Law Times

Law Times • augusT 18, 2014 Page 7 www.lawtimesnews.com COMMENT A sea change in the interpretation of contracts By earl CherniaK For Law Times arlier this month, the Supreme Court of Canada handed down a unanimous decision in Sattva Capital Corp. v. Creston Moly Corp. that amounts to a sea change in the interpretation of contracts in Canada, including with respect to the sur- rounding circumstances, the parol evidence rule, appel- late review, and much more. It has long been understood in Canada that not only are the words of a contract, considered as a whole, rel- evant in order to glean its meaning but also that the ob- jective surrounding circumstances, or factual matrix, known to both parties at the time of entering into the contract are relevant as well. Parol evidence, which is the subjective evidence of the intention of the parties and ne- gotiations leading up to entering into the contract, was not admissible except to assist in the resolution of an am- biguity if one existed. In Sattva, a unanimous decision written by Justice Marshall Rothstein, the Supreme Court has clarified the interaction between what may be considered to be sur- rounding circumstances and the parol evidence rule. Surrounding circumstances "should consist only of ob- jective evidence of the background facts at the time of the execution of the contract . . . that is, knowledge that was or reasonably ought to have been within the knowledge of the parties at or before the date of contracting." Subject to this, it can include "absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man." Evidence of surrounding circumstances can be con- sidered in interpreting the contract "but they must never be allowed to overwhelm the words of that agreement" or "change or overrule the meaning" of the written words chosen by the parties. The determination of what are properly surrounding circumstances is a question of fact. Rothstein held that "the parol evidence rule does not apply to preclude evidence of surrounding circumstanc- es" as long as the parol evidence otherwise meets the test for surrounding circumstances. This is new. What remains to be seen is the scope of this restate- ment of the interaction between surrounding circum- stances and the parol evidence rule. Will it permit the admissibility of evidence of the negotiations between the parties leading up to entering into the contract to the ex- tent that they are in the knowledge of both parties as, for instance, would be the case in the exchange of drafts of the agreement if such evidence would have "affected the way in which the language of the document would have been understood by a reasonable man?" The court went on to change the standard of review in appeals involving the interpretation of a contract. It has long been well understood that a decision of a court on the inter- pretation of a contract involved a question of law and thus was not entitled to deference on appeal. But that is no longer the case. In Sattva, Rothstein held that the "historical rationale" no longer applies in Canada. The court will now treat contractual interpreta- tion as an exercise in deciding a question of mixed fact and law and subject to the principle defined in Housen v. Nikolaisen except in those rare cases where there can be said to be an "extricable question of law" from what was initially characterized as a mixed question of fact and law, such as the application of an incorrect principle, a legal test or a relevant factor or where the appeal other- wise engages various substantive rules of the law of con- tract. Rothstein found that where the "legal principle is not readily extricable," the court will consider the matter to be one of "mixed law and fact" in which "the principles of contractual interpretation are applied to the words of the written contract, considered in the light of the factual matrix." This new doctrine will now apply to all appeals from the interpretation of a contract and will preclude appeals in cas- es where they are only permitted on a question of law. Later in the reasons, in considering the standard of re- view in the case of commercial arbitration awards where appeals are restricted to a question of law, Rothstein held that the standard of review would now be reasonableness and the Dunsmuir v. New Brunswick analysis will apply "unless the question is one that would attract the correct- ness standard, such as constitutional questions or ques- tions of law of central importance to the legal system as a whole and outside the adjudicator's expertise." In other sections of this important case, Rothstein clarified what will and will not amount to a miscarriage of justice where such a requirement is a condition of granting leave. He found "an applicant must demonstrate that the point of law on appeal is material to the final re- sult and has arguable merit," something that requires a preliminary assessment of the standard of review. More generally, he went on to clarify that a court hear- ing an appeal in which leave is granted is not bound by the decision of the court that granted leave even if a court of appeal endorsed that position. He observed that to hold otherwise "would render an appeal futile." While Sattva nominally involved the appeal of a com- mercial arbitration award, the case has much wider im- plications and application. It is required reading for all commercial litigators and arbitrators as well as all appel- late counsel. LT Earl Cherniak is a Toronto-based commercial arbitrator and counsel, a member of Arbitration Place, and a partner at Lerners LLP. A philosophical look at the prostitution law Do harms of criminalization outweigh the benefits? n my experience, criminal lawyers tend to have an ambivalent attitude to the criminal law. This probably dis- tinguishes us from how architects feel about architecture and how dentists feel about teeth. We find the legal doctrine in- tellectually engaging, the human