Mosten Investment LP v Manufacturers Life Insurance Company

QUEEN’S BENCH FOR SASKATCHEWAN

Citation: 2019 SKQB 76

Date:

2019 03 15

Docket:

Judicial Centre:

QBG 1597 of 2016 / QBG 1519 of 2017

Saskatoon

___________________________________________________________________________

BETWEEN:

MOSTEN INVESTMENT LP

Appellant

- and -

THE MANUFACTURERS LIFE INSURANCE COMPANY

o/a MANULIFE FINANCIAL

Respondent

Counsel:

Gordon J. Kuski, Q.C., Ronald L. Miller, Q.C.,

Nolan J. Dooley and Amanda M. Quayle

for Mosten Investment LP

Linda Plumpton and Crawford Smith

for The Manufacturers Life Insurance

Company o/a Manulife Financial

Eliot N. Kolers and Sinziana R. Hennig

for the intervenor, Canadian Life and Health

Insurance Association

Table of Contents

Introduction ........................................................................................................................................ 1

A Regulatory Intervention and Its Impact ....................................................................................... 4

Core Issues to Decide ....................................................................................................................... 12

Facts in Brief ..................................................................................................................................... 14

The Mosten 1 and Mosten 2 Applications ...................................................................................... 22

The Law Respecting Contractual Interpretation .......................................................................... 31

- Mosten 2 -

1.

2.

3.

The fundamental precepts of contract interpretation ............................................................ 31

Principles of interpretation specific to insurance contracts ................................................. 36

The law respecting interpretation of Standard Form Contracts ........................................... 37

Sattva .............................................................................................................................. 39

Ledcor ............................................................................................................................. 43

Sabean ............................................................................................................................. 53

(a)

(b)

(c)

The Contract Language to be Interpreted ..................................................................................... 56

The Parties’ Positions on the Proper Interpretation ..................................................................... 57

1.

2.

3.

Mosten’s position on the interpretive principles to apply ..................................................... 59

Manulife’s position on the interpretive principles to apply .................................................. 63

The parties’ disagreement on the applicable interpretive principles .................................... 66

The Context to be Considered at Stage 1 Interpretation of the Contract ................................... 72

Stage 1 Interpretation of the Contract ........................................................................................... 87

1.

2.

Mosten’s Stage 1 interpretation ............................................................................................ 87

Manulife’s Stage 1 interpretation .......................................................................................... 88

My Stage 1 Interpretation ................................................................................................................ 89

My Stage 1 Conclusion ................................................................................................................... 110

My Reasons for This Interpretation and Conclusions ................................................................. 118

1.

2.

The insurance context meaning of “premiums” .................................................................. 118

Harmonization of this interpretation of “premiums” with the balance of the contract ...... 132

Stage 2 of the Interpretation .......................................................................................................... 135

What are the Applicable Principles of General Contract Construction? ................................. 138

1.

2.

Subsequent conduct considerations ..................................................................................... 143

Parties are presumed to intend the legal consequences of their words

and the use of dictionaries .................................................................................................... 146

3.

4.

5.

Precedent and prior case law .............................................................................................. 149

Commercial certainty .......................................................................................................... 154

Illegality and the use of interpretation to avoid it ............................................................... 155

The Special Principles for Interpretation of Insurance Policies ................................................ 161

My Stage 2 Interpretation Conclusion ......................................................................................... 178

Mosten 2 .......................................................................................................................................... 182

My Analysis of the Mosten 2 Application and Decision Thereon .............................................. 187

1.

I decline jurisdiction to grant the declaratory relief sought in Mosten 2 ............................ 187

The Discretionary Nature of Declaratory Relief ......................................................................... 188

- Mosten 3 -

Declaratory Relief and Discretion Generally ............................................................................... 207

Is Mosten Outside the Two-Year Limitation Period? ................................................................. 213

If I am Wrong to Decline Jurisdiction, My Alternative Decisions ............................................. 223

1.

On the proper interpretation of the Income Tax Act and Regulations ................................ 223

The Evidentiary Issues ................................................................................................................... 246

1.

The applicable law and analysis of the objections .............................................................. 255

The Michaud affidavit ................................................................................................... 259

Other affidavits and objections thereto ......................................................................... 262

(a)

(b)

The Regulatory Issues and Analysis ............................................................................................. 291

1.

2.

The interpretation of regulations – an overview of the law and applicable principles ....... 291

The Regulation .................................................................................................................... 311

My Analysis and Conclusions ........................................................................................................ 313

1.

On the variable insurance contract issue ............................................................................ 313

Whether the Regulation has other than prospective effect .................................................. 322

Is the Regulation declaratory of the law? ..................................................................... 322

The vires issue ............................................................................................................... 329

2.

(a)

(b)

(c)

Purposive analysis and interpretation of the Regulation assuming the Lieutenant

Governor had the authority to pass retroactive regulations ......................................... 337

Conclusion on the Regulatory Issues ............................................................................................ 356

Conclusion ....................................................................................................................................... 357

___________________________________________________________________________

JUDGMENT

SCHERMAN J.

March 15, 2019

___________________________________________________________________________

Introduction

[1]

By originating applications (a form of summary procedure), Mosten

Investment LP [Mosten] asks the court to make declarations in respect of a contract

between it and The Manufacturers Life Insurance Company, operating as Manulife

Financial [Manulife]. Reduced to their essence, the declarations Mosten seeks would

interpret the contracts as having distinct life insurance and investment entitlements or

- Mosten 4 -

purposes and declare that Mosten is entitled to pay premiums, in such amounts as it

chooses, into investment options provided for in the contracts. Among the investment

options provided for in the contract are 10-year GIC-type investments that could pay

interest at the rate of 4 percent per annum or higher. Such a rate would be very

attractive to investors in the current interest rate environment.

[2]

Manulife opposes the declarations sought. Their position is that the

purpose of the contracts in question, so-called Universal Life Insurance policies, is to

provide life insurance and investments that are accrual tax exempt within such exempt

limits as the Income Tax Act, RSC 1985, c 1 (5th Supp), permits for life insurance

policies. Put another way, Manulife says the investment opportunities provided by the

contracts are inextricably linked to the core life insurance purpose and the investment

opportunities provided are limited to investments within the exempt policy criteria

under the Income Tax Act and its regulations (Income Tax Regulations, CRC, c 945)

and/or to fund future life insurance premiums payable under the policy terms. They

say the contracts or policies were never intended to permit insured parties to access

investment opportunities, as distinct or stand-alone investment rights, unconnected to

the core life insurance purpose of the contracts.

[3]

This action was heard at the same time as two other proceedings

brought by related entities Atwater Investment LP [Atwater] and Ituna Investment LP

[Ituna] against BMO Life Assurance Company and Industrial Alliance Insurance and

Financial Services Inc. respectively in which similar declarations or relief are sought

by the applicants. Each of these insurers issued Universal Life Insurance policies

which have similar provisions to the Manulife policies. Among other positions, the

insurance companies say that should the relief sought be granted, they face potential

liquidity or solvency concerns since they anticipate, on the basis of information

conveyed to them by the principals of the insureds, that the applicants will be utilizing

- Mosten 5 -

the policies to deposit or invest unlimited amounts of monies to access the specific

interest rate provided. The Canadian Life and Health Insurance Association has

intervened in each of the proceedings and advances the position that Universal Life

Insurance policies were never intended to provide, nor should they be interpreted so

as to permit the insureds, the investment opportunities the insureds seek in these

proceedings.

A Regulatory Intervention and Its Impact

[4]

The decision in each of the Ituna, Mosten and Atwater actions had been

on reserve less than 30 days when the Lieutenant Governor’s Order in Council

517/2018 was filed on October 26, 2018, as The Saskatchewan Insurance (Licence

Condition) Amendment Regulations, 2018, Sask Reg 75/2018 [Regulation], under

s. 467 of The Saskatchewan Insurance Act, RSS 1978, c S-26. The insurers take the

position this Regulation makes the various applications of Ituna, Mosten and Atwater

for declaratory relief moot. Therefore, they say I should, as an exercise of my

discretion, dismiss the various applications.

[5]

The insurers say the Regulation makes the applications moot because

the Regulation, with both retroactive and prospective operation:

(a)

(b)

prohibits licensed insurers from receiving or accepting for

deposit funds or payments in excess of the amount required to

pay the “life insurance premium” for the “eligible period” of the

contract;

“life insurance premium” and “eligible period” are so defined as

to apply to the subject policies and, in effect, prohibit the

payment, into a life insurance policy or an associated side

- Mosten 6 -

account, of any monies which are not for the purpose of paying

current or future premiums for the life insurance and current

payment of amounts permitted to be held in a life insurance

policy that is exempt from accrual taxation under the Income Tax

Act; and

(c)

“deems” each contract for life insurance issued by a licenced

insurer to contain the restrictions created by the Regulation.

[6]

Industrial Alliance, Manulife and BMO, with the support of the

Canadian Life and Health Insurance Association [CLHIA] say the Regulation:

(a)

(b)

is declaratory of what the law has always been as regards what

constitutes a premium or premiums in the context of life

insurance policies; or

in the alternative, is valid retroactive or retrospective legislation

which the Lieutenant Governor in Council passed pursuant to the

authority he had under s. 467 of The Saskatchewan Insurance Act

to address the mischief created by Ituna, Mosten and Atwater in

these proceedings and for the protection of the life insured

public.

[7]

Ituna, Mosten and Atwater take the position that:

(a)

(b)

to interpret the Regulation as the insurers argue would make the

Regulation ultra vires of the Lieutenant Governor in Council;

on a proper interpretation of the Regulation, it is prospective in

- Mosten 7 -

operation only and does not affect their vested rights; and

(c)

in any event, if the Regulation has any retroactive or

retrospective operation, there remain issues to be decided within

their various applications.

Ituna, Mosten and Atwater say that, in any event, I should decline to exercise any

discretion I have to dismiss their application on the grounds of mootness and render

my decisions on the applications heard before me in September 2018.

[8]

The parties’ positions with respect to the proper interpretation of the

Regulation and their “mootness” positions were argued before me the week of

February 11, 2019. There are, in effect, competing mootness issues that arise. As will

be apparent, the issues the insurers take in respect of the effect of the Regulation are

themselves effectively moot if I interpret the contracts as they argue I should.

[9]

Much concern was recently expressed of the need for “efficient use of

judicial resources” and how and where that should factor into my decision on whether

to render decisions on the grounds of mootness. I cannot help but observe the parties

seem to be late converts to the dogmas concerning the efficient use of judicial

resources.

[10]

Having regard to the following considerations:

(a)

(b)

the time and investment made by the litigants and the court in the

proceedings to date are, to use an accounting concept, “sunk

costs”;

appeals will likely be pursued given the very significant financial

- Mosten 8 -

implications for all parties;

(c)

given my interpretation conclusions, I could have taken an early

exit and stopped my analysis at the end of my Stage 1

interpretation of the contract. However, I concluded it to not be

in the interests of the final resolution of the disputes nor an

efficient use of judicial resources for me to not address the full

range of the issues placed before me.

(d)

the potential combination and permutations of differing opinions

or conclusions a court of appeal may have on the various issues

could well result in an appeal court returning issues back to this

Court to address or hear if a decision was not made in the first

instance.

(e)

courts of appeal have frequently stated that they find helpful,

perhaps even necessary, trial judges’ assessments of all issues.

Given the sequence of the decisions or opinions I have expressed, I concluded that it

would not be an efficient use of judicial resources nor fulfillment of the

responsibilities I have for me to not provide a trial judge’s analysis and conclusions

on the bulk of the issues addressed before me.

[11]

I appreciate that, given what could be described as threshold

conclusions, some of my following conclusions or opinions could be viewed as

essentially obiter dicta. I do not view my conclusions following threshold conclusions

as obiter. Rather, I view my judgment as a whole as addressing and deciding positions

and arguments presented in the alternative that needed to be decided. In any event, I

have chosen to engage on all issues and provided decisions on each with the objection

- Mosten 9 -

of providing the Court of Appeal with the ability to make a final determination on

each issue that might be raised in an appeal.

