Court of Appeal for Ontario

Date: 2018-04-09

Docket: C63468

Judges: Epstein, Paciocco and Nordheimer JJ.A.

Between

Karl Nodel Applicant (Respondent)

and

Stewart Title Guaranty Company Respondent (Appellant)

Counsel

For the Appellant: Peter H. Griffin and Danielle Glatt

For the Respondent: Gavin J. Tighe, Alexander Melfi, and John A. Campion

Heard: December 1, 2017

On Appeal

From the judgment of Justice Wendy M. Matheson of the Superior Court of Justice, dated February 8, 2017, with reasons reported at 2017 ONSC 890.

Paciocco J.A.

OVERVIEW

[1] Mr. Karl Nodel, a private mortgage lender, was the victim of a mortgage fraud. He made a claim for his loss under a mortgage insurance policy he had purchased from Stewart Title Guaranty Company ("Stewart Title").

[2] Stewart Title refused to pay. In denying the claim, Stewart Title relied on a coverage exception in the policy that applies if mortgage proceeds are paid to any person other than the registered title holder. Since Mr. Nodel's lawyer had paid the mortgage proceeds to the borrower's lawyer, in trust, rather than directly to the borrower, Stewart Title said the exception applied.

[3] The dispute over coverage was brought before an application judge. She concluded that, properly construed, the exception did not apply. In her view, the registered title holder was paid when the borrower's lawyer received the mortgage proceeds in trust. She declared that Mr. Nodel's loss was therefore covered by the mortgage insurance policy. Stewart Title now appeals.

[4] In my view, the application judge was correct. Properly interpreted, the exception enabling Stewart Title to deny coverage applies if the proceeds of the mortgage are transferred beneficially to a person or entity other than the borrower in the Insured Mortgage transaction (as defined in the policy). This did not happen here. Instead, the payment was made in trust to the borrower's lawyer for the benefit of the borrower. It was, in law, a payment to the borrower. The application judge was correct in declaring that Mr. Nodel's loss was covered by the mortgage insurance policy.

[5] I would therefore dismiss the appeal.

RELEVANT FACTS

[6] A man posing as John Colarieti (the borrower) sought a $1,100,000 loan from Mr. Nodel, for investment purposes. Mr. Nodel agreed to lend the money to the borrower, to be secured with a second mortgage on a valuable residential property registered in Mr. Colarieti's name.

[7] Mr. Nodel hired a lawyer, Mr. Isaac Singer, to arrange mortgage security and to close the transaction. He instructed Mr. Singer to acquire mortgage insurance. Mr. Singer was an "Examining Counsel", authorized to assist in the purchase of mortgage insurance from Stewart Title. He arranged mortgage insurance from Stewart Title that included coverage for mortgage fraud.

[8] At closing, Mr. Singer paid the mortgage money to the borrower's lawyer, Mr. Bryan Dale, in trust. After he received the money, Mr. Dale did not transfer the money to his client. Instead he transferred the money to third parties under his client's direction. The money and the client then disappeared.

[9] At Mr. Nodel's direction, Mr. Singer made a claim against Stewart Title for coverage under the policy because of the mortgage fraud. Stewart Title refused to pay, relying on an exception in the policy that permits Stewart Title to deny coverage in certain circumstances.

[10] Specifically, Clause 2 of Schedule B to the insurance policy provides, in relevant part:

2. Notwithstanding anything else contained within this Policy, in the event the proceeds of the Insured Mortgage are paid to any person or entity other than: i) to the registered title holder … then the Company can deny coverage and shall have no liability to the insured for any matters that involve the allegation of mortgage/title fraud.

[11] Mr. Nodel sued Mr. Singer. Mr. Singer commenced a third party claim against Mr. Dale and Stewart Title. LawPro, the insurer for both lawyers – Mr. Singer and Mr. Dale – settled with Mr. Nodel, and took over the claim against Stewart Title. LawPro and Stewart Title agreed to settle their dispute about insurance coverage through an application by LawPro, in Mr. Nodel's name, for a declaration that the title insurance provides coverage for the losses incurred. The application judge declared that the exception does not apply, and that the policy does provide coverage. Stewart Title now appeals, claiming that the application judge erred.

THE ARGUMENTS OF THE PARTIES AND THE STANDARD OF REVIEW

[12] Stewart Title argues that there is no need to look beyond the four corners of the policy because the language of Clause 2 is clear and unambiguous. Stewart Title says that on the plain language of the provision, the proceeds of the mortgage have to be disbursed or directed to the registered title holder for the exception to be avoided and for insurance coverage to apply. During oral argument before this court, Stewart Title explained that this entails the requirement that the money be transmitted into the hands of the registered title holder. It says that since the money was paid to the borrower's lawyer, it was not paid into the hands of the registered title holder.

[13] Stewart Title urges that the application judge erred, in turn, by: (i) failing to give effect to this clear meaning, and in finding ambiguity by looking at the word "paid" in isolation; (ii) "giving no weight to the factual matrix surrounding how the Policy language operates in practice and in its commercial context" when resolving the ambiguity; and (iii) resorting to contra proferentem reasoning before exhausting other methods of contract construction.

[14] LawPro contends that the application judge's conclusion is correct. It argues that the words "are paid to" cannot be confined to payment transmitted into the hands of the registered title holder without nullifying coverage under the policy. It agrees that "paid to" is unambiguous, but argues that it is unambiguously a broad enough term to encompass many methods of payment, including payment to the borrower's trustee. In the alternative, LawPro argues that if Stewart Title's proposed interpretation is viable and the exception is ambiguous, then that ambiguity must be resolved in favour of coverage, as the application judge did.

[15] The parties agree that this appeal is to be determined on a correctness standard because the policy is a contract of adhesion or a standard form contract. See also MacDonald v. Chicago Title Insurance Company of Canada, 2015 ONCA 842, 127 O.R. (3d) 663, at para. 41; and Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co., 2016 SCC 37, [2016] 2 S.C.R. 23, at para. 46.