drama compelling, and the rights of the accused worth protecting. But most of us still think that, as a society, we should have less of it with fewer crimes, charges, arrests, people populating our jails, and prisons. Why is that? Simply put, people in- volved in the system tend to recognize that criminal law isn't very good at many of the things society calls on it to do. Sure, it's passably good at its core mission: mark- ing off the very worst behaviour, deter- ring people from committing those acts, stigmatizing those who do so anyway, and locking up the relatively few criminals so- ciety really needs protection from. For these central functions, we couldn't do without it. But criminal law has proven itself to be pretty bad at many other tasks: policing morality, promoting business integrity, and winning the war on drugs. Even with respect to our demonstrably guilty clients, it's more often than not our sense that nobody in particular benefits from their odyssey through the criminal justice system. In far too many cases, ev- eryone would be better off if police had never laid a charge. In my mind, that's where the legisla- tive debate over the new prostitution law needs to begin. It struck me that much of the media commentary focused on the wildly differing characterizations of sex work by both proponents and opponents of the law. Sex work is either the destructive handmaiden of sexual exploitation or the healthy expression of a valid occupational choice. I suspect that, depending on context, it can be either of those two things. But I also think the ar- gument misses the main ques- tion we need to be asking our- selves: Is criminal law the best response to prostitution? Incredibly, Justice Minister Peter MacKay announced the law's objective is to eliminate prostitu- tion in Canada. If a single criminal law has ever eliminated a particular activity, I'm unaware of it. Even granting MacKay some rhetorical leeway, I'm also unaware of any activity that has fallen to negligible levels as a result of criminal proscription. In other words, contrary to the min- ister's utopian aspirations, criminal law is substantially predicated on its own failure. People are going to break the law. This means the relevant question isn't whether we should prohibit a given be- haviour. Instead, the question is whether it's worth punishing people who do it anyway. As the legal philosopher Douglas Husak points out in his very compelling treatise Overcriminalization, the question of whether to criminalize or not would be a lot simpler if the criminal law actually succeeded in modifying people's behav- iour. In other words, if passing a criminal law forbidding an act actually prevented people from doing it, we wouldn't need to worry about whether punishing people for committing the offence is justifiable. But in reality, criminal law is really about punishing peo- ple who break the laws rather than ensuring people comply with them. And there are plen- ty of ways to discourage or pe- nalize bad behaviour without branding people as criminals and punishing them accord- ingly. After all, society gener- ally considers lots of things to be bad but not suitable for criminalization: adultery, cheating at cards, drinking too much, committing torts, and breaches of contract. Even if we all now agree on some version of John Stuart Mill's harm principle — the idea that the state should only criminalize conduct that's harmful to others — we still lack consensus on how much harm should be necessary to invoke the machinery of criminal justice. So I think the debate should focus less on whether sex work is good or bad and more about whether, even if sex work is mostly bad, it's appropriate to brand sex workers or their customers as criminals. Recall that the criminal process itself causes harm to those caught up in it. Fam- ily members of the accused are often col- lateral damage, and the experience is rare- ly heartening for witnesses and victims. All this being so, the state ought to face a heavy burden to show that the upside of a criminal prohibition is sufficient to jus- tify all of the misery attendant upon ar- resting people, trying them, and putting some of them in jail. The burden is espe- cially difficult to satisfy when the candi- date for criminalization is a consensual act such as the purchase or sale of drugs or sex. In his book, Husak formulates an elaborate, and in my view, persuasive set of criteria to morally justify a criminal law. While philosophers will continue to de- bate the precise content of those criteria, I think the important point is we need to be more skeptical when politicians make the leap from decrying some social problem to invoking criminal law as the natural solution to it. We need to emphasize the harmful effects of criminalization and in- sist that we not overlook those issues when the politicians focus on the harm caused by pimps, johns or drug dealers. Fortunately, our courts are aware of these concerns. The Supreme Court in Canada (Attorney General) v. Bedford was clear that the old legal regime caused an unacceptable level of harm to sex workers. The government presents the new law as an effort to protect the sex workers it now sees as victims rather than criminals. But we need to evaluate whether the purport- ed improvements are anything more than cosmetic. I suspect they're not. We also need to have a conversation about whether attempting to regulate this trade with the blunt instrument of crimi- nal law does more harm than good. Crim- inal law should be an option of last resort when other ways of addressing a problem are clearly inadequate. When it comes to prostitution, we need to give other forms of regulation and harm reduction a try. LT uMatthew Gourlay handles criminal and regulatory matters at Henein Hutchison LLP with an emphasis on appellate litiga- tion. He's available at mgourlay@hhllp.ca. u SPEAKER'S CORNER E A Criminal Mind Matthew Gourlay I

• Cover