Subjective Intentions Do Not Factor Into Surrounding Circumstances

Written by Daniel Standing LL.B., Editor, First Reference Inc.

Pre-contract negotiations, such as prior drafts of agreements, are generally inadmissible as part of “surrounding circumstances” when interpreting a contract, and parties’ subjective intentions are always inadmissible. The Alberta Court of Appeal’s recent decision in Alberta Union of Provincial Employees v Alberta Health Services, 2020 ABCA 4 (CanLII) confirms this principle and states the limits of relying on the parties’ subjective intentions.


The Alberta Union of Provincial Employees (AUPE) represents employees in two bargaining units employed with Alberta Health Services (AHS). In 2015, AHS adopted an “Operational Best Practices” cost-saving and quality improvement initiative, confirming to the union that no unionized employees would lose employment as a result. The following autumn, three unions with bargaining unit relationships with AHS sought to formally confirm the public statements that there would be no layoffs, and the Alberta government directed AHS to enter an agreement with each of the unions to this effect.

On November 2, 2016, during a mediated collective bargaining session, AUPE presented AHS a draft letter of understanding to that effect, but the parties did not reach an agreement on that date. The parties met and negotiated again on November 5, 2016, culminating in a letter of understanding (LOU) which differed from the November 2 draft in that it did not refer to the Operation Best Practices program but rather to “Operational Restructuring.” Among other things, the LOU provided assurances that there would be no involuntary loss of employment for employees in the Auxiliary Nursing Bargaining Unit.

However, in January 2017, the employer advised the union that a particular unit closure would result in the layoffs of some 34 employees in the Auxiliary Nursing Bargaining Unit. A dispute arose between the parties about whether the unit in question was caught by the LOU. The parties jointly referred a question to an arbitrator requiring him to interpret the LOU and determine whether the LOU dealt with involuntary loss of employment in specific connection to the Operational Best Practices program, or whether it also applied to such loss of employment resulting from any kind of organizational restructuring whatsoever.

A hearing was held and the arbitrator considered jointly submitting facts and evidence from witnesses involved in bargaining of the LOU. On April 19, 2017, the arbitrator issued his decision in which he indicated that the phrase “Operational Restructuring” in the LOU was ambiguous, and therefore he considered the text of the LOU, evidence of the surrounding circumstances and the parties’ negotiations which lead to the conclusion that the LOU was only intended to apply to the Operational Best Practices program. Therefore, since it did not apply to broader forms of operational restructuring, the laid-off employees were not protected by the contract. AUPE sought judicial review of the arbitrator’s decision claiming that it was unreasonable in process and outcome.

The Court of Appeal’s analysis

The Court of Appeal first dealt with the appropriate standard of review, agreeing with the parties that the appropriate standard to be applied to a review of a labour arbitrator’s interpretation of a collective agreement is that of reasonableness. The issue was whether the arbitrator properly applied the law on contractual interpretation as set out in Sattva Capital Corporation (formerly Sattva Capital Inc) v Creston Moly Corporation (formerly Georgia Ventures Inc), 2014 SCC 53 (Sattva).

Next, the court summarized the law on contractual interpretation as set out by the Supreme Court of Canada in Sattva. At its core, the interpretation exercise requires the decision-maker to give words “their ordinary and grammatical meaning consistent with the surrounding circumstances known to the parties at the time of formation of the contract.” A consideration of the surrounding circumstances as an interpretive aid is limited to objective evidence of background facts that were or should have been within the knowledge of both parties at that time. Evidence about surrounding circumstances cannot add to, detract from or “overwhelm” in any way the written contract. Furthermore, Sattva confirmed that evidence about the parties’ subjective intentions-in other words, what a party thought was meant by a particular phrase or word in the contract-is always inadmissible because it is irrelevant.

The Court of Appeal stated that arbitrators must regularly apply principles of contract interpretation to collective agreements. In doing so, they consider the general context of the collective agreement, including evidence of the origin and purpose of the collective agreement, the nature of the parties’ relationship and the industry in which they operate. It went on to state that following Sattva, courts and commercial arbitrators must admit and consider evidence of the circumstances surrounding the contract to help interpret it, and it is a mistake of law to ignore the surrounding circumstances just because the contract is not ambiguous. Finally, it stated that in some cases, it will be necessary to establish an ambiguity before considering some kinds of evidence, such as evidence of negotiations not otherwise admissible as surrounding circumstances, or evidence of past practice or post-contract conduct.

The Court of Appeal then turned its focus to the arbitrator’s analysis in this case. The arbitrator found that “Operational Restructuring” was ambiguous and he identified some of the circumstances surrounding the execution of the LOU. He then identified various “additional facts” that a “hypothetical armchair observer would have become aware of,” all of which related to the negotiations between the parties leading to the LOU.

According to the court, while it was appropriate for the arbitrator to find that there was an ambiguity before admitting the pre-contract negotiation evidence, the case does not turn on the finding of ambiguity, but on the type of evidence the arbitrator admitted and how he used it. The problem here was that the evidence “falls on the wrong side of the line between evidence of surrounding circumstances on the date of entry into the LOU and evidence of the parties’ subjective intentions about the meaning of the phrase “Operational Restructuring.” It was wrong of the arbitrator to allow the evidence for the purpose of showing what the parties subjectively understood by the phrase “Operational Restructuring,” albeit indirectly.

Returning to the standard of review, the court noted that the arbitrator classified the pre-contract negotiation evidence as evidence of the surrounding circumstances. As such, that characterization was unreasonable since the evidence essentially concerned the parties’ subjective intentions. Fundamentally, the arbitrator’s decision was found to be unreasonable because he considered the parties’ subjective intentions in giving meaning to “Operational Restructuring.” Since the court was unable to determine how much of the arbitrator’s unreasonable reasoning affected the result, it quashed the decision and remitted it to the parties for further action, without offering comment on the reasonableness of the outcome in the arbitrator’s decision, or the reasonableness of the parties’ positions.

Takeaways for employers

While this case serves as an important reminder for arbitrators about the limits of evidence of “surrounding circumstances,” it contains important points for employers to consider when negotiating collective agreements and when considering a judicial review of arbitral decisions flowing from contract interpretation disputes. First, because subjective intention evidence is inadmissible, there is no advantage to a party who postures during negotiations to create a record for arbitration instead of making its best effort to achieve a consensus at the bargaining table. Second, the case illustrates the potential danger of intentionally leaving a term of an agreement ambiguous. In this case, the parties were pressured to reach an agreement and, the court surmised, deliberately avoided clarifying the meaning of “Operational Restructuring” in order to achieve an agreement, thereby leaving arbitration as the mechanism of determining its meaning. Further clarification at the bargaining table may be advantageous as both a cost-savings measure and to protect against unfavourable (yet reasonable) interpretations by a third party.

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