New Supreme Court of Canada ruling provides guidance on the use of extrinsic evidence in coverage determinations

The Supreme Court of Canada’s recent decision in Sattva Capital Corp. v. Creston Moly Corp (“Sattva”)[1] articulates how and when extrinsic evidence can be utilized to interpret contracts, including policies of insurance. The case arose from a dispute over the correct interpretation of contractual terms setting out the method of valuation for a finder’s fee. The contract stipulated that Sattva Capital Corp. was entitled to a finder’s fee of US$ 1.5 million, payable in the form of an allotment of shares in Creston Moly Corp. Sattva argued that since the contract date the shares had increased in value, so they were now entitled to 8-9 million. Creston’s position was that the agreement’s “maximum amount” proviso prevented Sattva from receiving more than US$1.5 million worth of shares. An arbitrator found in favour of Sattva, but the decision was reversed by the B.C. Court of Appeal. In a unanimous decision, the Supreme Court reinstated the arbitrator’s decision.

In its decision, the Supreme Court found that, while historically contractual interpretation may have been a question of law, it now considered it to be a question of mixed fact and law. The historical approach was complimentary to the parol evidence rule, which precluded the admission of evidence outside the words of the written contract that would add to, subtract from, vary, or contradict a contract that has been wholly reduced to writing.[2] The parol evidence rule is not absolute and it had long been understood that there are circumstances where contracts are vague or ambiguous and extrinsic evidence can be analyzed, although the relaxation of the parol evidence rule had not always been applied consistently.

The Supreme Court explained that the goal of contractual interpretation is to ascertain the objective intentions of the parties, which, is inherently fact specific. The Court confirmed that the parol evidence rule still exists, but it was not offended by considering surrounding circumstances. The Court was unequivocal that the terms of a written contract are to be considered in light of a factual matrix, stating:

[59]    It is necessary to say a word about consideration of the surrounding circumstances and the parol evidence rule.  The parol evidence rule precludes admission of evidence outside the words of the written contract that would add to, subtract from, vary, or contradict a contract that has been wholly reduced to writing (King, at para. 35; and Hall, at p. 53). To this end, the rule precludes, among other things, evidence of the subjective intentions of the parties (Hall, at pp. 64-65; and Eli Lilly & Co. v. Novopharm Ltd., [1998] 2 S.C.R. 129, at paras. 54-59, per Iacobucci J.). The purpose of the parol evidence rule is primarily to achieve finality and certainty in contractual obligations, and secondarily to hamper a party’s ability to use fabricated or unreliable evidence to attack a written contract (United Brotherhood of Carpenters and Joiners of America, Local 579 v. Bradco Construction Ltd., [1993] 2 S.C.R. 316, at pp. 341-42, per Sopinka J.).

[60]    The parol evidence rule does not apply to preclude evidence of the surrounding circumstances. Such evidence is consistent with the objectives of finality and certainty because it is used as an interpretive aid for determining the meaning of the written words chosen by the parties, not to change or overrule the meaning of those words. The surrounding circumstances are facts known or facts that reasonably ought to have been known to both parties at or before the date of contracting; therefore, the concern of unreliability does not arise.

[61]    Some authorities and commentators suggest that the parol evidence rule is an anachronism, or, at the very least, of limited application in view of the myriad of exceptions to it (see for example Gutierrez v. Tropic International Ltd. (2002), 63 O.R. (3d) 63 (C.A.), at paras. 19-20; and Hall, at pp. 53-64).  For the purposes of this appeal, it is sufficient to say that the parol evidence rule does not apply to preclude evidence of surrounding circumstances when interpreting the words of a written contract.

Sattva is relevant to insurers who wish to use extrinsic evidence to contextualize the intentions behind insurance policies, typically in cases where there may have been negotiations over the policy wording that provide assistance in interpreting the final policy wording. The case confirms that the parol evidence rule does not prevent an insurer from providing evidence of surrounding circumstances to assist in policy interpretation. [3]