[16] In oral argument, LawPro placed great emphasis on the fact that the legal burden is on Stewart Title because it is relying on an exception. I do not agree that the burden of proof is central to this appeal. It is true that where coverage is established or conceded, an insurer bears the burden of establishing that an exception to that coverage applies: Progressive Homes Ltd. v. Lombard General Insurance Co. of Canada, 2010 SCC 33, [2010] 2 S.C.R. 245, at para. 51. This case does not turn, however, on a factual contest. It is about whether the application judge's construction of the policy is correct, a question not heavily affected by who bears the burden of proof.

FOCUSING THE INQUIRY

[17] Before examining whether the application judge was correct, I want to address the fact that much of the information shared with us was of limited utility.

[18] First, we were presented with a series of documents released by Stewart Title to its "Examining Counsel" setting out its expectations and approval practices. These documents are largely irrelevant. The documents released to "Examining Counsel" are not incorporated into the insurance policy. Even though these documents purport to reflect Stewart Title's interpretation of its contracts of insurance, it is trite law that the meaning of an insurance contract is to be found within the four corners of the policy. The plain meaning of the language in the context of the policy governs unless the language is ambiguous, in which case the search is for the intention of the parties as determined using the tools of construction, including, if necessary, the rules of strict construction. The meaning that terms bear in a contract cannot be controlled by the subjective interpretations of one of the parties to the contract as reflected in other documents that the party generates. The Supreme Court's decision in Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, [2014] 2 S.C.R. 633, at paras. 59-61, expressly distinguished admissible objective evidence of the factual matrix from inadmissible parol evidence of a party's subjective intent.

[19] We have also been provided with detailed information about Stewart Title's insurance application process, and the breadth of the direction to pay that Mr. Singer was provided. In my view, this information is also largely irrelevant.

[20] As the application judge mentioned, she was not dealing with the enforceability of the policy. The issue before her, and hence before us, relates to the interpretation of an exception in a contract of adhesion, and whether the payment that was made triggered the exception. That exception is a term of a standard form contract. As such, its meaning does not vary from case to case, nor is that meaning affected by the way the application process unfolded in this particular case.

[21] In my view, the sole contribution the backstory can make arises if the clear words of the contract do not settle matters. If that occurs, this backstory can assist in illustrating the broader commercial context in which the contract must be interpreted, a point I will return to later.

[22] Similarly, whether the policy provides coverage for the losses incurred does not depend on the direction to pay, but rather on the actual payment made. The application judge found that the money was "disbursed to the borrower's lawyer, in trust for his client." That finding has not been appealed.

[23] The sole issue requiring resolution before the application judge, therefore, was whether the exception was invoked by payment to the borrower's lawyer in trust for the borrower. As indicated, the sole issue before us is whether the application judge was correct in holding that the exception did not apply.

ANALYSIS

A. Overview

[24] In my view, Clause 2 is ambiguous. As discussed below, the application judge attempted to apply the ordinary meaning of "are paid to", and came to the conclusion that the phrase includes payment in trust to the borrower's lawyer. However, as I will explain, given the context in which "are paid to" is used, its ordinary meaning does not resolve the matter.

[25] Stewart Title's contention that the ordinary meaning of Clause 2 requires direct delivery to the registered title holder suffers from problems of its own, not the least of which is that such an interpretation would nullify the mortgage fraud insurance coverage in its entirety, a construction impermissible in law.

[26] Given that the ordinary meaning of the terms cannot apply, there are at least two potential meanings that arise for the language used, in context. Either the exception arises where money is paid beneficially to someone other than the borrower, or where money is handed over or delivered to someone other than the borrower.

[27] When Clause 2 is interpreted in context, in light of the reasonable expectation of the parties and in a commercially sensible manner, the ambiguity that is created by these complications is resolved. Properly interpreted, that exception is triggered if the proceeds of the mortgage are transferred beneficially to any person or entity other than the borrower in the Insured Mortgage transaction. Payments in trust to the borrower's lawyer for the borrower do not fall within that exception, since, in law, such payments are to the borrower, not to any person or entity other than the borrower.

[28] I will begin by examining the juridical nature of a payment in trust, followed by an evaluation of the application judge's attempt to resolve the interpretation of Clause 2 by using ordinary language. I will then identify the difficulties with the interpretation offered by Stewart Title using ordinary language. Finally, I will review and support the application judge's alternative analysis, involving the use of the tools of construction to resolve the meaning of the Clause 2.

B. The Juridical Nature of a Trust

[29] Since this case is a contest over whether an authorized payment to a lawyer in trust is payment to the client-borrower within the meaning of Clause 2, it is helpful to put the dispute into context by describing, in simple terms, the juridical nature of a trust.

[30] "A trust is a fiduciary relationship, which exists between a trustee and a beneficiary (or beneficiaries), whereby the trustee holds title to property and manages it for the benefit of the beneficiary who has exclusive enjoyment of it": Dunnison Estate v. Dunnison, 2017 SKCA 40, [2017] S.J. No. 205, at para. 15, citing Donovan W.M. Waters, ed., Waters' Law of Trusts in Canada, 4th ed. (Toronto: Carswell, 2012) at p. 9.

[31] A trust beneficiary has an equitable entitlement to compel a trustee to use its legal ownership over the property for the benefit of the beneficiary, according to the terms of the trust. Indeed, a sole trust beneficiary who is a competent adult and absolutely entitled to the trust property can, at any time, collapse the trust and demand delivery of full title, relying on the rule in Saunders v. Vautier, [1841] E.W.H.C. J82, affirmed (1841), 41 E.R. 482 (Eng. Ch. Div.): Eileen E. Gillese, The Law of Trusts, 3rd ed. (Toronto: Irwin Law, 2014), at pp. 85-88. This right "is based upon the theory that, though title and management rest in the trustees, the significance of property lies in the right of enjoyment": Waters' Law of Trusts, at p. 1235.

