Canadian Contractual Interpretation Just Got More Difficult

Bennett Jones LLP

[co-author: Jonathan McDaniel – Student-at-Law]

Supreme Court of Canada Revives Correctness Test for Interpreting Standard Form Contracts

There is a new exception to the new Canadian approach for reviewing the interpretation of contracts: a trial court’s interpretation of a standard form contract may be reviewed on appeal on the standard of correctness, rather than the usual standard of palpable and overriding error, the Supreme Court of Canada recently held in Ledcor Construction Ltd v Northbridge Indemnity Insurance Co, 2016 SCC 37 [Ledcor]. The Court stated that in most circumstances, the interpretation of a standard form contract will be a question of law, rather than a question of mixed law and fact, thus attracting a less deferential standard.

As discussed in a previous blog, the Supreme Court of Canada in Creston Moly Corp v Sattva Capital Corp, 2014 SCC 53 [Sattva], a ground breaking 2014 decision, held that “contractual interpretation is a question of mixed fact and law subject to deferential review on appeal,” unless there is an “extricable question of law” at issue. As such, the palpable and overriding error standard of review, rather than correctness, normally applies. This means that an appeal court will only overrule the interpretation given to a contract by a trial judge where the interpretation is unreasonable, or is palpably and overridingly wrong, not merely because the appeal court would interpret the contract differently itself.  This results in it being much more difficult to overturn a trial decision on appeal. For standard form contracts, however, there is now an exception to this general rule. A standard form contract has been described as “a standard printed form that the party proffering the document invariably uses when entering transactions of [that] kind.” Subject to the additional considerations noted below, a trial judge’s interpretation of a standard form contract must be correct, allowing an appeal court to overturn a trial judge’s interpretation when the appeal court disagrees with that interpretation. In such cases there is no longer any need for the interpretation of a standard form contract to be unreasonable or subject to a palpable and overriding error before it is overturned. It is once again easier to overturn a trial court decision on a standard form contract.

The facts of Ledcor involved a plaintiff construction company and building owner seeking to recover from their builder’s risk insurer the cost of replacing windows that had been damaged by window cleaners. The plaintiffs’ recovery depended on the interpretation of an exclusion clause in the policy, which excluded coverage for the “cost of making good faulty workmanship”. The policy was a standard form, and the Court noted that such contracts are commonly used in the insurance business.

In considering the applicable standard of review, the Supreme Court explicitly recognized an exception to the rule laid down in Sattva. The Court indicated that in the case of standard form contracts, the proper interpretation of the contract may be a question of law and thus subject to review on the standard of correctness. In particular, the Court held that “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.”

On the factual matrix consideration, the Court stated that in the case of most standard form contracts, the factual matrix will be “less relevant” to the interpretive exercise. While the Court must still consider things like “the purpose of the contract, [and] the nature of the relationship it creates,” these will in most cases be the same for all parties who enter into a given standard form contract. As such, “the first reason given in Sattva for concluding that contractual interpretation is a question of mixed fact and law — the importance of the factual matrix — carries less weight in cases involving standard form contracts.”

A second reason given by the Court in Sattva that contractual interpretation is a question of mixed fact and law was that “contractual interpretation does not fit within the definition of a pure question of law”. In Ledcor, the Court recognized that a “standard form contract could affect many people” and have precedential value. The role of appellate courts – to ensure “the consistency in the law” – would be furthered by permitting appellate review of standard form contracts on the correctness standard. The Court stated that “[e]stablishing 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.”

However, the Court also noted that …

[d]epending on the circumstances … 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.

On the facts of Ledcor, the Court held that the interpretation of the standard form insurance policy was reviewable on a standard of correctness. Ultimately the Court overturned the Alberta Court of Appeal’s interpretation of the exclusion clause and discussed at length the specific principles applicable to the interpretation of insurance contracts.

It is clear that Ledcor has laid down an explicit exception to the rule in Sattva. Where the interpretation is of precedential value and there is no meaningful factual matrix, appellate courts are now empowered to review the interpretation of standard form contracts on a standard of correctness. While Ledcor involved a standard form contract in the insurance industry, the standard of review principles are not limited to insurance contracts. Rather, Ledcor has implications for all companies which use such contracts, including telecommunication companies, banks, and energy companies using CAPL contracts. Following Ledcor, once the interpretation of a provision in a standard form contract has been judicially settled, it is more likely that this interpretation will be applied uniformly in subsequent cases.

Creating exceptions to what standard of review applies on appeal can also be expected to make contractual interpretation appeals longer and more complex. In the administrative law context, where different applicable standards of review are also common, parties routinely argue not only about the substance of the appeal, but also about what standard of review applies. The Court is inviting a similar approach in contract cases, where each side can be expected to argue about whether the contract in question is a standard form contract or not, depending on whether the correctness or palpable and overriding error standard is desired. This fight over the applicable standard of review has not generally been welcomed in the administrative law context, and it can be expected to receive a similar welcome in the sphere of contractual interpretation.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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