In Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, the Supreme Court of Canada ushered in a sea change to the standard of review for the interpretation of contracts. No longer would questions of contractual interpretation be subject to a standard of correctness. Instead, in recognition of the importance of the factual matrix to the contract interpretation exercise, issues of contract interpretation would be recognized as questions of mixed fact and law, subject to a standard of palpable and overriding error. Exceptions would be made for extricable errors of principle or law, but Justice Rothstein made clear that such errors would be rare.
In MacDonald v. Chicago Title Insurance Company of Canada, 2015 ONCA 842, the Ontario Court of Appeal joined the chorus of the Courts of Appeal for Alberta and British Columbia in holding that the Sattva analysis does not necessarily apply to all types of contracts. Justice Hourigan found that the rationales for the move from correctness to palpable and overriding error, identified by the Supreme Court of Canada, did not apply to the context of standard form contracts or contracts of adhesion. Accordingly, the standard of review for the interpretation of the title insurance policy at issue was determined to be correctness. The MacDonald decision is also interesting for its analysis of the binding nature of affidavits by corporate officers on corporate litigants in summary judgment motions.
In MacDonald, the Appellants had brought a motion for summary judgment seeking coverage from their title insurer for the remediation of the dangerous structural condition affecting their home. After purchasing the multiple story dwelling, the Appellants discovered that the prior owner had removed load bearing walls in the course of a renovation without obtaining the necessary permits from the City of Toronto. As a result, the City of Toronto had issued an Order requiring the Appellants to undertake temporary work to reinforce the home. The Appellants sought coverage from their title insurer for the cost of the temporary repairs and the permanent repairs that would be required to make the home safe.
At first instance, the motion judge found that the title insurance policy did not apply to the defect caused by the prior owner and that the Appellants had not suffered any loss as defined in the policy. The motion judge denied the motion for summary judgment and, although no cross-motion had been brought, granted summary judgment in favour of the Respondent and dismissed the action.
Standard of Review
As noted above, Justice Hourigan determined that the appropriate standard of review of the interpretation of the title insurance policy was correctness. The two principal rationales for applying a more deferential standard that had been adopted by the Supreme Court were first, that the determination of the factual matrix, a central feature for the interpretation of most contracts, is largely a fact finding exercise that deserves deference, and second, that the interpretation of negotiated agreements usually has no impact beyond the interests of the immediate parties before the Court. Justice Hourigan found these rationales inapplicable to standard form agreements.
First, factual matrix is of far less significance to such contracts. Standard form contracts are not negotiated, and so the “search for the intention of the parties in the surrounding circumstances of these contracts “is merely a legal fiction”.” Second, standard form agreements are repeatedly used with numerous individuals. Accordingly, the impact of their interpretation will typically extend beyond the immediate parties before the Court. The interpretation of such agreements does have precedential value, and, as a matter of public policy, intervention by appellate courts is important to ensure consistency:
It is untenable for standard form insurance policy wording to be given one meaning by one trial judge and another by a different trial judge: see Ledcor, at para. 18. Unpredictable outcomes in litigation only serve to encourage litigation because the more a given result depends on the particular trial judge, the greater the chance that litigants will risk going to trial. Appellate courts have a valuable role to play in ensuring consistency in the law and greater predictability in litigation outcomes: see Northwest Territories, at para. 28.
Affidavits of Executives Binding on Corporate Litigants
It has long been the law of Ontario that where a corporate litigant’s officer is examined for discovery, the officer’s answers bind the corporation. The Court of Appeal concluded that the same result applies to answers given by an officer on a cross-examination for a summary judgment motion:
In conclusion, I am of the view that where a corporate officer is cross-examined on an affidavit filed in support of the corporation’s position on a motion for summary judgment, that officer speaks for the corporation and his or her admissions on cross-examination may be used against the corporation in the same way that admissions on an examination for discovery could be. It was an error in law for the motion judge to conclude otherwise.
