DATE: 20051205
DOCKET: C42262
COURT OF APPEAL FOR ONTARIO
GOUDGE, ARMSTRONG and LANG JJ.A.
B E T W E E N :
LEANNE HULL MACDOUGALL
Bryan Finlay, Q.C. and Stephen W. Ireland for the appellant
Plaintiff (Appellant)
- and -
BARTLETT HERBERT MACDOUGALL
A. Burke Doran, Q.C. and Jacqueline Mills for the respondent
Defendant (Respondent)
Heard: October 7, 2005
On appeal from the judgment of Justice Bonnie L. Croll of the Superior Court of Justice dated July 16, 2004 made at Toronto.
LANG J.A.:
[1] The appellant wife, Leanne MacDougall, appeals from the judgment of Justice Croll, which granted various declarations flowing from her interpretation of the spousal support section of a marriage contract.
A. Overview
[2] The wife challenges only two interpretations of the numerous ones considered by the trial judge. First, the wife challenges the interpretation of the subsection providing for the annual variation of support. Second, she challenges the interpretation of the subsection providing for a minimum amount of support.
[3] The wife’s first challenge succeeds because the interpretation given by the trial judge did not consider the context of the provision within the contract and the intention of the parties. The second challenge fails because the trial judge’s interpretation is correct.
B. Facts
[4] Before they married, the parties entered into a marriage contract. In their tenth year of marriage, when the husband was 53 years old and the wife 48, the parties executed a new marriage contract. They separated seven years later. The marriage contract requires the amount of spousal support to be determined through arbitration on the basis of several considerations, including the husband’s income.
[5] At the time of their marriage contract, both parties were financially secure. The husband expected to maintain and improve his already significant employment income and, in addition, anticipated a future inheritance of at least $3 million (ss. 12.3 and 13.1 of the contract).
[6] The husband raises a new argument on this appeal. While he argues that the wife is not in financial need because she has significant assets, the wife's current financial position is irrelevant to the interpretation of the contract, which is an exercise in discerning the parties’ intention at the time they entered into the marriage contract.
[7] The marriage contract provides that support would depend, among other considerations, on both the husband’s income from employment and his income from all sources. In accordance with these two categories of relevant income, the arbitrator fixed the initial amount of spousal support at $351,900 annually. At the time, the husband earned $1,180,005 in total income from all sources, $876,673 of which was attributable to his employment income as an investment dealer. Since then, apart from the year 2000 when the husband experienced a negative income, the husband's annual income from all sources has not fallen below $663,719 and his employment income had not fallen below $549,224.
[8] Where the parties disagree is on the interpretation of the contract’s variation provision when the husband experiences a decrease in income. The wife argues that, properly interpreted, the provision entitles her to support calculated on the greater of the husband’s two income categories: his employment income and his income from all sources. The husband argues that the provision operates to reduce the wife’s support by the greater of the two percentage decreases in his income.
[9] For example, if the husband’s employment income diminishes by 15%, and his income from all sources diminishes by 10%, the wife argues that she is entitled to a variation based on the greater of the husband's incomes so that her support would diminish by only 10%. In contrast, the husband argues that support would reduce by the higher percentage of decrease: 15%.
[10] The parties also disagree on whether the contract provides a minimum level of annual support for the wife. While the husband argues that the subsection providing for minimum support applies only to the initial determination of support and not to its subsequent variations, the wife argues that it applies every year.
C. The Support Agreement
[11] Section 15 deals with both spousal support and its variation. The two subsections at issue provide as follows:
s. 15.5 The amount of support determined by the arbitrator shall be subject to annual variation in proportion to the annual increase or decrease, if any, in the Husband's total income from employment, or total income from all sources as described in paragraphs 15.4 and 15.3 hereof, whichever is greater.
s. 15.4 The parties expressly agree that the amount of support awarded by the arbitrator in favour of the Wife and to be paid to her by the Husband in each year shall not be less than an amount equal to the greater, in any year, of:
(a) 40% (FORTY PERCENT) of the Husband's total income from employment; and
(b) 20% (TWENTY PERCENT) of the Husband's a total income from all sources referred to in subparagraph 15.3 hereof.