Core Issues to Decide

[12]

The central and overarching issue is the proper interpretation to be given

to the standard form contract in issue. More specifically, the core issue is whether:

(a)

(b)

the contract is a life insurance policy that permits limited

investment within the “exempt from accrual taxation” criteria

established under the Income Tax Act; or

a contract that provides both a policy of life insurance and

unlimited investment, within and outside the “exempt from

accrual taxation” criteria established under the Income Tax Act.

[13]

Among the more prominent subsumed issues that need to be addressed

during the interpretation exercises are the following:

(a)

(b)

What is or are the purpose(s) of the subject contract?

How is purpose to be determined? What, if any, “surrounding

circumstance” evidence can be considered in determining the

purpose(s) of the contract?

(c)

(d)

What is the meaning to be given to the undefined terms

“premiums” and “premium payments” as used in the contract?

Does the contract language as a whole, and specifically language

under the headings Carrier Fund and Payment of Premiums,

provide the insured a right to pay unlimited sums of monies as

premiums and have amounts in excess of:

- Mosten 10 -

(i)

present and anticipated future cost of insurance, premium

tax and management fees; and

(ii) qualifying exempt from accrual taxation investments in

Investment Accounts;

invested in selected interest-bearing accounts within the Carrier

Fund?

Facts in Brief

[14]

While there are significant issues regarding what evidence is properly

admissible, I do not need to address those issues at this stage of the decision. The

parties are in fundamental agreement that under Sattva Capital Corp. v Creston Moly

Corp., 2014 SCC 53, [2014] 2 SCR 633 [Sattva], which will be discussed in detail

later, the permissible factual matrix does not include evidence of a contracting party’s

subjective intention and the permissible factual matrix evidence consists only of

objective facts known to the parties at or before the date of contracting. There is also

agreement that a contract is to be interpreted as of the date it was made.

[15]

As indicated by the heading above, the objective of this section is to

summarize the essential facts in brief and thereby provide a context for the following

discussion of Stage 1 interpretation of the contract. The concept of Stage 1

interpretation is discussed below.

[16]

The policy was issued on November 19, 1997, by Aetna Life Insurance

Company of Canada as Policy No. F 2239527. Extracts from the policy language are

attached to this decision as Appendix “A”. The policy in issue insured the life of one

Dr. de Bruin for $1,000,000. At the time the policy issued, the stated total annual

minimum premium was $1,072.30. Subsequently, on July 17, 1999, he added

- Mosten 11 -

accidental death benefit coverage in the amount of $250,000. Then in 2002, he

reduced the sum insured to $175,000 as permitted by the death benefit change

provisions of the contract.

[17]

The applicant, insured and beneficiary was Dr. Walter de Bruin.

Manulife acquired the rights, liabilities and obligations of Aetna under the policy in

2004. In 2010 Mosten purchased the policy from Dr. de Bruin by way of an

assignment. Manulife recorded the assignment and acknowledged the change of

ownership to Mosten on February 22, 2010. Mosten cancelled the accidental death

benefit on Dr. de Bruin’s life, reduced the sum insured on his life to $101,000 and

later further reduced it to $25,000. Mosten added Michael Hawkins as an insured life

in a sum insured amount of $100,000. The death benefit selected by Mosten was

“Sum Insured + Fund Value (last death)”. All of these changes were in accordance

with the policy provisions and were accepted by Manulife.

[18]

As of July 19, 2010, the annual minimum premiums were stated to be

$434.30 in respect of the then sum insured of $101,000 on the life of Dr. de Bruin and

$530.00 in respect of the sum insured of $100,000 on the life of Michael Hawkins.

[19]

An illustration of a tax sheltered program was prepared for the policy by

Aetna representatives under date of October 22, 1997, and acknowledged received by

Dr. de Bruin on October 24, 1997, some three weeks before the policy was issued.

This illustration assumed a sum insured of $1,000,000 and $12,000 in annual deposits

from the 1st through the 29th years of the policy when Dr. de Bruin would be age 65.

Based upon a level guaranteed cost of insurance of $3,510.00 per year and an

assumed 8% return on excess of annual premiums deposited over the annual cost of

insurance into the Fund Value, it projected a Fund Value of $1,198,193 at age 65 and

$22,123,092 by age 100. This illustration clearly demonstrates the potential returns of

an assumed 8% compounded annual interest. I take little guidance from this

- Mosten 12 -

illustration other than it demonstrates the policy being marketed as a tax-sheltered

program and the indications therein provided that future annual cost of insurance

beyond year 29 will be paid from monies accruing in the tax exempt growth within

the Investment Accounts. The assumed 29 annual deposits of $12,000 constituted

both prepayment of future cost of insurance charges and the investments in the

tax-sheltered program.

[20]

To interpret this contract, as of the date the contract came into existence,

I have only the language of the contracts itself, the original application and

endorsements completed and permissible context or factual matrix evidence that will

be discussed below in this decision.

[21]

Apart for one period in 2012-2013, the balance in the Carrier Fund (a

policy feature outlined below) was zero until November 2016. During 2016, Mosten

began to inquire whether payments could be made directly into the Carrier Fund,

including a proposed payment of $1,000,000. Manulife declined to accept such

payments, advising that the Carrier Fund was not intended to accept payments that

had no prospect of being transferred back into the policy.

The Mosten 1 and Mosten 2 Applications

[22]

In an Originating Application originally filed on November 23, 2016, as

QBG 1597 of 2016, Judicial Centre of Estevan, later transferred to the Judicial Centre

of Saskatoon and there consolidated with QBG 1519 of 2017 [Mosten 1], Mosten

seeks declarations that it is entitled to invest amounts, with no limits, into

guaranteed-interest options within the Carrier Fund of Policy No. F2239527 [527].

[23]

Subsequently, by a second Originating Application filed October 6,

2017, as QBG 1519 of 2017, Judicial Centre of Saskatoon [Mosten 2], Mosten took

- Mosten 13 -

the position that Policy 527 never had or lost its status as a tax-exempt life insurance

policy and as such there is no limit on the premiums or amounts Mosten can pay into

the Investment Account of the Policy and thereby access the guaranteed interest

options available within the Investment Accounts. In Mosten 2, it asks for declaratory

relief that gives effect to this position.

[24]

Mosten 1 and Mosten 2 were consolidated by Order of this court, and

continued in the Judicial Centre of Saskatoon within QBG 1519 of 2017. Subsequent

to this consolidation, Mosten filed an application seeking leave to amend its

Originating Application in Mosten 2. On August 2, 2018, on the filing of a Consent

by the parties, Mosten was given leave to amend the Originating Application in

Mosten 2 to clarify the grounds on which the application was made. This was done

without amending the actual relief sought within Mosten 2. Mosten and Manulife

have proceeded on the basis that, notwithstanding the consolidation, the Originating

Applications in both Mosten 1 and Mosten 2 are before the Court for determination.

[25]

Mosten and Manulife each presented detailed, comprehensive and

distinct submissions in respect of the relief sought in each of Mosten 1 and Mosten 2.

[26]

The relief sought in Mosten 1 is:

(a) An order determining and declaring that Mosten has the

following rights and privileges under Architect Classic

IIe universal life insurance contract, Policy Number

F 2239527 (the “Contract”):

(i) that Mosten may make additional premium

payments to the Contract in such amounts and at

such times as Mosten determines;

(ii) that there is no limit on the amount that can be held

by or for Mosten in the Carrier Fund forming part of

the Contract; and

(iii) that the respondent, The Manufacturers Life

- Mosten 14 -

Insurance Company operating as Manulife

Financial (“Manulife”) is not entitled to refund

premiums or funds held in the Contract, either from

the Investment Accounts or the Carrier Fund, in the

absence of a request by Mosten;

(b) An Order granting the applicant costs of this application.

[27]

The relief sought in Mosten 2 is:

(a) An order determining and declaring that Mosten has the

following rights and privileges under Architect Classic IIe

universal life insurance contract, Policy Number F 2239527

(the “Contract”):

(i) That Mosten is entitled to have the Investment Bonus

payable under the Contract calculated and credited on

November 18 of each calendar year;

(ii) That all funds paid to Manulife under the Contract are

and shall be held in the Investment Accounts that

comprise the Fund Value under the Contract and that

Manulife is not entitled to transfer any funds, whether

currently held or subsequently paid under the Contract,

to the Carrier Fund;

(iii) With no balance in the Carrier Fund, that Mosten is

entitled to have the Investment Bonus payable under the

Contract calculated on the Fund Value which shall

represent all funds under the Contract;

(iv) Manulife shall not be entitled to effect Additional Sum

Insured and, as such, shall not be entitled to increase the

amount of life insurance coverage under the Contract by

up to eight percent each year (or by any percent) unless

expressly instructed to do so by Mosten; and

(v) That the Exempt Status and Carrier Fund provisions of

the Contract cease to have any application to the

Contract and that the Contract otherwise continues

unaffected.

(b) An Order granting the applicant costs of this application.

[28]

The submissions of Mosten and Manulife at the hearing first addressed

the relief sought in Mosten 1 and, within those submissions, focused on the

- Mosten 15 -

interpretation to be given to the contract, with significant focus on Mosten’s position

that anything paid by Mosten was a premium within the meaning of the policy and,

thus, Mosten was entitled to access unlimited investments within the Carrier Fund.

Then, as a distinct topic, the parties addressed the Mosten 2 claim that the Policy

never had or lost its tax exempt status, with the consequence that Mosten could pay

unlimited premiums for investment within the Investment Account of the Policy.

[29]

These latter submissions involved complex arguments with relation to

interpretation of the Income Tax Act, the Income Tax Regulations and the contract

language, all as it related to tax exempt status and requirements therefore. These

submissions raised related issues as to whether or not Mosten 2 was brought within

the applicable limitation period, whether the court had the jurisdiction to provide the

declaratory relief sought and issues related to the discretionary nature of declaratory

relief.

[30]

Consistent with the approach taken by counsel in their submissions to

the Court, this decision will deal first with the relief sought in Mosten 1 and then

address, in a distinct section, the issues and arguments arising from the relief sought

in Mosten 2.

The Law Respecting Contractual Interpretation

1.

The fundamental precepts of contract interpretation

[31]

The contract in question is a standard form contract and a contract in

relation to insurance. Specific principles apply to the interpretation of contracts in

each of these categories. Those principles need to be understood and applied against

the background of the fundamental precepts of contract interpretation that apply to

contracts generally. These precepts are not in dispute. A review of these fundamental

- Mosten 16 -

precepts is necessary instructions to myself before I engage in the specific

interpretation exercise at hand.

[32]

With regard to efficient use of judicial resources and the folly of

attempting to improve on a proven product, I utilize the leading textbook, Geoff R.

Hall, Canadian Contractual Interpretation Law, 3d ed (Toronto: LexisNexis, 2016)

[Hall], to summarize in this decision those fundamental precepts of contract

interpretation. I quote or summarize the learned author’s discussion of those

fundamental precepts I find apt for my own instruction in this case. I will, using the

author’s numbering format, reference the section or paragraph from which I extract

my summary of the text. However, with a view to efficiency of expression, I will not

be more precisely identifying what is a quote, summary or a combination thereof. I

take this liberty with a view to being concise and readable.

[33]

This section of my decision is background, albeit important background,

to the more detailed discussion of the law respecting interpretation of standard form

contracts and contracts of insurance that follows.

[34]

As the learned author states at 2.1.1, “Words and their context,

therefore, are the primary theme of the law of interpretation of contracts, and set the

parameters for the interpretive exercise.” He quotes Montréal (City) v 2952-1366

Québec Inc., 2005 SCC 62 at para 15, [2005] 3 SCR 141, where the Court, in a clear

encapsulation of principle, said: “Any act of communication presupposes two distinct

but inseparable components: text and context.”

