Standard Form Contract To Be Given Plain Meaning, Not The Industry Meaning: Supreme Court Of Canada

In its recent decision in Sabean v. Portage La Prairie Mutual Insurance Co., the Supreme Court of Canada has held that words in a standard form contract used by the public should be given their plain and ordinary meaning, and not a different meaning that those words might be given by the industry or trade which drafted the contract.

While this decision related to an insurance contract, it may well apply to standard form building contracts. The question may then arise as to whether building contracts – such as the CCDC contracts – are standard form contracts. If they are, can the words in those contracts have a trade or industry meaning when they are used between participants in the building industry who understand that meaning, and another meaning when they are entered into by a member of the public, such as a homeowner?

Background      

The plaintiff recovered a judgment arising from a motor vehicle accident. The judgment exceeded the limits of the tortfeasor’s insurance policy. The plaintiff claimed the shortfall under the policy with his own insurer. Under the standard form excess insurance provision of that policy, there were deductions from the amount payable by the insurer. One of those deductions was for future benefits arising from a “policy of insurance providing disability benefits.” The plaintiff was entitled to receive future Canada Pension Plan (CPP) disability benefits. The insurer asserted that the CPP was a “policy of insurance”. The trial judge held that the CPP benefits were not deductible from the amount payable by the insurer. The Nova Scotia Court of Appeal held that they were. The Supreme Court of Canada re-instated the trial judge’s decision, holding that the CPP benefits were not payable under a “policy of insurance”.

Decision of the Supreme Court of Canada

In arriving at its conclusion, the Supreme Court held that benefits payable by the Canada Pension Plan did not fall within the plain meaning of the words “policy of insurance”. The insurer then submitted that in Gill v. Canadian Pacific Railway, [1973] S.C.R. 654, the Supreme Court of Canada had decided that CPP payments were deductible in calculating monies due under the Families’ Compensation Act of British Columbia. The insurer submitted that the court in the present case should apply the reasoning in the Gill decision. More particularly, however, the insurer submitted that the Supreme Court should recognize that, by reason of the Gill decision, the deductibility of CPP benefits from damage claims had been recognized or assumed in the insurance industry and that therefore the words “policy of insurance” in private insurance policies, like the one in issue in the Sabean case, were meant to include CPP benefits. Accordingly, the insurer submitted that this meaning which had developed in the insurance industry, not the ordinary meaning of the words “policy of insurance, should be applied to those words.

The Supreme Court disagreed. Having found that the ordinary and natural meaning of the words “policy of insurance” did not include CPP benefits, the Supreme Court rejected the submission that an insurance industry or trade meaning could displace the ordinary meaning of those words. It said:

“The insurer submits and the Court of Appeal accepted that the meaning of “policy of insurance” under the Endorsement must be understood in the context of this Court’s decision in Gill. Implicit in the approach urged by the insurer is the suggestion that this Court’s decision in Gill itself supports an alternative reasonable interpretation of the disputed words at the first stage of the Ledcor analysis. As I shall explain, I cannot accept this as a reasonable interpretation of this insurance policy. Gill does not interpret or inform the ordinary words of the Endorsement. Nor would the average person applying for this insurance contemplate the distinct tort and statutory context in Gill in understanding the words of the Endorsement. The insurer relies on its specialized knowledge of the jurisprudence to advance an interpretation that goes beyond the clear words of the policy.” (underlining added)

The Supreme Court arrived at this conclusion for a number of reasons. The purchasers of insurance coverage are not knowledgeable about the insurance case law nor about the drafting of insurance policies:

“It cannot be assumed that the average person who applies to purchase this excess insurance policy would imbue the words in the Endorsement with knowledge of how they were interpreted by the courts for the purposes of provincial insurance legislation and the collateral benefits rule in tort. In this context, the purchaser is not someone with the specialized knowledge of related jurisprudence or of the objectives of the insurance industry. Thus, the history and intention of the insurance industry in drafting the Endorsement following Gill do not assist in the interpretation of this contract.” (underlining added)

In addition, the Gill decision dealt with a statutory, not a contractual, provision. The court in Gill was applying the legislature’s intent, not the intent of parties to a contract as in Sabean. As the Supreme Court said in Sabean:

“…the decision in Gill is confined to a distinct statutory context. When interpreting a statute, the court searches for the intention of the legislature. In interpreting a standard form policy of insurance, the court is concerned with the ordinary meaning of the contract as it would be understood by the average insured.”

