Atwater Investment LP v BMO Life Assurance Company

QUEEN’S BENCH FOR SASKATCHEWAN

Citation: 2019 SKQB 77

Date:

2019 03 15

Docket:

Judicial Centre:

QBG 1775 of 2017 / QBG 1823 of 2017

Saskatoon

___________________________________________________________________________

BETWEEN:

ATWATER INVESTMENT LP

Appellant

- and -

BMO LIFE ASSURANCE COMPANY

Respondent

Counsel:

Gordon J. Kuski, Q.C., Pierre Barsalou,

Philip Hambelin and Amanda M. Quayle

Munaf Mohamed and Christine A. Viney

Eliot N. Kolers and Sinziana R. Hennig

for Atwater Investment LP

for BMO Life Assurance Company

for the intervenor, Canadian Life and Health

Insurance Association

Table of Contents

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

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

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

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

The Atwater 1 and Atwater 2 Applications .................................................................................... 32

The Law Respecting Contractual Interpretation .......................................................................... 41

- Atwater 2 -

1.

2.

3,

The Fundamental precepts of contract interpretation ........................................................... 41

Principles of interpretation specific to insurance contracts ................................................. 46

The law respecting interpretation of Standard Form Contracts ........................................... 47

(a)

(b)

(c)

Sattva ........................................................................................................................ 49

Ledcor ....................................................................................................................... 53

Sabean ...................................................................................................................... 63

The Contract Language to be Interpreted ..................................................................................... 66

The Parties’ Positions on the Proper Interpretation ..................................................................... 67

1.

2.

3.

Atwater’s position on the interpretative principles to apply ................................................. 69

BMO’s position on the interpretive principles to apply ........................................................ 74

The parties’ disagreement on the applicable interpretive principles .................................... 77

The Context to be Considered at Stage 1 Interpretation of the Contracts .................................. 83

Stage 1 Interpretation of the Contracts .......................................................................................... 98

1.

2.

Atwater’s Stage 1 interpretation ........................................................................................... 98

BMO’s Stage 1 interpretation ............................................................................................... 99

My Stage 1 Interpretation .............................................................................................................. 100

Stage 1 Conclusion .......................................................................................................................... 121

My Reasons for This Interpretation and Conclusions ................................................................ 128

1.

2.

The insurance context meaning of “premiums” .................................................................. 128

Harmonization of this interpretation of “premiums” with the balance of the contract ...... 141

Stage 2 of the Interpretation .......................................................................................................... 143

What are the Applicable Principles of General Contract Construction? ................................. 146

1.

2.

Subsequent conduct considerations ..................................................................................... 150

Parties are presumed to intend the legal consequences of their words and the use of

dictionaries ........................................................................................................................... 153

3.

4.

5.

Precedent and prior case law .............................................................................................. 156

Commercial certainty .......................................................................................................... 161

Illegality and the use of interpretation to avoid it ................................................................ 162

The Special Principles for Interpretation of Insurance Policies ................................................ 168

My Stage 2 Interpretation Conclusion ......................................................................................... 185

Atwater 2 ......................................................................................................................................... 189

My Analysis of the Atwater 2 Application and Decision Thereon ............................................. 193

1.

I decline jurisdiction to grant the declaratory relief sought in Atwater 2 ........................... 193

The Discretionary Nature of Declaratory Relief ......................................................................... 194

- Atwater 3 -

Declaratory Relief and Discretion Generally ............................................................................... 213

Is Atwater 2 Outside the Two-Year Limitation Period? ............................................................. 219

If I am Wrong to Decline Jurisdiction, My Alternative Decisions ............................................. 229

1.

Evidentiary Objections and My Rulings Thereon ....................................................................... 250

1. The applicable law and analysis of the objection ............................................................... 260

On the proper interpretation of the Income Tax Act and Regulations ................................ 229

(a)

(b)

Affidavit evidence in other proceedings ................................................................. 264

The affidavits filed in this proceeding .................................................................... 265

The Regulatory Issues and Analysis ............................................................................................. 290

1.

2.

The interpretation of regulations – an overview of the law and applicable principles ....... 290

The Regulation .................................................................................................................... 310

My Analysis and Conclusions ........................................................................................................ 312

1.