[35]

The fundamental precepts of contractual interpretation are set out and

expanded upon by Hall in Chapter 2, with extensive foundation in the authorities he

cites. Those fundamental precepts which I find significant to my analysis in this case

include the following:

- Mosten 17 -

2.2 A contract is to be construed as a whole with meaning given to

all of its provisions, not just consideration of the specific words

in dispute. The words of one provision must not be read in

isolation but should be considered in harmony with the rest of the

contract and in light of its purposes and commercial context.

2.3.1 Contractual interpretation is all about giving meaning to words in

their proper context, including the surrounding circumstances in

which a contract has arisen – usually referred to as the “factual

matrix”.

2.3.2 The factual matrix constitutes an essential element of contractual

interpretation in all cases, even when there is no linguistic

ambiguity in the text of the document.

2.3.4 and 2.3.5 The factual matrix does not include evidence of a

contracting party’s intentions. It consists only of objective facts

known to the parties at or before the date of contracting.

2.3.6 The factual matrix evidence must not overwhelm the words of a

contract and can only be used to clarify the parties’ intentions as

expressed in the written agreement. It can not be used to

contradict that intention, to create an ambiguity or have the effect

of making a new agreement. In cases of conflict, the words will

prevail over the context.

2.5 Interpretation of the words of a contract is an objective exercise

that seeks to discover the parties’ intention at the time the

contract was made, and the objective approach applies to both the

- Mosten 18 -

words of the contract and their context. Thus, meaning must be

assessed from the perspective of what a reasonable person would

have objectively understood from the words of the document

read as a whole and from the factual matrix.

2.6 Commercial contracts must be interpreted in accordance with

sound commercial principles and good business sense. This

commercial efficacy principle is grounded in the intentions of the

parties and assessed objectively referencing the language of the

contract as a whole and the factual matrix. The purpose of the

commercial efficacy principle is not to protect business people

from absurd results but, rather, is used to inform what the parties

likely intended. Commercial absurdities are to be avoided.

2.8 A contract is to be interpreted as of the date it was made.

3.2 In the event the court is unable to resolve a contradiction or

ambiguity in the terms of a contract, the language of the contract

will be construed against its author in accordance with the contra

proferentem rule. This rule is only applied as a last resort.

2.

Principles of interpretation specific to insurance contracts

[36]

Once again I turn to Hall’s text for statements of the principles of

interpretation specific to insurance contracts. Commencing at page 241, he lists nine

special principles in the following words:

The interpretation of insurance policies involves a somewhat unique

blend of the general principles of interpretation applicable to all

contracts and special principles applicable in the insurance context.

As a result, the Supreme Court of Canada has described insurance

- Mosten 19 -

policies as forming “a special category of contracts”:

As with all contracts, the terms of the policy must be examined, in light

of the surrounding circumstances, in order to determine the intent of the

parties and the scope of their understanding. Nevertheless, through its

long history, insurance law has given rise to a number of principles

specific to the interpretation of insurance policies.

Thus the principles of interpretation which apply to insurance

contracts are the same as those generally applicable to commercial

contracts, but at the same time nine special principles also govern the

interpretative process:

1. The court should look at the words of the contract to determine if

there is ambiguity.

2. The court should ascertain the intention of the parties concerning

specific provisions by reference to the language of the entire

contract.

3. The court should construe ambiguities found in the insurance

contract in favour of the insured (the contra proferentem rule).

4. The court should limit the construction in favour of the insured

by reasonableness.

5. Coverage provisions should be construed broadly and exclusion

clauses should be construed narrowly.

6. It is desirable, at least where a policy is ambiguous, to give effect

to the reasonable expectations of the parties.

7. Policies of insurance should be interpreted in a manner

consistent with the general economic purpose of insurance.

8. In general, an insurance policy is interpreted such that only

fortuitous or contingent losses are covered (the fortuity

principle).

9. There is an increased willingness to rely on precedent, including

in some cases American authorities, for insurance contracts than

there is for other types of contracts.

…

3.

The law respecting interpretation of Standard Form Contracts

[37]

Within this topic lies fundamental disagreement between Ituna and

Industrial Alliance, as well as between Mosten and Atwater and their respective

- Mosten 20 -

insurers in the proceedings among them.

[38]

At page 222 of his text, Hall has a four-paragraph discussion of the law

relating to the interpretation of “contracts of adhesion”, or what are described herein

as standard form contracts. Hall’s text was published in 2016 following the Sattva

decision, which was in large part responsible for Hall issuing his third edition of this

text. However, the text was published before two important decisions of the Supreme

Court that are significant here. These two significant decisions of the Supreme Court

dealing with the interpretation of standard form contracts are:

• Ledcor Construction Ltd. v Northbridge Indemnity Insurance Co.,

2016 SCC 37, [2016] 2 SCR 23 [Ledcor]; and

• Sabean v Portage La Prairie Mutual Insurance Co., 2017 SCC 7,

[2017] 1 SCR 121 [Sabean].

(a)

Sattva

[39]

Sattva had its origins in a judicial review of an arbitration award, made

under the Arbitration Act, RSBC 1996, c 55 [AA], interpreting a negotiated

commercial agreement. The Supreme Court stated at paragraph 1 of its decision that

the first issue in the appeal was:

[1]

When is contractual interpretation to be treated as a question

of mixed fact and law and when should it be treated as a question of

law? …

If treated as a question of mixed fact and law, the applicable standard of review would

be reasonableness; if treated as a question of law, the standard of review would be

correctness. The Court found the appropriate standard of review to be applied to

commercial arbitration decisions under the AA to be reasonableness.

- Mosten 21 -

[40]

It is important to note that the contract in question in Sattva was a form

of negotiated agreement and not a standard form agreement. In that context,

Rothstein J., writing for the Court, said the following at paragraphs 47, 48 and 55:

[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” (Jesuit Fathers of Upper Canada v. Guardian

Insurance Co. of Canada, 2006 SCC 21, [2006] 1 S.C.R. 744, at

para. 27, per LeBel J.; see also Tercon Contractors Ltd. v. British

Columbia (Transportation and Highways), 2010 SCC 4, [2010]

1 S.C.R. 69, at paras. 64-65, per Cromwell J.). 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.

(Reardon Smith Line [[1976] 3 All ER 570], at p. 574, per Lord

Wilberforce)

[48]

The meaning of words is often derived from a number of

contextual factors, including the purpose of the agreement and the

nature of the relationship created by the agreement (see Moore

Realty Inc. v. Manitoba Motor League, 2003 MBCA 71, 173 Man. R.

(2d) 300, at para. 15, per Hamilton J.A.; see also Hall, at p. 22; and

McCamus, at pp. 749-50). As stated by Lord Hoffmann in Investors

Compensation Scheme Ltd. v. West Bromwich Building Society,

[1998] 1 All E.R. 98 (H.L.):

The meaning which a document (or any other utterance) would convey

to a reasonable man is not the same thing as the meaning of its words.

The meaning of words is a matter of dictionaries and grammars; the

meaning of the document is what the parties using those words against

the relevant background would reasonably have been understood to

mean. [p. 115]

…

- Mosten 22 -

[55]

Although that caution was expressed in the context of a

negligence case, it applies, in my opinion, to contractual

interpretation as well. As mentioned above, the goal of contractual

interpretation, to ascertain the objective intentions of the parties, is

inherently fact specific. The close relationship between the selection

and application of principles of contractual interpretation and the

construction ultimately given to the instrument means that the

circumstances in which a question of law can be extricated from the

interpretation process will be rare. In the absence of a legal error of

the type described above, no appeal lies under the AA from an

arbitrator’s interpretation of a contract.

[41]

Following the above, Rothstein J. undertook a discussion of “The Role

and Nature of the ‘Surrounding Circumstances’” wherein he said the following:

[57]

While 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 (Hayes Forest Services

[2008 BCCA 31, 289 DLR (4th) 230], at para. 14; and Hall, at p. 30).

The goal of examining such evidence is to deepen a

decision-maker’s understanding of the mutual and objective

intentions of the parties as expressed in the words of the contract.

The interpretation of a written contractual provision must always be

grounded in the text and read in light of the entire contract (Hall, at

pp. 15 and 30-32). While the surrounding circumstances are relied

upon in the interpretive process, courts cannot use them to deviate

from the text such that the court effectively creates a new agreement

(Glaswegian Enterprises Inc. v. B.C. Tel Mobility Cellular Inc.

(1997), 101 B.C.A.C. 62).

[58]

The nature of the evidence that can be relied upon under the

rubric of “surrounding circumstances” will necessarily vary from

case to case. It does, however, have its limits. It should consist only

of objective evidence of the background facts at the time of the

execution of the contract (King [2011 MBCA 80, 270 Man R (2d)

63], at paras. 66 and 70), that is, knowledge that was or reasonably

ought to have been within the knowledge of both parties at or before

the date of contracting. Subject to these requirements and the parol

evidence rule discussed below, this includes, in the words of Lord

Hoffmann, “absolutely anything which would have affected the way

in which the language of the document would have been understood

by a reasonable man” (Investors Compensation Scheme, at p. 114).

Whether something was or reasonably ought to have been within the

common knowledge of the parties at the time of execution of the

contract is a question of fact.

- Mosten 23 -

[59]

It is necessary to say a word about consideration of the

surrounding circumstances and the parol evidence rule. The parol

evidence rule precludes admission of evidence outside the words of

the written contract that would add to, subtract from, vary, or

contradict a contract that has been wholly reduced to writing (King,

at para. 35; and Hall, at p. 53). To this end, the rule precludes, among

other things, evidence of the subjective intentions of the parties

(Hall, at pp. 64-65; and Eli Lilly & Co. v. Novopharm Ltd., [1998] 2

S.C.R. 129, at paras. 54-59, per Iacobucci J.). The purpose of the

parol evidence rule is primarily to achieve finality and certainty in

contractual obligations, and secondarily to hamper a party’s ability to

use fabricated or unreliable evidence to attack a written contract

(United Brotherhood of Carpenters and Joiners of America, Local

579 v. Bradco Construction Ltd., [1993] 2 S.C.R. 316, at pp. 341-42,

per Sopinka J.).

[60]

The parol evidence rule does not apply to preclude evidence

of the surrounding circumstances. Such evidence is consistent with

the objectives of finality and certainty because it is used as an

interpretive aid for determining the meaning of the written words

chosen by the parties, not to change or overrule the meaning of those

words. The surrounding circumstances are facts known or facts that

reasonably ought to have been known to both parties at or before the

date of contracting; therefore, the concern of unreliability does not

arise.

[42]

This statement of the law by Rothstein J. falls within the scope of what

Hall discusses in Chapter 2 of his text under the descriptor “Fundamental Precepts of

Contractual Interpretation”. Rothstein J. was specifically addressing the role of

surrounding circumstances in contractual interpretation generally and the nature of the

evidence that can be considered when interpreting a negotiated contract.

Considerations specific to insurance contracts and standard form contracts were not

addressed.

(b)

Ledcor

[43]

In September 2016, the Supreme Court handed down its decision in

Ledcor. Writing for the Court, other than Cromwell J. who wrote a concurring

decision, Wagner J. (as he then was) said at paragraph 20:

- Mosten 24 -

[20]

These appeals present an opportunity to clarify how

Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, [2014] 2

S.C.R. 633, applies to the interpretation of standard form contracts,

sometimes called contracts of adhesion.

[44]

The standard form contract in question was a builders’ risk insurance

policy which had been issued to the owner and general contractor of a building under

construction and provided coverage to them and to all contractors and subcontractors

working on the project for all builders’ risks, except specified excluded risks.

Builders’ risk policies were widely used in the construction industry, and there was an

understanding by industry participants of the purpose of such policies. The contract

had an exclusion clause that denied coverage for the “cost of making good faulty

workmanship” but, as an exception to that exclusion, covered “physical damage” that

“results” from the faulty workmanship. The interpretation of this exclusion clause was

the specific issue before the Court.

