Contractual interpretation in context

Hundley v. Garnier, 2012 BCCA 199 is a useful decision dealing with use for context in interpretation of instruments:

[55]           The importance of considering surrounding circumstances is long-standing. The leading case in this area is Prenn v. Simmonds, [1971] 3 All E.R. 237 (H.L.). Lord Wilberforce, whose opinion was endorsed unanimously, stated in a well-known passage at 239j – 240a:

The time has long passed when agreements, even those under seal, were isolated from the matrix of facts in which they were set and interpreted purely on internal linguistic considerations. … We must … enquire beyond the language and see what the circumstances were with reference to which the words were used, and the object appearing from those circumstances, which the person using them had in view. … [E]vidence of mutually known facts may be admitted to identify the meaning of a descriptive term.

[56]           In Jacobsen et al v. Bergman et al, 2002 BCCA 102 (CanLII), 2002 BCCA 102, 163 B.C.A.C. 266 (applied in Hanna Collision Repair (1984) Ltd. v. Insurance Corporation of British Columbia, 2010 BCCA 490 (CanLII), 2010 BCCA 490, 10 B.C.L.R. (4th) 312 at paras. 58–59), Lambert J.A. canvassed "well-understood" principles of contractual interpretation and likened them to those underlying statutory interpretation, stating at paras. 3-6:

The applicable principles may be stated in this way. It is not sufficient in interpreting a clause in an agreement to look only at the wording of the clause in order to decide on its meaning and application; instead the clause must be examined in its place in the agreement as a whole. Further, the agreement as a whole, and the clause in particular, must be examined in the context of the factual matrix which gave rise to the agreement and against which the agreement and the clause were intended to operate.

Just as in statutory interpretation, so also in contract interpretation. The fact that the section or clause seems to have a plain enough meaning when viewed in isolation does not preclude, but indeed requires, an examination of the whole text of the statute or agreement, and a consideration of the section or clause in their place in the whole text and in the factual matrix in which they were intended to operate. That process is required in every case of interpretation of either a statute or an agreement.

Of course the process I have described does not detract in any measure from the importance of the words chosen to express the mutual intention of the parties. It merely underlines the view that it is the mutual intention of the party that is being sought and not simply the lexical possibilities inherent in the words chosen to express that mutual intention, perhaps by a third party advisor.

It must always be borne in mind that the function of an interpreting court is to give effect to the mutual intention of the parties and not to create an agreement or an obligation that the parties did not intend, merely because they might well have intended it.

[57]           In Perrin v. Shortreed Joint Venture Ltd., 2009 BCCA 478 (CanLII), 2009 BCCA 478, 277 B.C.A.C. 244 at para. 25, Madam Justice D. Smith made observations consonant with those of Lambert J.A. in Jacobsen:

The factual matrix of a contract is also material to a correct interpretation of its provisions. It is important to ensure that the plain and ordinary meaning of a contract's language is not excluded by the context in which it was made. …

[58]           In Reardon Smith Line Ltd. v. Hansen-Tangen, [1976] 3 All E.R. 570 (H.L.), Lord Wilberforce reiterated the opinion he had expressed in Prenn and offered, at 574c, his view as to what the factual matrix might include:

No contracts are made in a vacuum: there is always a setting in which they have to be placed. The nature of what is legitimate to have regard to is usually described as 'the surrounding circumstances' but this phrase is imprecise: it can be illustrated but hardly defined. In a commercial contract it is certainly right that the court should know the commercial purpose of the contract and this in turn presupposes knowledge of the genesis of the transaction, the background, the context, the market in which the parties are operating.

[59]           Similarly, in Glaswegian Enterprises Inc. v. BC Tel Mobility Cellular Inc. 1997 CanLII 4085 (BC CA), (1997), 101 B.C.A.C. 62, 49 B.C.L.R. (3d) 317, Lambert J.A. explained what constitutes the factual matrix giving rise to contract formation at para. 18:

… The factual matrix is the background of relevant facts that the parties must clearly have been taken to have known and to have had in mind when they composed the written text of their agreement. It can throw light on what the parties must have meant by the words they chose to express their intention. …

[60]           Madam Justice Smith also gave effect to this point at para. 23 in Perrin:

… In the absence of any ambiguity in the words of an agreement, the intention of the parties is to be determined objectively by attributing a meaning to the words that would be conveyed to "a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract": Investor's Compensation Scheme Ltd. v. West Bromwhich Building Society, [1998] 1 All E.R. 98 at 114 (H.L.).