To overturn a trial court's interpretation of a contract on appeal, it is not enough that the trial court was wrong, it must be really wrong, the Supreme Court of Canada recently affirmed in Heritage Capital Corp v Equitable Trust Co, 2016 SCC 19 [Heritage]. The Court confirmed that the standard of appellate review applicable to a lower court's interpretation of a contract is palpable and overriding error, not merely correctness, absent an extricable error of law.

In an important 2014 ruling arising from an arbitrator's decision, the Supreme Court of Canada held in Creston Moly Corp v Sattva Capital Corp, 2014 SCC 53 [Sattva] that the historical approach to contractual interpretation, where "the legal rights and obligations of the parties under a written contract was considered a question of law," should be abandoned. Instead, contractual interpretation was recognized as involving "issues of mixed fact and law as it is an exercise in which the principles of contractual interpretation are applied to the words of the written contract, considered in light of the factual matrix." Questions of mixed fact and law attract the palpable and overriding error standard of review rather than correctness. This means that an appeal court will only second-guess a decision from a fact-finder where the decision is unreasonable, or commits a palpable and overriding error, not merely because the appeal court would decide the case differently itself. Sattva also provided for the possibility of identifying "an extricable question of law", attracting the correctness standard, such as "application of an incorrect principle, the failure to consider a required element of a legal test, or the failure to consider a relevant factor."

Some commentators after Sattva questioned the scope of the decision. Were its comments on contractual interpretation binding or obiter? Could it be limited to its unique facts, which involved determining "the appropriate standard of review to be applied to commercial arbitral decisions"? Or was it more generally applicable?

The Supreme Court of Canada in Heritage confirmed for the first time that Sattva applies more generally, and specifically to decisions from lower courts. In Heritage, Lougheed Block Inc. and the City of Calgary contracted for the City to make certain incentive payments as a result of a building owned by Lougheed being designated a "Municipal Historical Resource" under Alberta's Historical Resources Act (HRA). At the Court of Appeal, a majority held that the applicable standard of review of the chambers judge's decision was correctness, while a dissent held that the interpretation of the contract was an issue of mixed fact and law that attracted the deferential standard of palpable and overriding error. At the Supreme Court of Canada, the Court unanimously sided with the dissenting justice on the standard of review.

The Supreme Court affirmed that contractual interpretation involves issues of mixed fact and law and "deference to fact-finders furthers the goals of limiting the number, length and cost of appeals, and of promoting the autonomy and integrity of trial proceedings." The Court recognized that the chambers judge's interpretation of the HRA attracted a standard of correctness since statutory interpretation is a question of law. However, the Court did not find the same standard applied to the interpretation of the contract, even though the interpretation of the contract depended, to some extent, on the interpretation of the statute. Instead, the Court held that the dissenting justice "was right to conclude that the palpable and overriding error standard applies to the chambers judge's interpretation of the [contract]."

Heritage thus confirms that in the ordinary case, appellate review of questions of contractual interpretation are reviewed on a standard of palpable and overriding error. Sattva is not limited to arbitration decisions; it applies equally to trial court decisions. In effect, Heritage confirms that Sattva has made a significant change to how appellate courts will treat contract cases. It is now more difficult than ever to overturn a contractual interpretation decision on appeal.

The decision also discusses at length the rules of statutory interpretation, emphasizing in particular that where a legislature (or parliament) expressly creates a statutory exception to a common law principle, that exception should be narrowly construed, as the legislature is assumed not to have intended to change the common law unless it has done so clearly and unambiguously.