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The Correct Approach to Contractual Interpretation

The Supreme Court of Canada’s freshly released Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co. provides welcome clarification to contract law generally and insurance law specifically. By holding that appellate courts are to review interpretation of “standard form” contracts on a correctness standard, the court protects the rule of law. The decision should also promote access to civil justice.

Background to the Decision

Historically, trial judges’ interpretations of contracts were considered legal questions meaning that such interpretations are to be reviewed by appellate courts on a correctness standard. But in its 2014 decision Sattva Capital Corp. v. Creston Moly Corp. (which the ARL Editors previously discussed here), the Court held that contractual interpretation is a “question of mixed fact and law” and should generally be overturned by appellate courts only in the presence of a “palpable and overriding error.” Two primary rationales were given for this change in the law. First, contracts take place in a specific factual context, and that factual context is relevant to the contract’s meaning. Second, it is not in the interests of judicial economy to have appellate courts interfering with a trial judge’s interpretation of a contract, particularly given that the interpretation of a contract will not generally create any significant precedential value.

Since Sattva, several appeal courts have noted that these rationales do not appear to apply to “standard form” contracts such as insurance contracts. The reasons for this were perhaps most succinctly summarized by Justice Hourigan of the Ontario Court of Appeal in MacDonald v. Chicago Title Insurance Company of Canada. Justice Hourigan noted that searching for the “intent of the parties” in the case of a standard-form contract is merely a “legal fiction” given that such contracts are presented on a take-it-or-leave-it basis. Moreover, given the fact that many parties sign the same standard-form contract, it is important for appellate courts to ensure that a correct precedent is set when courts interpret it.

In Ledcor, Justice Wagner, for a majority of the Court, essentially agreed with Justice Hourigan’s reasons from MacDonald. He therefore held that standard form contracts are to be an “exception” to the rule in Sattva that contractual interpretation is to be reviewed on a standard of palpable and overriding error.

A Welcome Result and Potential New Ways Forward

Ledcor is a welcome result for several reasons. First, the rationales noted by Justices Hourigan and Wagner for reviewing standard form contracts on a correctness standard are simply very compelling. Second, given the precedential value created by the interpretation of a standard form contract, the rule of law mandates that appellate courts review the interpretation on a correctness standard. Otherwise, inconsistent results may occur. This is inimical to the rule of law, for the same reason that inconsistent results by an administrative decision-maker are antithetical to the rule of law (as I discussed here). Third, providing consistency in this way assists in achieving access to civil justice. In the absence of a binding precedent, parties may be tempted to have “roll the dice” in court in the interpretation of a contract. This could lead to a proliferation of lawsuits, costing the parties time and expense, and also preventing others from having their day in court. In other words, the costs of a single appeal can be more than offset by countless saved trials.