Deslaurier Custom Cabinets Inc. v. 1728106 Ontario Inc.
[Indexed as: Deslaurier Custom Cabinets Inc. v. 1728106 Ontario Inc.]
Ontario Reports
Court of Appeal for Ontario
Cronk, Pepall and B.W. Miller JJ.A.
April 12, 2017
135 O.R. (3d) 241 | 2017 ONCA 293
Case Summary
Appeal — Standard of appellate review — Correctness standard of review applying to interpretation of contract where it is possible to identify extricable question of law within what was initially characterized as question of mixed fact and law.
Contracts — Interpretation — Standard of review — Tenant obtaining summary judgment against landlord for recovery of its losses arising from fire at leased premises — Court of Appeal finding that motion judge's interpretation of lease was tainted by several legal errors involving extricable questions of law which attracted correctness standard of review — Court allowing landlord's appeal after finding that motion judge failed to apply binding appellate authority regarding contractual allocation of risk, failed to assign meaning to all contested terms of lease and adopted construction of lease that failed to accord with governing principles of contractual interpretation — Supreme Court of Canada remanding matter to Court of Appeal for reconsideration in light of its decision in Ledcor Construction — Court of Appeal affirming its decision — Correctness standard still applying to extricable questions of law that arise in interpretation process after Ledcor.
The plaintiff tenant obtained summary judgment against the defendant landlord for recovery of its losses arising from a fire at premises leased under a non-standard form commercial lease. The landlord appealed. The Court of Appeal addressed the standard of review applicable to the motion judge's interpretation of the lease, and noted that, while the interpretation of a negotiated contract is generally subject to a deferential standard of review, the correctness standard will apply to questions of contractual interpretation where it is possible to identify an extricable question of law from what was initially characterized as a question of mixed fact and law. The court held that the motion judge's interpretation of the lease was tainted by several legal errors involving extricable questions of law, so that the correctness standard was engaged. The court found that the motion judge erred in her interpretation of the lease (a) by failing to hold that the tenant had contractually assumed the risk of any damage to its property and business arising from the leased premises; (b) by admitting extrinsic evidence of the landlord's leases with other tenants in the absence of evidence establishing that the existence and contents of the other tenants' leases formed part of the factual matrix of the lease and in the face of some evidence to the contrary; and (c) by ruling that the tenant's admitted breach of its contractual obligation to add the landlord as an additional insured to its property damage insurance policy did not bar its subrogated claim against the landlord for losses to the tenant's property arising from the fire. The appeal was allowed (the "appeal decision"). The tenant sought leave to appeal to the Supreme Court of Canada. The Supreme Court directed that the matter be remanded to the Court of Appeal for disposition in accordance with its recently released decision in Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co.
Held, the appeal decision should be affirmed.
Nothing in Ledcor deviated from the principle that the correctness standard of review applies to extricable questions of law arising within what is initially characterized as a question of mixed fact and law. In this case, as a starting point, the motion judge's interpretation of the lease involved a question of mixed fact and law subject to deferential appellate review. However, the motion judge's failure to identify and apply binding appellate authority on contractual allocation of the risk, her failure to assign meaning to all the contested terms of the lease and her adoption of a construction of the lease that failed to accord with the governing principles of contractual interpretation involved extricable questions of law which attracted the correctness standard of review.
Counsel
D.H. Rogers, Q.C. and Rebecca Moore, for appellant.
Matthew J. Halpin, for respondent.
BY THE COURT
I. Background
[1] On October 1, 2014, Deslaurier Custom Cabinets Inc. (the "tenant") obtained summary judgment in the Superior Court of Justice against 1728106 Ontario Inc. (the "landlord") for recovery of its losses arising from a fire at premises leased by it from the landlord under a commercial lease dated November 28, 2007 (the "lease"): Deslaurier Custom Cabinets Inc. v. 1728106 Ontario Inc., [2014] O.J. No. 4124, 2014 ONSC 5148 (S.C.J.) and [2014] O.J. No. 4643, 2014 ONSC 5533 (S.C.J.). The fire occasioned significant damage to the landlord's building and the tenant's property and business.
[2] The landlord appealed. On April 4, 2016, this court allowed the appeal, set aside the summary judgment and dismissed the tenant's action against the landlord: Deslaurier Custom Cabinets Inc. v. 1728106 Ontario Inc., (2016), 130 O.R. (3d) 418, [2016] O.J. No. 1705, 2016 ONCA 246, 399 D.L.R. (4th) 575. Costs of the appeal were awarded to the landlord: Deslaurier Custom Cabinets Inc. v. 1728106 Ontario Inc., [2016] O.J. No. 2886, 2016 ONCA 436.