On the variable insurance contract issue ............................................................................ 312

Whether the Regulation has other than prospective effect .................................................. 321

Is the Regulation declaratory of the law? ..................................................................... 321

The vires issue ............................................................................................................... 328

2.

(a)

(b)

(c)

Purposive analysis and interpretation of the Regulation assuming the Lieutenant

Governor had the authority to pass retroactive regulations ......................................... 336

Conclusion on the Regulatory Issues ............................................................................................ 355

Conclusion ....................................................................................................................................... 356

___________________________________________________________________________

JUDGMENT

SCHERMAN J.

March 15, 2019

___________________________________________________________________________

Introduction

[1]

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

Investment LP [Atwater] asks the Court to make declarations in respect of two

contracts between it and BMO Life Assurance Company [BMO]. Reduced to their

essence, the declarations Atwater seeks would interpret the contracts as having

distinct life insurance and investment entitlements or purposes and declare that

- Atwater 4 -

Atwater 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 a rate that

would be very attractive to investors in the current interest rate environment.

[2]

BMO 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, BMO 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

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 Mosten Investment LP [Mosten] and Ituna Investment LP

[Ituna] against The Manufacturers Life Insurance 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 BMO 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 the policies to deposit or invest unlimited amounts of monies to

- Atwater 5 -

access the returns 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

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

- Atwater 6 -

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

operation only and does not affect their vested rights; and

- Atwater 7 -

(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

implications for all parties;

- Atwater 8 -

(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

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

each issue that might be raised in an appeal.

- Atwater 9 -

Core Issues to Decide

[12]

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

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

(a)

(b)

the contracts are life insurance policies that permit limited

investment within the “exempt from accrual taxation” criteria

established under the Income Tax Act; or

contracts that provide both policies of life insurance and

unlimited investment, both 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 contracts?

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

circumstance” evidence can be considered in determining the

purpose(s) of the contracts?

(c)

(d)

What is the meaning to be given to the undefined terms

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

Does the contract language as a whole, and specifically language

under the headings Side Account and Payment of Premiums,

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

premiums and have amounts in excess of:

(i)

present and anticipated future cost of insurance, premium

- Atwater 10 -

tax and management fees; and

(ii) qualifying exempt from accrual taxation investments in

Investment Accounts;

invested in selected interest-bearing accounts within the Side

Accounts?

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 contracts. The concept of Stage 1

interpretation is discussed below.

[16]

The contracts were both issued on February 18, 2002, by AIG Life

Insurance Company of Canada [AIG] as the insurer. Extracts from the policy

language are attached to this decision as Appendix “A”.

[17]

The applicant, insured and beneficiary was 605945 Saskatchewan

Ltd. [605945]. The sole shareholder and officer thereof was one Conrad Walkom of

- Atwater 11 -

Estevan, Saskatchewan, stated occupation “Farmer”. The lives insured under Policy

16551 were Conrad Walkom and his daughter Brittany, then a minor, and under

Policy 13468 were Conrad Walkom and his daughter Shayla, then also a minor.

[18]

The Applications for Insurance were each dated January 23, 2002.

Under the heading Plan Selection, Life Dimension Series 1 JLTD (i.e., joint last to

die) was specified and an insurance amount of $3,455,650 was stated. Under Premium

Information, it selected an annual premium, with a planned premium of $50,000.

[19]

A Universal Life Supplementary Questionnaire (to be Completed by

Policyowner) was also completed and signed under the same date January 23, 2002.

Under the headings:

(a)

(b)

1. Coverage – the option Joint Life (last to die) was selected;

3. Tax Exempt Option – opposite Face Amount Adjustment, the

option Increase and Reversals was selected;

(c)

(d)

4. Death Benefit Options – the option Sum Insured was selected;

5. Universal Life Riders – none of the available options were

selected;

(e)

(f)

7. Investment Allocations – five different Market Indexed

Accounts in various percentages totalling 100% were selected;

and

8. Investment Allocation–Side Account – the same Market

Indexed Accounts selections were made.