[45]

In summarizing the Court’s decision, Wagner J. said at paragraphs 4

and 5 the following:

[4]

In my opinion, the appropriate standard of review in

this case is correctness. Where, like here, 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 particular parties to assist the interpretation

process, this interpretation is better characterized as a question of law

subject to correctness review.

[5]

Regarding the appropriate interpretation of the faulty

workmanship exclusion in all builders’ risk policies, I am of the view

that the exclusion clause serves to exclude from coverage only the

cost of redoing the faulty work. This interpretation is dictated by the

general rules of contractual interpretation. It best represents the

parties’ reasonable expectations, as informed by the purpose of

builders’ risk policies, aligns with commercial reality, and is

consistent with the jurisprudence on the matter. In this case, the cost

of redoing the faulty work is that of recleaning the windows.

Therefore, I would allow the appeals and hold that the windows’

replacement cost is covered under the insurance policy.

- Mosten 25 -

[46]

In respect of his conclusion that the correctness standard of review

should apply, Wagner J. said the following:

[24]

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.

[47]

Wagner J. explained why the reasons the Court gave in Sattva for

concluding the contractual interpretation there under consideration was a question of

mixed fact and law subject to deferential review on appeal were less compelling in the

context of standard form contracts. In so doing, Wagner J. said the following under

the heading “Factual Matrix”:

[28]

While a proper understanding of the factual matrix is crucial to

the interpretation of many contracts, it is often less relevant for standard

form contracts, because “the parties do not negotiate terms and the

contract is put to the receiving party as a take-it-or-leave-it

proposition”: MacDonald [2015 ONCA 842, 127 OR (3d) 663], at

para. 33. Standard form contracts are particularly common in the

insurance industry, as Professor Barbara Billingsley observed in

General Principles of Canadian Insurance Law (2nd ed. 2014), at p.

56:

As part of its business considerations and in advance of meeting with

any particular client, an insurance company decides the terms and

conditions under which it is willing to provide insurance coverage for

certain common types of risk. This means that, in most situations, an

insurance company does not negotiate the detailed terms of insurance

coverage with individual customers. Instead, before entering into any

insurance agreements, an insurer typically drafts a series of

pre-fabricated contracts outlining the terms upon which particular kinds

of coverage will be provided. These contracts are known as “standard

form policies”. The insurer then provides the appropriate standard form

policy to clients purchasing insurance coverage.

[29]

Parties to an insurance contract may negotiate over

matters like the cost of premiums, but the actual conditions of the

insurance coverage are generally determined by the standard form

contract: Billingsley, at p. 58.

- Mosten 26 -

[30]

My colleague Justice Cromwell accepts that, for

standard form contracts, there are usually no relevant surrounding

circumstances relating to negotiation (para. 106). However, he

observes that other elements of the surrounding circumstances – such

as the purpose of the contract, the nature of the relationship it

creates, and the market or industry in which it operates – have a role

in the interpretation process.

[31]

I agree that factors such as the purpose of the

contract, the nature of the relationship it creates, and the market or

industry in which it operates should be considered when interpreting

a standard form contract. However, those considerations are

generally not “inherently fact specificˮ: Sattva, at para. 55. Rather,

they will usually be the same for everyone who may be a party to a

particular standard form contract. This underscores the need for

standard form contracts to be interpreted consistently, a point to

which I will return below.

[32]

In sum, for standard form contracts, the surrounding

circumstances generally play less of a role in the interpretation

process, and where they are relevant, they tend not to be specific to

the particular parties. Accordingly, the first reason given in Sattva

for concluding that contractual interpretation is a question of mixed

fact and law – the importance of the factual matrix – carries less

weight in cases involving standard form contracts.

…

[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. As

Iacobucci J. recognized in Southam [[1997] 1 SCR 748], the line

between questions of law and those of mixed fact and law is not

always easily drawn. Appellate courts should consider whether “the

dispute is over a general proposition” or “a very particular set of

circumstances that is not apt to be of much interest to judges and

lawyers in the future” (para. 37).

[48]

Having said the above, Wagner J. turned to interpretation of the subject

exclusion clause and, under the heading “Rules Governing the Interpretation of the

Policy”, said the following:

- Mosten 27 -

[49]

The parties agree that the governing principles of

interpretation applicable to insurance policies are those summarized

by Rothstein J. in Progressive Homes [2010 SCC 33, [2010] 2 SCR

245]. The primary interpretive principle is that where the language of

the insurance policy is unambiguous, effect should be given to that

clear language, reading the contract as a whole: para. 22, citing

Non-Marine Underwriters, Lloyd’s of London v. Scalera, 2000 SCC

24, [2000] 1 S.C.R. 551, at para. 71.

[50]

Where, however, the policy’s language is

ambiguous, general rules of contract construction must be employed

to resolve that ambiguity. 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, and it should be

consistent with the interpretations of similar insurance policies. See

Progressive Homes, at para. 23, citing Scalera, at para. 71; Gibbens

[2009 SCC 59, [2009] 3 SCR 605], at paras. 26-27; and

Consolidated-Bathurst Export Ltd. v. Mutual Boiler and Machinery

Insurance Co., [1980] 1 S.C.R. 888, at pp. 900-902.

[49]

Discussing the reasonable expectation of the parties, Wagner J. said:

[65]

Parties’ reasonable expectations with respect to the

meaning of a contractual provision can often be gleaned from the

circumstances surrounding the contract’s formation: Sattva, at paras.

46-47. However, as discussed above, there is no factual matrix here

that would assist in ascertaining the parties’ understanding of and

intent regarding the Exclusion Clause. The Policy is a standard form

contract. And, as the Court of Appeal noted at para. 15 of its reasons,

there is no evidence that the parties gave any thought to the cleaning

of the windows, the relationship of faulty workmanship to resulting

damage, or anything else that would help in determining their

reasonable expectations.

[66]

Therefore, in my view, the purpose behind builders’

risk policies is crucial in determining the parties’ reasonable

expectations as to the meaning of the Exclusion Clause. In a nutshell,

the purpose of these polices is to provide broad coverage for

construction projects, which are singularly susceptible to accidents

and errors. This broad coverage – in exchange for relatively high

premiums – provides certainty, stability, and peace of mind. It

ensures construction projects do not grind to a halt because of

disputes and potential litigation about liability for replacement or

repair amongst the various contractors involved. In my view, the

purpose of broad coverage in the construction context is furthered by

- Mosten 28 -

an interpretation of the Exclusion Clause that excludes from

coverage only the cost of redoing the faulty work itself – in this case,

the cost of recleaning the windows.

[50]

Then, under the heading “No Unrealistic Results”, Wagner J. spoke to

the commercial efficacy precept in paragraphs 78 and 79 as follows:

[78]

In discussing the interpretation of insurance policies in

Consolidated-Bathurst [[1980] 1 SCR 888], at pp. 901-2, Estey J.

stressed the need to avoid interpretations that would bring about

unrealistic results or results that the parties would not have

contemplated in the commercial atmosphere in which they sold or

purchased the policy. The interpretation should respect the intentions

of the parties and “their objective in entering into the commercial

transaction in the first place”, as well as “promot[e] a sensible

commercial result” (p. 901). See also Guarantee Co. of North

America v. Gordon Capital Corp., [1999] 3 S.C.R. 423, at para. 62,

where this Court restated the importance of commercial reality,

albeit in a different context. Interpreting the Exclusion Clause to

preclude from coverage only the cost of redoing the faulty work

aligns with commercial reality and leads to realistic and sensible

results, given both the purpose underlying builders’ risk policies and

their spreading of risk on construction projects.

[79]

As already discussed above, the interpretation

advanced by the Insureds in these appeals best fulfills the broad

coverage objective underlying builders’ risk policies. These policies

are commonplace on construction projects, where multiple

contractors work side by side and where damage to their work or the

project as a whole commonly arises from faults or defects in

workmanship, materials or design. In this commercial reality, a

broad scope of coverage creates certainty and economies for both

insureds and insurers. In my opinion, it is commercially sensible in

this context for only the cost of redoing a contractor’s faulty work to

be excluded under the faulty workmanship exclusion. Such an

interpretation strikes the right balance between the two undesirable

extremes described by Estey J. in Consolidated-Bathurst, at pp.

901-2: “... the courts should be loath to support a construction which

would either enable the insurer to pocket the premium without risk or

the insured to achieve a recovery which could neither be sensibly

sought nor anticipated at the time of the contract”. Under the Policy,

the Insurers did not undertake to cover the “cost of making good

faulty workmanship”, but they did promise to cover “physical

damage [that] results” from that “faulty workmanship”. It can hardly

be said that recovery for the damages to the Tower’s windows in the

circumstances of this case could not have been sensibly sought or

anticipated when the Policy was purchased.

- Mosten 29 -

[51]

In his concurring reasons, Cromwell J. disagreed with the view of

Wagner J. that the first rationale underlying the Sattva decision did not apply to cases

interpreting standard form contracts. He outlined this first rationale in paragraph 103

of the decision as follows:

[103] Sattva explained that this was an appropriate

development for two related reasons. First, contractual interpretation

is not simply a question of ascribing an abstract legal meaning to the

words, but rather of understanding those words in their full context.

Second, this process of interpretation should generally be considered

to be the application of a legal standard to the facts; in other words,

contractual interpretation is generally a mixed question of law and

fact which, under the Court’s standard of review jurisprudence, is

generally reviewed for palpable and overriding error. Both of these

related reasons, as we shall see, apply to interpreting all types of

contracts.

[52]

With this background, Cromwell J. said the following:

[106] I accept, of course, that standard form contracts generally do

not have relevant surrounding circumstances relating to their

negotiation because there was in no real sense any negotiation of

their terms. However, standard form contracts, like all contracts,

have many other surrounding circumstances: they have a purpose,

they create a relationship of a particular nature and they frequently

operate within a particular market or industry. These factors are all

part of the context – of the surrounding circumstances – that must be

taken into account in interpreting the text of the contract. As Lord

Wilberforce put it in a passage cited with approval in Sattva, “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”: Reardon

Smith Line Ltd. v. Hansen-Tangen, [1976] 3 All E.R. 570 (H.L.), at

p. 574, quoted in Sattva, at para. 47. This point is further developed

in a short passage from Investors Compensation Scheme Ltd. v. West

Bromwich Building Society, [1998] 1 All E.R. 98 (H.L.), also quoted

by the Court in Sattva, at para. 48:

The meaning which a document ... would convey to a reasonable man

is not the same thing as the meaning of its words. The meaning of

words is a matter of dictionaries and grammars; the meaning of the

document is what the parties using those words against the relevant

background would reasonably have been understood to mean. [p. 115]

- Mosten 30 -

[107] All contracts, whether standard form or not, have important

contextual elements – elements of their surrounding circumstances –

that are generally considered in applying the contractual language to

a specific set of occurrences.

[108] Unlike my colleague, I do not read this aspect of Sattva as

holding that contractual interpretation is not generally a pure

question of law simply because it involves assessing a “factual

matrix” relating to negotiation. Rather, as I have discussed, Sattva

sees contractual interpretation as not being a pure question of law

because it involves understanding the words used in light of a

number of contextual factors beyond negotiation, including the

purpose of the agreement, the nature of the relationship, the market

in which the parties are operating, and so forth. While the words

have a consistent meaning, how they apply to the myriad of

situations that may arise will most often turn on these sorts of

contextual factors. My colleague’s interpretative analysis of the

standard form contract before us in this case shows that this is so.

That analysis relies on the nature of the particular work alleged to be

faulty; the nature and cause of the particular damage in issue; the

purpose of the contract; the market in which it operates (i.e. the

construction industry); the parties’ reasonable expectations; and

commercial reality.

[109] The importance of taking these contextual matters into

account is the first reason the Court relied on in Sattva to explain

why contractual interpretation is generally not a pure question of law

and applies to standard form contracts as it does to others. While

negotiating history will generally not be relevant to such contracts,

many other contextual matters are.