[3] The appeal hearing involved the following issues, described at para. 24 of the appeal decision:
What standard of review applied to the motions judge's decision?
Did the motions judge err in her interpretation of the Lease:
- a) by failing to hold that the Tenant had contractually assumed the risk of any damage to its property and business arising from fire?
- b) by relying on extrinsic evidence concerning the Landlord's leases with other tenants in the building to aid in her interpretation of the Lease?
- c) by failing to hold that the Tenant's claim was barred as a result of its failure to add the Landlord as an additional insured on its property damage insurance policy?
[4] As set out in the appeal decision, this court held as follows concerning these issues:
The motions judge made several legal errors involving extricable questions of law in her interpretation of the Lease. Consequently, appellate review of her decision was governed by the standard of correctness;
The motions judge erred in her interpretation of the Lease:
- a) by failing to hold that the Tenant had contractually assumed the risk of any damage to its property and business arising from fire at the leased premises;
- b) by admitting extrinsic evidence of the Landlord's leases with other tenants in the absence of evidence establishing that the existence and contents of the other tenants' leases formed part of the factual matrix of the Lease and in the face of some evidence to the contrary; and
- c) by ruling that the Tenant's admitted breach of its contractual obligation to add the Landlord as an additional insured to its property damage insurance policy did not bar its subrogated claim against the Landlord for losses to the Tenant's property arising from the fire.
[5] On June 3, 2016, the tenant sought leave to appeal to the Supreme Court of Canada.
[6] On September 15, 2016, while the tenant's leave application was pending, the Supreme Court released its decision in Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co., [2016] 2 S.C.R. 23, [2016] S.C.J. No. 37, 2016 SCC 37.
[7] The Supreme Court did not grant or deny leave to appeal. Instead, on October 21, 2016, it directed that the case forming the basis of the application for leave to appeal be remanded to this court, pursuant to s. 43(1.1) of the Supreme Court Act, R.S.C. 1985, c. S-26, for disposition "in accordance with Ledcor" (the "remand order").
[8] Section 43(1.1) provides:
43(1.1) Notwithstanding subsection (1), the Court may, in its discretion, remand the whole or any part of the case to the court appealed from or the court of original jurisdiction and order any further proceedings that would be just in the circumstances.
[9] After the remand order, this court requested and received submissions from the parties on three issues: (a) the meaning and effect of the remand order; (b) the appropriate disposition in light of Ledcor; and (c) whether oral submissions should be received, at the request of the parties. No request for a further oral hearing was made. Accordingly, the remand case proceeded on the basis of the parties' written submissions.
[10] These reasons will explain why we remain of the view that the motion judge's interpretation of the lease is subject to appellate review on the standard of correctness and why, on application of that standard, we affirm our previous decision.
II. Meaning and Effect of Remand Order
[11] The landlord argues that the remand order directs this court to revisit only those matters addressed in Ledcor, that it is not open to this court to reconsider other matters, and that the only issue to be determined is the standard of review applicable to the motion judge's interpretation of the lease in light of Ledcor.
[12] The tenant's submissions do not expressly address the nature and scope of a remand case under s. 43(1.1) of the Supreme Court Act. That said, the thrust of the tenant's argument is that the remand order requires this court to consider afresh the merits of the issues addressed in the appeal decision in light of Ledcor's holdings on the appropriate standard of review for contractual interpretation. According to the tenant, Ledcor dictates that the standard of palpable and overriding error applies to appellate review of the motion judge's interpretation of the lease, the application of which yields a different result.
[13] Several provincial appellate courts have recently undertaken remand reviews: Canada (Procureur général) c. Syndicat canadien de la fonction publique, section locale 675, [2016] J.Q. no 633, 2016 QCCA 163, D.T.E. 2016T-121, at para. 3, leave to appeal to S.C.C. refused [2016] C.S.C.R. no 117; British Columbia (Ministry of Forests) v. Teal Cedar Products Ltd., [2015] B.C.J. No. 1180, 2015 BCCA 263, 70 B.C.L.R. (5th) 318, leave to appeal to S.C.C. granted [2015] S.C.C.A. No. 363, appeal heard and reserved November 1, 2016, at para. 2; R. v. Polches, [2008] N.B.J. No. 4, 2008 NBCA 1, 325 N.B.R. (2d) 262, at para. 18, leave to appeal to S.C.C. refused (2008), 349 N.B.R. (2d) 399 n. See, also, this court's decision in Sankar v. Bell Mobility Inc., [2017] O.J. No. 1818, 2017 ONCA 295, released concurrently with these reasons.
