Canada: Not Your Standard "Standard-Form" Contract: The Interpretation Of Contracts On Appeal

Standard-form contracts are ubiquitous. From insurance to real estate, template agreements are the most common form of contractual obligation between Canadian consumers and the industries that affect their daily lives. This is why the way Courts interpret these agreements is so important.

In its 2016 decision, Ledcor v. Northbridge, 2016 SCC 37, the Supreme Court of Canada made it clear that while a lower Court's interpretation of a contract normally attracts a deferential standard of review on appeal (i.e. the appellate Court will defer to how the lower Court interpreted the language and context of the agreement), this may not be the case with a "standard-form" contract. 

If the interpretation of a standard-form agreement has "precedential value" and there is no meaningful "factual matrix" underlying the formation of the contract, appeal Courts will not defer to the lower Court's interpretation. The interpretation exercise in such cases is a question of law, subject to the less deferential "correctness" standard of review.

A recent decision of the Ontario Court of Appeal, Himidan v. Farquharson, 2019 ONCA 575, however, recognizes that not all standard-form agreements are created equal.  

The interpretation of a standard-form contract may still be subject to a deferential standard of review on appeal if the parties made changes to the agreement. 

This is because, in such cases, the "factual matrix" underlying the formation of the contract is relevant to its interpretation. The normal rules regarding the standard of review on contractual interpretation apply—the interpretation of the contract raises a question of "mixed fact and law" subject to deference.

Not All Agreements of Purchase and Sale Are the Same

Himidan involved an action by the buyer of a residential property who had entered into an agreement of purchase and sale (the "APS") with the defendant seller.

Before the parties had signed the APS, the seller had advertised the property as including a private driveway. The buyers viewed the property before putting in an offer. At the time, the driveway appeared to include a driveway, which led to a garage. There was also a fence which separated the driveway from the neighbouring property.

The APS included two modified Schedules which made mention of the driveway.   Schedule "D" to the APS was a 1987 survey of the property which showed a private driveway of 26 by 7 feet. Schedule "B" to the APS stated that "the subject property driveway is owned by 45 Moore Avenue, but is subject to a right of way.  The driveway functions as a private driveway".

After the parties entered into the APS, but before closing, the owners of the neighbouring property to the one being sold alleged that the seller did not own all of what appeared to be the driveway. The neighbours then fenced off a two-foot-wide strip along the driveway, claiming that part of the driveway as their own.

The buyer refused to close under the APS. The seller could not convey clear title to the entire driveway. 

The seller then started a civil action in Court against the buyer for failing to close. The buyer counterclaimed for a return of their deposit. Each party brought a motion for summary judgment.

The motion judge found in favour of the buyers. She held that the APS represented that the seller owned what was visually apparent as the functioning part of the driveway at the time the APS was executed. There was accordingly a defect in the seller's title and the buyers had the right to refuse to close.

On appeal, the sellers argued that the motion judge erred in her interpretation of the APS.  According to the sellers, properly interpreted, the APS provided that the sellers had only agreed to sell the home with a seven-foot driveway. The fact that the driveway appeared to be nine-feet wide when the APS was executed was irrelevant under the APS.

The Court of Appeal disagreed. It upheld the motion judge's interpretation of the APS on appeal.

Deference to a Modified "Standard-Form" Agreement

One the arguments advanced by the sellers in Himidan is that the less deferential standard of review of "correctness" should apply to the motion judge's interpretation of the APS.

According to the sellers, the APS represented a "standard-form" contract. Applying the reasoning in Ledcor, supra, standard-form contracts attract a less deferential standard of review because the "factual matrix" surrounding the formation of the contract is not at issue. Moreover, the Court's interpretation of the contract will have precedential value, given that the contract applies to future cases involving the same contract.

The Court of Appeal rejected the sellers' argument. Citing Sattva Capital Corp. v. Creston Molly Corp., 2014 SCC 53, the Court held that, normally, contractual interpretation is a question of mixed fact and law attracting a deferential standard of review.

The fact that, in this case, the APS was, at least in part, a "standard-form" contract did not take this case out of the Sattva principle. This is because the "factual matrix" was actually relevant in this case—the APS, at the time of execution, included Schedules particular to the parties' agreement. In this way, the APS was not an ordinary "standard form" agreement:

Nor is this a case attracting a correctness standard of review because the APS in part uses a standard form. This is not a case of a standard form contract entered into under circumstances where there is no relevant factual matrix, such as a contract of adhesion. Some of the disputed clauses of the APS are not part of the pre-printed standard form contract, but were added as Schedules. And there is a factual matrix concerning the matter that is specific to these parties and assists in interpreting the APS. A deferential standard of review is thus applicable...

In keeping with this approach, the Schedules to the APS figured prominently in the Court of Appeal's contractual interpretation exercise. The Court noted that despite the language of the Schedules, which the sellers argued implied that they were selling a seven-foot driveway, the mutual intention of the parties was that the buyers were always purchasing the driveway they visually saw on the property. The "physical and visual appearance of the property at the time of the contract were objective facts known to the parties" and were useful in interpreting the description of the property in the APS.

Accordingly, deference was owed to the motion judge's conclusion that the title defect allowed the purchasers to refuse to close.

Not an Ordinary "Standard Form"

Himidan represents an important clarification regarding the standard of review applicable to contractual interpretations by a lower Court. 

The principle that the interpretation of a standard-form agreement attracts a less deferential standard of review is not set in stone.  

The appeal Court must still look to the issue of whether the factual matrix surrounding the formation of the contract is relevant. If so—if, as in this case, the parties modified or expanded upon the standard language of the agreement—then the contract is to be treated like any other on appeal.  Its interpretation is subject to deference.

The reasoning in Himidan has significant implications for service industries that use standard-form contracts. If the parties have the discretion to alter the language of their agreements, then it is unlikely an appeal Court will defer to the standard interpretation of the agreement. The changes to the contract makes it unique, at least in the eyes of the law.

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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