[110] Turning to the second related reason given in Sattva, it too

applies to the interpretation of standard form contracts. That second

reason was that “the historical approach to contractual interpretation

does not fit well with the definition of a pure question of law

identified in Housen and [Canada (Director of Investigation and

Research) v. Southam Inc., [1997] 1 S.C.R. 748]”: para. 49. Rather,

contractual interpretation should be understood as generally giving

rise to mixed questions of law and fact. As Rothstein J. wrote for the

Court, “Contractual interpretation 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”: para. 50. In short, Sattva

brought appellate review of contractual interpretation into the

general framework for appellate review in civil cases set out in the

Court’s standard of review jurisprudence.

[111] I see no reason to think that the interpretation of certain

types of contracts should be excluded from these general principles

that apply to appellate review in all civil cases. A number of

- Mosten 31 -

appellate courts have reached the same conclusion: Industrial

Alliance Insurance and Financial Services Inc. v. Brine, 2015 NSCA

104, 392 D.L.R. (4th) 575, at paras. 40-41; Ontario Society for the

Prevention of Cruelty to Animals v. Sovereign General Insurance

Co., 2015 ONCA 702, 127 O.R. (3d) 581, at paras. 34-36; Acciona

Infrastructure Canada Inc. v. Allianz Global Risks US Insurance

Co., 2015 BCCA 347, 77 B.C.L.R. (5th) 223, at paras. 34-35; GCAN

Insurance Co. v. Univar Canada Ltd., 2016 QCCA 500, at paras.

37-42 ().

(c)

Sabean

[53]

In January 2017, some four months after delivering its decision in

Ledcor, the Supreme Court delivered its decision in Sabean. The case involved the

interpretation of a standard form excess-insurance policy endorsement which

indemnified insureds against any shortfall in the payment of a judgment for damages

by an underinsured tortfeasor. Part of the interpretive exercise involved interpreting

the phrase “any policy of insurance providing disability benefits” and whether the

Canada Pension Plan [CPP] was such a policy of insurance.

[54]

In a short 44-paragraph decision, the Supreme Court held that the CPP

was not a policy of insurance. In paragraphs 12 and 13, the Court says the following

in relation to its decision in Ledcor:

[12]

In Ledcor Construction Ltd. v. Northbridge Indemnity

Insurance Co., 2016 SCC 37, [2016] 2 S.C.R. 23, this Court

confirmed the principles of contract interpretation applicable to

standard form insurance contracts. The overriding principle is that

where the language of the disputed clause is unambiguous, reading

the contract as a whole, effect should be given to that clear language:

Ledcor, at para. 49; Progressive Homes Ltd. v. Lombard General

Insurance Co. of Canada, 2010 SCC 33, [2010] 2 S.C.R. 245, at

para. 22; Non-Marine Underwriters, Lloyd’s of London v. Scalera,

2000 SCC 24, [2000] 1 S.C.R. 551, at para. 71. Only where the

disputed language in the policy is found to be ambiguous, should

general rules of contract construction be employed to resolve that

ambiguity: Ledcor, at para. 50. Finally, if these general rules of

construction fail to resolve the ambiguity, courts will construe the

- Mosten 32 -

contract contra proferentem, and interpret coverage provisions

broadly and exclusion clauses narrowly: Ledcor, at para. 51.

[13]

At the first step of the analysis for standard form contracts of

insurance, the words used must be given their ordinary meaning, “as

they would be understood by the average person applying for

insurance, and not as they might be perceived by persons versed in

the niceties of insurance law”: Co-operators Life Insurance Co. v.

Gibbens, 2009 SCC 59, [2009] 3 S.C.R. 605, at para. 21; see also

Ledcor, at para. 27.

[55]

At paragraphs 28, 29 and 35, the Court also said the following:

[28]

In my view, the ordinary meaning of a “policy of insurance”

is limited to private contracts of insurance between an insured and a

private insurance agency. An average person would not consider

benefits provided under a mandatory statutory scheme to be a private

insurance contract.

[29]

The insurer submits and the Court of Appeal accepted that

the meaning of “policy of insurance” under the Endorsement must be

understood in the context of this Court’s decision in Gill [[1973] 3

SCR 654]. Implicit in the approach urged by the insurer is the

suggestion that this Court’s decision in Gill itself supports an

alternative reasonable interpretation of the disputed words at the first

stage of the Ledcor analysis. As I shall explain, I cannot accept this

as a reasonable interpretation of this insurance policy. Gill does not

interpret or inform the ordinary words of the Endorsement. Nor

would the average person applying for this insurance contemplate the

distinct tort and statutory context in Gill in understanding the words

of the Endorsement. The insurer relies on its specialized knowledge

of the jurisprudence to advance an interpretation that goes beyond

the clear words of the policy.

…

[35]

First, it is wrong to rely on Gill to illustrate that insurance

companies amended their policies in light of that judgment and thus

intended to include CPP benefits. It cannot be assumed that the

average person who applies to purchase this excess insurance policy

would imbue the words in the Endorsement with knowledge of how

they were interpreted by the courts for the purposes of provincial

insurance legislation and the collateral benefits rule in tort. In this

context, the purchaser is not someone with the specialized

knowledge of related jurisprudence or of the objectives of the

insurance industry. Thus, the history and intention of the insurance

industry in drafting the Endorsement following Gill do not assist in

the interpretation of this contract.

- Mosten 33 -

The Contract Language to be Interpreted

[56] While the contract as a whole is to be interpreted, the focus of the

submissions and the interpretational issues arise from certain portions of the contract.

Attached as Appendix “A” to this decision are extracts from the contract. Included in

Appendix “A” are significant portions of the contract referenced by counsel in their

submissions. However, the provisions that will figure most prominently in my

interpretation of the contract are quoted below:

Architect Minimum Premium

The Architect Minimum Premium is the sum of the Annual

Minimum Premium(s) for the Architect coverage(s) plus twelve

times the monthly administration fee shown in the Schedule. Annual

Minimum Premium is a factor of the Cost of Insurance rate

multiplied by the Sum Insured. The Architect Minimum Premium

increases if the Sum Insured is increased.

Total Annual Minimum Premium

The Total Annual Minimum Premium is shown in the Schedule. The

Total Annual Minimum Premium changes if a policy change is made

that affects the Monthly Deduction, such as a request to increase or

decrease the Sum Insured. The cumulative Total Annual Minimum

Premium is the sum of the Total Annual Minimum Premiums for

each year (including fractions) that has elapsed since the Policy Date.

…

Investment Account

Investment Accounts are savings pools within Our general funds to

which Your premiums are directed and from which charges are

deducted. They provide different levels of risk, liquidity and

expected rates of return. While Your policy is in force, We will offer

various Investment Accounts which may change from time to time.

We reserve the right to discontinue at any time any Investment

Account except the Guaranteed Interest Accounts which We

guarantee will always be available to You. When an Investment

Account is no longer being offered, We reserve the right to transfer

the Account Value to another Investment Account then being offered

by Us. There will be no charge when We make such a transfer. Any

such transfer will only take effect after We have advised You that a

transfer is occurring.

…

- Mosten 34 -

Exempt Status

Exempt Status means this policy is exempt from accrual taxation

under the provisions of the Income Tax Act of Canada in effect on

the Policy Date. We guarantee to take the required action to maintain

the Exempt Status. An exempt test is done each Policy Anniversary.

Should the definition of an exempt policy change, We will

administer the next exempt test under the terms of the amendment.

When an adjustment is required to maintain the Exempt Status of this

policy, We will take action in the following order:

1. We will increase the amount of life insurance coverage by up to

eight percent each year, as permitted under the current Income

Tax Act. Any such increase is referred to in this contract as

Additional Sum Insured. This option only applies if the Insured

is living when the exempt test is done. The Additional Sum

Insured is effective for one year and the amount will be

recalculated on the next Policy Anniversary.

2. We will transfer the excess funds to the Carrier Fund, as

described below.

Carrier Fund

The Carrier Fund is a special account that holds funds in excess of

the maximum allowable tax exempt value calculated by the annual

exempt test. During the first Policy Year, We will also credit to the

Carrier Fund any premiums that exceed the maximum premium

determined by Us on the Policy Date. You may base the Carrier

Fund on any one of the available Investment Accounts. The Money

Market Account will be the default basis. You may change the basis

for the Carrier Fund up to twice each year at no charge. However, a

Market Value Adjustment may apply if you change the Carrier Fund

from a Guaranteed Interest Account basis.

The Carrier Fund investment return is as described in the

corresponding Investment Account section, subject to the same

guarantees. However, the Carrier Fund will not be entitled to any

Investment Bonus. Account Deductions will not be made from the

Carrier Fund. The Carrier Fund is not included in the calculation of

the Fund Value. The Carrier Fund will be paid to You or Your estate

when the contract terminates.

The investment income of the Carrier Fund is subject to annual

accrual taxation.

Cash Withdrawals may be made from the Carrier Fund, subject to

Market Value Adjustment if the Carrier Fund has a Guaranteed

Interest Account basis. Withdrawal Charges do not apply.

Each year, the exempt test is redone as described in the Exempt

Status provision. Transfers are made from or to the Carrier Fund as

required to keep the maximum amount in the tax exempt Investment

Accounts. Transfers to the Carrier Fund will be subtracted from the

Investment Accounts in proportion to the Account Values. Transfers

- Mosten 35 -

from the Carrier Fund will be in proportion to the Premium

Allocation. Transfer fees will not apply. Market Value Adjustment

may apply to transfers involving a Guaranteed Interest Account.

…

Payment of Premiums

The initial planned premium, as shown in the Schedule, is due on the

Policy Date and must be paid before any coverage becomes

effective. You may then pay premiums annually, or by a monthly

automatic payment system. You may make additional premium

payments at any time while this policy is in force. We will not refuse

any premium payment required to prevent the policy from

terminating as described in the Lapse provision.

All premiums after the first will be payable on premium due dates

determined from the Policy Date and the premium frequency.

Premiums are payable at Our head office or any Canadian chartered

bank. You must advise Us in writing of a change in address for

premium notification.

[These provisions are not quoted in the order they appear in the

contract.]

The Parties’ Positions on the Proper Interpretation

[57] The position of each of the parties is that the contract is unambiguous

and should be interpreted as they propose. Each says that if the contract is found to be

ambiguous, the relevant and properly admissible evidence of the surrounding

circumstance or factual matrix leads to the interpretation they propose. Both Mosten

and Manulife rely on Sattva, Ledcor and Sabean and, for their respective reasons, say

these decisions support the interpretation they propose.

[58]

Mosten says the bulk of the affidavit evidence filed by Manulife is

inadmissible and irrelevant evidence, and has applied to strike that evidence. Manulife

says its affidavit evidence is both admissible and relevant; but if struck by the court,

then on the same rationale advanced by Mosten, the reply and some original affidavit

evidence of Mosten should be similarly struck. Manulife has brought its own

application to strike affidavit evidence of Mosten. Before considering these issues,

- Mosten 36 -

I will deal with what has been designated the Stage 1 interpretive exercise.

1.

Mosten’s position on the interpretive principles to apply

[59]

Mosten says the proper interpretive approach is set out in Ledcor, and in

particular in paragraphs 49 and 50 quoted at paragraph 48 above. Mosten points out

this approach was again confirmed at paragraph 12 of Sabean in 2017.

[60]

Mosten says that at Stage 1 of the interpretive process of standard form

contracts of insurance, the focus is on the language of the contract and the ordinary

meaning of the words as understood by the average person buying insurance. Sabean

directs that:

[13]

At the first step of the analysis for standard form contracts of

insurance, the words used must be given their ordinary meaning, “as

they would be understood by the average person applying for

insurance, and not as they might be perceived by persons versed in

the niceties of insurance law”: Co-operators Life Insurance Co. v.

Gibbens, 2009 SCC 59, [2009] 3 S.C.R. 605, at para. 21; see also

Ledcor, at para. 27.