[14] Having considered the terms of the remand order, the parties' submissions and the available authorities, it is our view that the remand in this case is not "at large". Rather, it requires this court to reconsider its previous decision in light of the Supreme Court's authoritative pronouncements in Ledcor on issues that may have affected our disposition of the appeal. This court should not revisit questions that Ledcor does not touch upon. If the application of Ledcor mandates a different disposition, this court should alter its earlier decision in light of the teachings of Ledcor. If it does not, this court should affirm its earlier decision.
[15] Based on these guiding principles, there are two issues now before this court. First, does Ledcor mandate the application of a different standard of appellate review in respect of the motion judge's interpretation of the lease, namely, the palpable and overriding standard? Second, if the appropriate standard is that of palpable and overriding error, does the application of that deferential standard require this court to alter the appeal decision?
III. Appropriate Disposition in Light of Ledcor
(1) Standard of review discussion in appeal decision
[16] The appeal decision addressed the standard of review applicable to the motion judge's interpretation of the lease by reference to the Supreme Court of Canada's decision in Sattva Capital Corp. v. Creston Moly Corp., [2014] 2 S.C.R. 633, [2014] S.C.J. No. 53, 2014 SCC 53.
[17] In the appeal decision, this court quoted the Sattva court's holding, at para. 50, that contractual interpretation typically involves issues of mixed fact and law, "as it is an exercise in which the principles of contractual interpretation are applied to the words of the written contract, considered in light of the factual matrix". As a result, this court stated, at para. 25, "the interpretation of a negotiated contract is generally subject to a deferential standard of review".
[18] The appeal decision also recognized two exceptions to this general standard of review rule regarding contractual interpretation.
[19] First, Sattva holds, at para. 53, that in rare cases the correctness standard of review will apply to questions of contractual interpretation where it is "possible to identify an extricable question of law from within what was initially characterized as a question of mixed fact and law" (citation omitted). Justice Rothstein, writing for the Supreme Court, explained in Sattva, at para. 53, that "extricable questions of law" include legal errors involving "the application of an incorrect principle, the failure to consider a required element of a legal test, or the failure to consider a relevant factor" (citation omitted).
[20] Second, at the time of the appeal decision, the jurisprudence of some provincial appellate courts, including this court's decision in MacDonald v. Chicago Title Insurance Co. of Canada, (2015), 127 O.R. (3d) 663, [2015] O.J. No. 6350, 2015 ONCA 842, leave to appeal to S.C.C. refused [2016] S.C.C.A. No. 39, recognized an exception to the Sattva general standard of review rule for the interpretation of standard form contracts. These authorities had held that, for standard form contracts, the correctness standard applies.
[21] In Ledcor, the Supreme Court held that the correctness standard does generally apply to the interpretation of standard form contracts as the factual matrix or surrounding circumstances are usually not engaged in the interpretation exercise. See Sankar, at para. 11.
[22] The lease in this case is not a standard form contract but, rather, was negotiated by the parties. In the first instance, therefore, the palpable and overriding error standard of review applied to the motion judge's interpretation of the lease.
[23] However, in the appeal decision, this court held that the motion judge's interpretation of the lease was tainted by several legal errors involving extricable questions of law. Consequently, applying Sattva standard of review principles, the correctness standard was engaged. The court stated, at para. 31 of the appeal decision:
[T]he motions judge erred in law by failing to apply binding appellate authority regarding contractual allocation of risk. She also erred in law by failing to assign meaning to all the contested terms of the Lease and by adopting a construction of the Lease that fails to accord with the governing principles of contractual interpretation. As these errors involve extricable questions of law within the meaning of Sattva, the correctness standard of review applies.
(2) Ledcor decision
[24] Ledcor involved the interpretation of an exclusion clause and an exception to that exclusion in a common form of builders' all-risk property insurance. The exclusion clause, a standard form provision, denied coverage for the "cost of making good faulty workmanship". As an exception to that exclusion, coverage applied for "physical damage" that "result[ed]" from the faulty workmanship: Ledcor, at para. 1.
[25] The Supreme Court considered two issues in Ledcor, described at paras. 16-18. First, what standard of appellate review applies to a trial judge's interpretation of a standard form insurance contract? Second, what interpretation should be given to the faulty workmanship exclusion clause and the "resulting damage" exception to that exclusion contained in builders' risk insurance policies?
[26] The trial judge in Ledcor had found the insurers to be liable under the relevant all-risk insurance policy, a standard form contract. The Court of Appeal of Alberta had held that standard form contracts are subject to appellate review on the correctness standard, and reversed the trial decision. The Supreme Court concluded that, in certain circumstances, standard form contracts are reviewable on the standard of correctness. However, the majority of that court disagreed with the Court of Appeal of Alberta's interpretation of the policy and restored the trial judge's decision.