The Parties agree that for the purpose of this Section 15 hereof, the Husband's total income from employment shall mean the average of the Husband's total income from employment in the three full calendar years immediately preceding the commencement of the arbitration provided for under this, Section 15.
[12] The following is a brief summary of the other support subsections of the marriage contract that may inform the interpretation of the two challenged subsections:
15.1 An arbitrator will determine the amount of spousal support payable.
15.2 The arbitrator will consider the parties’ intention that spousal support will be liberal and generous and reflect the standard of living enjoyed by the parties during their marriage.
15.3 The arbitrator will consider all the circumstances of the parties, including the husband's total income from all sources and any other income.
15.6 The parties shall make full financial disclosure on request as long as the husband is obliged to pay spousal support.
15.7 The parties agree to arbitration.
15.8 The husband's obligation to pay support shall end upon the earliest of the husband's death (providing there is life insurance); the wife's death; the wife's remarriage; or the wife becoming the spouse of another man.
15.9 Either party may seek a variation of support in the event of an unforeseen material change in circumstances.
15.10 The support payments shall be included in the wife's income and deducted from the husband's for income tax purposes.
[13] The wife argues that other provisions of the contract may also be relevant to the interpretation. Those provisions are summarized as follows:
12.3 The husband specifically acknowledges that he anticipates receipt of a substantial inherited property.
13.1 The husband will be required to make an equalization payment only if, among other events, the husband inherits not less than $3 million.
17.1 The parties acknowledge that the wife holds life insurance on the husband's life in the amount of $2,500,000, which policy shall be maintained until the husband is no longer obliged to pay spousal support.
17.3 As long as the wife is entitled to spousal support, the husband shall provide the wife with sufficient funds to maintain the life insurance policy.
19.1 If the husband receives periodic disability insurance payments, or periodic payments of personal injury proceeds, such payments shall be considered part of the husband's total income from employment for the purposes of calculating spousal support.
D. The Trial Decision
[14] After canvassing the particulars of the parties’ marriage and separation, as well as the post-separation arbitration results, the trial judge considered numerous interpretation issues. Those issues included the interpretation of the arbitrator’s function; the subsection 15.2 "generosity" provision; the interpretation of the contract with respect to deductions and inclusions and other calculations of the husband's income; and a determination of the base year on which future variations would be calculated, which the trial judge concluded was 1996.
[15] In interpreting the overall structure of the spousal support section and the arbitrator’s function, the trial judge concluded that support was to be determined in a two-step process. First, the arbitrator would determine the base level of support. Second, the parties would apply the s. 15.5 variation formula to the initial support without any involvement of the arbitrator.
[16] After determining that the contract provided a formulaic approach to variation, the trial judge interpreted the formula set out in the variation subsection. She canvassed the submissions made by both parties and agreed with the husband that, while “negative 10 is a larger absolute number than negative 40,” the subsection referenced “the greater variation.” In the example given by the trial judge, where one category of the husband’s income decreased by 10% and the other by 40% the wife’s support would decrease by 40%, because 40% is a greater variation than 10%.
[17] Accordingly, the trial judge concluded that “whichever is greater” refers, not to the change that would give the wife the greater amount of support, but instead to the greater proportional change in the percentage increase or decrease of the husband's two defined types of income.
[18] In explaining her reasoning, the trial judge said:
While Mrs. MacDougall's interpretation of paragraph 15.5 is a creative one and accords with the mathematical principles of integers, in my view, it distorts the meaning of paragraph 15.5 and it does not reflect common sense. It is the size or span of the change that is determinative, not the absolute value of the negative number. In other words, a change of 40% is greater than a change of 10%, whether positive or negative.
For these reasons, I find that the words "whichever is greater" in paragraph 15.5 modify the phrase "annual variation in proportion to the annual increase or decrease" and paragraph 15.5 refers to the greater proportional change, regardless of whether it is an increase or decrease."
