude that they intended to be bound: Kernwood Ltd. v. Renegade Capital Corp. (1997), 1997 CanLII 846 (ON CA), 97 O.A.C. 3; Smith v. Hughes (1871), L.R. 6 Q.B. 597, at p. 607. In answering this question, courts are not limited to the four corners of the purported agreement, but may consider the surrounding circumstances: Leemhuis v. Kardash Plumbing Ltd., 2020 BCCA 99, 34 B.C.L.R. (6th) 248, at para. 17; Crystal Square, at para. 37.
Under the objective test, the nature of the relationship among the parties and the interests at stake may be relevant to the existence of an intention to create legal relations. For example, courts will often assume that such an intention is absent from an informal agreement among spouses or friends: Balfour v. Balfour, [1919] 2 K.B. 571 (C.A.); Eng v. Evans (1991), 1991 CanLII 5926 (AB QB), 83 Alta. L.R. (2d) 107 (Q.B.). The question in every case is what intention is objectively manifest in the parties’ conduct.
Significantly, a contract need not be reduced to writing: Mountain v. Mountain Estate, 2012 ONCA 806, 112 O.R. (3d) 721, at para. 66. ....
D. Consideration of Subjective Intention
[31] The appellant also submits that the trial judge erred by considering the subjective intentions of the parties and relies on Dumbrell v. Regional Group of Companies Inc., 2007 ONCA 59, 85 O.R. (3d) 616, at paras. 49-51 and Eli-Lilly & Co. v. Novopharm Ltd., 1998 CanLII 791 (SCC), [1998] 2 S.C.R. 129, at paras. 52-56. Both cases deal with the interpretation of written contracts and hold that it is the objective meaning of the written contract rather than the subjective intentions of the parties that determines the terms of the agreement.
[32] As noted earlier, there was no written contract in this case. That said, the test for the formation of a binding agreement is objective regardless of whether the agreement is written: Ethiopian Orthodox Tewahedo Church, at para. 37. Thus, the issue is not what the parties subjectively intended, but what a reasonable person would conclude based on the conduct of the parties. In considering this, a trier of fact is entitled to consider all of the surrounding circumstances, including what the parties said and did: Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, [2014] 2 S.C.R. 633, at para. 59-60.
[33] The trial judge considered all of the surrounding circumstances, including the relationship between the parties, the Document, communications between them, and their conduct and concluded that a contract existed. There is nothing in his reasons to suggest that he based his conclusion on the subjective intentions of the parties or otherwise erred in his analysis. . Spina v. Shoppers Drug Mart Inc.
In Spina v. Shoppers Drug Mart Inc. (Ont CA, 2024) the Ontario Court of Appeal considered class action franchise appeals (direct and cross) from summary judgment decisions.
Here the court considers Sattva principles of contractual interpretation:[69] The goal of contract interpretation is to determine the objective intentions of the parties. The contract must be read 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.
[70] The surrounding circumstances, while relied on in the interpretative process, “must never be allowed to overwhelm the words of the agreement”: Sattva, at para. 57 (citations omitted). The surrounding circumstances should only consist of “objective evidence of the background facts at the time of execution of the contract”: Sattva, at para. 58 (citation omitted).
[71] Subject to these requirements and the parole evidence rule, the surrounding circumstances include “absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable [person]” at the time the agreement was entered into: Sattva, at para 58, quoting from Investors Compensation Scheme Ltd. v. West Bromwich Building Society, [1998] 1 All E.R. 98 (H.L.), at p. 114. . Waldron v. Canada (Attorney General)
In Waldron v. Canada (Attorney General) (Fed CA, 2023) the Federal Court of Appeal considers some interesting contractual interpretation issues, here in an indigenous class-action settlement. Here the court considers the principles that the subjective intentions - and post-contract conduct - of the parties are irrelevant in contractual interpretation:(a) Subjective intention and post-contract conduct
[74] As a document that “is at root a contract,” construing the IDSSA requires ascertaining “the objective intentions of the parties”: Fontaine at para. 35. That exercise requires reading the contract as a whole, giving the words used their ordinary and grammatical meaning, and doing so consistently with the surrounding circumstances, or factual matrix: Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53 at paras. 47, 50, 58.
[75] The factual matrix comprises “objective evidence of the background facts at the time of the execution of the contract [...], that is, knowledge that was or reasonably ought to have been within the knowledge of both parties at or before the date of contracting”: Sattva at paras. 50, 58. While the surrounding circumstances will be considered, they “must never be allowed to overwhelm the words of [the] agreement,” or in effect to create a new agreement: Sattva at para. 57.
