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Appeals - Standard of Review - Contractual Interpretation - Standard Form Contracts

Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co. (SCC, 2016)

In this case the Supreme Court of Canada clarified that the appellate standard of review for standard form contracts was that of correctness:
[19] In my view, the trial judge’s interpretation of the Policy should be reviewed for correctness.

[20] These appeals present an opportunity to clarify how Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53 (CanLII), [2014] 2 S.C.R. 633, applies to the interpretation of standard form contracts, sometimes called contracts of adhesion.

[21] In Sattva, Rothstein J. held that “[c]ontractual interpretation involves 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” (para. 50). As a result, the palpable and overriding error standard of review applies to a trial court’s interpretation of a contract: Heritage Capital Corp. v. Equitable Trust Co., 2016 SCC 19 (CanLII), [2016] 1 S.C.R. 306, at paras. 21-24. However, Rothstein J. acknowledged that the correctness standard of review still applies to the “rare” extricable questions of law that arise in the interpretation process, such as “the application of an incorrect principle, the failure to consider a required element of a legal test, or the failure to consider a relevant factor”: Sattva, at paras. 53 and 55, quoting King v. Operating Engineers Training Institute of Manitoba Inc., 2011 MBCA 80 (CanLII), 270 Man. R. (2d) 63, at para. 21. This is consistent with the jurisprudence on the standard of review for questions of mixed fact and law: Housen v. Nikolaisen, 2002 SCC 33 (CanLII), [2002] 2 S.C.R. 235, at para. 36. However, in this case, the Court of Appeal did not purport to identify an extricable question of law that arose in the interpretation process. Rather, it concluded that the interpretation of the contract itself should be reviewed for correctness, despite Sattva’s holding that contractual interpretation is a question of mixed fact and law and is owed deference on appeal: paras. 18-19.

[22] Appellate courts have disagreed on whether this Court’s holding in Sattva on the standard of review of contractual interpretation applies to standard form contracts. Many appellate courts have held that Sattva does not apply, and have conducted correctness review: Vallieres v. Vozniak, 2014 ABCA 290 (CanLII), 5 Alta. L.R. (6th) 28, at paras. 11-13; Portage LaPrairie Mutual Insurance Co. v. Sabean, 2015 NSCA 53 (CanLII), 386 D.L.R. (4th) 449, at para. 13; Precision Plating Ltd. v. Axa Pacific Insurance Co., 2015 BCCA 277 (CanLII), 387 D.L.R. (4th) 281, at paras. 28-30; Stewart Estate v. 1088294 Alberta Ltd., 2015 ABCA 357 (CanLII), 25 Alta. L.R. (6th) 1, at para. 273, per McDonald J.A.; MacDonald v. Chicago Title Insurance Co. of Canada, 2015 ONCA 842 (CanLII), 127 O.R. (3d) 663, at paras. 40-41; Monk v. Farmers’ Mutual Insurance Co., 2015 ONCA 911 (CanLII), 128 O.R. (3d) 710, at paras. 22-24; Daverne v. John Switzer Fuels Ltd., 2015 ONCA 919 (CanLII), 128 O.R. (3d) 188, at paras. 12-14; True Construction Ltd. v. Kamloops (City), 2016 BCCA 173, at para. 34 (CanLII); and Sankar v. Bell Mobility Inc., 2016 ONCA 242, at para. 26 (CanLII).

