Want the Contract Interpreted Correctly and Conclusively? Do Not Forget to Include the Surrounding Circumstances
By Joseph Roselli KC, FCIArb, PEng
Here is a scenario that could be avoided. After a lengthy arbitration involving a contractual dispute, the tribunal makes an award based on what appears to be a common sense interpretation of the contract. However, the losing party then challenges the award in court because it makes no mention of the surrounding circumstances relevant to the contract, which the arbitral panel was required to consider. The parties are then faced with ongoing uncertainty, delay, and added expenses.
Commercial arbitrations often involve the interpretation of a contract. Unless there is an exception, the interpretation requires that arbitrators consider the surrounding circumstances when the contract was made. Even when there is no apparent ambiguity in the contractual wording, surrounding circumstances must be considered to some extent in every arbitration award.
Even if you believe that the contract fits into a recognized exception, such as standard form contracts that may not require consideration of surrounding circumstances, be prepared in case the tribunal disagrees.
Here are some important steps you can take:
- Consider the surrounding circumstances early in case planning, as the parties may not agree on the objective facts known at the time of contract creation. Determine how to obtain and present evidence from the point in time that the contract was made. Sometimes this requires locating evidence dating back decades. Early planning and having the desired facts clearly in evidence is prudent.
- Present the relevant case law about surrounding circumstances to the tribunal. Not all arbitrators may be familiar with Canadian decisions in this area. Do not assume that arbitrators will locate and apply the law.
- Identify evidence that would qualify as surrounding circumstances in your particular case according to the case law. These are often described as the objective facts known to the parties at or before contract execution that would have affected the way in which the contract would have been understood by a reasonable person. Examples include:
- The genesis, aim or purpose of the agreement
- The nature of the relationship created by the agreement
- The commercial context
- Market factors in which the parties were operating
- The sophistication of the parties
- In addition, plan for potential disagreements about matters that may not be considered surrounding circumstances. Consider presenting law, evidence, and admissibility submissions about issues such as:
- Pre-contract negotiations
- Subjective intentions about the meaning of the contractual wording
- Prior draft versions of the contract
- Post-contract conduct
- Parol evidence
- Entire agreement clauses
- Expert opinion evidence on the meaning or intent of the contract
Consideration of the surrounding circumstances is an essential part of the modern contextual approach to contractual interpretation. Courts require that it be done except in limited circumstances. Unfortunately, there is no exhaustive list of what a tribunal can consider as surrounding circumstances. Early consideration of these issues helps to ensure that all of the contractual issues are determined in the final award and prevents the award from being successfully judicially challenged on that basis.
Joseph Rosselli, KC, FCIArb, PEng, is an international and domestic arbitrator. He is also a professional engineer and a lawyer with 30 years’ experience resolving disputes involving commercial matters, contracts, technology and intellectual property, construction, major insurance claims, fiduciary obligations, and professional liability.