[27] Justice Wagner, writing for the majority of the Supreme Court, began his analysis of the standard of review applicable to a standard form insurance contract by indicating, at para. 20, that the appeals then before the court afforded an opportunity "to clarify how Sattva . . . applies to the interpretation of standard form contracts, sometimes called contracts of adhesion". He went on to state the majority's core holding on standard of review, at para. 24, in these terms:
I would recognize an exception to this court's holding in Sattva that contractual interpretation is a question of mixed fact and law subject to deferential review on appeal. In my view, where an appeal involves the interpretation of a standard form contract, the interpretation at issue is of precedential value, and there is no meaningful factual matrix that is specific to the parties to assist the interpretation process, this interpretation is better characterized as a question of law subject to correctness review.
See, also, to the same effect, the majority's comments, at paras. 4, 34 and 46.
[28] Ledcor thus identifies an exception to the general rule established by Sattva for contractual interpretation by holding that the proper interpretation of a contract is a question of law subject to appellate review on the standard of correctness where three criteria are satisfied [at para. 4]:
- "the appeal involves the interpretation of a standard form contract";
- "the interpretation at issue is of precedential value"; and
- "there is no meaningful factual matrix that is specific to the parties to assist the interpretation process".
[29] Where these three criteria are not met, Ledcor confirms that the interpretation of even standard form contracts may involve issues of mixed fact and law reviewable on the deferential standard of palpable and overriding error. Justice Wagner put it this way, at para. 48:
Depending on the circumstances, however, the interpretation of a standard form contract may be a question of mixed fact and law, subject to deferential review on appeal. For instance, deference will be warranted if the factual matrix of a standard form contract that is specific to the particular parties assists in the interpretation. Deference will also be warranted if the parties negotiated and modified what was initially a standard form contract, because the interpretation will likely be of little or no precedential value. There may be other cases where deferential review remains appropriate.
[30] The Ledcor court distinguished Sattva on a factual basis, noting, at para. 25, that Sattva involved a complex commercial agreement concluded by sophisticated parties, and not a standard form contract. As a result, Sattva did not address "the unique issues that standard form contracts raise". In contrast, Ledcor was specifically concerned with the standard of review for standard form contracts. And it is in respect of only standard form contracts that the exception for correctness review accepted in Ledcor may apply.
[31] The Ledcor court's recognition of the correctness standard for appellate review of the interpretation of standard form contracts was also grounded in its conclusion that the reasons provided in Sattva for holding that contractual interpretation is a question of mixed fact and law subject to deferential appellate review "are less compelling in the context of standard form contracts": Ledcor, at para. 26. As the majority explained, at para. 32, for standard form contracts, the surrounding circumstances generally play less of a role in the interpretation process. Moreover, where they are relevant, they tend not to be specific to the particular parties. Consequently, the importance of the factual matrix in contractual interpretation carries less weight in cases involving standard form contracts.
[32] Further, the interpretation of standard form contracts often has significant precedential import. A review of standard form contracts on the standard of correctness therefore fosters the ability of appellate courts to fulfill their functions, including their mandate of ensuring consistency in the law: Ledcor, at paras. 33-45.
[33] Of critical importance, nothing in Ledcor deviates from the holding in Sattva that the correctness standard of review applies to extricable questions of law arising within what is initially characterized as a question of mixed fact and law.
[34] To the contrary, Ledcor affirms, at para. 21, Sattva's holding that the correctness standard "still applies to extricable questions of law that arise in the interpretation process". The majority in Ledcor noted that "[t]his is consistent with the jurisprudence on the standard of review for questions of mixed fact and law" and elaborated, at para. 36:
For questions of mixed fact and law, the correctness standard applies to extricable errors of law (such as the application of an incorrect principle) because, again, a review on the standard of correctness is necessary to allow appellate courts to fulfill their role. However, where it is "difficult to extricate the legal questions from the factual", appellate courts defer on questions of mixed fact and law.
(Citations omitted)
[35] Accordingly, Ledcor directs that "Sattva should not be read as holding that contractual interpretation is always a question of mixed fact and law, and always owed deference on appeal": Ledcor, at para. 46.
[36] Justice Cromwell, in his separate reasons in Ledcor, agreed. He stated, at para. 112:
It is important to remember that Housen did not hold that all applications of a legal standard to the facts should be reviewed for palpable and overriding error. As I have discussed, Housen recognized that sometimes the analysis will turn on an extricable pure question of law. Sattva adopted this holding. Rothstein J. in Sattva acknowledged, echoing Housen, that it may sometimes be possible to identify an extricable question of law such as the application of incorrect principles, the failure to consider a required element of a legal test, or the failure to consider a relevant factor. I therefore agree with Wagner J. that "Sattva should not be read as holding that contractual interpretation is always a question of mixed fact and law": para. 46. Sattva was explicit on this point: para. 53.