- Atwater 12 -

The questionnaire included the statement, “I agree that the foregoing Options and

Investment Allocations shall form part of the application for insurance made by me to

AIG Life Insurance Company of Canada (AIG Life of Canada).”

[20]

The policies issued with issue and effective dates of February 18, 2002.

Policy Information, page 5, designated the policies as “Life Dimensions – Investor

Maximizer” with:

(a)

(b)

(c)

(d)

(e)

(f)

the plan being Universal Life;

the total annual minimum premium as $5,895.94;

the total monthly minimum premium as $491.33;

the planned premium as $5,417.00;

the death benefit option as Sum Insured;

the minimum sum insured as $0.00; and

(g)

a monthly administration fee of $10.00 and a provincial premium

tax of 3% was indicated.

Under Basic Coverages, page 6, the plan type was stated as Joint – Last to Die and the

cost of insurance option as “Investor Maximizer Yearly Renewable Term”. Pages 7

to 9 stated the “Yearly Renewable Term Cost of Insurance” and “Additional Sum

Insured Cost of Insurance” for the years 2002 to 2100 and a table of surrender charges

showing the surrender charge on each Coverage Anniversary Date of February 18,

2002, through February 18, 2011.

- Atwater 13 -

[21]

An initial premium of $50,000 was paid by 605945 into each policy. No

additional premium payments were made by 605945 into either policy while it was

the insured under the policy.

[22]

On February 27, 2002, Conrad Walkom received an illustration of

potential insurance coverage, fund values and total death benefits that might be

achieved under the policies making various assumptions about investment returns

achieved on monies in the Investment Account. These illustrations were, as per

indications on the documents, prepared by AIG on February 19, 2002, and received

by Conrad Walkom on February 27, 2002. Both dates are subsequent to the policy

application dates of January 23, 2002, and the policy effective dates of February 18,

2002. Given these illustrations were not produced and shared until after the contracts

came into existence, I do not regard these illustrations as objective facts known to the

parties at or before the date of contracting. In any event, given the specific assumption

made in the illustrations, they do not provide me with relevant and objective factual

matrix evidence that assists or informs me as to what the parties mutually understood

about the contract’s purpose and intention.

[23]

To interpret these contracts, as of the date the contracts came into

existence, I have to consider the language of the contracts themselves, the applications

and questionnaires completed in connection with the applications and permissible

context or factual matrix evidence that will be discussed below in this decision.

[24]

Subsequent to AIG entering into the contracts, the shares of AIG were

acquired by an entity controlled by BMO Financial Group. On April 1, 2009, the

name of AIG was changed to BMO Life Assurance Company.

[25]

Beyond the initial $50,000 premiums paid, no additional premium

payments were made on either policy. This resulted in subsequent decreases in the

- Atwater 14 -

level of insurance coverage. By December 31, 2008, the amounts insured under both

policies had been reduced significantly as permitted by the policies.

[26]

On December 31, 2008, Atwater acquired all rights and interests in

respect of Policies 13468 and 16551 and subsequently provided to BMO notice of

their assignments and changes of beneficiary to Atwater. The notices of assignment

and changes of beneficiary were recorded by BMO on January 22, 2009.

[27]

After acquisition of the policies by Atwater, the contracts were amended

so as to include Michael Hawkins as an insured life on both. Since July 18, 2011,

Michael Hawkins has been an insured life on contract 16551, with a sum insured of

$25,000 pursuant to a term rider to the policy. Atwater’s position is that on the death

of Michael Hawkins, it is entitled to receive the $25,000 sum insured and the fund

value on the last to die of Conrad Walkom and Brittany Walkom, which was

$1,627.04 on February 17, 2016. In respect of Policy 13468, Atwater claims to be

entitled to receive the sum insured, totalling $13,413.00, on the last to die of Conrad

Walkom and Shayla Walkom.

[28]

Payments of $1,029,500 were made by Atwater to BMO into Policy

13468 between January 20, 2009, and September 22, 2016, most of which were

credited to the Side Account. In addition, transfers among accounts were made and

various withdrawals totalling approximately $139,850 were made by Atwater.

