Alberta Court Of Appeal Sets Negotiation Parameters In Interpreting Contracts

In Sattva Capital Corporation v Creston Moly Corporation, 2014 SCC 53 (Sattva), the Supreme Court of Canada conclusively endorsed the principle of contractual interpretation that courts must always consider the 'surrounding circumstances' (i.e. background facts) known to both parties at the time a contract was made. However, another longstanding principle of contractual interpretation is that evidence regarding the parties' pre-contractual negotiations isgenerally inadmissible when interpreting a contract, unless the contract is found to be ambiguous. These principles can contradict each other. In practice, what the parties communicated to each other while negotiating a contract is often relevant to establishing the background facts that were known to both parties when the contract was made.

In Alberta Union of Provincial Employees v Alberta Health Services, 2020 ABCA 4 (AUPE), the Alberta Court of Appeal provided some clarity on the role that pre-contractual negotiations should play by focusing on the overriding principle that such evidence can never be used, directly or indirectly, to show the parties' subjective intentions about the meaning of contractual language.

Background

The central issue in this case was about the meaning of the words "Operational Restructuring" in a collective agreement between the Alberta Union of Provincial Employees (the Union) and Alberta Health Services (AHS). AHS had implemented a program called Operational Best Practices (OBP) and had made public promises that the OBP would not result in job losses for unionized employees.

The Union was one of three public sector unions which sought to formally confirm these public statements by negotiating labour agreements to the effect that the OBP would not result in layoffs to their respective members. While the other two unions ultimately entered into agreements which stated that the Operational Best Practices program would not result in adverse job consequences, the letter of understanding (the LOU) between the Union and AHS instead stated that "Operational Restructuring" would not result in adverse job consequences.

A number of months after entering into the LOU, AHS announced it would be closing a facility, resulting in a number of layoffs of the Union members. It was undisputed that this closure was not a result of the OBP program, but a dispute arose as to whether it was captured by the words "Operational Restructuring" and was therefore a breach of the LOU. The dispute went to arbitration. AHS took the position that Operational Restructuring referred solely to the OBP, while the Union took the position that the phrase applied broadly to any type of organizational restructuring.

In approaching the interpretation of the LOU, the arbitrator considered himself bound by the long line of labour arbitration cases, which hold that an arbitrator must first determine that a collective agreement is...