[37] The application of the correctness standard of review for an extricable question of law within what is initially characterized as a question of mixed fact and law therefore accords with both Sattva and Ledcor.
[38] Ledcor also affirms other critical Sattva holdings. In Sattva, at para. 47, the court emphasized the significance of the surrounding circumstances or "factual matrix" of a contract to the determination of the parties' intent and the scope of their understanding. The court held, at para. 58, that the relevant surrounding circumstances "consist only of objective evidence of the background facts at the time of the execution of the contract . . . that is, knowledge that was or reasonably ought to have been within the knowledge of both parties at or before the date of contracting" (citation omitted).
[39] Thus, under Sattva, "the scope of the factual matrix is temporally limited to evidence of facts known to the contracting parties contemporaneously with the execution of the contract": Shewchuk v. Blackmont Capital Inc., [2016] O.J. No. 6190, 2016 ONCA 912, at para. 41. Further, "[w]hile the surrounding circumstances will be considered in interpreting the terms of a contract, they must never be allowed to overwhelm the words of that agreement" and "[t]he interpretation of a written contractual provision must always be grounded in the text and read in light of the entire contract" (citations omitted): Sattva, at para. 57.
[40] Nothing in Ledcor diminishes these important principles.
[41] To summarize, Ledcor instructs that
as Sattva holds, contractual interpretation is generally a question of mixed fact and law subject to appellate review on the deferential standard of palpable and overriding error;
as Sattva also holds, the correctness standard of review applies to extricable questions of law arising within what was initially characterized as a question of mixed fact and law;
as an exception to the general Sattva standard of review rule for contractual interpretation, the correctness standard applies where an appeal involves the interpretation of a standard form contract, the interpretation at issue is of precedential value, and there is no meaningful factual matrix that is specific to the parties to assist the interpretation process; and
as Sattva further holds, the factual matrix or surrounding circumstances of a contract remain an important consideration in the contractual interpretation exercise. The factual matrix, however, is temporally limited to objective evidence of the background facts at the time of contract formation, namely, knowledge that was or reasonably ought to have been known to both parties at or before the time of contracting.
(3) Discussion
[42] This court's key holdings in the appeal decision are set out at para. 4 of these reasons. For convenience, we repeat them here:
The motions judge made several legal errors involving extricable questions of law in her interpretation of the Lease. Consequently, in accordance with Sattva, appellate review of her decision was governed by the standard of correctness;
The motions judge erred in her interpretation of the Lease:
- a) by failing to hold that the Tenant had contractually assumed the risk of any damage to its property and business arising from fire at the leased premises;
- b) by admitting extrinsic evidence of the Landlord's leases with other tenants in the absence of evidence establishing that the existence and contents of the other tenants' leases formed part of the factual matrix of the Lease and in the face of some evidence to the contrary; and
- c) by ruling that the Tenant's admitted breach of its contractual obligation to add the Landlord as an additional insured to its property damage insurance policy did not bar its subrogated claim against the Landlord for losses to the Tenant's property arising from the fire.
[43] The tenant takes aim, on various grounds, at each of these holdings. It contends that this court's identification of extricable questions of law in the motion judge's interpretation of the lease, as well as its consideration of the motion judge's admission of extrinsic evidence to aid in the interpretation of the lease, are inconsistent with Ledcor. As a result, says the tenant, this court should restore the judgment below in favour of the tenant and remit the matter to the Superior Court of Justice for a determination of the balance of the issues in the action relating to damages.
[44] We will consider the tenant's arguments in turn.
(a) Extricable questions of law
[45] The tenant submits that, with the exception of the motion judge's rulings on the admissibility of external evidence concerning the landlord's leases with other tenants and the availability of subrogated claims against additional insureds, each of the legal errors attributed to the motion judge in the appeal decision relate to the way in which she applied correctly identified legal principles to the unique factual circumstances before her. Accordingly, the tenant says, the questions of contractual interpretation that arose on appeal are questions of mixed fact and law subject to appellate review on the deferential standard of palpable and overriding error.
[46] We disagree.
[47] To begin, this court's application of the correctness standard of review to the motion judge's interpretation of the lease was grounded in the nature of the legal errors made by the motion judge. Neither party argued at the appeal hearing, and this court did not hold, that the lease is a standard form contract. Nor is such an argument now advanced by the parties. In particular, the tenant accepts, indeed it emphasizes, that the lease is a negotiated contract.