[23] In other cases, however, courts of appeal have applied Sattva and have deferred to trial courts’ interpretations of standard form contracts: Kassburg v. Sun Life Assurance Co. of Canada, 2014 ONCA 922 (CanLII), 124 O.R. (3d) 171, at para. 33; Anderson v. Bell Mobility Inc., 2015 NWTCA 3 (CanLII), 593 A.R. 79, at paras. 9 and 33-35; Van Camp v. Chrome Horse Motorcycle Inc., 2015 ABCA 83 (CanLII), 599 A.R. 201; Industrial Alliance Insurance and Financial Services Inc. v. Brine, 2015 NSCA 104 (CanLII), 392 D.L.R. (4th) 575, at paras. 40-41; Ontario Society for the Prevention of Cruelty to Animals v. Sovereign General Insurance Co., 2015 ONCA 702 (CanLII), 127 O.R. (3d) 581, at paras. 34-36; Acciona Infrastructure Canada Inc. v. Allianz Global Risks US Insurance Co., 2015 BCCA 347 (CanLII), 77 B.C.L.R. (5th) 223, at para. 35; and GCAN Insurance Co. v. Univar Canada Ltd., 2016 QCCA 500, at para. 40 (CanLII). See also Stewart Estate, at para. 63, per Rowbotham J.A. (dissenting on this point).

[24] I would recognize an exception to this Court’s holding in Sattva that contractual interpretation is a question of mixed fact and law subject to deferential review on appeal. In my view, where an appeal involves the interpretation of a standard form contract, the interpretation at issue is of precedential value, and there is no meaningful factual matrix that is specific to the parties to assist the interpretation process, this interpretation is better characterized as a question of law subject to correctness review.

[25] The statements made in Sattva on the standard of review of contractual interpretation must be considered in their full context. That case concerned a complex commercial agreement between two sophisticated parties — not a standard form contract. Professor John D. McCamus has described standard form contracts as follows:
. . . the document put forward will typically constitute a standard printed form that the party proffering the document invariably uses when entering transactions of this kind. The form will often be offered on a “take it or leave it” basis. In the typical case, the other party, then, will have no choice but either to agree to the terms of the standard form or to decline to enter the transaction altogether. Standard form agreements are a pervasive and indispensable feature of modern commercial life. It is simply not feasible to negotiate, in any meaningful sense, the terms of many of the transactions entered into in the course of daily life.

(The Law of Contracts (2nd ed. 2012), at p. 185)
Sattva did not consider the unique issues that standard form contracts raise.

[26] Moreover, the Court in Sattva gave two reasons for concluding that contractual interpretation is a question of mixed fact and law subject to deferential review on appeal. As a general matter, those reasons are less compelling in the context of standard form contracts.

..............


(2) The Definitions of “Question of Law” and “Question of Mixed Fact and Law”

[33] In Sattva, this Court gave a second reason for concluding that contractual interpretation is a question of mixed fact and law: contractual interpretation does not fit within the definition of a pure question of law. Questions of law are “about what the correct legal test is”: para. 49, quoting Canada (Director of Investigation and Research) v. Southam Inc., 1997 CanLII 385 (SCC), [1997] 1 S.C.R. 748, at para. 35. For instance, the content of a particular legal principle of contractual interpretation is a question of law. However, in interpreting contracts, courts apply the legal principles of contractual interpretation to determine the parties’ objective intentions: Sattva, at para. 49. Therefore, according to Sattva, contractual interpretation is a question of mixed fact and law, which is defined as “applying a legal standard” (the legal principles of contractual interpretation) “to a set of facts” (the words of the contract and the factual matrix): para. 49, quoting Housen, at para. 26.

[34] In my view, however, while contractual interpretation is generally a question of mixed fact and law, in situations involving standard form contracts, it is more appropriately classified as a question of law in most circumstances.

[35] The law of standard of review — including the distinction between questions of law and those of mixed fact and law — seeks to achieve an appropriate division of labour between trial and appellate courts in accordance with their respective roles. The main function of trial courts is to resolve the particular disputes before them: Housen, at para. 9. Appellate courts, however, “operate at a higher level of legal generality”: Association des parents ayants droit de Yellowknife v. Northwest Territories (Attorney General), 2015 NWTCA 2 (CanLII), 593 A.R. 180, at para. 23. They ensure that “the same legal rules are applied in similar situations”, as the rule of law demands: Housen, at para. 9. Appellate courts also have a law-making function, which requires them to “delineate and refine legal rules”: ibid.

