Canada: Ledcor Construction Limited v Northbridge Indemnity Insurance Company: The SCC Revisits Sattva On Standard Of Review For Contractual Interpretation

While initially heralded as a transformative for the law of contractual interpretation and appellate intervention, the legacy of Sattva Capital Corp v Creston Moly has become more complicated as the Supreme Court begins to revisit this case.

Sattva arose in the context of a finder's fee agreement. An arbitrator's interpretation of this agreement entitled Sattva to a finder's fee, the size of which Creston disputed. The arbitral award led to a dizzying string of appeals, culminating at the Supreme Court. Historically, contractual interpretation had been viewed as a question of pure law, reviewable under a correctness standard of appellate review. In Sattva, the Supreme Court reversed this historical standard. The Court's finding that contractual interpretation amounted to a question of mixed fact and law had immediate implications for the appellate standard of review, requiring the application of a very deferential standard of palpable and overriding error. Nonetheless, Sattva left room for provincial appellate courts to review cases involving contractual interpretation on the historical correctness standard where an extricable question of law could be identified.

Following Sattva, a growing chorus of dissent emerged from the provincial appellate courts about the standard of review that applied to the interpretation of standard form contracts. This dissent culminated in Ledcor Construction Ltd. v Northbridge Indemnity Insurance Co., in which the Supreme Court clarified how its decision in Sattva should be interpreted in the context of standard form contracts. In Ledcor, a contractor was hired to clean the windows of a building under construction, but in doing so damaged its windows. The windows' replacement cost was claimed under a builders' risk insurance policy, but the insurers denied coverage under an exclusion clause. At issue was the proper interpretation of the exclusion clause in the standard-form insurance contract. At trial, the judge concluded the windows' replacement cost was not excluded. Applying a correctness standard of review, the Alberta Court of Appeal overturned the trial judge's decision. Taking the opportunity to revisit its decision in Sattva, the Supreme Court found that the Alberta Court of Appeal had applied the appropriate standard of review.

In Ledcor, the Supreme Court recognized a possible exception to its holding in Sattva, finding that where: (i) an appeal involves the interpretation of a standard form contract, (ii) the interpretation at issue is of precedential value, and (iii) there is no meaningful factual matrix that is specific to the particular parties to assist in the interpretation process, this interpretation is better characterized as a question of law, subject to a correctness standard of review. The Court found that the reasons underlying the decision in Sattva are generally "less compelling in the context of standard form contracts". First, the factual matrix surrounding the formation of the contract is less relevant to adhesion contracts, where parties have not negotiated terms. Second, the interpretation of standard form contracts – which are typically highly-specialized in nature and widely distributed to customers without negotiation of their terms – may have significant precedential value. Consistency in the interpretation of such contracts may be of interest to the legal system in the future. This is not to say that following Ledcor the interpretation of a standard form contract will always be a question of law; rather, the Supreme Court left this determination to the provincial appellate courts.

In the wake of Ledcor, it remains to be seen whether the Supreme Court will further clarify its decision in Sattva. One opportunity to do so will arise when the Court hears the appeal of Teal Cedar Products v British Columbia in November 2016. This case relates to a settlement agreement between Teal Cedar and the Province of British Columbia under the B.C. Forestry Revitalization Act. In Teal Cedar, an arbitrator awarded interest on the settlement award to Teal Cedar, notwithstanding a clause in an addendum to the settlement agreement which the Province submitted precluded an award of interest. The Alberta Court of Appeal determined that the appropriate standard of review was correctness in relation to both the arbitrator's statutory and contractual interpretation in that case. Considering the arbitrator's statutory interpretation, the Court of Appeal found that no deference was owed to the arbitrator, who had no special expertise in the legislation at issue. With regard to contractual interpretation, the Court of Appeal found that an extricable question of law had arisen as to whether the arbitrator had incorrectly allowed the surrounding circumstances to overwhelm the words of the settlement agreement. In the appeal of Teal Cedar, the Supreme Court will have an opportunity to weigh in on the standard of review applicable to commercial arbitrations which engage both statutory and contractual interpretation. The Court will also have the chance to clarify whether allowing the surrounding circumstances to overwhelm the words of an agreement is an "incorrect legal principle" which attracts a correctness standard. It remains to be seen what further guidance we will see from the Court in the post-Sattva era.

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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