Contract interpretation: It’s an open question in Canadian courts

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Here is some life advice: it is important to read a contract before you sign it.

Otherwise, you might discover that you didn't buy what you thought you bought. For example, you might think you've used your Powerball billions to buy the Playboy Mansion and all the glory that comes with it. But then it turns out what you really bought is the right to the home only after Hugh Hefner dies, as Hef has mandated.

If you didn't read the contract, you'd be unpleasantly surprised when Mr. Hefner greeted you at the door in a bathrobe, martini in hand, and invited you to a party in the grotto. Let's continue this hypothetical and say that the purchase contract required that Mr. Hefner maintain the mansion in the "ordinary course, consistent with past practice." Let's also say that, upon his death, Mr. Hefner delivered you the mansion and you found that the grotto was roughly as clean as a Superfund site. Do you have a claim against Mr. Hefner's estate for breach?

This is an ambiguous question that rests on a particular set of facts: How clean did Mr. Hefner typically keep the grotto? If a lower court found that this was typical grotto maintenance, you could appeal the decision. And, if the contract was a Canadian contract, the appeal would be governed by the rule in the Supreme Court's controversial 2014 decision Sattva Capital Corp. v. Creston Moly Corp.

Historically, appellate courts have reviewed contracts using a "correctness" standard, which requires not just that the decision of the lower court be a reasonable interpretation, but that it is "correct" in the eyes of the appellate court. The reasons for this are largely historical – the crooked-toothed, illiterate English peasants who composed juries couldn't read the contracts that they were deciding, requiring the clear-eyed judgment of a crooked-toothed, literate English appellate judge.

Sattva upended this tradition, declaring contractual interpretation to be a question of "mixed law and fact." Such questions are reviewed on a "reasonableness" standard, meaning that appellate courts can't overrule the decision if they deem it to be reasonable – even if they wouldn't concur with it – but only if they think it is outright wrong.

Many of my colleagues think that this explicit focus on facts injected much uncertainty into contractual interpretation (and therefore contract drafting) as it requires courts to look beyond the written words of the contract itself. I'm somewhat skeptical – if a contract is in litigation, it's effectively ambiguous, and no legal analysis will resolve that ambiguity without appeal to the facts. Moreover, Sattva seems to me to be mostly about standard of review. As I've discussed, in our division of judicial responsibility, lower courts are better equipped to uncover facts while higher courts are better equipped to interpret the law.

Contractual interpretation has always required an examination of the facts surrounding an ambiguous clause and Sattva didn't change that, it just changed the degree of deference higher courts show to lower courts. Indeed, Sattva didn't change the principle that where a court is reviewing a point of pure law, the standard is still correctness.

But it turns out that Sattva may not apply to all contracts. The Ontario Court of Appeals (OCA) recently addressed the application of Sattva to the contracts we most commonly confront in our day-to-day lives: contracts of adhesion that are the standard-form contracts you enter into on an almost daily basis. Unlike contracts to purchase, say, the Playboy Mansion, your cellphone contract, your credit-card contract and, yes, even your title insurance contract are essentially take-it or leave-it propositions.

There's a vibrant academic debate around these contracts that are not negotiated – and that few read. Some argue these agreements are economically efficient and may reflect a free market for contract terms as terms are added and deleted over time based on market forces. Others suggest they may propagate unjust terms and undermine legal rights as they are rarely subjected to the scrutiny of negotiation. What's important from the perspective of Sattva is that these contracts are not negotiated and, as such, the "factual matrix" – the facts that surround the formation of the contract – is of much less value. Similarly, they are used again and again, unlike our Playboy Mansion contract, which is a one-shot deal.

In the OCA's decision, which involved a contested term in a title insurance policy, Justice William Hourigan recognized that the questions courts face when analyzing adhesion contracts are slightly different from the considerations when analyzing negotiated agreements. First, as I mentioned, with no negotiations, there is a limited "factual matrix" surrounding the contract. Moreover, a ruling on an adhesion contract has great precedental value, as the decision will affect hundreds, if not thousands, of other contracts. And finally, since scores of people are governed by different iterations of the contract, inconsistent rulings would undermine commercial certainty.

Thus, Judge Hourigan held that the title insurance policy – and probably all adhesion contracts – should be reviewed on a "correctness" standard. In the OCA's view, where the factual circumstances of a contentious term don't, and can't, illuminate the meaning of that term, the question is wholly a legal one: which interpretative principles give this term the most sensible meaning?

This is a big deal. The idea that lower-court decisions with respect to different contracts may be reviewed under different standards – or that the level of appellate court deference to a lower-court decision on contractual interpretation will itself have to be litigated – is a novel one.

Which is to say, we've certainly not heard the last of this issue. Indeed, it's an open question as to when Canadian courts will figure out how to definitively interpret contracts. As for the eventual buyers of the Playboy Mansion, they would be well advised to closely scrutinize the terms of their contract before they move into their new home.

Adrian Myers is a lawyer at Torkin Manes LLP.