Standard of review was once referred to by Binnie J. (in the administrative law context) as a matter of "law office metaphysics" (see: Dunsmuir v. New Brunswick, 2008 SCC 9 at para. 122). The same might be said of appellate standard of review. In Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co., 2016 SCC 37 ("Ledcor"), the Supreme Court of Canada revised its approach to appellate standard of review for contractual interpretation, established in Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53 ("Sattva"), by creating an exception for standard form contracts whereby such contracts will be reviewed as a question of law on the standard of correctness, as opposed to the usual standard of palpable and overriding error for contractual interpretation.
At issue in Ledcor was the interpretation of several "builders' risk" insurance policies and, in particular, an exception for "faulty workmanship."
During the construction of a building in Edmonton, the company contracted to clean the windows used improper tools and methods and scratched the windows so badly that they needed to be replaced at an estimated cost of $2.5 million.
The insurers denied coverage on the basis of an exclusion for faulty workmanship that provided:
This policy section does not insure:
(b) The cost of making good faulty workmanship ... unless physical damage ... results, in which event this policy shall insure such resulting damage.
The insureds did not deny the damage to the windows was the result of faulty workmanship; however, they argued that the expense of replacing the windows constituted resulting damage and thus fell within that exception to the exclusion. The insurers, unsurprisingly, argued that it constituted no more than the cost of "making good" the subcontractor's faulty workmanship and thus was excluded.
While Ledcor largely turned on a detailed analysis of the exclusion clause, it also raised an issue regarding the applicability of the standard of review for matters of contractual interpretation. In Sattva, Rothstein J. held that contractual interpretation generally gives rise to a mixed question of fact and law and the appropriate standard of appellate review is palpable and overriding error. In overturning the trial judge's decision that had favoured the insureds, the Alberta Court of Appeal applied the correctness standard of review. In Ledcor, Wagner J. also applied the correctness standard of review, explaining at para. 24 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.
This constitutes an exception to the holding in Sattva that contractual interpretation is a question of mixed fact and law that is subject to a deferential standard of review on appeal.
Justice Wagner explained that the two reasons given in Sattva for concluding that matters of contractual interpretation are subject to deferential review on appeal are less compelling for standard form contracts.
The first reason is the factual matrix in which the contract was formed. In Sattva this was of great importance as the contract in question was a complicated commercial agreement negotiated between two parties with relatively equal bargaining power. For a standard form contract such as the builders' risk policies in issue in Ledcor, however, the factual matrix is of limited significance, as such contracts are presented to the receiving party as a "take-it-or-leave-it" proposition. There is no negotiation in any meaningful sense.
The second reason cited in Sattva to justify deference to a trial judge's contractual interpretation is that contractual interpretation does not fit well within the definition of a pure question of law. Contractual interpretation is generally a question of mixed fact and law, defined as applying a legal standard to a set of facts. However, Wagner J. was of the view that where a standard form contract is involved, contractual interpretation is more appropriately classified as a question of law.
Unlike many contracts, standard form contracts may be used by a company with all of its customers or throughout an entire industry. As a result, the interpretation of such a contract could affect many people outside of the immediate litigation, as it is likely to have a precedential effect on future interpretation of the same or similar contracts. The mandate of appellate courts to ensure consistency of the law is advanced by reviewing the interpretation of such contracts on the standard of review of correctness, especially where there is nothing particularly unusual about the factual matrix in which the contract was made.
The interpretation of the exclusion clause in Ledcor by Wagner J. demonstrates the insignificance of the factual matrix in the interpretation of standard form contracts and the relative importance of the "reasonable expectations" of the parties generically. The analysis of the exclusion clause refers to no evidence regarding the circumstances that led to the formation of the insurance contracts in question. Justice Wagner relied extensively, however, on commentary regarding the purpose of builders' risks insurance and the expectations of parties in the construction industry that coverage under such policies will be broad in nature.
The exception created in Ledcor for standard form contracts is clearly intended to reduce the need for litigation by confirming the precedential effect of the interpretation of a standard form contract.