Canada: Through The Scratched Looking Glass: Sattva, Ledcor, Teal And Developments In The Law Of Contract

I. INTRODUCTION

The 2014 Sattva Capital Corp. v. Creston Moly Corp.¹ decision of the Supreme Court of Canada resulted in two significant changes to the law of contract in Canada. First, Sattva broadened the scope and availability of the use of surrounding circumstances for the purpose of contractual interpretation. Second, recognising the factual nature of those surrounding circumstances, the Court held that questions of contractual interpretation were questions of mixed law and fact. A deferential, rather than the traditional correctness, standard of review now applies to appeals on questions of contractual interpretation.

In the two and a half years since Sattva's release, Canadian courts have wrestled with how to apply these two changes, particularly as they relate to standard form contracts. The Supreme Court of Canada's Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co.² decision represents the resolution of the different lines of thought which developed as Canadian courts dealt with the question of how to apply Sattva.

Ledcor added clarity to the issue of interpreting standard form contracts, but questions remain as to the scope of the surrounding circumstances to be considered, when they should be considered (particularly when addressing non-ambiguous standard-form insurance contracts), and the standard of review for questions of contractual interpretation. Given the Ledcor majority's express reliance upon the surrounding circumstances to arrive at its finding, and given Sattva's clear, logical and unambiguous direction that contracts cannot be interpreted in a vacuum, this paper will argue that no special exception should arise for insurance contracts. It is hoped that future cases dealing with these issues will resolve this potential inconsistency in a principled manner, applying Sattva so that the surrounding circumstances will always have a role to play in the interpretive process, even absent a finding of ambiguity in the insurance policy language.

The above questions are discussed in this paper, along with an examination of the British Columbia Court of Appeal's British Columbia (Ministry of Forests) v. Teal Cedar Products Ltd.⁴ decision. The appeal of Teal was recently heard by the Supreme Court of Canada, and the Court rendered its judgment in June 2017.⁵ Teal may provide further clarity in terms of the appropriate standard of review in light of the fact-specific surrounding circumstances.

II. SATTVA AND THE INTERPRETATION OF CONTRACTS

1. Redefining Interpretative Principles

The interpretation of contracts has always been an exercise in determining the intent of the contracting parties. Sattva, however, placed a greater emphasis on the use of the surrounding circumstances — the extrinsic factual matrix surrounding the creation of an agreement — as part of the interpretive process.

Before Sattva, the leading case on the interpretation of contracts was Eli Lilly & Co. v. Novopharm Ltd.⁶ According to Eli Lilly, an agreement was to be interpreted based on the objective intentions of the parties, ''by reference to the words [the parties] used in drafting the document, possibly read in light of the surrounding circumstances which were prevalent at the time."⁷ Reference to the surrounding circumstances was possible, not mandatory. For an agreement that was ''clear and unambiguous on its face", the Supreme Court of Canada explained it was ''unnecessary to consider any extrinsic evidence".⁸ Accordingly, the ''surrounding circumstances", pre-Sattva, were not to be considered if the contract could be interpreted based on its clear and unambiguous wording.

With respect to contracts of insurance, this interpretive paradigm was used as recently as 2010 by the Supreme Court of Canada in Progressive Homes Ltd. v. Lombard General Insurance Co. of Canada.⁹ In Progressive Homes, Justice Rothstein identified a three-step process for the interpretation of insurance contracts:

• First, he held: ''The primary interpretive principle is that when the language of the policy is unambiguous, the court should give effect to clear language, reading the contract as a whole."¹⁰
• Second, he went on to explain that, in the face of ambiguity, courts will move on to ''rely on general rules of contract construction."¹¹ These rules include interpretations that are consistent with the reasonable expectations of the parties, that avoid unrealistic results, and that ensure that similar policies are construed consistently.¹² The rules of construction are ''applied to resolve ambiguity," and ''do not operate to create ambiguity where there is none in the first place."¹³
• Third, he noted further ''that where these rules of construction fail to resolve the ambiguity",¹⁴ the Court will:
• Firstly, construe the policy against the insurer (or contra proferentem); and
• Secondly, interpret coverage provisions broadly and exclusion clauses narrowly.¹⁵

In Progressive Homes, the Court recognized that these interpretative principles had been ''canvassed by this Court many times".¹⁶ These same interpretative principles are recognized in Ledcor.¹⁷

Prior to Sattva, principles of contractual interpretation arising from Eli Lilly, therefore, appeared consistent with the authorities that developed and delineated the appropriate fashion in which to interpret insurance law contracts. Sattva represented a significant departure from the approach endorsed in Eli Lilly as Sattva expanded when and how the surrounding circumstances are to be considered. While the Supreme Court reaffirmed ''the goal of the exercise is to ascertain the objective intent of the parties — a fact specific-goal — through the application of legal principles of interpretation",¹⁸ Sattva also significantly expanded the role of the factual matrix.

