Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co.

Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co.
Collection
Supreme Court Judgments
Date
2016-09-15
Neutral citation
2016 SCC 37
Report
[2016] 2 SCR 23
Case number
36452
Judges
McLachlin, Beverley; Abella, Rosalie Silberman; Cromwell, Thomas Albert; Moldaver, Michael J.; Karakatsanis, Andromache; Wagner, Richard; Gascon, Clément; Côté, Suzanne; Brown, Russell
On appeal from
Alberta
Notes
SCC Case Information: 36452
Decision Content
SUPREME COURT OF CANADA
Citation: Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co., 2016 SCC 37, [2016] 2 S.C.R. 23
Appeal heard: March 30, 2016
Judgment rendered: September 15, 2016
Docket: 36452
Between:
Ledcor Construction Limited
Appellant
and
Northbridge Indemnity Insurance Company,
Royal & Sun Alliance Insurance Company of Canada and
Chartis Insurance Company of Canada
Respondents
And Between:
Station Lands Ltd.
Appellant
and
Commonwealth Insurance Company,
GCAN Insurance Company and American Home Assurance Company
Respondents
Coram: McLachlin C.J. and Abella, Cromwell, Moldaver, Karakatsanis, Wagner, Gascon, Côté and Brown JJ.
Reasons for Judgment:
(paras. 1 to 97)
Reasons Concurring in the Result:
(paras. 98 to 128)
Wagner J. (McLachlin C.J. and Abella, Moldaver, Karakatsanis, Gascon, Côté and Brown JJ. concurring)
Cromwell J.
Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co., 2016 SCC 37, [2016] 2 S.C.R. 23
Ledcor Construction Limited Appellant
v.
Northbridge Indemnity Insurance Company,
Royal & Sun Alliance Insurance Company of Canada and
Chartis Insurance Company of Canada Respondents
‑ and ‑
Station Lands Ltd. Appellant
v.
Commonwealth Insurance Company,
GCAN Insurance Company and
American Home Assurance Company Respondents
Indexed as: Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co.
2016 SCC 37
File No.: 36452.
2016: March 30; 2016: September 15.
Present: McLachlin C.J. and Abella, Cromwell, Moldaver, Karakatsanis, Wagner, Gascon, Côté and Brown JJ.
on appeal from the court of appeal for alberta
Insurance — Property insurance — All risks policy — Exclusion clauses — Interpretation — Builders’ risk policy excluding from coverage cost of making good faulty workmanship — Windows of building under construction scratched by contractor hired to clean them and windows needing replacement — Whether faulty workmanship exclusion to coverage applicable.
Appeals — Courts — Standard of review — Contractual interpretation — Standard of appellate review applicable to trial judge’s interpretation of standard form insurance contract.
During construction, a building’s windows were scratched by the cleaners hired to clean them. The cleaners used improper tools and methods in carrying out their work, and as a result, the windows had to be replaced. The building’s owner and the general contractor in charge of the construction project claimed the cost of replacing the windows against a builders’ risk insurance policy issued in their favour and covering all contractors involved in the construction. The insurers denied coverage on the basis of an exclusion contained in the policy for the “cost of making good faulty workmanship”.
The trial judge held the insurers liable, finding that the exclusion clause was ambiguous and that the rule of contra proferentem applied against the insurers. The Court of Appeal reversed that decision. Applying the correctness standard of review to the interpretation of the policy, the court held that the trial judge had improperly applied the rule of contra proferentem because the exclusion clause was not ambiguous. The court devised a new test of physical or systemic connectedness to determine whether physical damage was excluded as the “cost of making good faulty workmanship” or covered as “resulting damage”. Based on this test, the court concluded that the damage to the windows was physical loss excluded from coverage, because it was not accidental or fortuitous, but was directly caused by the intentional scraping and wiping motions involved in the cleaners’ work.
Held: The appeals should be allowed.
Per McLachlin C.J. and Abella, Moldaver, Karakatsanis, Wagner, Gascon, Côté and Brown JJ.: The appropriate standard of review in this case is correctness. The interpretation of a standard form contract should be recognized as an exception to the Court’s holding in Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, [2014] 2 S.C.R. 633, that contractual interpretation is a question of mixed fact and law subject to deferential review on appeal. The first reason given in Sattva for concluding that contractual interpretation is a question of mixed fact and law — the importance of the factual matrix — carries less weight in cases involving standard form contracts. Indeed, while a proper understanding of the factual matrix of a case is crucial to the interpretation of many contracts, it is less relevant for standard form contracts because the parties do not negotiate the terms. The contract is put to the receiving party as a take‑it‑or‑leave‑it proposition. Factors such as the purpose of the contract, the nature of the relationship it creates, and the market or industry in which it operates should be considered when interpreting a standard form contract, but they are generally not inherently fact specific and will usually be the same for everyone who may be a party to a standard form contract.
