In Earthco Soil Mixtures Inc. v. Pine Valley Enterprises Inc., 2024 SCC 20 (“Earthco”), the Supreme Court of Canada (“SCC”) expanded its “modern” approach to contractual interpretation, first pronounced in Sattva Capital Corp. v. Creston Moly Corp., 2014 SDD 53 (“Sattva”). This decision reinforces the shift away from technical rules of construction towards a more flexible, “practical, common-sense approach”.

The goal when interpreting a contract is to determine the parties’ intentions and the scope of their understanding. The exercise begins with an assessment of the words used, giving them their ordinary and grammatical meaning, consistent with the circumstances known to the parties when the contract was formed. In Sattva, the SCC directed courts to also consider the “factual matrix” surrounding the contract in determining what the parties intended by their bargain.

Typically, the review of “surrounding circumstances” has been restricted to facts known to exist at the time the contract was formed. However, in Earthco the SCC also considered post-contractual evidence to assist in understanding the circumstances that led to the inclusion of an exclusion of liability clause (para. 107).

This decision marks a growing trend toward the consideration of extrinsic evidence to assess what the parties intended when establishing their agreement. However, it was not unanimous, and in dissent Justice Cote argued that Sattva was not an invitation to allow the court to deviate from or contradict the words used in the contract, however fair the result may seem. Her preference is to have higher regard for the words used in the contract, and to resist a broad assessment of the factual matrix. She cautioned that the surrounding circumstances should never be allowed to overwhelm the words of the agreement (para. 159, citing Justice Rothstein’s comments in Sattva), as to do so would “defeat the reasonable expectations of the parties with respect to the meaning of the contract…and create great commercial uncertainty”.

Justice Cote has lived up her role as the most frequent dissenting voice on the SCC, and she stands out as its most traditional and dispositionally conservative member. The majority of the court is less restrained and has taken yet another step towards wholesale contextual analysis of contractual terms.

There is one notable point of unanimity within the decision, and that relates to the tendency of appellate courts to find “extricable questions of law” when reviewing a trial judge’s analysis of a contract. Both the majority and dissenting reasons reiterated that courts should be cautious in identifying extricable questions of law and should resist interfering with lower court decisions. Justice Martin decried the “tendency of some appellate courts to use Sattva to elevate the standard of review” (para. 28), while Justice Cote noted that “appellate courts should be cautious in identifying extricable questions of law in matters of contractual interpretation” (para. 174).

While Earthco does not have the same re-orienting impact as Sattva, it does illustrate the continuing trend toward allowing judges to gain a deeper understanding of the parties’ objective intentions through a broad consideration of contextual factors. Thus, regardless of how “clear and unambiguous” a contract may appear, counsel must fully apprehend and carefully assess the surrounding facts when formulating submissions in cases of contractual interpretation.

This article is intended to provide general guidance on the subject matter. Specific advice should be obtained in connection with your particular circumstances.