[76] Evidence of subjective intention of the parties “has no independent place” in the determination of contractual meaning: Eli Lilly & Co. v. Novopharm Ltd., 1998 CanLII 791 (SCC), [1998] 2 S.C.R. 129 at paras. 54-59; Sattva at para. 59; ING Bank N.V. v. Canpotex Shipping Services Limited, 2017 FCA 47 at paras. 111-112, 117, 120-121, 125.
[77] Nor does the factual matrix include subsequent or post-contract conduct. This, it has been held, is a category of conduct that may be considered only when ambiguity remains after the text is construed in light of the factual matrix, and only if the court is mindful of the inherent dangers associated with it: Re Canadian National Railways and Canadian Pacific Ltd. (1978), 95 D.L.R. (3d) 252 at 262 (B.C.C.A.), aff’d 1979 CanLII 229 (SCC), [1979] 2 S.C.R. 668; Shewchuk v. Blackmont Capital Inc., 2016 ONCA 912 at paras. 40-46; and for other recent examples, Wade v. Duck, 2018 BCCA 176 at paras. 28, 31; Magasins Hart Inc. v. 3409 Rue Principale Inc., 2020 NBCA 49 at paras. 50-52.
[78] Ms. Waldron submits that the supervising judge committed extricable legal errors in interpreting the IDSSA by relying on subjective intentions and post-contract conduct. She puts forward at least five instances of this reliance: appellant’s memorandum at paras. 35-40.. First, she submits, he relied on evidence of the parties’ post-contract conduct in the absence of any finding of ambiguity or acknowledgment of the inherent dangers of doing so.
. Second, she says, he looked to the subjective intentions of the parties to the IDSSA, and conducted an analysis of those intentions separately from his analysis of the text of the IDSSA and the circumstances surrounding its execution. He was wrong, she says, to consider the parties’ intentions separately and “in addition to” the text and context, when conclusions as to their intentions “flow” from the text and factual background and determining their objective intentions is “the goal of the exercise”.
. Third, she submits, he was wrong to consider it “compelling” that neither party to the IDSSA supported the moving parties’ position.
. Fourth, he relied on the claims administrator’s subjective understanding of the claims process long after the execution and approval of the IDSSA.
. Fifth, he relied on the claims administrator’s account of the difficulties a right to amend would entail. [79] The dividing line between pre- and post-contract conduct is not always easy to discern. That may be especially so in this case, where the IDSSA incorporated the claims process and claim form, and was therefore not complete until they were finalized and approved. Moreover, in both Fontaine and J.W., the Supreme Court appears to have relied, in interpreting the IRSSA, on conduct that could be seen as post-contractual, as well as the intentions of the parties in negotiating the agreement.
[80] The issue in Fontaine was whether the IRSSA should be interpreted as requiring that documents generated in the IAP be destroyed, to preserve confidentiality. Under the heading “The Surrounding Circumstances” (at paras. 42-45), the Supreme Court considered, among other things, (1) evidence that both claimants and alleged perpetrators had relied on assurances of confidentiality, and that, without those assurances, the IAP could not have functioned; (2) evidence that confidentiality was also crucial to the participation of the church defendants; and (3) evidence that, according to the chief adjudicator, confidentiality was often the “key factor” in whether a claim proceeded. In addition, the Court relied on the finding of the supervising judge in that case that the negotiators of the IRSSA intended the IAP to be a confidential and private process.
[81] In J.W., the issue was whether, under the IRSSA, decisions of IAP adjudicators were subject to judicial review. Under the heading “Judicial Recourse Is Available Only Where the Adjudicator Failed to Apply the Terms of the IAP,” a four-judge majority considered among other things (at paras. 134-136, 175), the delays that had resulted from court involvement in the claims process during implementation of the settlement agreement, as well as statistics bearing on timeliness, and stated that further court involvement would result in further delay and “would surely be contrary to the intentions of the parties […]” in creating the claims process set out in the agreement.