Moreover, the interpretation of a standard form contract itself has precedential value and can therefore fit under the definition of a pure question of law. In general, the interpretation of a contract has no impact beyond the parties to a dispute. While precedents interpreting similar contractual language may be of some persuasive value, it is often the intentions of the parties, as reflected in the particular contractual wording at issue and informed by the surrounding circumstances of the contract, that predominate. In the case of standard form contracts, however, judicial precedent is more likely to be controlling. Establishing the proper interpretation of a standard form contract amounts to establishing the correct legal test, as the interpretation may be applied in future cases involving identical or similarly‑worded provisions. The mandate of appellate courts — ensuring consistency in the law — is also advanced by permitting them to review the interpretation of standard form contracts for correctness. The result of applying the interpretation in future cases will of course depend on the facts of those cases.
In this case, while the base coverage under the relevant clause of the policy is for physical loss or damages, the exclusion clause need not necessarily encompass physical damage because perfect mutual exclusivity between exclusions and the initial grant of coverage is neither provided for under the policy nor required when interpreting the exclusion clause. Accordingly, the physical or systemic connectedness test established by the Court of Appeal was unnecessary.
While the language of the exclusion clause is ambiguous, the general principles of contractual interpretation lead to the conclusion that the exclusion clause serves to exclude from coverage only the cost of redoing the faulty work, that is, the cost of recleaning the windows. The damage to the windows and therefore the cost of their replacement is covered. Given that the general rules of contract construction resolve the ambiguity, it is not necessary to turn to the contra proferentem rule.
This interpretation is consistent with the reasonable expectations of the parties and reflects and promotes the purpose of builders’ risk policies. The broad coverage provided in exchange for relatively high premiums provides certainty, stability and peace of mind, and ensures construction projects do not grind to a halt because of disputes and potential litigation about liability for replacement or repair amongst various contractors involved. An interpretation of the exclusion clause that precludes from coverage any and all damage resulting from a contractor’s faulty workmanship merely because the damage results to that part of the project on which the contractor was working would undermine the purpose behind builders’ risk policies and would deprive insureds of the coverage for which they contracted. Moreover, interpreting the exclusion clause to preclude from coverage only the cost of redoing the faulty work aligns with commercial reality and leads to realistic and sensible results, given both the purpose underlying builders’ risk policies and their spreading of risk on construction projects. Such an interpretation is also consistent with the jurisprudence.
Per Cromwell J.: There is agreement as to the disposition of the appeals. The trial judge made no legal error because he properly described and applied the Court’s decision in Progressive Homes Ltd. v. Lombard General Insurance Co. of Canada, 2010 SCC 33, [2010] 2 S.C.R. 245.
However, the applicable standard of review is that of palpable and overriding error. As the Court held in Housen v. Nikolaisen, 2002 SCC 33, [2002] 2 S.C.R. 235, the general principles of appellate review in civil cases turn on characterizing the nature of the question being reviewed as one of fact, law or mixed fact and law. Questions of law are reviewed for correctness and questions of fact are reviewed for palpable and overriding error. Applying a legal standard to the facts is a question of mixed fact and law and is generally reviewable on appeal for palpable and overriding error. In rare cases, where the basis for a finding under review can be traced to a pure legal error, such as a wrong characterization of the legal test or the failure to consider a required element of the applicable standard, the reviewing court can extricate a purely legal question from the trial court’s analysis and apply the correctness standard to it.
The Court’s recent decision in Sattva brought appellate review in contract cases within this general framework. Applying the text of a contract to a particular fact situation involves applying the legal standard set by the contract to the facts of the situation at hand. Accordingly, a trial judge’s interpretation of the contract generally gives rise to a mixed question of law and fact and should be reviewable on appeal for palpable and overriding error. Contractual interpretation is generally not a pure question of law because it involves understanding the words used in light of a number of contextual factors beyond negotiation, including the purpose of the agreement, the nature of the relationship between the parties, and the market in which the parties are operating.