[32] Not surprisingly, a beneficial interest in a trust is therefore considered to be "property" for the purposes of the Family Law Act, R.S.O. 1990, c. F.3: Rawluk v. Rawluk, [1990] 1 S.C.R. 70, [1990] S.C.J. No. 4, at p. 91; and Hamilton v. Hamilton (1996), 92 O.A.C. 103 (C.A.), [1996] O.J. No. 2634, at paras. 32-40. Indeed, the beneficiary of a resulting trust was described in Kerr v. Bananow, 2011 SCC 10, [2011] 1 S.C.R. 269, at para. 16, citing A.H. Oosterhoff et al., Oosterhoff on Trusts: Text, Commentary and Materials, 7th ed. (Toronto: Carswell, 2009), at p. 25 as "the true owner" of the trust property.

[33] For these reasons, a party owing a payment obligation to another will be considered, in law, to have fulfilled that obligation by transferring the payment, as directed, to the trustee of the person to whom the payment is owed. Put more plainly, delivery to the trustee is a mode of paying the beneficiary. Indeed, it is through payment to a lawyer in trust that mortgage funds are typically advanced. The instant question is whether, by its terms, Clause 2 removes this usual method of payment as an acceptable method of payment if insurance coverage is to apply.

C. The Application Judge's "Ordinary" Interpretation

[34] The application judge did not offer a precise definition of Clause 2, the exception clause. What she did was accept that the exception did not apply because the clause accommodated the applicant's "ordinary proposition that payments to a lawyer, in trust of his or her client, are payments to the client. This is another way to pay the registered title holder/borrower."

[35] Stewart Title suggests that the application judge effectively interpreted the words "are paid to" as meaning "disbursed in such a way as to amount at law to payment that satisfies an obligation." If this is what the application judge did, her interpretation is consistent with the ordinary meaning of the operative word "paid", taken in isolation. As I will explain shortly, it is not consistent, however, with the way the phrase "are paid to" is used in Clause 2. I will nonetheless begin with the ordinary meaning or the operative word "paid" because this discussion remains relevant to the ultimate meaning of Clause 2.

[36] The ordinary denotative or technical meaning of "paid" does require payment in satisfaction of an obligation. The word "paid" is not a synonym for "disbursed to" or "directed to" or even "delivered to". This is because the concept of payment is inherently legalistic, denoting more than mere transmission or transfer to another. If I gift money to another, I am not paying them. If I transfer money to another, I am not necessarily paying them. I am only paying them in the ordinary sense of the term if I transfer money to them in satisfaction of an obligation. And if I, as a lender, transfer money with the borrower's authority to the borrower's lawyer, that borrower would be hard-pressed to argue credibly that the money owed was not paid to them. In effect, the ordinary meaning of the term "paid" describes more than a physical act of transfer. It requires a transfer that has an effect, namely, the satisfaction of an obligation.

[37] In coming to this conclusion the application judge relied on Black's Law Dictionary, 10th ed. (Thomson West, 2014), at p. 1309, to list five definitions of "pay." The fifth, "[t]o be profitable; to bring in a return", refers to a different and inapplicable use of the term, unfitting in the context of an insurance policy. The other four definitions all require that the transfer be made in fulfilment of an obligation:

1. To give money for a good or service that one buys; to make satisfaction.

2. To transfer money that one owes to a person, company, etc.

3. To give (someone) money for the job that he or she does; to compensate a person for his or her occupation.

4. To give (money) to someone because one has been ordered by a court to do so.

[38] The first and third definitions expressly link the act of transmission and the effect of transmission – specifically, (1) giving money to make satisfaction and (3) giving money to compensate. The other two definitions imply that payment is in satisfaction of obligations – specifically, (2) to discharge a debt and (4) to comply with a court order. The ordinary definition of pay does not simply describe an act of transmission.

[39] Stewart Title, which contends that the phrase "paid to" describes only the act of handing the money over, is correct in insisting that words, or even a phrase, cannot be interpreted in isolation, but must be read in the context of the contract as a whole. In my view, this does challenge the ordinary meaning of the word "paid" I have described.

[40] As indicated, Clause 2 provides, in material part, that Stewart Title can deny coverage "in the event that the proceeds of the Insured Mortgage are paid to any person or entity other than: i) to the registered title holder". In Clause 2, the term "are paid to" therefore contemplates money being "paid" to two categories of recipient: (i) to the "registered title holder", which will satisfy the mortgage lender's obligation; and (ii) to any other "person or entity", which may not satisfy the mortgage lender's obligation. The natural, ordinary, or denotative meaning of "paid" does not extend to delivery to persons not in satisfaction of the relevant obligation. By using the term "are paid to" with reference to such transfers, it appears that a meaning other than the ordinary meaning described is meant to apply. It follows that the ordinary meaning of the words used in Clause 2 does not resolve the issue decisively in LawPro's favour.

D. The Difficulty with Stewart Title's Interpretation

[41] Stewart Title argues that the ordinary meaning of Clause 2 requires transmission into the hands of the registered title holder before there will be insurance coverage. In its factum, Stewart Title attempted to rely upon the second of the four definitions I have reproduced above to support this position. It urged that the "ordinary meaning of 'paid' means … to transfer money that one owes to a person, company, etc." (emphasis in original). In my view, even if this definition were to be chosen it would not be decisive in Stewart Title's favour. The transfer of money owed to a person can be achieved by putting the money into the hands of the person owed, or by transferring the money to an authorized agent of the person owed, including a trustee of a trust in which the person owed is the beneficiary. There is nothing in the ordinary language of Clause 2 to require the kind of direct payment to the borrower that Stewart Title calls for.

