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