[48] The exception for correctness review recognized in Ledcor for standard form contracts therefore has no application in this case. The correctness standard applies to the motion judge's interpretation of the lease only if the landlord has demonstrated an extricable question of law within what is otherwise initially characterized as a question of mixed fact and law.
[49] On the authority of both Sattva and Ledcor, there is no doubt that, as a starting point, the interpretation of the lease involves a question of mixed fact and law subject to deferential appellate review. This characterization of contractual interpretation, Sattva instructs, recognizes that the goal of the contractual interpretation process is to ascertain the objective intentions of the parties, an exercise that is "inherently fact specific", and that this weighs in favour of deference to first instance decision-makers on points of contractual interpretation: Sattva, at paras. 55 and 52.
[50] But that does not end the matter. Where it is possible to identify an extricable question of law from within what was initially characterized as a question of mixed fact and law, both Sattva and Ledcor hold that the correctness standard of review applies. Specifically, while Sattva warns that courts should be cautious in identifying extricable questions of law in contract disputes, it also confirms that certain types of legal questions, those that are readily extricable from the factual, trigger the correctness standard of review: Sattva, at paras. 54-55. The Ledcor court agreed: Ledcor, at para. 36; see, also, Housen v. Nikolaisen, [2002] 2 S.C.R. 235, [2002] S.C.J. No. 31, 2002 SCC 33, at para. 36.
[51] The heart of the problem is that the distinction between a question of law, which may be subject to correctness review, and a question of mixed fact and law, subject to review on the palpable and overriding standard, is difficult to draw. As the majority in Ledcor stated, at para. 41, "There is no bright-line distinction between questions of law and those of mixed fact and law." See, also, Housen, at para. 28.
[52] Both Sattva and Ledcor provide guidance on this issue. The Sattva court, for example, at para. 51, cited Canada (Director of Investigation and Research, Competition Act) v. Southam Inc., [1997] 1 S.C.R. 748, [1996] S.C.J. No. 116 for the proposition that "the degree of generality (or 'precedential value') [is] the key difference between a question of law and a question of mixed fact and law". Southam holds, at para. 37:
[A]s the level of generality of the challenged proposition approaches utter particularity, the matter approaches pure application, and hence draws nigh to being an unqualified question of mixed law and fact . . . Of course, it is not easy to say precisely where the line should be drawn; though in most cases it should be sufficiently clear whether the dispute is over a general proposition that might qualify as a principle of law or over a very particular set of circumstances that is not apt to be of much interest to judges and lawyers in the future.
(Emphasis added)
[53] Ledcor, quoting Sattva and Southam, also endorses this proposition. The Supreme Court stated in Ledcor, at para. 42:
Contractual interpretation is often the "pure application" of contractual interpretation principles to a unique set of circumstances. In such cases, the interpretation is not "of much interest to judges and lawyers in the future" because of its "utter particularity". These questions of contractual interpretation are appropriately classified as questions of mixed fact and law, as the Court explained in Sattva.
[54] The Ledcor court also noted, at para. 41, that
The definition of questions of law -- "questions about what the correct legal test is" (Southam, at para. 35) -- does not preclude classifying some questions of contractual interpretation as questions of law.
[55] Sattva and Ledcor also instruct that certain legal errors constitute extricable questions of law for standard of review purposes. These include the application of an incorrect principle; the failure to consider a required element of a legal test; the failure to consider a relevant factor; the substantive requirements for the formation of a valid contract (Sattva, at para. 53, quoting King v. Operating Engineers Training Institute of Manitoba Inc., [2011] M.J. No. 311, 2011 MBCA 80, 270 Man. R. (2d) 63, at para. 21); and the content of a given legal principle of contractual interpretation (Ledcor, at para. 33).
[56] Notably, neither Sattva nor Ledcor provide an exhaustive list of the legal errors that may constitute "extricable questions of law". In both decisions, the Supreme Court provides examples of those questions of law that may trigger review on the correctness standard.
[57] It also bears emphasis that the difficulty of identifying extricable questions of law in contractual interpretation disputes does not relieve a reviewing court from the necessity of properly characterizing the nature of the interpretation questions at issue. Indeed, in contract disputes, the proper characterization of the proposed grounds of appeal is critical: Sattva, at para. 54. Extricable questions of law must be addressed by a reviewing court when they arise.
[58] In this case, having carefully considered the teachings of Sattva and Ledcor, we remain of the view that the motion judge's interpretation of the lease is tainted by legal errors involving extricable questions of law subject to review on the correctness standard. Recall that the appeal decision, at para. 31, identified the following legal errors by the motion judge:
- the failure to apply binding appellate authority regarding contractual allocation of risk;
- the failure to assign meaning to all the contested terms of the Lease; and
- the adoption of a construction of the Lease that fails to accord with the governing principles of contractual interpretation.