[19] The trial judge then considered the second issue in this appeal: whether the contract provided for a minimum annual amount of support. Based on her earlier determination that the contract required a two-step process, the trial judge concluded that the minimum support provision related only to the first step, the initial determination of support, and was not relevant to the later variation of support.
E. Principles of Interpretation
[20] The principles of contract interpretation are not in issue on this appeal. In interpreting a contract, effect must first be given to the intention of the parties. The principles are explained in Consolidated-Bathurst Export Ltd. v. Mutual Boiler and Machinery Insurance Co., [1980] 1 S.C.R. 888:
[T]he normal rules of construction lead a court to search for an interpretation which, from the whole of the contract, would appear to promote or advance the true intent of the parties at the time of entry into the contract. Consequently, literal meaning should not be applied where to do so would bring about an unrealistic result or a result which would not be contemplated in the commercial atmosphere in which the insurance was contracted. Where words may bear two constructions, the more reasonable one, that which produces a fair result, must certainly be taken as the interpretation which would promote the intention of the parties. Similarly, an interpretation which defeats the intention of the parties and their objective in entering into the commercial transaction in the first place should be discarded in favour of an interpretation of a policy which promotes a sensible commercial result. (p. 901)
[21] In B.G. Checo International Ltd. v. British Columbia Hydro and Power Authority, [1993] 1 S.C.R. 12 the Supreme Court provides further guidance:
It is a cardinal rule of the construction of contracts that the various parts of the contract are to be interpreted in the context of the intentions of the parties as evident from the contract as a whole (pp.23-24)
[22] Applying that principle to domestic contracts, a court must search for an interpretation that is in accordance with the parties' intention at the time they entered into the contract. Where two interpretations are possible, the court should reject the one that would produce a result that the parties would not have reasonably expected at the time they entered into the contract. Instead, the court should favour an interpretation that promotes the reasonable expectations of the parties and that provides a sensible result in the family law context. To arrive at such an interpretation, the court must interpret the provision in the context of the entire contract, including the entirety of the section at issue, to discern the likely intention of the parties.
F. Standard of Review
[23] Given the context of the primary issue in this case - the interpretation of a variation provision in a domestic contract - the question arises as to the appropriate standard of review on appeal.
[24] The appellant argues that the nature of the question in this case raises a question of law because it relates to the legal effect to be given to the words of the contract. Such a question attracts a standard of review of correctness. The respondent argues that the question is one of mixed fact and law, attracting a standard of review of palpable and overriding error.
[25] The leading authority on standard of review is Housen v. Nikolaisen, 2002 SCC 33, [2002] 2 S.C.R. 235. Housen does not address directly the standard of review for the interpretation of a contract. Rather, it canvasses the standard of review in a case involving the application of the law of negligence to findings of fact. In that context, it distinguishes among questions of fact, questions of law, and questions of mixed fact and law concluding that questions of fact are reviewed on the standard of palpable and overriding error and questions of law on the standard of correctness. Where the question of fact and of law are inextricably intertwined so that the question is one of mixed fact and law, the trial judge’s finding is entitled to deference.
[26] This court has considered the interpretation of a contract in two post-Housen decisions: Palumbo v. Research Capital Corp. (2004), 72 O.R. (3d) 241 (C.A.) and Casurina Limited Partnership v. Rio Algom Ltd. (2004), 181 O.A.C. 19.