[61]

Mosten argues you do not need to consider anything but the clear

language of the contract. They place particular reliance on the statement, “You may

make additional premium payments at any time while this policy is in force”, found in

the section headed Payment of Premiums. They argue that everything the insured pays

is premiums and, thus, the unambiguous meaning of this language is that the insured

can pay additional payments at any time and that premiums in excess of the exempt

policy rules are invested in the Carrier Fund. They say this meaning is consistent with

contract as a whole, which in other provisions provides:

(i)

minimum premiums only and does not limit or state maximum

premiums;

- Mosten 37 -

(ii) premiums can be invested;

(iii) premiums can be withdrawn; and

(iv) premiums paid can be invested in the Carrier Fund.

Thus, they say the ordinary insured would understand the contract to provide life

insurance, investment that is exempt from an annual accrual taxation and, in the

Carrier Account, investment opportunities subject to annual accrual taxation.

[62]

They say that if ambiguity is found to exist, then the applicable

principles of general contract interpretation to apply are that:

(a)

(b)

(c)

the interpretation should be consistent with the reasonable

expectations of the parties that are supported by the language of

the contract;

the interpretation should not give results the parties would not

have contemplated in the commercial atmosphere in which the

contract was made; and

the interpretation should be consistent with interpretations of

similar contracts.

If these general rules of construction fail to resolve a genuine ambiguity, then the

courts will construe the contract contra proferentem against the insurer.

2.

Manulife’s position on the interpretive principles to apply

[63]

Manulife agrees that the starting point is the language of the contract but

- Mosten 38 -

says, citing Sattva, para 47, that the interpretation of contracts has evolved towards a

practical, common sense approach not dominated by technical rules of construction,

with the overriding concern being to determine “the intent of the parties and the scope

of their understanding” and this approach applies to interpretation of standard form

contracts at Stage 1. They point to Sattva’s directions in paragraphs 47 and 48, quoted

above at paragraph 40 and take the position that the text cannot be interpreted without

regard to the context.

[64]

Manulife says this concept is at the core of modern contractual

interpretation and Ledcor and Sabean need to be read in light of this fundamental

principle of contractual interpretation. While acknowledging that the surrounding

circumstances to be considered should consist only of objective evidence of the

background facts at the time of the execution of the contract, it says failure to look to

the surrounding circumstances known to the parties at the time of formation of the

contract would result in interpreting the words of the contract out of context. Citing

Sattva, at para 57, it says the goal of examining the surrounding circumstances is to

deepen the decision-maker’s understanding of the mutual and objective intentions of

the parties as expressed in the words of the contract.

[65]

Manulife says that when the words of the policies are read in the context

of their surrounding circumstances, it is clear that the ordinary person would not have

understood the policies to provide the unlimited investment rights Mosten now

claims. It says the meaning of “premiums” in a life insurance contract is well known

and understood and does not include payments for investments not connected with the

life insurance purpose. Should the contract be found to be ambiguous, they say the

factual evidence they have presented is admissible to resolve that ambiguity and

clearly demonstrates what the intent of the parties was.

- Mosten 39 -

3.

The parties’ disagreement on the applicable interpretive principles

[66]

The parties agree with the proposition that the interpretive process starts

by reference to the language of the contract. They diverge with respect to whether

surrounding circumstance can and should be considered at Stage 1 of the

interpretation process and, if considered, what is the proper scope of those

surrounding circumstances. Further, should ambiguity be found, they disagree on the

proper scope of such surrounding circumstances to consider within a Stage 2

interpretation.

[67]

Mosten views the decisions in Progressive Homes Ltd. v Lombard

General Insurance Co. of Canada, 2010 SCC 33, [2010] 2 SCR 245 [Progressive

Homes], Ledcor and Sabean as establishing a distinct interpretive regime for standard

form insurance contracts, while Manulife’s position is that these decisions must be

read in light of the underlying and applicable logic of Sattva. Both rely on the words

of Wagner J., writing for the majority in Ledcor, where he said:

[31]

I agree that factors such as the purpose of the contract, the

nature of the relationship it creates, and the market or industry in

which it operates should be considered when interpreting a standard

form contract. However, those considerations are generally not

“inherently fact specificˮ: Sattva, at para. 55. Rather, they will

usually be the same for everyone who may be a party to a particular

standard form contract. This underscores the need for standard form

contracts to be interpreted consistently, a point to which I will return

below.

[32]

In sum, for standard form contracts, the surrounding

circumstances generally play less of a role in the interpretation

process, and where they are relevant, they tend not to be specific to

the particular parties. Accordingly, the first reason given

in Sattva for concluding that contractual interpretation is a question

of mixed fact and law – the importance of the factual matrix – carries

less weight in cases involving standard form contracts.

[68]

Manulife says that when Ledcor and Sabean are read properly, the

- Mosten 40 -

fundamental precepts of contract interpretation reiterated in Sattva apply to Stage 1

interpretation of standard form contracts. Manulife also views the words quoted above

as supporting their position that at least the specifically noted aspects of the

surrounding circumstances are to be considered at Stage 1. They have a more

expansive view of the scope of the purpose of the contract, the nature of the

relationship created and the market in which it operates than does Mosten.

[69]

The Supreme Court was not absolute in its statement – but rather said

that “the surrounding circumstances generally play less of a role in the interpretation

process” (emphasis added). Implicit in this conditional language is that there may be

circumstances where the surrounding circumstances play a greater role. Manulife says

that the Court can look to the evidence they have proffered to determine what

constitutes the purpose of the contract, the nature of the relationship it creates, and the

market or industry in which it operates.

[70]

Mosten says there is no objective evidence of relevant surrounding

circumstances at the time the contract was formed which assists in providing details

of these matters. The purpose of the contract, it says, must be determined from the

words of the contract itself and not from the subjective aspirations or expectations of

the insurer. Whatever the insurer may have subjectively thought the purpose of the

contracts was is irrelevant. Mosten says the purpose of the contract is clearly

expressed within the contract as providing life insurance and investment options.

[71]

Mosten says that it is only necessary to look to the contracts themselves

to ascertain the nature of the relationship created and the market within which they

operate. The nature of the relationship is one of an insurer agreeing to provide

insurance and investment options. The market within which this takes place is the life

insurance industry, which did in fact offer to its insureds both life insurance and

investment options.

- Mosten 41 -

The Context to be Considered at Stage 1 Interpretation of the Contract

[72]

The Supreme Court’s decision in Sattva was one of two decisions which

caused the author Hall to issue the third edition of his text. In his rewrite, Hall deals

extensively with how Sattva marks a significant shift in the Canadian law of contract

interpretation. He states that the reaction of a number of courts of appeal to Sattva was

that its logic did not apply to standard form contracts. He notes that the Supreme

Court had granted leave to appeal the Alberta Court of Appeal’s decision in Ledcor

and the British Columbia Court of Appeal’s decision in British Columbia (Ministry of

Forests) v Teal Cedar Products Ltd., 2015 BCCA 263, 386 DLR (4th) 40, and

expressed the hope that the Supreme Court would be able to clarify this issue. The

Supreme Court has delivered its decision in Ledcor, expressly stating that the appeal

presented an opportunity to clarify how Sattva applies to the interpretation of standard

form contracts. While it did provide some clarification, questions remain and, as a

result, I must venture into uncharted territory.

[73]

Since standard form insurance contracts are contracts, the general rules

of contract construction apply to their interpretation to some greater or lesser degree

at some stage in the interpretive process. Those general rules must include what Hall

describes as fundamental precepts of contractual interpretation in Chapter 2, as well

as other elements or principles of contractual interpretation found elsewhere in the

text where applicable. This is clear from paragraph 50 of Ledcor where Wagner J., in

very concise form, summarizes what Hall calls the fundamental precepts of

contractual interpretation. However, these general rules or fundamental precepts are

modified in their application to standard form contracts by the limited scope of the

context permitted by the decisions in Ledcor and Sabean.

[74]

As early as the decision in Consolidated-Bathurst Export Ltd. v Mutual

Boiler and Machinery Insurance Co., [1980] 1 SCR 888 [Consolidated-Bathurst], the

- Mosten 42 -

Supreme Court directed that the general rules of contract construction only apply to

insurance contracts in the event of ambiguity and, short of ambiguity, the courts are to

give effect to the clear language of insurance policy. In the intervening years, the

Supreme Court has reinforced this principle many times. There is, in my opinion, no

question but that the Supreme Court had established in Progressive Homes, Ledcor

and Sabean a distinct interpretation regime for insurance policies. The general rules of

contract interpretation do not apply within what has come to be known as Stage 1

interpretation of insurance contracts, where the focus is on the text of the contract.

[75]

The interpretation of standard form contracts proceeds in two distinct

phases. In Stage 1, the focus is on the words of the contract alone, but those words

must be assessed within that limited context identified in paragraph 31 of Ledcor. If

the meaning and intent cannot be thus determined (i.e., ambiguity exists), that same

limited context must again be part of the interpretation process at Stage 2. The context

to be considered, in either phase, is much more limited than the “absolutely anything

which would have affected the way in which the language of the document would

have been understood by a ‘reasonable man’” approach of Sattva to the interpretation

of negotiated contracts. Resort to general rules of construction is only had if

ambiguity remains at the conclusion of Stage 1.

[76]

Progressive Homes was decided in 2010 and concisely summarized the

primary interpretive principle applicable to insurance policies, being that if, reading

the contract as a whole, the language of the policy is clear, the court is to give effect

to it. The Supreme Court continued that when insurance contracts are ambiguous, the

court then relies on general rules of contract construction and prefers interpretations

which are consistent with the reasonable expectations of the parties.

[77]

In 2014, Sattva held that the law with respect to contract interpretation

has evolved towards a practical, common sense approach not dominated by technical

- Mosten 43 -

rules of construction. Here, the overriding concern is to determine “the intent of the

parties and the scope of their understanding” within which the importance of the

surrounding circumstances known to the parties at the time of the contract was viewed

as necessary context to understanding the words used in the contract.

[78]

This decision dealt not with an insurance contract or other form of

standard contract but with a situation specific contract negotiated between

sophisticated business people engaged in the businesses of mining and exploration. A

significant aspect of the decision and its reasons related to the standard of review that

should apply to an arbitrator’s decision made under the AA of British Columbia.

Fundamental to the decision was the Court’s conclusion that the interpretive process

there in question involved findings of fact that were entitled to deference on judicial

review.

[79]

It may be assumed that when Sattva was decided in 2014, the Court was

well aware of the distinct rules for the interpretation of insurance policies then in

existence. Indeed, the Supreme Court in Sattva referenced Jesuit Fathers of Upper

Canada v Guardian Insurance Co. of Canada, 2006 SCC 21, [2006] 1 SCR 744

[Jesuit Fathers], in their decision. In Jesuit Fathers, the Court had held that because

there was no ambiguity in the insurance policy in question, it was unnecessary to

resort to the principles specific to the interpretation of insurance policies. There is

nothing in the reasons for judgment of the Supreme Court in Sattva that suggests the

decision was intended to alter what it had said in 2010 in Progressive Homes.

[80]

In March 2016, the Supreme Court expressly stated at paragraph 20 of

its decision in Ledcor:

[20]

These appeals present an opportunity to clarify how Sattva

Capital Corp. v. Creston Moly Corp., 2014 SCC 53, [2014] 2 S.C.R.

633, applies to the interpretation of standard form contracts,

- Mosten 44 -

sometimes called contracts of adhesion.

The majority reasons of Wagner J. then proceeded to provide an analysis of why the

reasoning and conclusion in Sattva did not apply to the interpretation of standard form

contracts.

[81]

Ledcor was followed in January 2017 with the Supreme Court’s

decision in Sabean. It is significant to note that the appeal in Sabean was heard

October 5, 2016, just after the September 15, 2016, delivery of the court’s decision in

Ledcor. All seven of the justices hearing and concurring on the decision in Sabean

had also heard and concurred in the majority decision in Ledcor. Further, four of those

same justices had heard the appeal and concurred in the reasons given in Sattva.