[59] We have no difficulty in characterizing the first error as an extricable question of law. This error involves the motion judge's failure to consider the binding decisions of this court in Madison Developments Ltd. v. Plan Electric Co., (1997), 36 O.R. (3d) 80, [1997] O.J. No. 4249, 152 D.L.R. (4th) 653 (C.A.), leave to appeal to S.C.C. refused [1997] S.C.C.A. No. 659, and its progeny regarding contractual allocation of risk in a landlord and tenant relationship for losses arising from specified insured perils, including those occasioned by fire damage, and to factor the principles enunciated in those cases into her interpretation of the lease: appeal decision, at paras. 32-36 and 40.
[60] The tenant argues that this error merely involves the motion judge's application of governing legal principles to the particular facts before her and, hence, that it is properly characterized as a question of mixed fact and law. In support of this argument, the tenant points to passages from the appeal decision in which this court indicated that the motion judge erred in her assessment of risk allocation under the lease "by failing to apply" the principles from Madison Developments and its progeny, and from those cases referred to in the appeal decision as the "trilogy", as well as the governing principles of contractual interpretation, in her interpretation analysis: see, for example, appeal decision, at paras. 40 and 41.
[61] We do not accept this argument.
[62] We acknowledge that, on one reading, the passages from the appeal decision cited by the tenant may be taken as suggesting that the legal errors attributed to the motion judge involve only the application of accepted legal principles to the construction of the lease, a contract specific to the parties.
[63] But this reading casts too narrow an interpretation on this court's holdings in the appeal decision. While the language employed in the passages relied on by the tenant could have been crafted with greater precision, read as a whole, it is clear from the appeal decision that the first legal error identified by this court was the motion judge's failure to appreciate and take proper account of relevant precedent authorities, including binding authority, concerning contractual risk allocation. For this reason, the introductory language of para. 40 of the appeal decision refers more broadly to "the governing law regarding contractual allocation of risk".
[64] The tenant's argument assumes that the motion judge correctly identified the legal authorities and principles regarding contractual allocation of risk that governed her interpretation of the contested provisions of the lease and that she simply erred in her application of them to the specific facts of this case. This is incorrect.
[65] The motion judge's first legal error was the failure to appreciate and take proper account of precedent authorities relevant to the interpretation process. In our view, the question of what legal principles govern the interpretation of contractual risk allocation provisions is a question of law attracting the correctness standard of review. Paragraph 41 of the appeal decision reads in part:
While the motions judge referred to the principles enunciated by the Supreme Court in the Trilogy (although she made no mention of Madison Developments), at no point in her reasons did she actually apply the Trilogy and Madison Developments to the interpretation of the Tenant's Insurance Covenants.
[66] This is not an error in the manner of application of properly identified, relevant legal principles. In effect, the motion judge misdirected herself from the outset of the interpretation process by failing to identify and employ relevant legal authorities and principles in her interpretation of the risk allocation provisions of the lease: appeal decision, at paras. 42-43. On our reading of Sattva and Ledcor, this is a legal error involving an extricable question of law subject to correctness appellate review.
[67] We are mindful that, where the matter at issue is of limited precedential value and approaches "utter particularity", Ledcor and Sattva hold that it draws close to characterization as a question of mixed fact and law. But where, as here, the legal error at issue involves the failure to properly identify and employ the governing authorities and applicable principles regarding contractual allocation of risk, the matter transcends the interests of the parties and implicates the broader principle that disputes, including contract disputes, will be resolved according to law.
[68] As we see it, it cannot be said that such an error is of "utter particularity" to the parties, or that it is devoid of future interest to judges and lawyers. The goals of certainty, clarity and consistency in the law dictate that missteps in the identification of controlling legal principles be characterized as questions of law subject to correctness review. In Housen, for example, the Supreme Court held, at para. 9, that one of the underlying reasons for employing a correctness standard of review to matters of law is that "the principle of universality requires appellate courts to ensure that the same legal rules are applied in similar situations". This principle transcends the particularity of individual, fact-based disputes.
[69] This conclusion accords with the principle that even where a first instance decision-maker correctly identifies the relevant legal test, if he or she fails to actually consider an element of the test, this will constitute an error of law. As the majority of the Supreme Court notes in Housen, at para. 27, citing Southam, at para. 39:
[I]f a decision-maker says that the correct test requires him or her to consider A, B, C, and D, but in fact the decision-maker considers only A, B, and C, then the outcome is as if he or she had applied a law that required consideration of only A, B, and C. If the correct test requires him or her to consider D as well, then the decision-maker has in effect applied the wrong law, and so has made an error of law.