There is no reason for the interpretation of certain types of contracts such as standard form contracts to be excluded from the general principles that apply to appellate review in civil cases. Whether or not a contract is a standard form does not indicate anything about the degree to which it is concerned with a general legal proposition so as to attract correctness review. To ask the question in terms of precedential value rather than the generality of the legal principle in issue simply sends the analysis back to the question of the degree of generality. The more general the principle, the more the precedential value. Moreover, the absence of a factual matrix is not of much assistance, because like all contracts, standard form contracts have many surrounding circumstances — they have a purpose, they create a relationship of a particular nature between the parties, and they frequently operate within a particular market or industry — which must be taken into account in interpreting the text of the contract.
The question the present case raises involves applying a legal standard to a set of facts and does not give rise to any extricable question of law. The legal principle is that “making good faulty workmanship” means “the cost of redoing the faulty work”. This principle does not operate at a very high level of generality. Applying that principle turns on the scope of the faulty work and the nature of redoing it, and its application in other cases will ultimately be decided on a case‑by‑case basis in light of the particular circumstances of the particular case.
Cases Cited
By Wagner J.
Distinguished: Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, [2014] 2 S.C.R. 633; referred to: Heritage Capital Corp. v. Equitable Trust Co., 2016 SCC 19, [2016] 1 S.C.R. 306; King v. Operating Engineers Training Institute of Manitoba Inc., 2011 MBCA 80, 270 Man. R. (2d) 63; Housen v. Nikolaisen, 2002 SCC 33, [2002] 2 S.C.R. 235; Vallieres v. Vozniak, 2014 ABCA 290, 5 Alta. L.R. (6th) 28; Portage LaPrairie Mutual Insurance Co. v. Sabean, 2015 NSCA 53, 386 D.L.R. (4th) 449; Precision Plating Ltd. v. Axa Pacific Insurance Co., 2015 BCCA 277, 387 D.L.R. (4th) 281; Stewart Estate v. 1088294 Alberta Ltd., 2015 ABCA 357, 25 Alta. L.R. (6th) 1; MacDonald v. Chicago Title Insurance Co. of Canada, 2015 ONCA 842, 127 O.R. (3d) 663; Monk v. Farmers’ Mutual Insurance Co., 2015 ONCA 911, 128 O.R. (3d) 710; Daverne v. John Switzer Fuels Ltd., 2015 ONCA 919, 128 O.R. (3d) 188; True Construction Ltd. v. Kamloops (City), 2016 BCCA 173; Sankar v. Bell Mobility Inc., 2016 ONCA 242; Kassburg v. Sun Life Assurance Co. of Canada, 2014 ONCA 922, 124 O.R. (3d) 171; Anderson v. Bell Mobility Inc., 2015 NWTCA 3, 593 A.R. 79; Van Camp v. Chrome Horse Motorcycle Inc., 2015 ABCA 83, 599 A.R. 201; Industrial Alliance Insurance and Financial Services Inc. v. Brine, 2015 NSCA 104, 392 D.L.R. (4th) 575; Ontario Society for the Prevention of Cruelty to Animals v. Sovereign General Insurance Co., 2015 ONCA 702, 127 O.R. (3d) 581; Acciona Infrastructure Canada Inc. v. Allianz Global Risks US Insurance Co., 2015 BCCA 347, 77 B.C.L.R. (5th) 223; GCAN Insurance Co. v. Univar Canada Ltd., 2016 QCCA 500; Canada (Director of Investigation and Research) v. Southam Inc., [1997] 1 S.C.R. 748; Association des parents ayants droit de Yellowknife v. Northwest Territories (Attorney General), 2015 NWTCA 2, 593 A.R. 180; Tenneco Canada Inc. v. British Columbia Hydro and Power Authority, 1999 BCCA 415, 126 B.C.A.C. 9; Co‑operators Life Insurance Co. v. Gibbens, 2009 SCC 59, [2009] 3 S.C.R. 605; Progressive Homes Ltd. v. Lombard General Insurance Co. of Canada, 2010 SCC 33, [2010] 2 S.C.R. 245; Non‑Marine Underwriters, Lloyd’s of London v. Scalera, 2000 SCC 24, [2000] 1 S.C.R. 551; Consolidated‑Bathurst Export Ltd. v. Mutual Boiler and Machinery Insurance Co., [1980] 1 S.C.R. 888; Commonwealth Construction Co. v. Imperial Oil Ltd., [1978] 1 S.C.R. 317; Guarantee Co. of North America v. Gordon Capital Corp., [1999] 3 S.C.R. 423; Privest Properties Ltd. v. Foundation Co. of Canada Ltd. (1991), 57 B.C.L.R. (2d) 88; Sayers & Associates Ltd. v. Insurance Corp. of Ireland Ltd. (1981), 126 D.L.R. (3d) 681; Ontario Hydro v. Royal Insurance, [1981] O.J. No. 215 (QL); Bird Construction Co. v. United States Fire Insurance Co. (1985), 24 D.L.R. (4th) 104; Greene v. Canadian General Insurance Co. (1995), 133 Nfld. & P.E.I.R. 151; British Columbia v. Royal Insurance Co. of Canada (1991), 7 B.C.A.C. 172; Algonquin Power (Long Sault) Partnership v. Chubb Insurance Co. of Canada (2003), 50 C.C.L.I. (3d) 107; Simcoe & Erie General Insurance Co. v. Royal Insurance Co. of Canada (1982), 36 A.R. 553; Foundation Co. of Canada v. Aetna Casualty Co. of Canada, [1976] I.L.R. ¶ 1‑757; Commercial union cie d’assurance du Canada v. Pentagon Construction Canada Inc., [1989] R.J.Q. 1399.
