Considerations Of The 'Surrounding Circumstances' In Contract Interpretation Post-Sattva

Introduction

Historically, Alberta courts have tended to downplay the importance of pre-contractual evidence and the surrounding circumstances in determining the meaning of contractual terms. The typical approach to contract interpretation looks to read the contract as a whole, construed in a commercially reasonable manner. In the normal course, there was little reason to bring in evidence of the surrounding circumstances when interpreting contractual language.

The Supreme Court of Canada's ("SCC") blockbuster 2014 decision in Sattva Capital Corp v Creston Moly Corp1 ("Sattva") has expanded the use of surrounding circumstances when interpreting a contract. The most common examples of the "surrounding circumstances" in the construction industry are pre-contractual documents, including letters of intent ("LOIs"), memorandums of understanding ("MOUs"), term sheets and pre-contract meeting minutes.

Following Sattva, it is now clear that the surrounding circumstances leading to a contract, including pre-contractual documents, can play a significant role in the determination of contractual meaning.

However, two years following Sattva's release, the decision continues to raise questions. Among them: Are all pre-contractual communications now potentially relevant to determining the parties' intent? And when should the surrounding circumstances be applied to contract interpretation—only in cases of ambiguity, or in all cases?

What is the Scope of the Surrounding Circumstances?

Sattva established that the range of potentially relevant evidence of the surrounding circumstances is broad in scope and includes "all knowledge that was or reasonably ought to have been within the knowledge of both parties at or before the date of contracting"2, subject to two key limitations:

The evidence must be objective, and Evidence of the surrounding circumstances cannot be relied upon to the extent that it deviates from the written words of the contract such that the court effectively creates a new agreement. The effect of these two limitations is to narrow the scope of the surrounding circumstances, making it clear that:

Relevant evidence of the surrounding circumstances must be evidence that speaks to what both parties to the contract actually knew (or reasonably ought to have known) in reaching their agreement or at the time of contracting.3 Relevant evidence of the surrounding circumstances is to be used as an interpretive aid for determining the intended meaning...