[42] Even if the ordinary meaning of Clause 2 does purport to require transmission into the hands of the registered title holder before there will be insurance coverage, which I do not accept, Clause 2 cannot be given this interpretation. This is because no mortgage fraud occurs where money is transmitted into the hands of the registered title holder. If Clause 2 were to require transmission into the hands of the registered title holder for coverage to apply, the policy would provide no actual mortgage fraud insurance. As a matter of law, an exception clause that results in a policy insuring nothing is nullified: Cabell v. The Personal Insurance Company, 2011 ONCA 105, 104 O.R. (3d) 709, at paras. 1-2. Simply put, if Clause 2 does purport to negate coverage where mortgage proceeds are not transmitted into the hands of the registered title holder, Clause 2 is a nullity.

[43] No doubt because of this difficulty, Stewart Title conceded before the application judge that "receipt by an approved party is not part of the definition of are paid to". Its position before the application judge was that if money is paid in trust to a lawyer with an undertaking to disburse the funds directly to an approved party, then that will suffice even if mortgage fraud then occurs.

[44] The application judge rejected Stewart Title's attempt to interpret Clause 2 in this way because doing so would require reading words into the provision that are not there. In my view, the application judge was right in this regard.

[45] Perhaps because of this difficulty, Stewart Title changed its position on appeal. It retreated from the concession that payment in trust will suffice if there is a direction to pay the registered title holder, and now contends that payment in trust to the borrower's lawyer under direction to pay the borrower will satisfy the policy only if delivery is ultimately made to the borrower. In an attempt to skirt the nullification problem this new interpretation gives rise to Stewart Title accepts that the policy would have provided coverage in this case if the money had been received by the imposter rather than the lawyer in trust. The problem with this attempt to find some room for coverage in the policy is that the policy requires that proceeds of the Insured Mortgage be "paid to … the registered title holder", and an imposter is not "the registered title holder".

[46] Simply put, in promoting its "ordinary interpretation", Stewart Title encountered a paradox. Because of the nullification doctrine, its ordinary interpretation submission relating to Clause 2 depends on avoiding the ordinary interpretation of "the registered title holder".

[47] Having made this point, the difficulty the nullification doctrine presents for the ordinary meaning of "the registered title holder" can be overcome. It could not have been in the reasonable contemplation of the parties that Clause 2 would be given an interpretation that would nullify it. The option of interpreting Clause 2 as requiring receipt by the actual registered title holder is not on the table, if the clause is going to be interpreted to be valid. Where a clause reasonably bears a meaning that would not nullify it, then the meaning that should apply is the one that maintains the clause's validity. "Registered title holder" must therefore be read as the application judge evidently did, and as both parties have assumed throughout, as a reference to the individual identified as the registered title holder in the Insured Mortgage transaction; in other words, the borrower.

[48] Even though the ambiguity in the term "registered title holder" can be overcome in this way, it is obvious from this problem alone that the meaning of Clause 2 cannot be resolved using the ordinary or natural meaning of the words. In my view, Clause 2 is ambiguous in another more central respect, a point I now turn to below.

E. The Proper Construction

(1) Clause 2 is Ambiguous

[49] In her alternative analysis, the application judge found that if Stewart Title's interpretation was viable, then Clause 2 would be ambiguous based on the contested interpretations of the provision. She also found that Stewart Title's position was effectively a concession of ambiguity, given Stewart Title's attempt "to limit the different ways a payment can be made, allowing some but not others", without any supporting language in the policy. On appeal, Stewart Title argues that the application judge erred in finding ambiguity on these bases.

[50] I need not resolve the dispute over whether these bases for finding ambiguity are appropriate. In my view, Clause 2 is ambiguous because the ordinary language of Clause 2 does not offer a clear or settled meaning. I have explained that, because Clause 2 contemplates payments that do not satisfy obligations, the ordinary meaning of "paid" – disbursed in such a way as to amount at law to a payment that satisfies an obligation – cannot apply. The failure of the ordinary meaning of that operative word to provide a clear meaning leaves open more than one possible interpretation of Clause 2.

[51] On the one hand, even without a transfer satisfying an obligation, the operative word "paid" in the phrase "are paid to" connotes a transfer of the benefit of money. This interpretation would, of course, service LawPro's position that payment to the borrower's lawyer in trust for the borrower is enough, since payment to the borrower's lawyer in trust is considered in law to be a payment for the benefit of the borrower.

[52] On the other hand, a more colloquial use of the phrase could simply describe the act of transmitting money from one to another. This interpretation would service Stewart Title's position that, properly interpreted, Clause 2 requires that the mortgage proceeds be transmitted directly into the hands of the registered title holder before there will be insurance coverage.

(2) Resolving the Ambiguity

[53] Stewart Title takes issue with the way the application judge resolved the ambiguity in Clause 2. It urges that the application judge should have exhausted all means of ascertaining the meaning of the language before turning to the contra proferentem principle. In my view, the application judge complied with this analytical scheme.

[54] The first thing the application judge did in an effort to resolve the ambiguity she perceived was to look at the context of the policy, the reasonable expectations of the parties, and the reasonable commercial results – the very things Stewart Title says must go into the construction of the contract before the contra proferentem principle applies. Indeed, at para. 43 of her reasons, the application judge adverted to and applied the principles of interpreting insurance contracts that this court endorsed in MacDonald, at para. 66.

[55] This exercise by the application judge did not produce the result that Stewart Title desired. In the application judge's words at para. 59 of her reasons:

Relevant surrounding circumstances support the conclusion that the exception permits payments to a lawyer in trust for his or her client. Both the regulatory regime and common practice support the applicant's interpretation as reasonable and commercially sensible. And the regulatory regime and common practice are part of the industry in which the insurer operates.

[56] The application judge's analysis is persuasive. In my view, an interpretation of Clause 2 that is supported by the context of the policy, the reasonable expectations of the parties, and the reasonable commercial results, supports LawPro's position and defeats Stewart Title's claim that only direct transmission to the borrower will permit coverage.