By Cromwell J.
Applied: Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, [2014] 2 S.C.R. 633; referred to: Housen v. Nikolaisen, 2002 SCC 33, [2002] 2 S.C.R. 235; Vallieres v. Vozniak, 2014 ABCA 290, 5 Alta. L.R. (6th) 28; Precision Plating Ltd. v. Axa Pacific Insurance Co., 2015 BCCA 277, 387 D.L.R. (4th) 281; Stewart Estate v. 1088294 Alberta Ltd., 2015 ABCA 357, 25 Alta. L.R. (6th) 1; MacDonald v. Chicago Title Insurance Co. of Canada, 2015 ONCA 842, 127 O.R. (3d) 663; Monk v. Farmers’ Mutual Insurance Co., 2015 ONCA 911, 128 O.R. (3d) 710; True Construction Ltd. v. Kamloops (City), 2016 BCCA 173; Sankar v. Bell Mobility Inc., 2016 ONCA 242; Reardon Smith Line Ltd. v. Hansen‑Tangen, [1976] 3 All E.R. 570; Investors Compensation Scheme Ltd. v. West Bromwich Building Society, [1998] 1 All E.R. 98; Canada (Director of Investigation and Research) v. Southam Inc., [1997] 1 S.C.R. 748; Industrial Alliance Insurance and Financial Services Inc. v. Brine, 2015 NSCA 104, 392 D.L.R. (4th) 575; Ontario Society for the Prevention of Cruelty to Animals v. Sovereign General Insurance Co., 2015 ONCA 702, 127 O.R. (3d) 581; Acciona Infrastructure Canada Inc. v. Allianz Global Risks US Insurance Co., 2015 BCCA 347, 77 B.C.L.R. (5th) 223; GCAN Insurance Co. v. Univar Canada Ltd., 2016 QCCA 500; Greene v. Canadian General Insurance Co. (1995), 133 Nfld. & P.E.I.R. 151; Bird Construction Co. v. United States Fire Insurance Co. (1985), 24 D.L.R. (4th) 104; Ontario Hydro v. Royal Insurance, [1981] O.J. No. 215 (QL); Progressive Homes Ltd. v. Lombard General Insurance Co. of Canada, 2010 SCC 33, [2010] 2 S.C.R. 245.
Authors Cited
Audet, Maurice. “All Risks — a promise made or a promise broken?” (1983), 50:10 Canadian Underwriter 34.
Audet, Maurice G. “Part II — Insurance” (2002), 12 C.L.R. (3d) 100.
Billingsley, Barbara. General Principles of Canadian Insurance Law, 2nd ed. Markham, Ont.: LexisNexis, 2014.
Boivin, Denis. Insurance Law, 2nd ed. Toronto: Irwin Law, 2015.
Brown, Craig. Insurance Law in Canada. Toronto: Thomson Reuters, 2002 (loose‑leaf updated 2016, release 2).
Canadian College of Construction Lawyers. Insurance & Surety Committee. “‘Covered for What?’: Faulty Materials and Workmanship Coverage under Canadian Construction Insurance Policies” (2007), 1 J.C.C.C.L. 101.
Dolden, Eric A. “All Risk and Builders’ Risk Policies: Emerging Trends” (1990‑91), 2 C.I.L.R. 341.
Hall, Geoff R. Canadian Contractual Interpretation Law, 3rd ed. Toronto: LexisNexis, 2016.
Lichty, Mark G., and Marcus B. Snowden. Annotated Commercial General Liability Policy. Toronto: Canada Law Book, 2015 (loose‑leaf updated December 2015, release 24).
McCamus, John D. The Law of Contracts, 2nd ed. Toronto: Irwin Law, 2012.