[82]

The conclusion I draw from the foregoing decisions is that the

interpretation of standard form insurance contracts is subject to the distinct

interpretive process as outlined in Ledcor. The approach to interpretation set out in

Sattva applies to negotiated contracts and is not generally to be applied to standard

form insurance contracts, except that, as stated in paragraph 31 of Ledcor, “factors

such as the purpose of the contract, the nature of the relationship it creates, and the

market or industry in which it operates should be considered when interpreting a

standard form contract.”

[83]

What Ledcor and Sabean did not address is what, in the first instance or

Stage 1 of the interpretation process of standard form contracts, a court should or may

look to when determining the purpose of the contract, the nature of the relationship it

creates and the market or industry in which it operates. This is problematic when, as

here, a core issue is what is the purpose of the contract. The decision of the Supreme

Court provides no specific guidance on an important metric, i.e., what can or should

be considered when assessing the purpose of the contract.

- Mosten 45 -

[84]

I have concluded that in the circumstances of this case, the focus of my

Stage 1 analysis should be:

(a)

(b)

the language of the contract within its permitted context;

any extant decisions relating to the standard form of contract in

question;

(c)

reliable legal/academic analysis of the form of standard contract

in question, i.e., universal life policies;

(d)

(e)

relevant legislative provisions; and

what the ordinary person entering into such contracts would

know or should be taken to know about life insurance contracts.

[85]

These sources can provide guidance as to the purpose of the contract,

the nature of the relationship and the market in which the parties were operating. My

analysis of these limited contextual elements excludes consideration of much of the

evidence presented by either side. For the most part, this evidence does not satisfy the

criteria of being objective evidence confined to facts known, or reasonably capable of

being known, by both parties before or at the date of contracting. Further, it does not

fall within the permissible scope of context to be considered per Ledcor and Sabean at

Stage 1. My detailed decision on the evidentiary issues is set forth in a subsequent

section of this decision.

[86]

I have so concluded in part because:

(a)

when interpreting a standard form contract, the court can not

assess how widely that contract has been used and the impact that

- Mosten 46 -

the interpretation will have on parties not before the court;

(b)

for policy reasons such as those discussed in Ledcor, the

interpretation must be based solely on the words of the contract

and circumscribed contexts or surrounding facts as outlined in

Ledcor, objectively identified and assessed;

(c)

(d)

if surrounding circumstances specific to the subject contracts

were considered, the objective of consistent interpretations would

be compromised and precedential value lost; and

the standard of review applicable to interpretation of standard

form contracts has been clearly stated by the Supreme Court to

be correctness. Correctness review can not be effectively

implemented if the original decision has been informed by a

unique factual matrix specific to the contract in question.

Stage 1 Interpretation of the Contract

1.

Mosten’s Stage 1 interpretation

[87]

Mosten’s interpretive position, in brief, is as I have summarized at

paragraphs 59 to 62 above.

2.

Manulife’s Stage 1 interpretation

[88]

Manulife’s interpretive position, in brief, is that the meaning of the word

“premiums” in a life insurance contract is clear and does not include investments not

inextricably linked to the life insurance purpose. They say that:

- Mosten 47 -

(a)

(b)

(c)

the words of the contract as a whole do not support Mosten’s

interpretation;

the Carrier Fund’s role is defined by reference to the policy as a

whole;

the Carrier Fund is intended for temporary carriage of prepaid

premiums or funds in excess of the permitted investments within

a tax exempt life insurance policy; and

(d)

the fact that the Carrier Fund provisions are located within

Section 3 of the policy, the insurance provision section, is

instructive as to its purpose.

My Stage 1 Interpretation

[89]

As per the directions in Ledcor, I interpret the contract by careful

attention to the language of the policy as a whole, having regard to the purpose of the

contract, the nature of the relationships created by the contract and the market or

industry in which the contract was obtained. When determining the context matters,

I will proceed in the manner I outlined in paragraph 84 above.

[90]

I find the relevant context to be considered in the interpretation of this

policy to be as follows:

(a)

The purpose of the contract, which I determine from the language

of the contract and the legislation applicable to life insurance,

was to provide life insurance and investment opportunities on the

terms therein set forth. There are no judicial decisions or reliable

- Mosten 48 -

legal/academic analysis of universal life insurance policies which

provide further guidance as to the purpose of such contracts or

policies.

(b)

(c)

The nature of the relationship was a contract between Aetna and

Dr. de Bruin, wherein Aetna insured the life of Dr. de Bruin and

provided for various investment options.

The market or industry involved was the life insurance industry

in Canada.

[91]

The core issues at this stage then are:

(a)

Is the investment purpose of the contract limited to the

tax-sheltered investment permitted by the Income Tax Act, as a

function of the amount of life insurance provided under the

policy or is it, as argued by Mosten, broader and independent

investment options?

(b)

What is the meaning of “premiums” as the word is used in the

contract?

[92]

The insured is told at page 1.5, in an Explanation of Contract, that they

have purchased a universal life insurance policy and that because the “policy is

designed to be flexible, it can also seem very complex.” The insured is told frequently

to read the policy carefully. There is no explanation within the document what a

universal life insurance policy is or how it is different from whole life, permanent life

or term life.

- Mosten 49 -

[93]

The text Jason A. Swales & Erdem Erinc, Canadian Insurance

Taxation, 4th ed (Toronto: LexisNexis, 2015) at 143, states:

Permanent insurance policies accumulate a cash reserve that is

invested and used to subsidize mortality expenses in the later years

of the contract. This cash reserve becomes available to the

policyholder as a cash surrender value (CSV). …

The text then continues at page 144 to say the following:

The accrual rules were introduced in the 1981 federal budget,

proposing that the investment income element of all insurance

policies be taxed on a full accrual basis. At that time, triennial

accrual by individuals was required for other investment vehicles, so

it was proposed that the inside build-up of life insurance policies be

taxed at least every three years. After intense lobbying by the

insurance industry, a distinction was made between those policies

that are primarily purchased as investment contracts and those that

are primarily intended to be insurance contracts. The former type

became subject to accrual taxation, while the latter type continued to

build tax-deferred cash values.

Thus, the exempt policy rules were introduced in 1982 to

establish a standard, or benchmark, to distinguish between the

primarily investment-type policies and the primarily insurance-type

policies. …

[94]

The submissions at the hearing did not explore this referenced

distinction between “the primarily investment-type policies and the primarily

insurance-type policies”. Canadian Insurance Taxation (which I am treating as

reliable legal analysis) does inform me as to the historical fact that there was intense

lobbying by the Canadian life insurance industry for accrual taxation to not apply to

what the authors describe as those policies which are primarily intended to be

insurance contracts as opposed to investment contracts and, thus, the exempt policy

rules were introduced in 1982. Given that the subject contract is clearly intended to

access the accrual tax exemptions permitted by the Income Tax Act, it logically

follows that the policy falls within the category of being a primarily insurance-type

- Mosten 50 -

policy.

[95]

I was not provided with any judicial decisions, texts or academic

discussions which explained what it is that makes the designation “universal”

meaningful. The ordinary insured’s understanding of what a universal life form of

policy provided would be what he or she could infer from reading the policy, which

includes the statement that it is “flexible” and what he or she was told by the insurer’s

sales agents. What such sales agents may have said in this case is unknown and, in

any event, would be impermissible evidence of subjective intention.

[96]

Under the Exempt Status heading, page 3.2, the reader is told exempt

status means the policy is exempt from accrual taxation under the provisions of the

Income Tax Act. The average insured would or should understand that this exempt

status was limited to those savings pools described under the heading Investment

Accounts found at page 5.1

[97]

The first sentence of the Investment Accounts section tells the insured

that Investment Accounts are savings pools within the insurer’s general funds to

which his or her premiums are directed and from which charges are deducted. The

reader would understand that his or her premium payments under these contracts

provided not only life insurance but also limited income tax exempt savings or

investment options. The reader is told that the insurer is guaranteeing to maintain the

tax exempt status of the policy and, thus, the tax-sheltered growth of those qualifying

investments. There is nothing in the contracts that expressly states the only

permissible investments are those specified under the heading Investment Accounts.

[98]

Immediately following the Exempt Status heading is the heading Carrier

Fund at page 3.3. The first sentence thereunder states, “The Carrier Fund is a special

account that holds funds in excess of the maximum allowable tax exempt value

- Mosten 51 -

calculated by the annual exempt test.” Mosten says that the statement that this Carrier

Fund holds funds “in excess of the maximum allowable tax exempt value”, in

conjunction with other language, would lead the reader to conclude it was available

for such investments not tied to the life insurance policy portion of the contract.

[99]

The third sentence states, “You may base the Carrier Fund on any one

of the available Investment Accounts.” The second paragraph states, “The Carrier

Fund is not included in the calculation of the Fund Value. The Carrier Fund will be

paid to You or Your estate when the contract terminates.” The third paragraph also

states, “The investment income of the Carrier Fund is subject to annual accrual

taxation.” An average insured reading this language would understand that funds held

in this Carrier Fund are also invested to gain income, but that such income is taxable.

[100]

At this stage in the interpretive process, I am satisfied the contract is

unambiguous in the following respects:

(a)

(b)

the policy provides for life insurance protection;

the policy provides a mechanism for investment that can earn

tax-sheltered income within the exempt status criteria of the

policy; and

(c)

the policy provides that funds in excess of the cost of insurance

and the investment in the tax-sheltered Investment Accounts will

be held in and can be invested in the Carrier Fund and that

income accruing there will be taxed.

[101]

Mosten says its contractual right to pay “additional premiums” and,

thus, to have them invested in the Carrier Fund arises from the plain language of the

- Mosten 52 -

Payment of Premiums provisions found at page 6.2. This paragraph includes the

statement, “You may make additional premium payments at any time while this

policy is in force.” A question that may be asked is “additional to what?”

[102]

Reading the entire paragraph under the heading Payment of Premiums,

the additional premiums are necessarily additional to the initial planned premium due

on the Policy Date and subsequent annual or monthly premiums when due. There can

be little doubt that the initial planned premium and the subsequent annual or monthly

premiums would relate to the premiums needed to both maintain the life insurance or

sum insured and to fund the permitted tax-sheltered investment connected to that life

insurance. The first sentence under the heading Investment Accounts (page 5.1) states,

“Investment Accounts are savings pools within Our general funds to which Your

premiums are directed and from which charges are deducted.”

[103]

The policy expressly contemplates that the amount of life insurance

coverage provided can change, i.e., decrease or increase as outlined in the section

headed Death Benefit Changes (page 3.2). Thus, if the insured wished to increase the

sum insured, additional premiums would need to be paid beyond the initial planned

premium. In addition, there are provisions for the amount of life insurance coverage

to be increased to maintain the exempt status of the policy. Payment of additional

premiums, beyond the initial planned premiums, would trigger such increases.

[104]

Not clear at this stage of the analysis is whether additional premium

payments may also include monies paid to access taxable investments. Mosten says it

does because:

(a)

anything paid is a premium. There is no other descriptor used in

the contracts for payments to the insurer; and

- Mosten 53 -

(b)

the words of the Payment of Premiums section make it clear that

additional premium payments, i.e., premium payments beyond

what is necessary to maintain the life insurance can be made.

There is no language which limits additional premium payments

to funding investments within the Investment Account or which

limits the amount of premiums that can be paid. The general

permissive language must be given effect to.

[105]

Manulife says that in the context of an insurance policy, “premiums”

has a well understood meaning that restricts premiums to monies paid for insurance.

Manulife argues that since:

(a)

(b)

the contract is a policy of life insurance; and

“premiums” has a well-established meaning in the insurance

context; or

(c)

that well-established meaning of “premiums” is consistent with

its use in the subject policy;

the insured cannot pay into the policy investment monies that do not have the

character of being premiums.

