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The interpretation of standard form contracts is an exception to the usual rule of deferential appellate review; in such cases the factual matrix is less relevant. But, modified standard form contracts may attract deferential standard.

Ontario

,

Canada

In MDS Inc. v. Factory Mutual Insurance Company, 2021 ONCA 594 an insurer appealed a ruling that it was required to provide insurance coverage and compensation for losses arising out of a nuclear reactor shutdown. The policy in question excluded coverage for losses caused by ‘corrosion’ – a term the insurer did not define. The policy contained an exception to the exclusion for physical damage not excluded by the policy at specified locations. The nuclear reactor, which was covered under the policy, was shut down because of a leak. The leak was caused by corrosion. As a result, the owner of the reactor lost profits of approximately $121M. The central issues concerned the interpretation of the corrosion exclusion, and whether business losses arising from the shutdown were payable pursuant to the exception to the exclusion for physical damage caused by corrosion.

Interpretation of Standard Form Contracts

Thorburn J.A. wrote that typically, the interpretation of standard form contracts is an exception to the usual rule of deferential appellate review. Where an appeal involves the interpretation of a standard form contract, the interpretation is of precedential value and there is no meaningful factual matrix that is specific to the parties (paras. 14-15). The factual matrix is less relevant in standard form contracts because the parties do not negotiate the terms and the contract is put to the receiving party as a take-it-or-leave-it proposition (para. 16). That having been said, Thornburn J.A. noted that the interpretation of a contract may a question of mixed fact and law, subject to deferential review on appeal, where the parties negotiated and modified what was initially a standard form contract; in these circumstances the interpretation will be of little or no precedential value. The question is whether the dispute is over a general proposition or a particular set of circumstances of little or no precedential value (para. 17).

Focus on interpreting contracts is determining parties’ contractual intent by reference to the words the parties used in drafting the document; evidence of one party’s subjective intention has no independent place in this determination (para. 37). Thorburn J.A. set out the principles on how standard form contracts of insurance should be interpreted in paras. 39-45. These included that: (a) they should be interpreted consistently, (b) effect should be given to clear unambiguous language read in the context of the policy as a whole, (c) like all contracts, they are examined in light of the surrounding circumstances, (d) words are to be given their ordinary meaning, (e) where a policy is ambiguous the rules of contract construction may be employed to resolve the ambiguity (which means reasonably susceptible of more than one meaning), (f) parole evidence may be admitted to resolve ambiguity, and (g) failing all else, courts will construe the contract contra proferentem, interpreting coverage provisions broadly and exclusion clauses narrowly.

Prejudgment Interest

Provided that the exclusions to an award of interest set out in the CJA do not apply, the trial judge’s decision to award prejudgment interest at a rate higher or lower than provided for in ss. 128 and 129 is discretionary. In exercising the discretion, the trial judge must consider changes in market interest rates, the circumstances of the case, the amount claimed and recovered, and other relevant considerations. The Court will only interfere with the discretion if based on an error of law (determined on a correctness standard), a palpable or overriding error of fact, the consideration of irrelevant factors, or the omission of factors that ought to have been considered, or if the decision was unreasonable in the sense that it is not compatible with the judicial exercise of discretion (para. 24). Courts of equity have exercise power to award compound interest whenever there is wrongful detention of money that ought to have been paid and which the company uses in its business (para. 103).

Interpretation of Corrosion

American appellate courts have consistently held that the meaning of corrosion in standard form insurance policies includes corrosion, however brought about (para. 62).

Exceptions to Exclusions

Insured has onus of proving that an exception to an exclusion applies; such clauses should be interpreted broadly (paras. 85, 93). Canadian authorities hold that exclusions for physical damage do not include loss of use or pure economic loss unless otherwise specifically provided for (para. 86). Where a policy is intended to include not only physical but economic losses, insurance policies have specifically defined property damage to include “loss of use” (para. 89).

April 14, 2022
MDS Inc. v. Factory Mutual Insurance Company, 2021 ONCA 594