Poitras, Pierre‑Stéphane. “L’assurance et l’industrie de la construction”, dans Service de la formation permanente du Barreau du Québec, vol. 147, Développements récents en droit des assurances. Cowansville, Qué.: Yvon Blais, 2001, 181.
Reynolds, R. Bruce, and Sharon C. Vogel. A Guide to Canadian Construction Insurance Law. Toronto: Carswell, 2013.
Ricchetti, Leonard, and Timothy J. Murphy. Construction Law in Canada. Markham, Ont.: LexisNexis, 2010.
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APPEALS from a judgment of the Alberta Court of Appeal (Côté, Watson and Slatter JJ.A.), 2015 ABCA 121, 599 A.R. 363, 42 B.L.R. (5th) 190, 386 D.L.R. (4th) 482, 16 Alta. L.R. (6th) 397, 47 C.C.L.I. (5th) 218, [2015] 8 W.W.R. 466, [2015] A.J. No. 338 (QL), 2015 CarswellAlta 511 (WL Can.), setting aside a decision of Clackson J., 2013 ABQB 585, [2013] I.L.R. ¶ I‑5495, [2013] A.J. No. 1088 (QL), 2013 CarswellAlta 1943 (WL Can.). Appeals allowed.
Eugene Meehan, Q.C., and Stacey Boothman, for the appellant Ledcor Construction Limited.
Dennis L. Picco, Q.C., and Marie‑France Major, for the appellant Station Lands Ltd.
Gregory J. Tucker, Q.C., and Scott H. Stephens, for the respondents.
The judgment of McLachlin C.J. and Abella, Moldaver, Karakatsanis, Wagner, Gascon, Côté and Brown JJ. was delivered by
Wagner J. —
I. Introduction
[1] The outcome of these appeals hinges on the interpretation of an exclusion clause in a common form of all-risk property insurance, variably referred to as “builders’ risk”, “contractors’ risk”, “all risks”, “multi-risk” or “course of construction” insurance.[1] This type of insurance covers physical damage on a construction site. It is usually issued to the owner of the property under construction and the general contractor, providing coverage for them as well as for all contractors and subcontractors working on the project. The exclusion clause at the heart of these appeals is a standard form clause that denies coverage for the “cost of making good faulty workmanship” but, as an exception to that exclusion, nonetheless covers “physical damage” that “results” from the faulty workmanship.
[2] In the present case, a contractor was hired to clean the windows of a building under construction. In the course of the cleaning, the contractor scratched the building’s windows, which ultimately needed to be replaced. The windows’ replacement cost was claimed by the building’s owner and the general contractor in charge of the project under a builders’ risk policy issued in favour of the owner and all contractors involved in the construction, but the insurers denied coverage on the basis of the “cost of making good faulty workmanship” exclusion. The issue before the courts was thus to determine, where windows of a construction project are damaged from post-installation cleaning by a contractor responsible for only their cleaning, if the cost of the windows’ replacement was excluded from coverage under the faulty workmanship exclusion.
[3] After determining that the work performed by the contractor amounted to faulty workmanship, the trial judge applied the contra proferentem rule against the insurers and concluded that the faulty workmanship exclusion did not exclude from coverage the damage that the contractor had caused to the building’s windows. Applying a correctness standard of review to the interpretation of the insurance policy, the Court of Appeal of Alberta overturned the trial judge’s decision and declared that the damage to the building’s windows was excluded from coverage, as the damage was physically or systematically connected to the very work the contractor had performed.
[4] In my opinion, the appropriate standard of review in this case is correctness. Where, like here, the 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 particular parties to assist the interpretation process, this interpretation is better characterized as a question of law subject to correctness review.
[5] Regarding the appropriate interpretation of the faulty workmanship exclusion in all builders’ risk policies, I am of the view that the exclusion clause serves to exclude from coverage only the cost of redoing the faulty work. This interpretation is dictated by the general rules of contractual interpretation. It best represents the parties’ reasonable expectations, as informed by the purpose of builders’ risk policies, aligns with commercial reality, and is consistent with the jurisprudence on the matter. In this case, the cost of redoing the faulty work is that of recleaning the windows. Therefore, I would allow the appeals and hold that the windows’ replacement cost is covered under the insurance policy.
II. Facts
[6] Station Lands Ltd. (“Station Lands”) is the owner of the recently built EPCOR Tower (“Tower”), an office building in Edmonton. Ledcor Construction Limited (“Ledcor”) was the general contractor for the Tower’s construction.