[27] In Palumbo, Laskin J.A. reviewed the trial judge’s interpretation of a clause in an employment contract relevant to a damages claim in an action for wrongful dismissal. In considering the standard of review, he said:
The standard of review of the interpretation of a contract provision ordinarily is correctness. However, even if a deferential standard of review is called for, I consider the trial judge’s interpretation … to be unreasonable. (para. 32)
[28] In Casurina, Feldman J.A. upheld the interpretation of a contract, finding that the trial judge had applied the proper principles of interpretation, including consideration of the whole of the contract and the purpose of the trust at issue. Relying on Petty v. Telus Corp. (2002), 2002 BCCA 135, 164 B.C.A.C. 152 at para. 14, referring to Chitty on Contracts, 28th ed. (London: Sweet & Maxwell, 1999) at para. 12-046, she found “the construction of a written instrument is a question of mixed fact and law.” (para. 34)
[29] Before Housen, Laskin J.A. wrote on a question of contract interpretation in Bradscot (MCL) Ltd. v. Hamilton-Wentworth Catholic District School Board (1999), 42 O.R. (3d) 723 at 728-29 (C.A.):
I do not think that there is one “right” interpretation of the words … in the instruction to tenderers. Both the interpretations given by Shaw J. in the Smith Bros. case and the interpretation given by Somers J. in the present case are reasonable … Moreover, the appellant does not suggest that Somers J. applied incorrect principles of contract interpretation. Faced with two interpretations, either of which is reasonable, and no error in the application of the relevant legal principles, in my view this court should defer to the finding of the trial judge. [emphasis added]
[30] To begin with, the trial judge must apply the proper principles of contract interpretation, including consideration of the clause in the context of the entirety of the contract. A failure to follow the proper principles, including a failure to apply a fundamental principle of interpretation, would be an error of law attracting review on the standard of correctness.
[31] To the extent that this task of interpretation includes consideration of extrinsic evidence, or a determination of the factual matrix, the trial judge is involved in making a finding of fact, or drawing inferences from a finding of fact. Further, the trial judge’s “interpretation of the evidence as a whole” is one involving factual or inferential determinations. See Amertek Inc. v. Canadian Commercial Corp. (2005), 200 O.A.C. 38 at para. 68. Such questions of fact are entitled to deference and are not to be overturned except in the case of palpable or overriding error, or its “functional equivalents”: “clearly wrong”, “unreasonable”, and “not reasonably supported by the evidence”. See H.L. v. Canada, 2005 SCC 25, [2005] 1 S.C.R. 401 at para. 110.
[32] In interpreting the contract, the trial judge also applies the legal principles to the language of the contract in the context of the relevant facts and inferences. This requires the application of law to fact. This has been said to be a question of mixed fact and law. See Algoma Steel Inc. v. Union Gas Ltd. (2003), 63 O.R. (3d) 78 at paras. 19, 21 (C.A.); Amertek, supra at para. 68.
[33] Accordingly, in reviewing the trial judge’s interpretation of a contract, the appellate court must first classify the question as one of fact, law, or mixed fact and law. If the question is an inextricable intertwining of both fact and law, the question can be said to be one of mixed fact and law. Housen, supra, said this about such questions in the negligence context:
To summarize, a finding of negligence by a trial judge involves applying a legal standard to a set of facts, and thus is a question of mixed fact and law. Matters of mixed fact and law lie along a spectrum. Where, for instance, an error with respect to a finding of negligence can be attributed to the application of an incorrect standard, a failure to consider a required element of a legal test, or similar error in principle, such an error can be characterized as an error of law, subject to a standard of correctness. Appellate courts must be cautious, however, in finding that a trial judge erred in law in his or her determination of negligence, as it is often difficult to extricate the legal questions from the factual. It is for this reason that these matters are referred to as questions of "mixed law and fact". Where the legal principle is not readily extricable, then the matter is one of "mixed law and fact" and is subject to a more stringent standard. The general rule, as stated in Jaegli Enterprises, supra, is that, where the issue on appeal involves the trial judge's interpretation of the evidence as a whole, it should not be overturned absent palpable and overriding error. (para. 36)
[34] In this case, the first question of the interpretation to be given to the variation provision is to be reviewed on a standard of correctness. The trial judge’s interpretation did not include a cardinal rule of contract interpretation: to examine the subsection within the context of the entire contract. In the second interpretation of the minimum support, the trial judge did consider the correct legal principles.
G. Issue 1: Did the trial judge err in concluding that the annual variation in spousal support would be calculated on the basis of the greatest proportional change in the husband's income?
[35] The answer to this issue depends upon the interpretation of the following provision:
s. 15.5 The amount of support determined by the arbitrator shall be subject to annual variation in proportion to the annual increase or decrease, if any, in the Husband's total income from employment, or total income from all sources as described in paragraphs 15.4 and 15.3 hereof, whichever is greater.
