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Contracts - Adhesion Contracts. MDS Inc. v. Factory Mutual Insurance Company
In MDS Inc. v. Factory Mutual Insurance Company (Ont CA, 2021) the Court of Appeal considered the appellate standard of review that applied to a standard form insurance contract:The standard of review when interpreting insurance agreements
[14] Typically, the interpretation of a contract attracts a deferential standard of appellate review. The trial judge’s interpretation of the agreement is reviewed for palpable and overriding error, as the contract is to be construed in light of the factual matrix and the trial judge is better placed to answer questions of mixed fact and law. Correctness review only applies to extricable errors of law in the trial court’s interpretation: see Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, [2014] 2 S.C.R. 633, at paras. 50-55.
[15] However, standard form contracts, such as FM Global’s “Global Advantage” insurance policy, are an exception to the usual rule. As the Supreme Court explained in Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co., 2016 SCC 37, [2016] 2 S.C.R. 23, at para. 24:[W]here 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. [16] The factual matrix is less relevant in standard form contracts, such as insurance policies, because, as Wagner J. (as he then was) explained, “the parties do not negotiate terms and the contract is put to the receiving party as a take-it-or-leave-it proposition”: Ledcor, at para. 28, citing MacDonald v. Chicago Title Insurance Company of Canada, 2015 ONCA 842, 127 O.R. (3d) 663, at para. 33, leave to appeal refused, [2016] S.C.C.A. No. 39. Moreover, “factors such as the purpose of the contract, the nature of the relationship it creates, and the market or industry in which it operates” are usually the same for all parties to a particular standard form contract, which “underscores the need for standard form contracts to be interpreted consistently”: Ledcor, at para. 31.
[17] The interpretation of a contract may be a question of mixed fact and law, subject to deferential review on appeal, if the parties negotiated and modified what was initially a standard form contract. In these circumstances, the interpretation will likely be of little or no precedential value. The question is whether the dispute is over a general proposition or a particular set of circumstances of little or no precedential value: Ledcor, at para. 48.
[18] MDS concedes that the standard of review for the interpretation of a standard form policy that is not subject to negotiations is correctness, but argues that, as there are questions of mixed fact and law in dispute, the trial judge’s interpretation should be reviewed for palpable and overriding error. According to MDS’ written submissions, the trial judge’s interpretation was based on numerous findings of mixed fact and law, including:[T]he structure of the policy, that the leak was fortuitous, that the corrosion exclusion was listed along with other gradual physical processes, that the insurer chose not to define the term “corrosion” and that the reasonable expectations of the insurer was that this exclusion would not exclude all corrosion. And finally and importantly, that the all risk policy covers all fortuitous events, unless clearly excluded. It would also include the fact that the appellant, at trial and on discovery, categorically stated that the “corrosion exclusion” did not apply to all corrosion. [Emphasis in original.] [19] I disagree. The structure of the Policy, the fact that the leak was fortuitous, and the placement of the word corrosion with other gradual physical processes in the wording of the Policy are not in dispute. The only issues in dispute are the interpretation of (i) the “corrosion” exclusion, and (ii) the “physical damage” exception to the corrosion exclusion in the Policy.
[20] This is a standard form policy, there was no negotiation of the terms of the Policy by the parties, and the issues are of general importance to all insurers and insured parties who use this Policy. This court’s interpretation of the Policy is of precedential value given that it is issued to many both within and beyond Canada.
[21] As such, the standard of review is correctness.
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HOW CONTRACTS OF INSURANCE SHOULD BE INTERPRETED GENERALLY
(a) The interpretation of contracts generally
[36] In Sattva, the Supreme Court addressed the interpretation of a commercial arbitration award concerning the construction of a finder’s fee agreement. Rothstein J. stated, at paras. 57-60, that:While the surrounding circumstances are relied upon in the interpretive process, courts cannot use them to deviate from the text such that the court effectively creates a new agreement.
The nature of the evidence that can be relied upon under the rubric of “surrounding circumstances”.… should consist only of objective evidence of the background facts at the time of the execution of the contract.… Subject to these requirements and the parol evidence rule discussed below, this includes, in the words of Lord Hoffmann, “absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man”.… Whether something was or reasonably ought to have been within the common knowledge of the parties at the time of execution of the contract is a question of fact.
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The surrounding circumstances are facts known or facts that reasonably ought to have been known to both parties at or before the date of contracting; therefore, the concern of unreliability does not arise. [Citations omitted.] [37] In Eli Lilly & Co. v. Novopharm Ltd., 1998 CanLII 791 (SCC), [1998] 2 S.C.R. 129, at para. 54, Iacobucci J. clarified that the focus in interpreting contracts is determining parties’ contractual intent “by reference to the words [the parties] used in drafting the document.… Evidence of one party’s subjective intention has no independent place in this determination.”
[38] Emphasis on the subjective intentions of the parties “denudes the contractual arrangement of the certainty that reducing an arrangement to writing was intended to achieve”: Dumbrell v. The Regional Group of Companies Inc., 2007 ONCA 59, 85 O.R. (3d) 616, at para. 50.
(b) The interpretation of standard form contracts of insurance
[39] Standard form contracts of insurance should be interpreted consistently: Ledcor, at paras. 28-31.