Discussion

This decision follows and has solidly entrenched the recent decision of the Supreme Court of Canada in Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co. 2016 SCC 37. Both cases deal with standard form contracts. In Ledcor, the court held that the meaning of the words in a standard form contract cannot be changed by the circumstances surrounding one instance of the use of the contract, because they must be given the same meaning for all users of the contract.   In Sabean, the court has held that the meaning of the words in a standard form contract cannot be changed by industry or trade usage, at least when the contract is entered into by members of the public who are not familiar with the case law and drafting behind that wording. In both decisions, the Supreme Court has strongly endorsed the principle that standard form contracts, and particularly those prepared by a member of an industry for contracting with a member of the public, must be interpreted as written and in according with their ordinary meaning, and must not be altered by extraneous factors, particularly at the instance of and in favour of that industry.

This decision raises important questions for building contracts, such as the CCDC contracts. As I raised in my article of October 10, 2016 about the Ledcor decision, an initial question may be: are the CCDC contracts “standard form contracts”? Since they are not drafted by one particular company and are not issued on a “take it or leave it” basis to customers, but rather developed on a consensual basis by the entire building industry, there is an argument that building contracts like the CCDC contracts are not standard form contracts that fall within the Ledcor and Sabean decisions.

If building contracts do fall within the Sabean decision, what is the effect? If one of the parties to the contract is a member of the public – such as a homeowner, or a business seeking a building for its premises – then the decision in Sabean means that words in the contract may not be given a technical or trade meaning understood by the building industry but not by the general public.

But what if the contract is between the contractor and the subcontractor? Could the same contentious words in the contract be given a technical or trade meaning known to the building industry? And then what happens when there is a main contract with a member of the public and a subcontract between two members of the building industry, and the contentious words appear in both contracts? Could the words in the main contract mean one thing – because they cannot be given an industry meaning – but mean another thing in the subcontract – because the words have a well-known meaning in the building industry? And if the subcontract incorporates the main contract by reference, what happens to the conflicting meaning of the words?

Building contracts often contain a Definitions section to ensure that the parties understand what they mean by particular words. In the CCDC contracts, the Definitions are some two pages in length. The Sabean case is a warning to those drafting “standard form” contracts, including those in the building industry, that they should carefully review their contracts. If those contracts contain any wording that relies on an industry or trade meaning, that meaning should be clearly spelt out in the contract.

See Heintzman and Goldsmith on Canadian Building Contracts, 5th ed., chapter 2, parts 3(a), 3(e) and 4(v)

Sabean v. Portage La Prairie Mutual Insurance Co., 2017 CarswellNS 38, 2017 CarswellNS 39, 2017 SCC 7

Interpretation of Contracts – Standard Form Contracts – Trade and Industry meaning –

Thomas G. Heintzman O.C., Q.C., L.L.D. (Hon.), FCIArb                         March 5, 2017

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.

 

Standard Form Contracts Are To Be Reviewed On A Standard Of Correctness: Supreme Court Of Canada

In, Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co, 2016 SCC 37, the Supreme Court of Canada has held that the interpretation of a standard form contract is a matter of law alone, and not a matter of mixed fact and law. Accordingly, it is not sufficient for a judge to arrive at a reasonable interpretation of a standard form contract: the interpretation must be correct or it may be set aside by an appellate court.