[36] The parties agree that, if the husband experiences increases in both types of income, the wording of this subsection requires that spousal support be varied in accordance with the greater increase, which gives the wife the benefit of the greater amount of support. Following from that, argues the husband, in the event he experiences a decrease in one type of income, spousal support should vary in accordance with the proportional greater decrease.
[37] In other words the husband says that “whichever the greater” must be taken to mean “whichever is the greater number; whether positive or negative. On the other hand, the wife says it must be taken to mean, “whichever provides the wife with greater support.”
[38] If the husband's interpretation, which was accepted by the trial judge, is correct then the wife would be disentitled from all spousal support once the husband ceases employment. This would be so because, if the husband's income from employment decreased by 100%, spousal support would also decrease by 100% to zero. This would be the case even if the husband experienced an increase in income from all sources that more than compensated for his loss of employment income.
[39] In arriving at this interpretation, the trial judge’s reasons demonstrate an error in two respects. First, they interpret subsection 15.5 as a stand-alone provision, without reference to other provisions of the contract or the intention of the parties, contrary to the approach required by Consolidated-Bathurst, supra and B.G. Checo, supra. Second, they do not promote a reasonable and fair result that would achieve the intention and objective of the parties when entering into the agreement.
a) The need to interpret the provision within the context of the entire contract
[40] On the first point, the interpretation of subsection 15.5 must be made in the context of other provisions of the contract. In this case, other provisions indicate the parties’ intention to provide for ongoing spousal support even in the face of the husband’s unemployment, given his significant other income. This is so for several reasons.
[41] First, subsection 15.8 of the contract provides for the termination of spousal support on the earliest of certain events, including the death of one of the parties or the remarriage of the wife. Importantly, this subsection does not provide for the termination of spousal support in the event the husband ceases employment.
[42] If the parties had intended spousal support to end with the husband's employment, they would have explicitly so provided in this forty-three page sophisticated and comprehensive marriage contract. They did not do so despite the fact that, when the contract was executed, the husband, then 53 years of age, was anticipating a $3 million inheritance. Surely, the possibility that the husband might cease paid employment would have been within the reasonable expectation of the parties.
[43] Second, on its face, this interpretation is inconsistent with subsection 15.2 of the contract, which provides that "support for the Wife be liberal and generous." While the trial judge concluded that this provision applies only to the determination of the initial amount of support, she also found that the intention of generosity was “inherent” in all future support adjustments. Even assuming that the trial judge was correct in both, it is inconsistent with this intentional generosity to find that the husband intended to be generous in setting the initial support but that, within days of exhibiting that generosity, he could render it nugatory and eliminate his obligation to pay spousal support by leaving his employment. Such an interpretation would be particularly illogical when the husband, a wealthy man, would reasonably expect to have other income from which to meet his obligations.
[44] Third, the interpretation of the variation provision urged by the husband is inconsistent with subsection 15.4 of the contract, which as the trial judge found, provides minimum initial support for the wife. The parties cannot have intended both that the wife receive substantial minimum initial support in one subsection and then give the husband a unilateral means of terminating that support altogether in a later subsection.
[45] Fourth, the contract provides that the wife will hold life insurance on the husband's life in the amount of $2,500,000, and that the husband will ensure payment of the $27,000 annual premium for that policy as long as the wife receives support. There would have been no reason for the parties to agree to the life insurance provision if they contemplated, at the time the contract was signed, that the husband would no longer pay spousal support once he ceased employment. If that had been the parties' intention, the contract would have provided that the husband was only obliged to maintain the life insurance as long as he continued to earn employment income.
[46] Fifth, under the terms of the contract, if the wife did not receive the proceeds of the life insurance at the time of the husband's death, the husband's estate was obliged to maintain her spousal support. It makes no sense that the wife would receive spousal support even after the husband's death, but receive no such support if he ceased employment during his lifetime.