[82] I return to the question whether the supervising judge made an extricable legal error in relying on subjective intentions and subsequent conduct. In my view, he did so, largely in the manner submitted by Ms. Waldron. I do not agree that he erred in separating his analysis of the parties’ intentions from his analysis of the text and context—the order and manner in which these factors are considered is not material as long as (if applicable) they are considered. But in providing his analysis he did not advert to or apply either the requirement to focus on the parties’ objective rather than subjective intentions or the limits on consideration of post-contract conduct set out above in paragraph 77. While his analysis resembled in some respects that of the Supreme Court in Fontaine and J.W., in my view it fell short in its identification and application of the rules of contractual interpretation. I consider below, in concluding on the issue of contractual interpretation, the consequences of this error. . Ferraro v. Neilas
In Ferraro v. Neilas (Ont CA, 2023) the Court of Appeal articulates that contract law is based on objective - not subjective - intentions:[29] The principles of Canadian contract law focus on determining the objective, not subjective, intentions of the parties, as expressed by the language of an agreement, understood in light of the surrounding circumstances or factual matrix. As summarized in the dissenting reasons (although not on this point) in Resolute FP Canada Inc. v. Ontario (Attorney General), 2019 SCC 60, [2019] 4 S.C.R. 394, at para. 74:This Court has described the object of contractual interpretation as being to ascertain the objective intentions of the parties. It has also described the object of contractual interpretation as discerning the parties’ “reasonable expectations with respect to the meaning of a contractual provision”. In meeting these objects, the Court has signalled a shift away from an approach to contractual interpretation that is “dominated by technical rules of construction” to one that is instead rooted in “practical[ities and] common-sense”. This requires courts to read a 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”. [Citations omitted.] . Oxygen Working Capital Corp. v. Mouzakitis
In Oxygen Working Capital Corp. v. Mouzakitis (Ont CA, 2022) the Court of Appeal held that only objective evidence is admissible on contractual interpretation:[10] The motion judge first considered whether there was a genuine issue requiring a trial based on the record alone and without utilizing the enhanced fact-finding powers under r. 20.04. His interpretation of the MFA and guarantees based on their plain wording is unassailable. We agree with his conclusion that the appellants’ subjective, unilateral understanding that their guarantees only applied to the November 2019 transaction is inconsistent with the plain wording of the MFA and the guarantees that contain no such restriction, and is in any event irrelevant to the objective factual matrix that may assist with the interpretation of an agreement. As the Supreme Court instructed in Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, [2014] 2 S.C.R. 633, at para. 58, while “[t]he nature of the evidence that can be relied upon under the rubric of ‘surrounding circumstances’” will vary, it “should consist only of objective evidence of the background facts at the time of the execution of the contract” and not the parties’ unilateral subjective intentions. . 2484234 Ontario Inc. v. Hanley Park Developments Inc.
In 2484234 Ontario Inc. v. Hanley Park Developments Inc. (Ont CA, 2020) the Court of Appeal comments that a contract is to be assessed by the objective behaviour of the parties, not what they 'meant' subjectively:[51] The principles of contractual interpretation exclude consideration of either party’s subjective intention in determining whether the parties reached an agreement. In Olivieri v. Sherman, 2007 ONCA 491, 86 O.R. (3d) 778, at para. 44, this court re-stated the principle that only objective factors are relevant in determining whether the parties reached a consensus:As was stated by Middleton J.A. in [Lindsey v. Heron Co. (1921), 1921 CanLII 538 (ON CA), 64 D.L.R. 92 (Ont. C.A.)] at 98-9, quoting Corpus Juris, vol. 13 at 265:The apparent mutual assent of the parties essential to the formation of a contract, must be gathered from the language employed by them, and the law imputes to a person an intention corresponding to the reasonable meaning of his words and acts. It judges his intention by his outward expressions and excludes all questions in regard to his unexpressed intention. If his words or acts, judged by a reasonable standard, manifest an intention to agree in regard to the matter in question, that agreement is established, and it is immaterial what may be the real but unexpressed state of his mind on the subject. [52] Equally, evidence of a party’s subjective intention is irrelevant to what the parties’ agreement means: Eli Lilly & Co. v. Novopharm Ltd., 1998 CanLII 791 (SCC), [1998] 2 S.C.R. 129, at para. 54; Sattva, at paras. 59-61.
[53] The principle that subjective intentions are ignored when interpreting an agreement is also applicable to interpreting an antecedent agreement in rectification cases: McLean v. McLean, 2013 ONCA 788, 313 O.A.C. 364, at para. 61. In Fairmont, at para. 29, the court quoted the following from the English Court of Appeal in Frederick E. Rose (London) Ld. v. William H. Pim Jnr. & Co., [1953] 2 Q.B. 450 (C.A.), at p. 461:Rectification is concerned with contracts and documents, not with intentions. In order to get rectification it is necessary to show that the parties were in complete agreement on the terms of their contract, but by an error wrote them down wrongly; and in this regard, in order to ascertain the terms of their contract, you do not look into the inner minds of the parties — into their intentions — any more than you do in the formation of any other contract.
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