[40] Where the language of the disputed clause is unambiguous, effect should be given to the clear language of the policy read in the context of the policy as a whole: Sabean v. Portage La Prairie Mutual Insurance Co., 2017 SCC 7, [2017] 1 S.C.R. 121, at paras. 12-13; Ledcor, at para. 49; and Progressive Homes Ltd. v. Lombard General Insurance Co. of Canada, 2010 SCC 33, [2010] 2 S.C.R. 245, at para. 22. It is unnecessary to consider extrinsic evidence in order to interpret its terms: Eli Lilly, at para. 55; Dunn v. Chubb Insurance Company of Canada, 2009 ONCA 538, 97 O.R. (3d) 701, at para. 33. However, like all contracts, the policy is examined in light of the surrounding circumstances: Jesuit Fathers of Upper Canada v. Guardian Insurance Co. of Canada, 2006 SCC 21, [2006] 1 S.C.R. 744, at para. 27; Dunn, at para. 33.
[41] As above, the surrounding circumstances include “anything which would have affected the way in which the language of the document would have been understood by a reasonable man” at the time the parties made their agreement: Sattva, at para. 58, citing Investors Compensation Scheme Ltd. v. West Bromwich Building Society, [1998] 1 All E.R. 98, [1998] 1 W.L.R 896, at p. 114. The identity and sophistication of the parties, the jurisdictions in which the contract is in effect, and the commercial context of the contract are all elements of the “surrounding circumstances”.
[42] The words of the contract are given their ordinary meaning, not the meaning they might be given by persons versed in insurance law: Co-operators Life Insurance Co. v. Gibbens, 2009 SCC 59, [2009] 3 S.C.R. 605, at para. 21; see also Ledcor, at para. 27.
[43] However, where a policy provision is ambiguous, the rules of contract construction may be employed to resolve the ambiguity. A contractual provision is ambiguous if it is reasonably susceptible of more than one meaning: Dunn, at para. 34; Hi-Tech Group Inc. v. Sears Canada Inc. (2001), 2001 CanLII 24049 (ON CA), 52 O.R. (3d) 97 (C.A.), at para. 18. The goal is to reach a sensible commercial result that reflects the intentions of the parties at the time the agreement was entered into. As explained by Estey J. in Consolidated-Bathurst v. Mutual Boiler, 1979 CanLII 10 (SCC), [1980] 1 S.C.R. 888, at pp. 901-2:[L]iteral meaning should not be applied where to do so would bring about an unrealistic result or a result which would not be contemplated in the commercial atmosphere in which the insurance was contracted. Where words may bear two constructions, the more reasonable one, that which produces a fair result, must certainly be taken as the interpretation which would promote the intention of the parties. Similarly, an interpretation which defeats the intentions of the parties and their objective in entering into the commercial transaction in the first place should be discarded in favour of an interpretation of the policy which promotes a sensible commercial result. It is trite to observe that an interpretation of an ambiguous contractual provision which would render the endeavour on the part of the insured to obtain insurance protection nugatory, should be avoided. Said another way, the courts should be loath to support a construction which would either enable the insurer to pocket the premium without risk or the insured to achieve a recovery which could neither be sensibly sought nor anticipated at the time of the contract. [44] Extrinsic or parol evidence may be admitted to resolve ambiguity: United Brotherhood of Carpenters and Joiners of America, Local 579 v. Bradco Construction Ltd., 1993 CanLII 88 (SCC), [1993] 2 S.C.R. 316, at p. 342; see also Eli Lilly, at para. 55; Canadian Premier Holdings Ltd. v. Winterthur Canada Financial Corp. (2000), 2000 CanLII 5724 (ON CA), 132 O.A.C. 172 (C.A.), at para. 15; and SimEx Inc. v. IMAX Corp. (2005), 2005 CanLII 46629 (ON CA), 206 O.A.C. 3 (C.A.), at para. 23.
[45] If the general rules of construction fail to resolve the ambiguity, courts will construe the contract contra proferentem, and interpret coverage provisions broadly and exclusion clauses narrowly: Sabean, at para. 12; Ledcor, at paras. 50-51. However, courts should not impute ambiguity where none exists, as noted in Consolidated-Bathurst, at p. 901, citing Cornish v. Accident Insurance Co. (1889), 23 Q.B. 453 (C.A.) at p. 456: “[T]his principle [of contra proferentem] ought only to be applied for the purpose of removing a doubt, not for the purpose of creating a doubt, or magnifying an ambiguity, when the circumstances of the case raise no real difficulty.” . Celebre v 1082909 Ontario Limited
In Celebre v 1082909 Ontario Limited (Div Ct, 2007) a clause in a home inspection agreement purporting to limit liability was not enforced in a 'contract of adhesion' (supplier-issued standard consumer contract) where there was no true negotiation and consideration of the terms before the contract is executed, where the consumer was under time pressure to close a house sale, and where the contract was only presented for consumer signature after part of the inspection work had been completed:[13] While it is the case that the contract was signed, it does not follow that the limitation of liability clause is enforceable. The contract is one of adhesion, a consumer standard-form, and not the result of negotiation and the circumstances typically are that there is a limited time allowed in the contract of purchase and sale for the buyer to have a home inspection done. The buyer is not normally in the position of being able to have a second inspection done; there simply is not time. At its best for the appellant, this contract was not presented for signature and was not explained until the entire inspection of the exterior had been completed. At that point the buyer is not, in practical terms, able to reject the contract and engage another inspector. The inspector has done much of the work and will expect to be paid for it. There is thus a pressure applied by the practice of delaying the explanation and signature until after much work has been done. This was described by the inspector as his usual practice. It seems to me that this practice is not a fair one. If there are particularly onerous terms in a contract of adhesion, the duty of the inspector is to explain the term at a time and in a manner that gives the customer a real opportunity to refuse and to find an alternate inspector.
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