[7] During construction, the Tower’s installed windows were dirtied with paint specks, dirt and concrete splatter. To clean these windows prior to the completion of construction, Station Lands hired Bristol Cleaning (“Bristol”). The service contract between Station Lands and Bristol stipulated that Station Lands would provide all-risk property insurance for the project, which Station Lands did in the form of a builders’ risk policy (the “Policy”). The scope of Bristol’s work under the service contract was to “[p]rovide all necessary equipment, manpower, [and] materials required to complete a construction clean” of the Tower’s exterior windows.
[8] Unfortunately, Bristol used improper tools and methods in carrying out its cleaning work, scratching the Tower’s windows, which consequently had to be replaced. Station Lands estimated the replacement cost of the windows to be $2.5 million. Both Station Lands and Ledcor claimed this replacement cost against the Policy through their insurers at the time, the respondents Commonwealth Insurance Company, GCAN Insurance Company, and American Home Assurance Company (together, the “Insurers”).[2] The Insurers denied the claim on the basis of clause 4(A)(b) of the Policy (the “Exclusion Clause”), which is an exclusion for faulty workmanship.
[9] The relevant coverage provisions of the Policy provide that all risks of direct physical loss or damage to the property undergoing construction are insured, subject to certain outlined exclusions:
1. Property Insured
(a) Property undergoing site preparation, demolition, construction, reconstruction, fabrication, installation, erection, repair or testing (hereinafter called the “Construction Operations”) while at the risk of the insured and while at the location of the insured project(s), provided the value thereof is included in the declared estimated value of construction operations;
. . .
2. Perils Insured and Territorial Limits
This policy section insures against “All Risks” of direct physical loss or damage except as hereinafter provided.
[10] The Exclusion Clause excludes from coverage the “cost of making good faulty workmanship”, but provides an exception for “resulting damage”:
4(A) Exclusions
This policy section does not insure:
(a) Any loss of use or occupancy or consequential loss of any nature howsoever caused including penalties for non-completion of or delay in completion of contract or non-compliance with contract conditions;
(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. [Emphasis added.]
[11] Station Lands and Ledcor (together, the “Insureds”) submitted their statement of claim before the Court of Queen’s Bench of Alberta, seeking enforcement of the Policy and coverage for the replacement cost of the damaged windows.
III. Decisions Below
A. Court of Queen’s Bench of Alberta, 2013 ABQB 585, [2013] I.L.R. ¶ I-5495
[12] The trial judge concluded that the cleaning work Bristol had carried out constituted “workmanship” and that it had been faulty. He declared, however, that the Exclusion Clause did not exclude from coverage the damage that Bristol’s faulty workmanship had caused to the Tower’s windows. In coming to this determination, he found the Exclusion Clause ambiguous and the interpretations of “making good” advanced by the Insureds and Insurers equally plausible. He therefore applied the rule of contra proferentem against the Insurers. The Insureds had argued that the “cost of making good” encompassed only the cost of redoing the cleaning work, whereas the Insurers had argued that it encompassed both the cost of redoing the cleaning work and the damage to the windows, as they were the very thing on which Bristol had performed the faulty workmanship.
B. Court of Appeal of Alberta, 2015 ABCA 121, 599 A.R. 363
[13] On appeal, the Court of Appeal reversed the trial judge’s decision and declared that the damage to the Tower’s windows was excluded from coverage. Applying a correctness standard of review to the interpretation of the Policy, the court held the trial judge had improperly applied the rule of contra proferentem because the Exclusion Clause was not ambiguous.
[14] The Court of Appeal proceeded from the premise that because the base coverage under the Policy was for “physical loss or damage”, as provided by clause 2, the Exclusion Clause had to exclude physical damage of some kind, or else it would be redundant. For the court, then, the key was to determine the dividing line between the physical damage that was excluded as the “cost of making good faulty workmanship” and the physical damage that was covered as “resulting damage”. To establish this dividing line, the court devised a new test of physical or systemic connectedness, based on three primary considerations, outlined at para. 50 of its reasons: (1) the “extent or degree to which the damage was to a portion of the project actually being worked on at the time, or was collateral damage to other areas”; (2) the “nature of the work being done, how the damage related to the way that work is normally done, and the extent to which the damage is a natural or foreseeable consequence of the work”; and (3) “[w]hether the damage was within the purview of normal risks of poor workmanship, or whether it was unexpected and fortuitous.”
[15] In applying this newly formulated test, the Court of Appeal concluded that the damage to the windows was physical loss excluded as the “cost of making good faulty workmanship”, because it was not accidental or fortuitous but was directly caused by the scraping and wiping motions involved in Bristol’s cleaning work. According to the court, Bristol intentionally applied these motions to the windows, a core part of the work to be done, and the damage was not only foreseeable but highly likely.