[36] These particular functions of appellate courts — ensuring consistency in the law and reforming the law — justify reviewing pure questions of law on the standard of correctness. By contrast, appellate courts defer to findings of fact in part because they can discharge their mandate without second-guessing trial courts’ factual determinations: Housen, at paras. 11-14. For questions of mixed fact and law, the correctness standard applies to extricable errors of law (such as the application of an incorrect principle) because, again, a review on the standard of correctness is necessary to allow appellate courts to fulfill their role. However, where it is “difficult to extricate the legal questions from the factual”, appellate courts defer on questions of mixed fact and law: Housen, at para. 36; see also paras. 33-35.

[37] In many cases, appellate courts need not review for correctness the contractual interpretation itself in order to perform their functions — namely, ensuring the consistent application of the law and reforming the law. That is because, in general, the interpretation of a contract has no impact beyond the parties to a dispute. As Rothstein J. commented in Sattva, at para. 52:
. . . this Court in Housen found that deference to fact-finders promoted the goals of limiting the number, length, and cost of appeals, and of promoting the autonomy and integrity of trial proceedings (paras. 16-17). These principles also weigh in favour of deference to first instance decision-makers on points of contractual interpretation. The legal obligations arising from a contract are, in most cases, limited to the interest of the particular parties. Given that our legal system leaves broad scope to tribunals of first instance to resolve issues of limited application, this supports treating contractual interpretation as a question of mixed fact and law.
[38] For the interpretation of many contracts, precedents interpreting similar contractual language may be of some persuasive value. However, it is the intentions of the particular parties, as reflected in the particular contractual wording at issue and informed by the surrounding circumstances of the contract, that predominate, and “[i]f that intention differs from precedent, the intention will govern and the precedent will not be followed”: G. R. Hall, Canadian Contractual Interpretation Law (3rd ed. 2016), at pp. 129-30; see also Tenneco Canada Inc. v. British Columbia Hydro and Power Authority, 1999 BCCA 415 (CanLII), 126 B.C.A.C. 9, at para. 43.

[39] These teachings, however, do not necessarily apply in cases involving standard form contracts, where a review on the standard of correctness may be necessary for appellate courts to fulfill their functions. Standard form contracts are “highly specialized contracts that are sold widely to customers without negotiation of terms”: MacDonald, at para. 37. In some cases, a single company, such as a bank or a telephone service provider, may use its own standard form contract with all of its customers: Monk, at para. 23. In others, a standard form agreement may be common throughout an entire industry: Precision Plating, at para. 28. Either way, the interpretation of the standard form contract could affect many people, because “precedent is more likely to be controlling” in the interpretation of such contracts: Hall, at p. 131. It would be undesirable for courts to interpret identical or very similar standard form provisions inconsistently, without good reason. The mandate of appellate courts — “ensuring the consistency of the law” (Sattva, at para. 51) — is advanced by permitting appellate courts to review the interpretation of standard form contracts for correctness.

[40] Indeed, consistency is particularly important in the interpretation of standard form insurance contracts. In Co-operators Life Insurance Co. v. Gibbens, 2009 SCC 59 (CanLII), [2009] 3 S.C.R. 605, at para. 27, Binnie J. recognized that “‘courts will normally be reluctant to depart from [authoritative] judicial precedent interpreting the policy in a particular way’ . . . where the issue arises subsequently in a similar context, and where the policies are similarly framed”, because both insurance companies and customers benefit from “[c]ertainty and predictability”. And where an insurance policy is ambiguous, courts “strive to ensure that similar insurance policies are construed consistently”: Progressive Homes Ltd. v. Lombard General Insurance Co. of Canada, 2010 SCC 33 (CanLII), [2010] 2 S.C.R. 245, at para. 23.