In this respect, the Supreme Court has decided that a different standard of review applies to standard form contracts than for contracts generally. In Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, [2014] 2 S.C.R. 633, the Supreme Court held that a decision of an arbitrator interpreting a contract amounted to a matter of mixed fact and law, and not just a question of law. Accordingly, the Supreme Court held that the B.C. Court of Appeal had no jurisdiction to grant leave to appeal on a matter of law from a decision of a trial court upholding the arbitral award.

So, in Canada there are two kinds of contract which involve two different kinds of contractual interpretation:

General contracts; The interpretation of these contracts amounts to a question of mixed fact and law. Appellate courts will show great defence to a trial judge’s decision interpreting the contract.

Standard form contracts: The interpretation of these contracts amounts to a question of law alone. Appellate courts may reverse the trial judge’s decision if that decision is not correct.

For those involved in arbitration, the question is whether these two standards will be imported into the review of arbitral decisions.

The Supreme Court’s decision in Ledcor v. Northbridge also contains an extremely important ruling with respect to the exclusion for faulty workmanship contained in most Builders’ Risk insurance policies. This aspect of the decision was discussed by me in an article dated September 17, 2016. The present article addresses the “standard of review” issue.

Background

As discussed in my previous article, the Ledcor v. Northbridge case arose from damage done to the windows of a building under construction. Before the project was completed, the owner hired cleaners to clean the windows. The clearers used improper tools and methods and scratched the windows. The windows had to be replaced and the building’s owner and the general contractor claimed the replacement cost under the Builders’ Risk insurance policy covering the project. The insurers denied coverage, asserting that the claim fell within the policy’s exclusion for the “cost of making good faulty workmanship”.

The Alberta trial judge held that the clause was ambiguous and applied the contra proferentem rule to find that the claim was not excluded. The Alberta Court of Appeal reversed the trial judge’s decision. It concluded that the damage to the windows was excluded because it was directly caused by the intentional scraping and wiping motions involved in the cleaners’ work.

Accordingly, the appeal before the Supreme Court of Canada involved the application of two sets of principles.

First, the principles relating to the interpretation of contracts – in this case, an insurance contract.

Second, the principles to be applied to an appellate court’s review of a lower court’s decision interpreting a contract. It is this second aspect of the Supreme Court’s decision which is notable because the court applied a different standard of review than it had very recently pronounced in Sattva.

The Sattva Decision

In Sattva, the Supreme Court held that the interpretation of a contract is a question of mixed fact and law. Because a contract is negotiated in a factual setting, the interpretation of the contract is not just a matter of examining the words of the contract, but also examining the facts which gave rise to the contract.

Under s. 31(2) of the British Columbia Arbitration Act, the arbitrator’s award could only be appealed if the appeal raised “questions of law”. The judge of the B.C. trial division dismissed the appeal from the arbitral award, holding that the interpretation of the contract by the arbitrator raised a question of mixed fact and law, not a question of law. The Supreme Court agreed with that view. Accordingly, the Supreme Court held that the B.C. Court of Appeal erred in hearing the appeal since there was no question of law properly before the Court of Appeal over which that court had jurisdiction.

The Ledcor decision

In Ledcor, the majority of the Supreme Court held that the reasons for its decision in Sattva do not apply to the interpretation of a standard form contract, for several reasons.

First, there is no relevant factual matrix in which a standard form is signed. A standard form contract is prepared by one party and presented to the other side on a “take it or leave it” basis, with little or no negotiation between the parties. In the absence of a relevant factual matrix that could influence the proper interpretation of the contract, the interpretation should be characterized as a matter of law.

Second, the interpretation of a standard form contract applies to all users of that contract. The contract cannot have a different meaning for some parties than for others. For this additional reason, the interpretation of the contract should be seen as a matter of law. This is particularly so for insurance contracts which are usually prepared as “standard form policies” and are provided by the insurer to the insured without negotiation, except as to the amount of the premium.

