In its decision in Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, [2014] 2 S.C.R. 633, the Supreme Court of Canada held that the interpretation of a contract should have regard to the facts surrounding the making of the contract. For this reason, the review by a court of an arbitrator‘s decision interpreting the contract should not proceed on the basis that it involves a question of law alone. Rather, the decision must be reviewed on the basis that it involves a question of mixed fact and law.

However, this approach has recently been called into question in the case of standard form contracts. In three decisions, the Ontario Court of Appeal has held that a review of a decision interpreting a standard form contract involves a question of law, not a question of mixed fact and law: MacDonald v. Chicago Title Insurance Company of Canada, 2015 ONCA 842; Monk v. Farmer’s Mutual Insurance Company (Lindsay), 2015 ONCA 911; Daverne v. John Switzer Fuels, 2015, ONCA 919. In Ross-Clair v. Canada (Attorney General), 2016 CarswellOnt 3854, 2016 ONCA 205, 265 A.C.W.S. (3d) 289, the Court of Appeal also applied the legal correctness standard, and while it acknowledged that it could do so if the contract in question was a standard form contract, it preferred to apply that standard for reasons related to the Superior Court judge’s failure to consider the whole contract.

In MacDonald, the Ontario Court of Appeal explained why a standard of legal correctness should be applied to the review of a decision interpreting a standard form contract:

  1. The parties do not negotiate standard form contracts. Accordingly, a search for the intention of the parties in the surrounding circumstances is “illusory”, or a “mere legal fiction”.
  2. The interpretation of a standard form contract is significant to more than the immediate parties to the contract. The interpretation is important to all persons who are using that standard form. It is “untenable” for the contract to have one meaning for one set of parties who use it and another meaning for another set.
  3. The precedential value of a decision interpreting the contract is also of importance to all persons using the same standard form. Conversely, it is unacceptable for the contract to be given one interpretation by one judge or arbitrator and another interpretation by another judge or arbitrator.

The decisions in Monk, Daverne and Ross-Clair referred to the MacDonald decision.

In another earlier decision, however, the Ontario Court of Appeal held, applying Sattva, that the interpretation of an insurance contract is a matter of mixed fact and law: OSPCA v. Sovereign General Insurance Company, 2015 ONCA 702. That approach has been followed by the Quebec Court of Appeal with respect to the interpretation of a CGL insurance policy, relying on both the Sattva and OSPCA decisions.

Discussion

Each of these four cases involved, first, a decision by a Superior Court Judge interpreting an insurance contract (or in Ross-Clair, a construction contract with the federal government), and then a decision of the Court of Appeal reviewing that lower court decision. It is noteworthy that in OSPCA, in which a “mixed fact and law” approach was applied, the Court of Appeal dismissed the appeal. In Macdonald, Monk, Daverne and Ross-Clair, where the stricter “matter of law” approach was applied, the Court of Appeal reversed the lower court decision. In the reasons in the last four cases, the prior OSPCA decision was not referred to. One could conclude that the different approach was material in arriving at the different conclusions in these cases.

The Monk case involved an issue that is of considerable interest to the building industry. The question was whether the “faulty material or workmanship” exclusion in an owner’s insurance policy excluded, not just the cost of making good the faulty material or workmanship of the contractor doing work on the owner’s building, but also the damages resulting from that faulty material or workmanship. This distinction between “faulty material or workmanship” itself, and “resulting damage”, is a recurring issue under the Builders’ Risk policies used in the construction industry. Interesting, in Monk, the Superior Court judge held that the resulting damage was excluded by the faulty material or workmanship exclusion, while the Court of Appeal held that it was not.

The Ross-Clair decision involved a construction contract with the federal government. The Superior Court judge held that the contractor had submitted a proper claim for extras which was required to be considered by the engineer. The Court of Appeal reversed, holding that the contractor’s claim was invalid because it did not provide sufficient particulars.

It would seem that the approach of the Ontario Court of Appeal in these last four cases has broad application to contracts in the building industry. Thus the CCDC contracts which are often used between owners and contracts appear to fall within the sort of standard form contracts that the Court of Appeal was discussing.

Whether these decisions establish new rules of contract interpretation and court review remains to be seen. If they do, then, there will be two separate sets of rules: one applicable to negotiated contracts, and the other applicable to standard form contracts. Whether this is a good idea will have to be addressed by the courts in the future.

On the other hand, it may be that, since the contracts were in a standard form and there were no negotiations or other relevant surrounding circumstances, these cases involved the exception to the normal “mixed fact and law” approach to the interpretations of contracts, namely that the interpretation involves an “extricable question of law”. In Sattva, the Supreme Court of Canada held that if such an “extricable question of law” does arise from the initial decision, then the interpretation of the contract, and the review by a court, is strictly a matter of law, and not a matter of mixed fact and law. If so, then these Ontario Court of Appeal decisions do not create a new rule applicable to standard form contracts. Rather, standard form contracts fit under the Sattva decision. However, while the Court of Appeal in MacDonald referred to the “extricable question of law” exception contained in Sattva, it did not base its decision on it. Nor did the Court of Appeal in the other cases adopt that approach.

Another possibility is that the Sattva decision applies to the review of arbitral decisions and these Ontario Court of Appeal decisions apply to the review of lower court decisions. In MacDonald, the Court of Appeal alluded to that distinction but considered that, nevertheless, the guidance in Sattva “must be heeded”. And in the OSPCA decision, the court expressly applied Sattva to the review of lower court decision interpreting a contract.

See Heintzman and Goldsmith on Canadian Building Contracts, 5th ed., chapters 2 part 3, 11 part 11 and 14 part 3(b)(ii)

Interpretation of contracts –Review of decisions interpreting contracts –insurance– standard form contracts

Thomas G. Heintzman O.C., Q.C., FCIArb                               June 12, 2016

www.heintzmanadr.com

www.constructionlawcanada.com

 

This article contains Mr. Heintzman’s personal views and does not constitute legal advice. For legal advice, legal counsel should be consulted.