[41] The definition of questions of law — “questions about what the correct legal test is” (Southam, at para. 35) — does not preclude classifying some questions of contractual interpretation as questions of law. There is no bright-line distinction between questions of law and those of mixed fact and law. Rather, “the degree of generality (or ‘precedential value’)” is the key difference between the two types of questions: Sattva, at para. 51. As Iacobucci J. stated in Southam, at para. 37:
If a court were to decide that driving at a certain speed on a certain road under certain conditions was negligent, its decision would not have any great value as a precedent. In short, as the level of generality of the challenged proposition approaches utter particularity, the matter approaches pure application, and hence draws nigh to being an unqualified question of mixed law and fact. . . . Of course, it is not easy to say precisely where the line should be drawn; though in most cases it should be sufficiently clear whether the dispute is over a general proposition that might qualify as a principle of law or over a very particular set of circumstances that is not apt to be of much interest to judges and lawyers in the future.
[42] Contractual interpretation is often the “pure application” of contractual interpretation principles to a unique set of circumstances. In such cases, the interpretation is not “of much interest to judges and lawyers in the future” because of its “utter particularity”. These questions of contractual interpretation are appropriately classified as questions of mixed fact and law, as the Court explained in Sattva.

[43] However, the interpretation of a standard form contract could very well be of “interest to judges and lawyers in the future”. In other words, the interpretation itself has precedential value. The interpretation of a standard form contract can therefore fit under the definition of a “pure question of law”, i.e., “questions about what the correct legal test is”: Sattva, at para. 49; Southam, at para. 35. Establishing the proper interpretation of a standard form contract amounts to establishing the “correct legal test”, as the interpretation may be applied in future cases involving identical or similarly worded provisions.

[44] My colleague Cromwell J. suggests that the interpretation of a standard form contract will not be of much precedential value because “its application in other cases will ultimately be decided on a case-by-case basis in light of the particular circumstances of the particular case” (para. 120). I respectfully disagree. Settling on a consistent interpretation of a standard form provision is useful. Of course, the result of applying the interpretation in future cases will depend on the facts of those cases. The facts are for the trial judge to find, and those findings will be owed deference.

[45] For instance, in this case, the Court of Appeal interpreted the Exclusion Clause as excluding damages physically or systemically connected to the faulty work. For the reasons I will give below, I am of the view that the Exclusion Clause excludes only the cost of redoing the faulty work. These are two different interpretations of the same standard form language. Selecting one interpretation over the other as correct will give parties certainty and predictability. This is true even though what constitutes the cost of redoing the faulty work will depend on the facts of future cases.

(3) Conclusion on Standard of Review

[46] Sattva should not be read as holding that contractual interpretation is always a question of mixed fact and law, and always owed deference on appeal. I would recognize an exception to Sattva’s holding on the standard of review of contractual interpretation. Where, like here, the appeal involves the interpretation of a standard form contract, the interpretation at issue is of precedential value, and there is no meaningful factual matrix specific to the particular parties to assist the interpretation process, this interpretation is better characterized as a question of law subject to correctness review.

[47] These criteria are met in the present case, so the standard of review applicable to the trial judge’s interpretation of the Policy is correctness. The trial judge’s underlying factual findings remain subject to deferential review, as mentioned above.

[48] Depending on the circumstances, however, the interpretation of a standard form contract may be a question of mixed fact and law, subject to deferential review on appeal. For instance, deference will be warranted if the factual matrix of a standard form contract that is specific to the particular parties assists in the interpretation. Deference will also be warranted if the parties negotiated and modified what was initially a standard form contract, because the interpretation will likely be of little or no precedential value. There may be other cases where deferential review remains appropriate. As Iacobucci J. recognized in Southam, the line between questions of law and those of mixed fact and law is not always easily drawn. Appellate courts should consider whether “the dispute is over a general proposition” or “a very particular set of circumstances that is not apt to be of much interest to judges and lawyers in the future” (para. 37).

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