IV. Issues on Appeal
[16] The Exclusion Clause in the standard form builders’ risk insurance policy at issue in these appeals raises two questions that this Court must answer.
[17] First, what standard of appellate review applies to a trial judge’s interpretation of a standard form insurance contract?
[18] Second, what is the proper interpretation to be given to the faulty workmanship exclusion clause and the “resulting damage” exception to that exclusion contained in builders’ risk insurance policies?
V. Analysis
A. The Standard of Review Is Correctness
[19] In my view, the trial judge’s interpretation of the Policy should be reviewed for correctness.
[20] These appeals present an opportunity to clarify how Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, [2014] 2 S.C.R. 633, applies to the interpretation of standard form contracts, sometimes called contracts of adhesion.
[21] In Sattva, Rothstein J. held that “[c]ontractual interpretation involves issues 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” (para. 50). As a result, the palpable and overriding error standard of review applies to a trial court’s interpretation of a contract: Heritage Capital Corp. v. Equitable Trust Co., 2016 SCC 19, [2016] 1 S.C.R. 306, at paras. 21-24. However, Rothstein J. acknowledged that the correctness standard of review still applies to the “rare” extricable questions of law that arise in the interpretation process, such as “the application of an incorrect principle, the failure to consider a required element of a legal test, or the failure to consider a relevant factor”: Sattva, at paras. 53 and 55, quoting King v. Operating Engineers Training Institute of Manitoba Inc., 2011 MBCA 80, 270 Man. R. (2d) 63, at para. 21. This is consistent with the jurisprudence on the standard of review for questions of mixed fact and law: Housen v. Nikolaisen, 2002 SCC 33, [2002] 2 S.C.R. 235, at para. 36. However, in this case, the Court of Appeal did not purport to identify an extricable question of law that arose in the interpretation process. Rather, it concluded that the interpretation of the contract itself should be reviewed for correctness, despite Sattva’s holding that contractual interpretation is a question of mixed fact and law and is owed deference on appeal: paras. 18-19.
[22] Appellate courts have disagreed on whether this Court’s holding in Sattva on the standard of review of contractual interpretation applies to standard form contracts. Many appellate courts have held that Sattva does not apply, and have conducted correctness review: Vallieres v. Vozniak, 2014 ABCA 290, 5 Alta. L.R. (6th) 28, at paras. 11-13; Portage LaPrairie Mutual Insurance Co. v. Sabean, 2015 NSCA 53, 386 D.L.R. (4th) 449, at para. 13; Precision Plating Ltd. v. Axa Pacific Insurance Co., 2015 BCCA 277, 387 D.L.R. (4th) 281, at paras. 28-30; Stewart Estate v. 1088294 Alberta Ltd., 2015 ABCA 357, 25 Alta. L.R. (6th) 1, at para. 273, per McDonald J.A.; MacDonald v. Chicago Title Insurance Co. of Canada, 2015 ONCA 842, 127 O.R. (3d) 663, at paras. 40-41; Monk v. Farmers’ Mutual Insurance Co., 2015 ONCA 911, 128 O.R. (3d) 710, at paras. 22-24; Daverne v. John Switzer Fuels Ltd., 2015 ONCA 919, 128 O.R. (3d) 188, at paras. 12-14; True Construction Ltd. v. Kamloops (City), 2016 BCCA 173, at para. 34 (CanLII); and Sankar v. Bell Mobility Inc., 2016 ONCA 242, at para. 26 (CanLII).
[23] In other cases, however, courts of appeal have applied Sattva and have deferred to trial courts’ interpretations of standard form contracts: Kassburg v. Sun Life Assurance Co. of Canada, 2014 ONCA 922, 124 O.R. (3d) 171, at para. 33; Anderson v. Bell Mobility Inc., 2015 NWTCA 3, 593 A.R. 79, at paras. 9 and 33-35; Van Camp v. Chrome Horse Motorcycle Inc., 2015 ABCA 83, 599 A.R. 201; Industrial Alliance Insurance and Financial Services Inc. v. Brine, 2015 NSCA 104, 392 D.L.R. (4th) 575, at paras. 40-41; Ontario Society for the Prevention of Cruelty to Animals v. Sovereign General Insurance Co., 2015 ONCA 702, 127 O.R. (3d) 581, at paras. 34-36; Acciona Infrastructure Canada Inc. v. Allianz Global Risks US Insurance Co., 2015 BCCA 347, 77 B.C.L.R. (5th) 223, at para. 35; and GCAN Insurance Co. v. Univar Canada Ltd., 2016 QCCA 500, at para. 40 (CanLII). See also Stewart Estate, at para. 63, per Rowbotham J.A. (dissenting on this point).