[47] Finally, despite the husband’s argument to the contrary, the contract does not permit the wife to seek a remedy by invoking the provision of the contract allowing for variation in the event of a material change in circumstances. Such a remedy is, or may well be, precluded because the material change provision only allows for variation if the change in circumstances "could not be reasonably foreseen." Certainly, in the circumstances of these parties, it would be difficult, if not impossible, for the wife to argue that the husband's cessation of employment was not reasonably foreseeable.
[48] Given this context to subsection 15.5, it must be interpreted in a manner reasonably consistent with the other provisions of the contract. An interpretation that would provide the wife with no support where the husband is earning sizeable non-employment income is inconsistent with the other terms of the contract.
b) Reasonable intention of the parties
[49] Moreover, where two interpretations are possible, the interpretation chosen must promote the reasonable expectations of the parties and a sensible result in a family law context. The interpretation put forward by the husband does not produce such a result.
[50] This is illustrated by a situation where the husband's income from all sources increases by 10% and his employment income decreases by 15%. In those circumstances, and on the husband’s interpretation, even though the husband's overall income increases, the wife would suffer a 15% decrease in spousal support because 15% is a greater proportional change in income than 10%.
[51] Such an interpretation cannot accord with the reasonable intention of the parties. It would not have been the parties’ reasonable intention that the wife benefits during the husband's good years, but leaves her assuming all the risk in years when the husband experiences a downturn in his employment income. With such an interpretation, the wife would receive no spousal support if the husband receives no employment income, even if the husband's income from all sources more than compensates for his loss of employment income.
[52] In contrast to the husband’s interpretation, the wife’s interpretation is consistent with the sections of the agreement referred to, particularly section 15.8, and conforms to the reasonable intention of the parties that the husband pay support that would not terminate simply if he stopped working.
[53] For these reasons, it is my view that subsection 15.5 means that the initial spousal support shall be varied each year in a manner that provides the wife with the greater amount of support.
H. Issue 2: Did the trial judge err in concluding that the contract did not provide for minimum support?
[54] This issue depends on the interpretation of the following provision:
15.4 The parties expressly agree that the amount of support awarded by the arbitrator in favour of the Wife and to be paid to her by the Husband in each year shall not be less than an amount equal to the greater, in any year, of:
(a) 40% (FORTY PERCENT) of the Husband's total income from employment; and
(b) 20% (TWENTY PERCENT) of the Husband's a total income from all sources referred to in subparagraph 15.3 hereof.
The Parties agree that for the purpose of this Section 15 hereof, the Husband's total income from employment shall mean the average of the Husband's total income from employment in the three full calendar years immediately preceding the commencement of the arbitration provided for under this, Section 15.
[55] The trial judge concluded that the arbitrator was only required to determine the initial amount of support, not further variations. Since the trial judge concluded that the "minimum annual support" applied only to the initial amount of arbitrator-determined support, and subsection 15.4 specifically ties its application to the period preceding the arbitration, it cannot be relevant to later variation of that support.
[56] Further, the last paragraph of subsection 15.4 supports the trial judge’s interpretation of the balance of the paragraph. The trial judge interpreted that last paragraph to refer to an averaging of the husband's income only for the three years that preceded the arbitrator's determination of initial support, not to provide for an averaging for the purposes of subsequent variations. That unchallenged interpretation supports the trial judge’s conclusion that the balance of subsection 15.4 was not intended to apply to subsequent variations. Accordingly, whatever the standard of review, the trial judge’s interpretation is correct.
[57] Accordingly, I would dismiss the appeal on the second issue.
I. Result
[58] For these reasons, I would allow the appeal and vary the judgment below by deleting subparagraph 1(6) and substituting the following:
1(6) The words "whichever is greater" in subsection 15.5 of the contract were intended to mean whichever results provides the Wife with the greater amount of support.
[59] I would otherwise dismiss the appeal.
J. Costs
[60] The appellant has been largely successful on this appeal, and the respondent abandoned his cross-appeal. I would award the appellant costs fixed at $20,000.00 inclusive of disbursements and GST.
RELEASED: December 5, 2005
“S.E. Lang J.A.”
“I agree: D.H. Doherty J.A.”
“I agree: R.P. Armstrong J.A.”