Atwater made or tendered payments of $1,730,500 to BMO for Policy 16551 between

January 22, 2009, and October 5, 2016, most of which, to the extent accepted, were

credited to the Side Account. In addition, various withdrawals totalling approximately

$16,500 were made by Atwater.

[29]

By letter dated October 6, 2016, BMO advised Atwater that it would not

accept disproportionately large deposits into the Side Account of Contract 13468 and

- Atwater 15 -

returned Atwater’s payments received since January 2016 totalling $907,000, together

with interest of $749 for what it described as “a goodwill gesture for inconvenience”.

The letter stated BMO would be willing to accept deposits totalling $11,731 to the

13468 contract “based on [BMO’s] estimate of the present value of future Maximum

Premiums allowed by CRA [Canada Revenue Agency] to maintain the tax-free status

of the policy” and that it would “return any deposits” above that amount “as such

deposits fall well outside the terms, spirit and intent of the policy”.

[30]

By another letter, also dated October 6, 2016, in respect of

Contract 16551, BMO enclosed a cheque in the amount of $100,000 described as the

“return” of Atwater’s deposits in September 2016 plus $10.00 interest as a “good will

gesture for the inconvenience”. It also returned, uncashed, a cheque in the amount of

$430,000 Atwater had forwarded to BMO as an additional premium payment on or

about September 29, 2016. The letter continued that BMO would be willing to accept

deposits to the contract totalling $16,509 based on its “estimate of the present value of

the future Maximum Premiums allowable by CRA to maintain the tax-free status of

the policy”. By a further letter of October 7, 2016, BMO returned an uncashed

Atwater cheque of $1,200,000 that Atwater had tendered on or about October 5, 2016,

to BMO as additional premiums for the policy, stating it was being returned for the

reasons outlined in its October 6, 2016 letter.

[31]

There followed extensive correspondence between Atwater and BMO in

which Atwater took the position that it was entitled, under the terms of the contracts,

to make the additional premium payments it had tendered in the past and proposed to

make in the future. BMO maintained its position that it was under no contractual

obligation to accept premium payments beyond its estimate of the present value of the

future maximum premiums allowed by the Canada Revenue Agency to maintain the

tax-free status of the policies.

- Atwater 16 -

The Atwater 1 and Atwater 2 Applications

[32] In an Originating Application originally filed on February 1, 2017, as

QBG 20 of 2017, Judicial Centre of Estevan, and later transferred to the Judicial

Centre of Saskatoon as QBG 1775 of 2017 [Atwater 1], Atwater seeks declarations

that it is entitled to invest amounts, with no limits, into guaranteed-interest options

within the Side Accounts of Policies No. 13468 and 16551.

[33]

By a second Originating Application filed October 24, 2017, as

QBG 145 of 2017, Judicial Centre of Estevan, and later transferred to the Judicial

Centre of Saskatoon as QBG 1823 of 2017 [Atwater 2], Atwater says the Policies

never had or lost their status as tax-exempt life insurance policies. As later amended,

Atwater essentially took the position that since the subject policies lost their

tax-exempt status there is no limit on the premiums or amounts Atwater can pay into

the Investment Accounts of the subject Policies and thereby access the guaranteed

interest options available within the Investment Accounts, rather than within the Side

Accounts. In Atwater 2, it asks for declaratory relief that gives effect to this position.

[34]

Atwater 1 and Atwater 2 were subsequently consolidated by Order of

this Court, and continued in the Judicial Centre of Saskatoon. Subsequent to this

consolidation, Atwater filed an application seeking to leave to amend its Originating

Notice in Atwater 2. On August 2, 2018, on the filing of a Consent by the parties,

Atwater was given leave to amend the Originating Application in Atwater 2. Then,

during the hearing, Atwater was given leave to again amend its Originating

Application in Atwater 2. Atwater and BMO have proceeded on the basis that,

notwithstanding the consolidation, the Originating Applications in both Atwater 1 and

Atwater 2 are before the Court for determination.

