Canada: Ledcor Decision Considers Standard Of Review And Insurance Policy Exclusion Clause

Last Updated: September 27 2016
Article by Mark E. Fancourt-Smith

On September 15, 2016, the Supreme Court of Canada (the "SCC) released its decision in Ledcor Construction Ltd. v Northbridge Indemnity Insurance (2016 SCC 37). In its decision, the Court considered the appropriate standard of review for standard form contracts, as well as the proper interpretation of an insurance policy exclusion clause.

Writing for all but Justice Cromwell, Justice Wagner held that – in most cases – the interpretation of standard form contracts (such as insurance policies) is a question of law and that such contracts thus constitute an exception to the rule in Sattva Capital Corp. v Creston Moly Corp. (2014 SCC 53), which held that contractual interpretation is a question of mixed fact and law. Additionally, Justice Wagner held that an exclusion clause, when ambiguous, is to be interpreted using the general principles of contractual construction, including the reasonable expectations of the parties, and the need for realistic and consistent results.

Though Justice Cromwell agreed with the rest of the Court in its disposition of the matter, he disagreed with its creation of the Sattva exception for standard form contracts. Furthermore, unlike the rest of the Court, Justice Cromwell did not find the exclusion clause to be ambiguous.

Window Washing Gone Awry

Station Lands, the owner of the newly-built EPCOR Tower in Edmonton, hired Bristol Cleaning to clean the tower's windows while the building was still under construction. As is standard across the construction industry, Station Lands held all-risk property insurance for the construction project. In the course of its work, Bristol damaged the tower's windows, requiring them to be replaced at a cost of $2.5 million. Station Lands, along with Ledcor Construction Ltd. (its general contractor), claimed the cost of replacement against the insurance policy. The insurers denied the claim, on the basis that an exclusion clause excluded coverage for faulty workmanship.

4(A) Exclusions
This policy section does not insure: ... (b) The cost of making good faulty workmanship, construction materials or design unless physical damage not otherwise excluded by this policy results, in which event this policy shall insure such resulting damage.

(the "Exclusion Clause")

The Court of Queen's Bench of Alberta found that Bristol's work constituted 'faulty workmanship', but that the Exclusion Clause did not exclude coverage of the damage resulting from Bristol's work. However, the trial judge found the Exclusion Clause ambiguous, and only found for Station Lands and Ledcor, i.e.: that only the cost of redoing the cleaning work was excluded, after applying the contra proferentem rule against the insurers.

The Alberta Court of Appeal reversed the trial judge's decision, holding that the damage to the windows was excluded from coverage under the insurance policy. The Court of Appeal arrived at this decision by interpreting the insurance policy on the correctness standard of review, and creating a new test of "physical or systematic connectedness".

SCC: Standard Form Contracts – An Exception to the Sattva Rule

In finding that standard form contracts generally constitute an exception to the Sattva rule and that their "interpretation is best characterized as a question of law subject to correctness review" (Ledcor at para 24), the SCC provided guidance on a matter that has divided courts since 2014. In holding thus, Justice Wagner noted that standard form contracts usually have no 'meaningful factual matrix' specific to the signing parties, as such contracts are often signed without negotiation or modification. Further, since standard contracts (by definition) are generally standard across parties, their interpretation ought to attract greater precedential value than contracts that have been tailored to the individual parties' needs.

SCC: Ambiguity and the Exclusion in the Exclusion Clause

In interpreting the Exclusion Clause, Justice Wagner noted the general rules of contract construction ought to be used when interpreting ambiguous language in insurance policies. Finding the Exclusion Clause is ambiguous, Justice Wagner interpreted it by addressing the reasonable expectations of the parties, and the need for realistic and consistent results. Furthermore, he looked to Bristol's contract to determine that it had been hired to clean windows – and not "to install windows in good condition" (Ledcor at para 87).

Ultimately, Justice Wagner held that the Exclusion Clause only operated to exclude the cost of re-washing the windows from coverage under the insurance policy. The cost of re-installing the windows as a result of the damage done to them by Bristol constituted "physical damage not otherwise excluded" by the insurance policy, and was thus covered.

Takeaways

At first glance, the SCC's judgment in Ledcor provides much-needed guidance to lower courts on the interpretation of standard form contracts in a post-Sattva age. However, just as Justice Rothstein in Sattva left open the possibility for contracts to be interpreted as questions of law, in Ledcor, Justice Wagner leaves open the possibility for standard form contracts to be interpreted as questions of mixed fact and law in cases where a meaningful factual matrix exists or where a standard form contract has been modified.

Furthermore, with respect to the insurance policy exclusion clause, the Court appears to come down heavily on the side of the insured. Indeed, through judicial interpretation of the insurance policy and a narrow reading of Bristol's contract, the Court understands the Exclusion Clause as excluding very little from insurance coverage. However, the Court's decision on this issue rests on Justice Wagner's finding that the insurance policy's language is ambiguous. Were judges to find otherwise, Ledcor would instruct them to read the contract as a whole.

As such, though the SCC's judgment in Ledcor provides guidance and creates an exception to the Sattva rule and signals the Court's inclination towards the insured, it leaves open sufficient space for lower courts to interpret standard form contracts and insurance policy exclusion clauses differently.

With thanks to articling student Nabila Pirani for her assistance.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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