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SCC takes 'practical approach' to interpreting standard form contracts

Toronto litigator Isabelle Eckler says a recent Supreme Court of Canada decision regarding an exclusion clause in a standard form contract took a very practical approach that may lead to fewer disputes in court over contract terminology.

In the matter of Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co., 2016 SCC 37, the top court suggested that when it comes to disputes over standard form contracts, the standard of review is correctness rather than reasonableness.

The dispute involved a construction project where an office tower’s windows were scratched by the cleaners who used improper tools and methods in carrying out their work. As a result, the windows had to be replaced at a cost of $2.5 million. The building’s owner and the general contractor 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.”

At trial, the judge found the cleaning work constituted “workmanship” that had been faulty and held the insurers liable, finding that the exclusion clause was ambiguous and that the rule of contra proferentem applied.

The Alberta Court of Appeal reversed the trial judge’s decision, declaring that the damage to the tower’s windows was excluded from coverage. The appeal court held that the trial judge had improperly applied the rule of contra proferentem because the exclusion clause was not ambiguous and applied the correctness standard of review to the interpretation of the policy.

"The SCC applied the standard of review of correctness to the interpretation of a standard form contract. In doing so, the court noted that the standard form contract is distinguishable from a traditional contract where the intent of the parties, the factual context and the back-and-forth negotiation of the parties can often be important to the contract's interpretation. This is to say that the characteristics inherent to a traditional contract do not necessarily define the standard form contract," says Eckler, an associate with Shibley Righton LLP.

“It is more of a ‘take it or leave it’ situation when it comes to standard form contracts,” she says. “The court looked at the practicalities of how contracts are being used in the industry in order to create more consistency and predictability between parties when they are contracting.

Eckler, who did not act on this matter and makes her comments generally, says she thinks the intention of the SCC was to try to limit litigation on interpretation issues around standard form contracts.

“The way the court has framed it as a question of law means there will likely be less litigation over contract terminology in these cases,” she tells AdvocateDaily.com.

Eckler, who practices with the professional liability, commercial litigation and construction law practice groups, says she often sees contracts that have been customized to indicate what services a professional or firm is providing.

"These contracts between independent sophisticated parties in construction are not standard form contracts," she says. "It is unclear whether the standard of correctness will be applied to construction contracts beyond those providing insurance policies in the construction industry."

She says the ruling looked behind the contract at the parties’ reasonable expectations and how, generally speaking, when looking at insurance contracts courts will look at the regime as a whole and what the insured is hoping to gain.

“The court read the contract broadly because part of the purpose of getting insurance coverage is to create stability, certainty and peace of mind when undertaking a project,” Eckler says. “I think that was also a very practical approach in looking at the context and purpose behind insurance and the insurance regime.”

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