The factual matrix would no longer only be referenced in cases of ambiguity, as provided for by Eli Lily and Progressive Homes. The old rule, expressed by the Supreme Court of Canada in 1951 that ''where the language in a contract is clear and unambiguous it alone can be looked at to ascertain the intent of the parties", was no longer applicable.¹⁹ Rather, the surrounding circumstances were to be used in all cases (ambiguity or no ambiguity) to ''deepen a decision-maker's understanding of the mutual and objective intentions of the parties as expressed in the words of the contract."²⁰ The Court explained that ''consideration of the surrounding circumstances recognises that ascertaining contractual intention can be difficult when looking at words on their own, because words alone do not have an immutable or absolute meaning."²¹

The interpretive process outlined in Sattva is, as follows (emphasis added, illustrating Sattva's modification of the Eli-Lilly test):

No reference is made by the Supreme Court in Sattva to its own line of authorities delineating the appropriate principles of interpretation applicable to insurance law contracts. While insurance law contracts may have some specific interpretive rules related to the very nature of the contract (for example, the doctrine of contra proferentem, coverage clauses being given wide scope and exclusion clauses being given narrow scope, etc.), insurance policies are nonetheless contracts. In a post-Sattva world, the question then arose as to how to reconcile Sattva with the long line of insurance authorities from the Supreme Court of Canada, culminating in Progressive Homes.

2. Shifting the Standard of Review

The new focus on the factual matrix provided the Supreme Court of Canada with an opportunity to finalize a ''shift away from the historical approach" in Canada, which mandated that questions of contractual interpretation were questions of law and were to be reviewed on a standard of correctness.²³ The use of the surrounding circumstances, an inherently factual question, to ascertain the intent of the parties for the purposes of interpretation was seen to be ''closer to a question of mixed fact and law".²⁴ The Sattva Court held that contractual interpretation was, therefore, a question of ''mixed fact and law as it is an exercise in which the principles of contractual interpretation are applied to the words of the written contract, considered in light of the factual matrix."²⁵

Accordingly, Sattva represented a significant departure from the traditional and historical standard of review of contractual interpretation questions by appellate courts. A deferential, palpable and overriding error standard is now to be used, rather than the traditional correctness standard.

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Originally published by Carswell Annual Review of Civil Litigation 2017.

Footnotes

1 Sattva Capital Corp. v. Creston Moly Corp., [2014] 2 S.C.R. 633 (S.C.C.).

2 Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co., 2016SCC37 (S.C.C.).

4 British Columbia (Ministry of Forests) v. Teal Cedar Products Ltd., 2015 BCCA 263 (C.A.), leave to appeal allowed Teal Cedar Products Ltd. v. British Columbia, 2015 CarswellBC 4074 (S.C.C.).

5 Teal Cedar Products Ltd. v. British Columbia, 2017 SCC 32 (S.C.C.).

6 Eli Lilly Co. v. Novopharm Ltd., [1998] 2 S.C.R. 129 (S.C.C.).

7 Ibid. at para. 54 [emphasis added].

8 Ibid. at para. 55.

9 Progressive Homes Ltd. v. Lombard General Insurance Co. of Canada, [2010] 2 S.C.R. 245 (S.C.C.).

10 Ibid. at para. 22.

11 Ibid. at para. 23.

12 Ibid. at para. 23.

13 Ibid. at para. 23.

14 Ibid. at para. 24.

15 Ibid. at para. 24.

16 Ibid. at para. 21.

17 Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co., 2016 SCC 37 (S.C.C.) at paras. 49-52.

18 Sattva Capital Corp. v. Creston Moly Corp., [2014] 2 S.C.R. 633 (S.C.C.) at para. 49.

19 Indian Molybdenum Ltd. v. The King, [1951] 3 D.L.R. 497 (S.C.C.) at pp. 502-503 [D.L.R.].

20 Sattva Capital Corp. v. Creston Moly Corp., [2014] 2 S.C.R. 633 (S.C.C.) at para. 57.

21 Ibid. at para. 47.

22 Ibid. at para. 47.

23 Ibid. at para. 46.

24 Ibid. at para. 49.

25 Ibid. at para. 50.

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