[57] Interpreted in context, the term "are paid to" is capable of describing either a transfer of beneficial ownership or the act of transmitting money. In my view, however, the former use of the term is more natural. This is because the concept of payment connotes the transfer of beneficial interest, and not just the act of transmission. In other words, the term "are paid to" more naturally refers to the effect of a transfer rather than the act of transmission. Interpreting "are paid to" in context as describing the transfer of beneficial interest in money honours the connotation of the term, whereas interpreting "are paid to" as simply describing the act of transmitting money requires setting aside both the denotation and the ordinary connotation of the phrase. Thus, the contextual interpretation preferred by LawPro is the more natural interpretation.

[58] The reasonable expectations of the parties also serves LawPro's preferred interpretation. As the application judge noted, payment of mortgage money to a borrower's lawyer in trust is a routine practice. In my view, it would not be in the reasonable contemplation of the parties that using the standard method of disbursing mortgage money to the borrower would disqualify mortgage fraud insurance.

[59] Moreover, disqualifying coverage where payment is made to the borrower's lawyer in trust would not produce a reasonable commercial result. As the application judge pointed out, if the borrower has counsel, the lender's lawyer cannot deal directly with the borrower and must deal with the lawyer.

[60] Indeed, if Stewart Title's position that Clause 2 requires direct delivery to the borrower is accepted, even a direct deposit into a bank account in the name of the borrower would not suffice to assure coverage. This is because a depositor does not own the money in the account. The bank does, subject to a simple debtor's obligation to pay the amount of the deposit to the depositor as its creditor: Foley v. Hill (1848), 2 H.L. Cas. 28, 9 E.R. 1002 (U.K.H.L.); and B.M.P. Global Distribution Inc. v. Bank of Nova Scotia, 2009 SCC 15, [2009] 1 S.C.R. 504, at para. 63. It follows that a direct deposit by the lender into the borrower's bank account would not entail direct delivery to the borrower, even if the negotiable instrument used to achieve payment was made payable in the borrower's name. The interpretation Stewart Title offers would therefore effectively absolve it from paying insurance unless the lender put a bag of money or a cheque directly into the borrower's hands. In my view, such an interpretation is not commercially reasonable because direct payment of the kind contemplated would be impractical and inefficient.

[61] In my view, Stewart Title's submissions about the involvement of lawyers being inadequate to prevent fraud, or the goal of improving visibility of the destination of mortgage proceeds, do not add weight to its interpretation either. These matters may well be of concern to insurers, but they are not the kinds of considerations that, in the face of the routine use of "in trust" payments, can sustain a mutual or objectively reasonable expectation that the exception would disqualify coverage if "in trust" payments are made to lawyers. Put more plainly, these are subjective concerns that insurers may hold. They are not the kinds of considerations that the parties to an insurance policy, the insurer and the insured, would naturally contemplate in understanding the meaning of the policy's terms.

[62] Nor am I persuaded that trust payments to lawyers do not provide a commercially reasonable mode of paying mortgage advances given the risks of mortgage fraud, whereas payment to financial institutions would do so. Lawyers are obliged by Rules of Professional Conduct to take steps to assure the identity of their clients, and trust funds held by lawyers receive greater legal protection than bank deposits do. While Stewart Title would be well within its rights to insist that insurance coverage will extend only if money is paid directly into the hands of borrowers, or into their bank accounts, the disparity in the security of transactions it claims between trust payments to lawyers and deposits into financial institutions is not, in my view, a consideration that can drive the interpretation of Clause 2, based either on considerations of the parties' reasonable expectations or commercial reasonableness.

[63] The specific "elements" cited by Stewart Title in its factum as relevant to the factual matrix it relies upon, cannot fairly drive the interpretation of this standard form contract either. The fact that this transaction was a private lender contract cannot colour the meaning of a general exception clause that purports to apply to all lender contracts, private or not. Meanwhile, Mr. Singer's subjective awareness that payments to third parties unrelated to the transaction increases the risk of fraud is irrelevant to the meaning of a standard form contract. Even converting Mr. Singer's subjective appreciation into a more general proposition that third party payments are a flag indicating possible fraud says nothing about payments to lawyers authorized to receive funds for lenders, since those lawyers are not third parties. Questions asked by Stewart Title, one party to a contract, of its "Examining Counsel" when considering an insurance request may reflect its policy positions in lending, but cannot drive the contractual interpretation of an agreement entered into with others.

[64] Simply put, a consideration of the factors that Stewart Title says should have been examined first by the application judge in resolving any ambiguity in Clause 2 actually defeats an interpretation of the exception that would invalidate coverage if payment is made to lawyers in trust for the borrower.

[65] Properly interpreted using these tools of construction, the Clause 2 exception is triggered if the proceeds of the mortgage are transferred beneficially to any person or entity other than the borrower in the Insured Mortgage transaction. Payments in trust to the borrower's lawyer do not fall within that exception, since, in law, they are payments to the borrower.

[66] In my view, had these ordinary tools of construction not resolved the meaning of "are paid to" in Clause 2, things would not have become easier for Stewart Title. If there is ambiguity in a valid exclusion clause, that exclusion clause will be strictly or narrowly interpreted. As this court explained in Cabell, at para. 11, "ambiguity in the policy will be construed against the insurer, applying the contra proferentum doctrine" (emphasis in original). On this basis, it is difficult to see how the term "are paid to" can be interpreted to exclude the conventional way of advancing mortgage money by payment to a borrower's lawyer in trust for the borrower.

[67] As a result, Clause 2 cannot be relied upon by Stewart Title to exclude coverage in this case. Either the clause is invalid as an improper attempt to nullify coverage under the policy, or Clause 2 is to be interpreted as including payment to the borrower's lawyer in trust as money "paid to … the registered title holder".

[68] Since this resolves the question on appeal, it is unnecessary to deal with the respondent's fresh evidence application.

CONCLUSION

[69] In my view, the application judge was correct in declaring that the exception in Clause 2 does not exclude coverage for the loss incurred by Mr. Nodel, and that the title insurance provides coverage for the losses incurred. I would dismiss the appeal.