[35]

Atwater and BMO each presented detailed, comprehensive and distinct

- Atwater 17 -

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

[36]

The relief sought in Atwater 1 is declarations that:

(a) Atwater may make additional premium payments to the Contracts

in such amounts and at such times as Atwater determines;

(b) there is no limit on the amount that can be held by or for Atwater

in the Side Accounts that form part of the Contracts; and

(c) BMO is not entitled to refund premiums or funds held in the

Contracts, either from the Investment Accounts or the Side

Account in the absence of a request by Atwater.

[37]

The relief sought in Atwater 2, as detailed in a Fresh Second Amended

Originating Application, filed October 18, 2018, is:

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

following rights and privileges under two Life Dimensions –

Investor Maximizer universal life insurance contracts, Policy

Numbers 000013468 (the “13468 Contract”) and 0000016551

(the “16551 Contract”, and, together with the 13468 Contract,

collectively referred to herein as the “Contracts”) under which

Atwater is insured by the respondent, BMO Life Assurance

Company (“BMO”):

(i)

That any Investment Bonus payable under the

Contracts to Atwater shall be credited on February 18

of each calendar year;

(ii)

That any Cumulative Fund Bonus payable under the

Contracts to Atwater shall be credited on February 17

of each calendar year;

(b) Following a decision that the Contracts are not exempt policies

under the provisions of the Income Tax Act of Canada, a

further order determining and declaring that Atwater has the

following rights and privileges under the Contracts:

(iii)

That all funds paid to BMO under the Contracts are

- Atwater 18 -

and shall be held in the Investment Accounts that

comprise the Fund Value under each contract and that

BMO is not entitled to transfer any funds, whether

currently held or subsequently paid under either

contract, to the Side Account of the Contracts;

(iv)

With no balance in the Side Account of the Contracts,

that any Investment Bonus payable under the

Contracts to Atwater shall be calculated on each of the

Investment Accounts that comprises the Fund Value

which shall, with respect to each contract, represent all

funds held under each contract;

(v)

With no balance in the Side Account of the Contracts,

that any Cumulative Fund Bonus payable under the

Contracts to Atwater shall be calculated on the Fund

Value which shall, with respect to each contract,

represent all funds held under each contract;

(vi)

That BMO shall not be entitled to effect the provision

with respect to Additional Sum Insured under the

Contracts and, as such, shall not be entitled to increase

the amount of the life insurance coverage under either

contract by up to the maximum amount permitted

under the Income Tax Act of Canada (or by any

amount including the lesser of $3,000,000.00 or four

times the original Sum Insured) unless expressly

instructed to do so by Atwater; and

(vii)

That the Exempt Status, Side Account and Investor

Maximizer provisions of the Contracts cease to have

any application to the Contracts and that the Contracts

otherwise continue unaffected.

(c) An Order granting the applicant costs of the within application,

on a full indemnity basis.

[38]

The submissions of Atwater and BMO at the hearing first addressed the

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

to be given to the contracts, with significant focus on Atwater’s position that anything

paid by Atwater was a premium within the meaning of the policies and, thus, Atwater

was entitled to access unlimited investments within the Side Accounts. Then, as a

distinct topic, the parties addressed the Atwater 2 claim that the Policies never had or

lost its tax-exempt status, with the consequence that Atwater could pay unlimited

premiums for investment within the Investment Account of the Policies.

- Atwater 19 -

[39]

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 Atwater 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.

[40]

Consistent with the approach taken by counsel in their submissions to

the Court, this decision will deal first on the relief sought in Atwater 1 and then

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

in Atwater 2.

The Law Respecting Contractual Interpretation

1.

The fundamental precepts of contract interpretation

[41]

The contracts in question are standard form contracts and contracts 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

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

interpretation exercise at hand.

[42]

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

- Atwater 20 -

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.

[43]

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.

[44]

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.”

[45]

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:

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.

- Atwater 21 -

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

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

- Atwater 22 -

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

[46]

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

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

- Atwater 23 -

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

[47]

Within this topic lies fundamental disagreement between Atwater and

BMO, as well as between Mosten and Ituna and their respective insurers in the

proceedings among them.

[48]

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 the third edition of his

- Atwater 24 -

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

[49]

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.

[50]

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

- Atwater 25 -

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]

…

[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.

- Atwater 26 -

[51]

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.

[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

- Atwater 27 -

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.