[24] I would recognize an exception to this Court’s holding in Sattva that contractual interpretation is a question of mixed fact and law subject to deferential review on appeal. In my view, 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.
[25] The statements made in Sattva on the standard of review of contractual interpretation must be considered in their full context. That case concerned a complex commercial agreement between two sophisticated parties — not a standard form contract. Professor John D. McCamus has described standard form contracts as follows:
. . . the document put forward will typically constitute a standard printed form that the party proffering the document invariably uses when entering transactions of this kind. The form will often be offered on a “take it or leave it” basis. In the typical case, the other party, then, will have no choice but either to agree to the terms of the standard form or to decline to enter the transaction altogether. Standard form agreements are a pervasive and indispensable feature of modern commercial life. It is simply not feasible to negotiate, in any meaningful sense, the terms of many of the transactions entered into in the course of daily life.
(The Law of Contracts (2nd ed. 2012), at p. 185)
Sattva did not consider the unique issues that standard form contracts raise.
[26] Moreover, the Court in Sattva gave two reasons for concluding that contractual interpretation is a question of mixed fact and law subject to deferential review on appeal. As a general matter, those reasons are less compelling in the context of standard form contracts.
(1) Factual Matrix
[27] The first reason is that the surrounding circumstances of the contract, or the factual matrix in which it was formed, are important considerations in contractual interpretation: Sattva, at para. 46. Rothstein J. stated that determining the intention of the parties is a “fact-specific goal” that requires a trial court to “read the contract as a whole, giving the words used their ordinary and grammatical meaning, consistent with the surrounding circumstances known to the parties at the time of formation of the contract”: paras. 47 and 49.
[28] While a proper understanding of the factual matrix is crucial to the interpretation of many contracts, it is often less relevant for standard form contracts, because “the parties do not negotiate terms and the contract is put to the receiving party as a take-it-or-leave-it proposition”: MacDonald, at para. 33. Standard form contracts are particularly common in the insurance industry, as Professor Barbara Billingsley observed in General Principles of Canadian Insurance Law (2nd ed. 2014), at p. 56:
As part of its business considerations and in advance of meeting with any particular client, an insurance company decides the terms and conditions under which it is willing to provide insurance coverage for certain common types of risk. This means that, in most situations, an insurance company does not negotiate the detailed terms of insurance coverage with individual customers. Instead, before entering into any insurance agreements, an insurer typically drafts a series of pre-fabricated contracts outlining the terms upon which particular kinds of coverage will be provided. These contracts are known as “standard form policies”. The insurer then provides the appropriate standard form policy to clients purchasing insurance coverage.
[29] Parties to an insurance contract may negotiate over matters like the cost of premiums, but the actual conditions of the insurance coverage are generally determined by the standard form contract: Billingsley, at p. 58.
[30] My colleague Justice Cromwell accepts that, for standard form contracts, there are usually no relevant surrounding circumstances relating to negotiation (para. 106). However, he observes that other elements of the surrounding circumstances — such as the purpose of the contract, the nature of the relationship it creates, and the market or industry in which it operates — have a role in the interpretation process.
[31] I agree that factors such as the purpose of the contract, the nature of the relationship it creates, and the market or industry in which it operates should be considered when interpreting a standard form contract. However, those considerations are generally not “inherently fact specificˮ: Sattva, at para. 55. Rather, they will usually be the same for everyone who may be a party to a particular standard form contract. This underscores the need for standard form contracts to be interpreted consistently, a point to which I will return below.
[32] In sum, for standard form contracts, the surrounding circumstances generally play less of a role in the interpretation process, and where they are relevant, they tend not to be specific to the particular parties. Accordingly, the first reason given in Sattva for concluding that contractual interpretation is a question of mixed fact and law — the importance of the factual matrix — carries less weight in cases involving standard form contracts.
(2) The Definitions of “Question of Law” and “Question of Mixed Fact and Law”
[33] In Sattva, this Court gave a second reason for concluding that contractual interpretation is a question of mixed fact and law: contractual interpretation does not fit within the definition of a pure question of law. Questions of law are “about what the correct legal test is”: para. 49, quoting Canada (Director of Investigation and Research) v. Southam Inc., [1997] 1 S.C.R. 748, at para. 35. For instance, the content of a particular legal principle of contractual interpretation is a question of law. However, in interpreting contracts, courts apply the legal principles of contractual interpretation to det