The issue arose from the Appellants’ reliance on several admissions made by an officer of the Respondent on cross-examination. The motion judge had concluded that the answers did not bind the Respondent, because the affiant had sworn the affidavit on information and belief and did not indicate his answers bound the Respondent.
The Court of Appeal found the result untenable, concluding that it would unfairly preclude an opposing party from relying on the admissions of the corporate party’s affiant. It could not be that a corporate litigant could lead evidence through an officer to raise an issue for trial, but that the opposing party could not rely on facts elicited through cross-examination to undermine that position. Not only would the result be unfair, but it would undermine the usefulness of summary judgment to achieve efficient and effective justice.
Interpretation of the Policy
Ultimately, the Court of Appeal overturned the motion judge’s interpretation of the policy and granted the Appellants’ summary judgment. First, the Court held that the motion judge erred by concluding that the City Order did not impact the Appellants’ interest in the property because it was not registered on title. The Court noted that there may be a variety of defects to title that can only be discovered by “off-title searches.” Indeed, LAWPRO had intervened on the appeal because it disagreed with the motion judge’s limited interpretation of the term “title”. If the motion judge were right, the defence and indemnity obligations for claims arising under title insurance policies, that LAWPRO had negotiated for from title insurers in exchange for the waiver of LAWPRO’s real estate transaction levy surcharge would be greatly diminished.
Second, the Court disagreed with the motion judge that the structural defect did not render title unmarketable, on the basis of speculation that a purchaser might be willing to buy the defective home at a diminished price. The title insurance policy covered the risk that title would become unmarketable, such that another person could refuse to perform a contract to purchase, to lease, or to make a mortgage loan. The Court found the motion judge’s conclusion to be inconsistent with policy’s definition of “unmarketable”. The Respondent further admitted that the structural defect would permit a potential purchaser to refuse to close a purchase transaction.
The Respondent argued, however, that the title insurance nonetheless did not apply because the structural issue was a latent defect caused by improper construction, not the failure of the prior owner to obtain the required city permit. Moreover, the Respondent argued, the title policy was never intended to cover the particular situation, which would have demanded a much higher premium.
The Court rejected both arguments. Justice Hourigan concluded that the faulty construction was directly linked to the failure to obtain a city permit because, if the request had been made, it would have been denied and the construction would not have taken place. In respect of the issue of the premium, the insurer could not deny coverage because it had failed to properly draft the policy to constrain the coverages. Such a result would turn the insured into an insurer for the insurer’s poor drafting.
The Court also rejected the Respondent’s position that the loss was excluded because it was not discovered at the time the Appellants purchased the home. While the policy did not cover losses arising from issues that affect title after the policy date, the structural defect did exist at the policy date. The mere fact that the Appellants had not discovered the defect until after the policy date did not exclude coverage.
Finally, the Court of Appeal disagreed with the motion judge to the extent he concluded that there was no coverage because the Appellants had not yet paid for the permanent repairs. The Court of Appeal found this to be a remarkable result, as it would mean that only those insureds who could afford to cover a loss would receive compensation.
It appears that following this decision the interpretation of standard form insurance policies will be subject to the standard of correctness. It is of note that just recently, in Ontario Society for the Prevention of Cruelty to Animals v. Sovereign General Insurance Co., 2015 ONCA 702, the Ontario Court of Appeal had concluded that the interpretation of an insurance policy on a duty to defend application was a question of mixed fact and law. The distinction is particularly glaring given that a duty to defend application, unlike the coverage action in MacDonald, is typically based on the pleadings and the insurance policy, requiring little to no fact finding. In any event, given Justice Hourigan provided a more in depth analysis of the issue, and that it corresponds to determinations made by the Courts of Appeal of Alberta and British Columbia, it is likely the standard of review of correctness will prevail.
A further potential implication of Justice Hourigan’s analysis is that the importance and the ambit of factual matrix will be limited, even at first instance, when it is the interpretation of a standard form contract that is at issue. Arguably, the same principles and analysis should apply to other types of standard form contracts, like consumer contracts of adhesion, leading to a more literal and textual interpretation of such agreements.
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