[70] In these circumstances, Housen confirms, at para. 27, that "what appears to be a question of mixed fact and law . . . can actually be an error of pure law". Similarly, where an impugned finding by a first instance decision-maker rests on an incorrect statement of the legal standard, this can amount to an error of law: Housen, at paras. 31 and 33-35.
[71] The second and third errors, described above, concern the failure to assign meaning to all the contested terms of the lease and the adoption of a construction of the lease that is inconsistent with the governing principles of contractual interpretation. The tenant, renewing its argument advanced at the appeal hearing, submits that these errors do not involve extricable errors of law but, rather, the application of the legal principles of contractual interpretation to a unique set of facts, a question of mixed fact and law.
[72] Again, we disagree.
[73] The motion judge's first error, described above, permeated her entire interpretation of the lease. In the appeal decision, we held, at para. 46, that her failure to deal directly with the parties' agreed allocation of risk regarding fire loss or damage to the tenant's property and business flowed from her flawed analysis of the meaning of the word "premises", a defined term under the lease. This court held, among other things, that the motion judge improperly discounted the defined meaning of "premises" under the lease and ignored several relevant provisions of the lease bearing on the intended meaning of "premises": appeal decision, at paras. 54-70.
[74] The difficulty, in this regard, is that while the motion judge correctly listed the well-established principles of contractual interpretation (appeal decision, at paras. 54 and 59), she did not actually consider several of them in her interpretation of the lease. Specifically, she ignored or discounted the requirements to consider the lease as a whole, to give effect to the parties' intentions (the principal objective of contractual interpretation) and, to the extent possible, to adopt an interpretation of the lease that assigned meaning to each of its terms: appeal decision, at paras. 54, 59, 61 and 66-70.
[75] In short, the motion judge failed to consider a number of principles relevant to the interpretation of the lease. This failure constitutes a legal error subject to correctness review. Sattva, for example, holds that the failure to read a disputed contract as a whole is a question of law that is extricable from a finding of mixed fact and law: Sattva, at paras. 53, 63-64. See, also, 1298417 Ontario Ltd. v. Lakeshore (Town), (2014), 122 O.R. (3d) 401, [2014] O.J. No. 5449, 2014 ONCA 802, at paras. 4, 7 and 8, leave to appeal to S.C.C. refused [2015] S.C.C.A. No. 43.
[76] We therefore reject the tenant's claim that the legal errors identified in the appeal decision relate only to the way in which the motion judge applied the law to the interpretation of the particular contract before her. The motion judge's interpretation of the lease, a question of mixed fact and law, involved extricable questions of law. The correctness standard of appellate review therefore applied to those questions.
(b) Other issues raised
[77] Although the tenant also attacks this court's holdings in the appeal decision concerning (a) the motion judge's admission of external evidence regarding the terms of the landlord's leases with other tenants, and (b) her ruling on the availability of subrogated claims against additional insureds, it does not claim that these issues fail to involve extricable questions of law. In our view, as set out in the appeal decision, they do.
[78] This court employed the correctness standard of review in the appeal decision in its analysis of the motion judge's rulings on these issues. The only issues now before this court concern the appropriate standard of review in respect of the motion judge's interpretation of the lease in accordance with Ledcor, and whether the application of that standard requires this court to alter the appeal decision. The tenant does not challenge the application of the correctness standard to this court's previous consideration of the motion judge's rulings on the admissibility of extrinsic evidence and the availability of subrogated claims against additional insureds. In accordance with Ledcor, there is therefore no basis for alteration of the appeal decision in respect of these issues.
[79] The tenant also argues that this court erred in its consideration of the tenant's claim against the landlord for business interruption losses. As we have said, this remand case is not an "at large" review of the merits of the issues on appeal. The tenant's business interruption claim against the landlord was not the focus of submissions before the motion judge or this court at the appeal hearing. It is not open to the tenant to now raise what are essentially new arguments regarding its business interruption claim that were not pursued on appeal and that are not Ledcor related.
IV. Disposition of Remand Case
[80] For these reasons, having reconsidered our decision in light of Ledcor, we affirm the appeal decision. The parties may make written submissions as to costs. The landlord shall deliver its brief written submissions to the registrar of this court within 15 days from the date of these reasons, and the tenant shall deliver its brief responding submissions to the registrar within ten days thereafter.
Original appeal decision affirmed.
Notes
1 We will refer in these reasons to the original judgment on appeal and this court's costs endorsement dated June 2, 2016, collectively, as the "appeal decision".
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