[70] Counsel for both parties agree that the successful party should receive costs in the amount of $20,000, inclusive of taxes and disbursements. I would therefore order costs in that amount to the respondent. I would not disturb any costs award made in the proceedings below.

David M. Paciocco J.A.

I agree. Gloria Epstein J.A.

Nordheimer J.A. (Dissenting)

[71] I have read the very thorough reasons of Paciocco J.A. and agree with much of the analysis he undertakes. I agree that the standard of review is correctness. I also agree that the burden of proof is not central to this appeal because this case does not turn on a factual contest. I further agree that much of the additional material provided to us was of limited, if any, assistance. Unfortunately, I do not agree with my colleague with respect to his conclusion on the central issue, that is, whether the exception clause is ambiguous.

[72] My colleague has set out the factual background to this case so I do not need to repeat it.

[73] In my view, the answer to the question posed by this appeal is, in the first instance, a straight forward one. Is the language of the exception to the title insurance policy ambiguous? If it is, then a more detailed analysis must follow, as my colleague has undertaken. If it is not, then Stewart Title Guaranty Company ("Stewart Title") was entitled to deny coverage and the matter ends. As Rothstein J. said in Progressive Homes Ltd. v. Lombard General Insurance Co. of Canada, 2010 SCC 33, [2010] 2 S.C.R. 245, at para. 22:

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…

[Citation omitted.]

[74] Although they reach their conclusions through different routes, both my colleague and the application judge conclude that the language of the exception is ambiguous. I do not agree.

[75] This whole case arises from the reality that the borrower was not in fact the registered title holder. Rather, he pretended to be the registered title holder and was, apparently, able to convince his lawyer, Mr. Dale, that he was, in fact, the registered title holder. There can be no dispute that the insurance policy was intended to provide coverage against such a result, but only if the terms of the policy were complied with. This is the commercial context that surrounds this insurance contract interpretation appeal.

[76] The starting point for the analysis is the actual language of the exception. While my colleague has set out the language above, I repeat it here for the sake of convenience. The exception is contained in Clause 2 of Schedule B to the policy. It reads, in part:

Notwithstanding anything else contained within this Policy, in the event that the proceeds of the Insured Mortgage are paid to any person or entity other than: i) to the registered title holder or holders, as the case may be […] then the Company can deny coverage…

[77] There is no dispute on the facts of this case that the proceeds of the Insured Mortgage (as defined in the policy) were not paid to the registered title holder. Rather, the proceeds were paid to Mr. Dale, the lawyer for the imposter registered title holder. They were so paid pursuant to a written direction, ostensibly signed by the registered title holder, that the funds were to be paid to "Bryan R. Dale in trust or as he may further direct in writing". The question is whether that method of payment falls within the exception language in Clause 2.

A. The Coverage Exception is Not Ambiguous

[78] In my view, fairly read, there is nothing ambiguous about the wording of the exception. It is clear that Stewart Title is entitled to deny coverage if the proceeds are paid to "any person or entity" other than the registered title holder. The right to deny coverage is clear from the opening words of Schedule B:

This policy does not insure against loss or damage [...] which arise by reason of...

[79] Stewart Title has the right to create exceptions to the insurance coverage it is agreeing to provide. Once an insured accepts the insurance policy provided, the insured is bound by the exceptions, just as any person is bound by the terms and conditions of any contract to which they are a party. As Moldaver J.A. said in Stuart v. Hutchins (1998), 40 O.R. (3d) 321 (C.A.), 164 D.L.R. (4th) 67, at para. 30:

Trite though it may be, an insurer has the right to limit coverage in a policy issued by it and when it does so, the plain language of the limitation must be respected.

[80] Both my colleague and the application judge reject this plain meaning because it would result in the "policy insuring nothing". That conclusion is based on their interpretation that a plain meaning interpretation would suggest that the funds had to be received by the actual registered title holder, otherwise Clause 2 would apply. I do not share their view.

[81] This disagreement frames the central issue in this appeal: what is the meaning of the words "are paid to" as used in Clause 2? The nullity consequence relied upon both by my colleague and the application judge only occurs if the words "are paid to" are given the restricted interpretation prescribed by the application judge as "disbursed in such a way as to amount at law to payment that satisfies an obligation".

[82] With respect, that is not the only plain meaning of the word "paid" and it is not the appropriate meaning to be given in the context of this contract of insurance. The Oxford Dictionary of English, 3rd ed. (Oxford University Press, 2010) defines "pay" as meaning, among other things, to "Hand over or transfer the amount due" to someone. This is also consistent with the second definition of "pay" to which my colleague refers from Black's Law Dictionary, 10th ed. (Thomson West, 2014), at p. 1309, that is, "To transfer money that one owes to a person, company, etc."

[83] My colleague says that the plain meaning of "hand over or transfer" cannot be accepted "because no mortgage fraud occurs where money is transmitted into the hands of the registered title holder". This is because my colleague restricts the meaning of "registered title holder" to "actual registered title holder", and excludes an "imposter registered title holder". As such, the title insurance contract would be of no use if the monies had to be paid to the actual registered title holder. In his view, the words "are paid to" must be given a meaning that ameliorates the restrictive meaning that he imposes upon the words "registered title holder". Therefore, my colleague interprets the words "are paid to" to include a payment to the borrower's lawyer. Further, my colleague also holds the view that one cannot "pay" an imposter registered title holder because there is no legal obligation to be discharged vis-à-vis the imposter. Again, I do not agree.

B. The Commercial Context

[84] With respect, my colleague's interpretation is detached from the commercial realities of the context of this case. The object of the title insurance contract must be kept in mind. What is being insured against is the possibility that money will be transmitted into the hands of a person, who is believed to be the registered title holder, but who is not, in fact, that person. The plain meaning of "are paid to" in this context is a transfer or hand over of money that may or may not satisfy an obligation. And the plain meaning of "registered title holder" must include an "imposter registered title holder". In this case, if the funds had been transferred or handed over to the imposter registered title holder, the insurance coverage would have applied. But that is not what happened. Rather, the money was handed over to a lawyer.