Third, a standard of correctness properly sorts out the responsibilities of trial judges and appellate courts. The function of trial judges is to make factual finding. The function of appellate courts is to decide legal principles that will be applied by and to society at large, and not just those who are parties to the immediate dispute. In this setting, it is more appropriate that the review by an appellate court of a trial judge’s interpretation of a standard form contract be conducted on a standard of correctness. As the majority said, “ensuring consistency in the law and reforming the law” is the function of appellate courts.   By “selecting one interpretation over the other as correct” the appellate court provides “certainty and predictability.” For all these reasons, there is one correct interpretation of a standard form contract, and if the trial judge does not come to the correct conclusion, then the appellate court may set it aside.

Justice Cromwell dissented. In his view, all contracts have a factual matrix. Even standard form contracts involve surrounding facts, including the market, industry or setting in which they exist, their purpose, the parties’ reasonable expectations and commercial reality, etc. For this reason, there is not a sufficient generality associated with a standard form contract to turn its interpretation into a question of law.

Discussion

There are a number of interesting aspects to the Ledcor decision.

First, one may ask whether it is a practical or commercially sensible to differentiate between general contracts and standard form contracts. What if the contract is partly standard form and partly negotiated? Does the “correctness standard apply to part of the contract, or part of the judge’s decision, but not to the balance? Can the two parts be separated?

Second, what amounts to a “standard form contract” for the purposes of Ledcor? This is an important issue in the construction industry. “Standard form” construction contracts, such as the CCDC contracts prepared by the Canadian Construction Document Committee, are not prepared by one party or one side of the industry and presented to the other on a “take it or leave it” basis. Rather, they are prepared by the consensus of the participants on all sides of the construction industry. Are these contracts “standard form contracts” within Ledcor?

Third, does the Ledcor decision apply to the review of arbitration awards involving standard form contracts? The Ledcor decision involved appellate review of a trial court decision, and the majority of the Supreme Court decided that that review should have been conducted on a correctness standard. One of the factors in its decision was the relationship between trial judges and appellate courts which, in the Supreme Court’s view, supported a correctness standard of review. In Sattva, the original decision being reviewed was an arbitral award that was appealed to the superior court. The Supreme Court ultimately decided that appellate review of the superior court’s decision did not involve a pure question of law, but a question of mixed fact and law. Does the fact that Sattva originally involved an arbitration decision and Ledcor originally involved a court decision make a difference? And if an arbitrator is dealing with a standard form contract, as opposed to a negotiated contract, does that make a difference?

Some provincial arbitration statutes allow the parties to appeal an arbitral award on a question of law, sometimes by agreement of the parties or with the court’s leave. Sattva involved such a statute, and the Supreme Court of Canada held that leave to appeal the trial court’s decision reviewing the arbitral award should not have been granted under the B.C. arbitration statute since the interpretation of the contract in question did not involve a question of law, but rather a question of mixed fact and law. If the contract had been a standard form contract, would the interpretation of the contract now be a matter of law under Ledcor?

In addition, are the roles of a judge and arbitrator in interpreting a contract, and is the relationship of a judge and arbitrator to an appellate court, the same? Is the arbitrator, even though selected by the parties and selected because of his or her expertise and knowledge of the industry, bound to approach the interpretation of the contract in exactly the same way as a judge?

In the net result, is a decision of an arbitrator under a CCDC contract reviewable by a court on a standard of correctness? If so, the “hands off” approach of courts toward arbitration, which has been the trend in arbitration law over the last twenty years, may be changed by Ledcor.

See Heintzman and Goldsmith on Canadian Building Contracts (5th ed.), chapter 11, part 11.

Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co, 2016 SCC 37

Contracts – interpretation of contracts – standard of review – questions of law and mixed fact and law

Thomas G. Heintzman O.C., Q.C., FCIArb                             October 10, 2016

www.heintzmanadr.com

www.constructionlawcanada.com

Should The Interpretation Of A Standard Form Contract Be Reviewed According To A Standard Of Legal Correctness?

Construction and builders liens

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.