[106]

Citing National Home Warranty Programs Ltd. v Wylie Crump Limited,

2012 BCSC 1436 at para 77, Manulife says the ordinary meaning of the term

“premiums” in the insurance industry is clear – that is, consideration passing from the

insured in exchange for obtaining coverage. Manulife says to the same effect is The

Saskatchewan Insurance Act, which defines “premium” as:

- Mosten 54 -

… the single or periodical payment under a contract for the

insurance, and includes dues, assessments and other considerations;

[107]

Manulife says that by reason of the clear meaning of premiums in the

insurance context, the entitlement to make additional premium payments is limited to

what is commonly understood by premiums, i.e., payments to purchase insurance, and

does not extend to make unlimited payments for investments not connected to the life

insurance purpose of the contract. I accept that payments to fund the future life

insurance premiums and permitted tax exempt investment would be inextricably

linked to a life insurance purpose and, thus, monies paid for these purposes would be

within their view of the purpose of the contract and these definitions of premiums.

[108]

Manulife’s position on the meaning of premiums engages two

questions:

(a)

(b)

Is the purpose of the contract limited to providing insurance and

tax exempt investment connected with that life insurance, or does

the contract have a wider purpose of taxable investment

opportunities as well?

What meaning is to be given to the provision, “You may make

additional premiums at any time while this policy is in force”?

[109]

Counsel for both sides, in extensive and well-crafted arguments, relied

upon specific language throughout the contracts to support their respective core

positions. Mosten’s position is that:

(a)

the purpose of the contract is to provide life insurance, limited

investments in the tax-sheltered Investment Account and

unlimited investment in the Carrier Fund;

- Mosten 55 -

(b)

(c)

the contract permits it to pay additional premium payments at

any time; and

premiums in the context of this contract, which contemplate both

insurance and investments, must be interpreted as meaning any

payments made by the insured.

Manulife’s position is that:

(a)

the purpose of the contract is to provide life insurance and

investment options limited to the tax-sheltered investments

available within the tax-exempt accounts and investments to fund

future policy premiums which could be invested within either the

Investment Account or the Carrier Fund;

(b)

the word “premiums” must be given its insurance context

meaning and, thus, any payments proffered which are not for the

purposes stated above are not premiums, and Manulife is under

no obligation to accept same.

My Stage 1 Conclusion

[110] As stated in Ledcor and in Sabean, at para 13:

At the first step of the analysis for standard form contracts of

insurance, the words used must be given their ordinary meaning “as

they would be understood by the average person applying for

insurance, and not as they might be perceived by persons versed in

the niceties of insurance law” ….

While the structure and language of the policies is complex and the exercise of giving

- Mosten 56 -

the words used their ordinary meaning as they would be understood by the average

person applying for insurance in this form of policy is challenging, the interpretation

starts with giving the words their ordinary meaning as they would be understood by

the average person applying for insurance.

[111]

From the outset of my hearing of this matter, I have focused on the issue

of what is the purpose of this contract. Relying on language of the contract itself,

Mosten says the purpose is both to provide life insurance and investment

opportunities beyond those tied to the accrual tax exempt investment opportunities. It

says the language of the policy clearly indicates this to be so.

[112]

I have concluded the purpose of these contracts is to provide life

insurance and investment opportunities within the accrual tax exempt opportunities

permitted by the Income Tax Act; not investment opportunities unrelated to the

fundamental life insurance purpose of the contract. Factors that lead me to this

conclusion include:

(a)

the insurer, nominally and licensed as a life insurance company,

sold to the insured what is clearly identified as a life insurance

policy, albeit a universal life insurance policy;

(b)

there is nothing in the factual matrix related to the initial

acquisition of this policy that in any way suggests the insured

was seeking investment opportunities unconnected to the life

insurance purpose of the policy;

(c)

the meaning that I find must be given to the words premium and

premiums within life insurance policies;

- Mosten 57 -

(d)

(e)

attributing such a purpose to the policy and meaning to premiums

harmonizes the language of the policy as a whole; and

in my opinion, the ordinary insured person would so understand

the word “premiums” and the policy to be providing life

insurance and tax-exempt investment opportunities; but not the

extended opportunities the applicant here says the policy

provides.

[113]

I have concluded that any apparent conflicts or ambiguity in the

language of the policy raised by counsel are resolved and the various provisions of the

contract are harmonized by giving to the word “premiums” its commonly understood

meaning in the context of insurance policies. In doing so, I reject the argument that

since premiums is an undefined word, it must encompass all payments made by the

insured to the insurer.

[114]

The ordinary insured would understand the statement, “You may make

additional premium payments at any time while this policy is in force”, found in the

Payment of Premiums section of the contract as permitting prepayment of future

premiums. The more pertinent question is whether that ordinary insured would

understand that statement to give him or her the right to make such payments for an

investment purpose not connected to the life insurance benefits and the Fund Value.

[115]

It is my conclusion that the words “premium” or “premiums” as used in

this contract would be understood by the ordinary insured to be monies paid by the

insured to the insurer:

(a)

to cover the cost of insurance, premium taxes and policy

maintenance fees as they come due; and

- Mosten 58 -

(b)

for savings or investment within the Investment Accounts to the

extent to which such savings or investments were permitted

within this policy while maintaining its status as an accrual

income tax-exempt life insurance policy.

[116]

I also conclude that the ordinary insured would understand that the

purpose of the Carrier Fund as outlined in the contract was a fund, distinct from the

Insurance Policy:

(a)

(b)

to which excess premiums would be transferred to maintain the

tax-exempt status of the policy;

within which those premiums and additional prepayments of

future premiums could be held for future transfer back into the

policy and while held therein would be invested, but that the

income thereon would be subject to accrual income taxation; and

(c)

from which premium payments could be withdrawn by the

insured.

[117]

I conclude that the ordinary insured would not understand the policy as

permitting investment within Carrier Fund accounts of monies not infused with the

character of being premiums for the life insurance benefits.

My Reasons for This Interpretation and Conclusions

1.

The insurance context meaning of “premiums”

[118]

I have had the benefit of many days of submissions by very capable

advocates as to what “premiums” means in the context of this contract, with multiple

- Mosten 59 -

reasons why “premiums” means precisely what each says it means. Given the limited

scope of the factual matrix available to me to be considered in the interpretation of

this standard form contract, the applicable fundamental precepts of contract

interpretation and the general rules of contract interpretation, I have concluded that

“premiums has a singular and established meaning in the insurance context generally,

with a refinement thereof in the context of a life insurance policy.

[119]

There is, in my opinion, no question but that in a general insurance

context, “premiums” has a universally understood meaning, being the sum paid by the

insured to the insurer to purchase insurance against the insured against risk. When

purchasing fire, theft, liability or other forms of fortuity insurance, premiums are quite

simply the price or cost of the specific insurance purchased. When used in a general

insurance context, everyone understands precisely what premiums are. I conclude that

beyond having a commonly understood meaning, in the insurance context

“premiums” has attained such a status and specific meaning that it has become a legal

term of art that must be adhered to when interpreting an insurance policy.

[120]

This meaning and understanding of “premiums” necessarily gets

modified when purchasing a life insurance policy where the Income Tax Act permits

there to be an accrual tax-exempt element to the policy. Here, the ordinary purchaser

of the life insurance would understand that the term “premiums” relates not only to

the cost of the life insurance per se, but also the amount permitted to be paid for the

permitted and associated tax-exempt investment. Given the universally understood

meaning of “premiums” in the insurance context generally, the ordinary insured,

purchasing life insurance, would not interpret or understand premium or premiums to

include investment in opportunities not associated with or tied to the prerequisite life

insurance purpose or requirements of the policy.

[121]

The Alberta Court of Appeal decision in IFP Technologies (Canada)

- Mosten 60 -

Inc. v EnCana Midstream and Marketing, 2017 ABCA 157, [2017] 12 WWR 261

[IFP], leave to appeal to SCC denied, 2018 28111 (SCC), provides significant

guidance to me. The decision was rendered subsequent to the Supreme Court’s

decisions in both Sattva and Ledcor and applied those decisions in the interpretation

before it.

[122]

IFP dealt with the interpretation of contracts in the oil and gas industry

and the meaning to be given to the phrase “working interest” in those contracts. In its

decision, the Court of Appeal held that the term “working interest” was a legal term of

art that had an accepted meaning and usage in the oil and gas industry and interpreted

the contracts in question using that accepted meaning and usage. It held that while the

customary meaning could be modified by parties to an agreement, in the absence of

such modification a trial judge cannot ignore the customary meaning or usage of a

phrase within an industry and to do so would be an error in law.

[123]

In the course of her reasons, Fraser C.J.A said a number of things that

are instructive with respect to the law of contractual interpretation generally and how

to interpret a word or phrase that may be a term of art within a particular industry.

Thus, I quote extensively:

[60]

Where a standard form contract is involved, the standard of

review that applies to its interpretation is usually correctness: Ledcor

Construction Ltd. v Northbridge Indemnity Insurance Co., 2016 SCC

37 at paras 4, 24, 46, 48, [2016] 2 SCR 23 [Ledcor]. As the Supreme

Court noted, these are highly specialized contracts typically sold

widely to customers without negotiation of their terms and their

interpretation could affect a large number of people. As a result, it

would be undesirable for courts to interpret identical standard form

provisions inconsistently.

[61]

By analogy, this reasoning applies with equal force to legal

terms of art which have a common meaning to participants in a given

industry. In such event, there is no identified need to define what

such terms mean. Participants in the oil and gas industry rely on the

commonly accepted usage of many terms: see, for example, the

- Mosten 61 -

Glossary of Land Terms published by the Canadian Association of

Petroleum Land Administration (CAPLA): CAPLA, “Glossary of

Land Terms 2016”, NEXUS (September 2016) 9 at 15.5 “Working

interest” is one of them. Since this term has an accepted meaning and

usage in this sector, and its interpretation has precedential value, it

must therefore be interpreted consistently. Thus, where the issue

involves the meaning of a legal term of art – in this case, “working

interest” as used in the oil and gas industry – the standard of review

with respect to the meaning of that term is correctness.

[62] While a legal term of art may be modified by the parties

to an agreement, that does not permit a trial judge to ignore the

meaning attributable to it in the absence of such modification.

To do so is tantamount to failing to take into account a key

term of a contract or relevant factor or ignoring applicable

principles and governing authorities. That, in turn, is a question

of law reviewable for correctness: Sattva [2014 SCC 53] at

para 53; Deslaurier Custom Cabinets Inc. v 1728106 Ontario

Inc., 2017 ONCA 293 at paras 65-68. Accordingly, a trial

judge’s failure to recognize that a legal term of art has a certain

meaning is, by itself, an error of law reviewable for

correctness. That is what happened here.

…

[79]

I now turn to a brief overview of the applicable principles of

contractual interpretation. The goal of contractual interpretation is to

determine the objective intent of the parties at the time the contract

was made through the application of legal principles of

interpretation: Sattva, supra at para 49. To this end, “the exercise is

not to determine what the parties subjectively intended but what a

reasonable person would objectively have understood from the

words of the document read as a whole and from the factual matrix”:

Geoff R. Hall, Canadian Contractual Interpretation Law, 2nd ed

(Markham: LexisNexis, 2012) at 33 [Hall]. Accordingly, disputed

contractual terms must be interpreted, not in isolation, but in light of

the contract as a whole: Tercon Contractors Ltd. v British Columbia

(Transportation and Highways), 2010 SCC 4 at para 64, [2010] 1

SCR 69.

[80]

One aspect of the current law on contractual interpretation

engaged by this appeal relates to the relevance of the factual matrix.

In Sattva, the Supreme Court finally clarified that courts ought to

“have regard for the surrounding circumstances of the contract –

often referred to as the factual matrix – when interpreting a written

contract” (para 46). Why? As the Supreme Court noted,

“ascertaining contractual intention can be difficult when looking at

words on their own, because words alone do not have an immutable

or absolute meaning” (para 47).