[85] The words "are paid to" and "registered title holder" have to be understood in the context of the instant insurance contract. This fundamental principle regarding the interpretation of a contract was stated in Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, [2014] 2 S.C.R. 633, where Rothstein J. said, at para. 47:

Regarding the first development, the interpretation of contracts has evolved towards a practical, common-sense approach not dominated by technical rules of construction. The overriding concern is to determine "the intent of the parties and the scope of their understanding" […] To do so, a decision-maker must 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. Consideration of the surrounding circumstances recognizes 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:

No contracts are made in a vacuum: there is always a setting in which they have to be placed. ... In a commercial contract it is certainly right that the court should know the commercial purpose of the contract and this in turn presupposes knowledge of the genesis of the transaction, the background, the context, the market in which the parties are operating…

[Citations omitted.]

[86] The same point was again made in Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co., 2016 SCC 37, [2016] 2 S.C.R. 23, a case that also dealt with insurance policies, where Wagner J. said, at para. 50:

These rules include that the interpretation should be consistent with the reasonable expectations of the parties, as long as that interpretation is supported by the language of the policy; it should not give rise to results that are unrealistic or that the parties would not have contemplated in the commercial atmosphere in which the insurance policy was contracted…

[87] In this case, the commercial purpose of the title insurance policy is clearly to protect against fraud, that is, the receipt of monies by someone other than the person who is expected, and entitled, to receive the funds. Consequently, the term "registered title holder", as used in Clause 2, cannot mean the actual registered title holder because, as my colleague quite correctly points out, that would eliminate any opportunity for the insurance coverage to apply. In order to give commercial sense to the contract, in other words to have it operate as the parties bargained for and intended, the term "registered title holder" must be understood as meaning a person who everyone involved in the transaction believes to be the actual registered title holder. It is the possibility of those persons being duped, in that regard, which constitutes the event that the title insurance policy insures against. This does not mean that the term "registered title holder" is ambiguous because, as Rothstein J. observed, "words alone do not have an immutable or absolute meaning": Sattva, at para. 47. It simply means that the term has to be understood in a manner that honours the commercial purpose of the contract.

[88] A substantially similar point applies to the use of the term "are paid to" in Clause 2. Where the same word has different meanings, it is not appropriate to create an ambiguity as a consequence of adopting a meaning of a word that leads to an absurdity or, in this case, results in the nullification of insurance coverage. Rather, the proper rules of interpretation direct that one first looks for a meaning of the word that does not render terms of the contract ineffective: Weyerhaeuser Company Limited v. Ontario (Attorney General), 2017 ONCA 1007, at para. 65. In this case, given that there are different meanings for the words "pay" or "paid", the interpretative process ought to begin with giving the word a meaning that will not result in the insurance coverage being nullified. Neither my colleague's approach, nor that of the application judge, accords with that fundamental principle.

[89] One of the "surrounding circumstances known to the parties at the time of formation of the contract" was that the more hands that mortgage monies pass through, the greater the chance for mortgage fraud to occur. As the Law Society of Upper Canada noted in its March 24, 2005 "Report to Convocation on Mortgage Fraud", at para. 21:

In this type of transaction, numerous parties are involved – many never know or actually meet each other in person. Without due diligence throughout the process, it is easy for fraudsters to pass themselves off and to take advantage of the lack of oversight.

[90] In light of that reality, Stewart Title had the contractual right to restrict the parties, in terms of their movement of the funds, given the purpose of the insurance. Stewart Title was entitled, as a term of its coverage, to only permit the mortgage funds to be transmitted to the person who was believed to be the registered title holder and not to any intermediary, including the purported registered title holder's lawyer. Insofar as this involved a departure from the usual or routine practice of monies being paid to a party's lawyer in trust, Stewart Title was entitled to insist on that departure in favour of a requirement that the monies had to be paid to the registered title holder. Put another way, Stewart Title was entitled to insist on a more restricted method of payment in order to reduce its exposure under the policy.

[91] Therefore, contrary to what my colleague concludes, the language in Clause 2 is unambiguous in my view. The plain meaning of the words "are paid to" in this context is the transferring of an amount to another. In particular, the words "are paid to" carries this meaning, given the context of the case and the commercially reasonable expectations of the parties to this title insurance contract. As such, there is no contradiction in concluding that Clause 2 is not invoked where a transfer of funds is made to an imposter registered title holder with no legal effect. Since the plain meaning of the words do not give rise to an ambiguity, there is no basis to read into Clause 2 an additional method of "paying to a lawyer in trust".

C. Restricting the Opportunities for Fraud

[92] It might be asked why this makes a difference. Surely payment to the party's lawyer is payment to the party, as some, including my colleague, would say. The answer to that question is evident from this case. If payments are allowed to be made to the registered title holder's lawyer, Stewart Title is then relying on the lawyer to ensure that his or her client is, in fact, the registered title holder. As this case (and, unfortunately, many others) proves, that is not always a reliable safeguard. If, on the other hand, the monies have to be paid (that is transferred) to the registered title holder, instead of the lawyer receiving the funds and then retransmitting them as directed by his or her client, then the funds have to be transferred or handed over to the person who purports to be the registered title holder. Normally, such a transfer will be accomplished either by way of cheque or electronic transfer. In that situation, the purported registered title holder must convince some financial institution that he or she is the actual registered title holder in order to receive the funds. Stewart Title was entitled to its reasonable belief that Canadian financial institutions may be less easily fooled by a fraudster than a lawyer might be. By requiring this method of payment only, Stewart Title could rely on the extra security steps that a Canadian financial institution must take when dealing with its account holders to reduce the possibility of fraud.

[93] In this case, for example, if a cheque or electronic transfer for the mortgage funds had been directed to John Colarieti, the actual registered title holder, then in order to gain control over the funds, the imposter would have had to arrange with a Canadian financial institution for an account to receive those funds so that the imposter could then gain access to them. Again, I believe that one can reasonably assume that a Canadian financial institution, approached by an individual asking to receive $1.1 million, would require a high level of proof of the identity of the individual before it would agree to process such a sum. I say Canadian financial institution since the actual registered title holder, Mr. Colarieti, was known to be Canadian. This was not a transaction involving foreign investors or borrowers, or a transaction that otherwise called for the funds to be sent out of the country. Indeed, under the meaning I give to the exception, if the borrower had asked that the mortgage funds be transferred to a foreign financial institution or foreign location, that, in and of itself, might have given rise to questions which might have revealed the fraud.

[94] Mr. Nodel argues that there was no evidence that requiring the monies to be paid in the manner involving a Canadian financial would invoke "more stringent scrutiny" than in a private lender transaction. I make two observations in response to that point. First, the application judge accepted that more stringent scrutiny would likely be the result from the requirement that a Canadian financial institution be involved. She said, at para. 66 of her reasons, "I accept that a bank may take steps that would reduce the risk of fraud, to the benefit of Stewart Title." Second, common sense should be sufficient to conclude that would be the case. However, in the end result, it matters not whether increased scrutiny would have resulted in fact. The point is that Stewart Title was entitled to contractually require payment of the funds to the registered title holder, and not through a lawyer, because it believed that would reduce the risk of fraud.

D. Payments to Agents

[95] Another ground on which my colleague and I differ in respect of the plain meaning of Clause 2, is the application of the general principle that payment to an authorized agent is payment to the person to whom the obligation is owed. The application judge took the same approach as my colleague. She said, in her reasons at para. 59:

Relevant surrounding circumstances support the conclusion that the exception permits payments to a lawyer in trust for his or her client. Both the regulatory regime and the common practice support the applicant's interpretation as reasonable and commercially sensible. And the regulatory regime and common practice are part of the industry in which the insurer operates.

[96] I do not quarrel with this general proposition or the "common practice" described. But the general proposition and industry practice has little application where the manner of payment is expressly provided for and restricted by the contract itself. As I have already alluded to, a party to a contract is entitled to exclude what may otherwise be normal or routine manners of payment. It is especially entitled to do so where it is insuring against fraudulent conduct. In this case, Stewart Title saw fit to preclude the ability to pay through intermediary agents (as that term is understood in law).

[97] I would also note, on this point, that the concern raised that lawyers must deal with other lawyers, and not with a party directly, does not arise here nor can it be used to bolster my colleague's interpretation. What is central to the issue raised is how the monies are transmitted, not who transmits them. Put another way, it is a question as to whom the cheque for the proceeds is made payable, not who delivers the cheque or to whom it is delivered.

[98] The proposition that my colleague advances in support of his interpretation that payment to the borrower's lawyer was permitted might have more sway if Clause 2 had been worded more generally. For example, if Clause 2 had read simply "Unless the proceeds are paid to the registered title holder", then the scope for payment to an agent, such as a lawyer, might be more easily found. That is not, however, how the exception is worded. Clause 2 expressly provides that if payment is made to "any person or entity" other than the registered title holder, then the exception applies. With respect, the wording could not be clearer.

E. When Does Ambiguity Actually Arise?

[99] Finally, the suggestion was made that, because there has been a debate over the meaning of the words used in the exception, that disagreement on its own establishes that the language is ambiguous. I do not accept that proposition. I have no doubt that lawyers can find a basis to argue over different interpretations no matter what words are used. Indeed, I suspect that there are no words used in a contract or statute that lawyers could not argue over. The fact that they can use their talents for that purpose does not mean that the words are, in fact, ambiguous. As Iacobucci J. said in Bell ExpressVu Limited Partnership v. Rex, 2002 SCC 42, [2002] 2 S.C.R. 559, at para. 30:

For this reason, ambiguity cannot reside in the mere fact that several courts – or, for that matter, several doctrinal writers – have come to differing conclusions on the interpretation of a given provision. Just as it would be improper for one to engage in a preliminary tallying of the number of decisions supporting competing interpretations and then apply that which receives the "higher score", it is not appropriate to take as one's starting point the premise that differing interpretations reveal an ambiguity.

[100] It follows from this same point that the mere fact that a word has more than one plain meaning does not automatically render the meaning of that word ambiguous when it is used in a contract or other document. Rather, in keeping with the modern rule of interpretation, one employs the meaning of the word that is consistent with the purpose of the contract. In the context of this contract of title insurance the meaning of the word "paid" must be "hand over or transfer" in order to fairly achieve the purpose of Clause 2, which is to reduce the likelihood of fraud, while still maintaining coverage when a fraud occurs.

[101] I would add that holding the parties to a strict interpretation of the insurance contract does not produce any unfairness in this case. The true victim in this case, Mr. Nodel, has been compensated for his loss. What is left is a battle between two insurers as to which of them should bear the loss. Given that it is clear that it was the lawyer who allowed himself to be duped by the imposter, it does not seem unreasonable that his insurer, LawPro, should be the one to bear the resulting loss.

CONCLUSION

[102] The fact of the matter is that the wording of the exception is unambiguous and by its plain terms it applies to this situation. The mortgage funds were not handed over or transferred to the registered title holder, or the person everyone assumed was the registered title holder, and thus the funds were not paid in accordance with the terms of the insurance contract. If they had been, and the person posing as the registered title holder had managed to make off with the funds, then undoubtedly Stewart Title would have had to provide coverage (subject to any other defences or claims against others). But that is not what happened in this case. The mortgage funds were paid in breach of the express terms of the insurance policy. As a result, Stewart Title was entitled, under the terms of its policy, to deny coverage.

[103] I would allow the appeal, set aside the order of the application judge, and dismiss the application.

Released: April 9, 2018

G.E.

I.V.B. Nordheimer J.A.