[52]

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

[53]

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:

[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.

[54]

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.

- Atwater 28 -

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.

[55]

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.

[56]

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

- Atwater 29 -

interpretation process, this interpretation is better characterized as a

question of law subject to correctness review.

[57]

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. 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.

[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

- Atwater 30 -

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).

[58]

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:

[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.

- Atwater 31 -

[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.

[59]

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

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.

[60]

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

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

- Atwater 32 -

[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.

[61]

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:

- Atwater 33 -

[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.

[62]

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]

[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

- Atwater 34 -

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

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 (CanLII).

- Atwater 35 -

(c)

Sabean

[63]

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.

[64]

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

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.

- Atwater 36 -

[65]

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.

The Contract Language to be Interpreted

[66]

There are two contracts which are the subject of this proceeding, but the

language of the contracts is identical. While the contracts as a whole are to be

interpreted, the focus of the submissions and the interpretational issues arises from

certain portions of the contracts. Attached as Appendix “A” to this decision are

- Atwater 37 -

extracts from the contract. Included in Appendix “A” are the significant portions of

the contracts referenced by counsel in their submissions. However, the provisions that

will figure most prominently in my interpretation of the contracts are quoted below:

Net Premium

The Net Premium is the premium received by Us less any applicable

Federal and Provincial taxes, levies or similar charges on premiums

paid by You.

Premium Allocation

Premium Allocation is the portion of the Net Premium directed

toward a particular Investment Account. You can change the

Premium Allocation by notifying Us in writing. The $30 fee charged

for each change in Premium Allocation will be waived for the first

three Premium Allocation changes in each Policy Year. The effective

date of any Premium Allocation change will be the business day

Your written request is received at Our head office, or later if so

indicated.

Investment Accounts

Investment Accounts are savings pools to which Your premiums are

directed and from which charges are deducted. They provide

different levels of risk, liquidity and rates of return. We will offer a

number of Investment Accounts from time to time. We guarantee

that at least four Market Indexed Accounts, the Daily Interest

Account and Guaranteed Interest Accounts 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 from a Guaranteed Interest

Account will take effect only at the end of the selected term. Any

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

transfer is occurring.

…

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 Effective Date. An exempt test is done each Policy

Anniversary. We will take action to maintain the Exempt Status.

Should the definition of an exempt policy be amended, 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

- Atwater 38 -

the maximum each year, as permitted under the current Income

Tax Act and subject to an overall maximum increase of the

lesser of four times the original Sum Insured or $3,000,000. Any

such increase is referred to in this contract as Additional Sum

Insured. This will only apply if the Life Insureds are living when

the exempt test is done.

2. We will transfer the excess funds to the Side Account, as

described below.

Side Account

The Side Account 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

Side Account any premiums that exceed the maximum premium

determined by Us on the Policy Effective Date. You may elect to

have funds in the Side Account accumulate under either the Daily

Interest Account, Guaranteed Interest Account or Market Indexed

Account as determined by You.

However, the Side Account will not be entitled to any Investment

Bonus, Cumulative Fund Bonus or Investor Advantage. Account

Deductions will not be made from the Side Account. The Side

Account is not included in the calculation of the Fund Value. The

Side Account will be paid to You or Your estate in addition to the

Death Benefit when the contract terminates. The investment income

of the Side Account is subject to annual accrual taxation.

Cash Withdrawals may be made from the Side Account and no

administrative charges shall apply.

If it appears to Us that this policy may lapse, We will transfer funds

from the Side Account into the policy’s tax exempt Investment

Accounts.

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

Status provision. Transfers are made from or to the Side Account as

required to keep the maximum amount in the tax exempt Investment

Accounts, or if it appears to Us that this policy may lapse. Transfer

fees will not apply to transfers to and from the Side Account. A

Market Value Adjustment will apply to transfers from a Guaranteed

Interest Account to an Investment Account other than a Guaranteed

Interest Account of the same remaining term. Any transfer from the

Side Account into the Investment Accounts will be treated as

premiums and will therefore attract premium taxes as described in

the Net Premiums provision.

…

Payment of Premiums

The initial planned premium, as shown in the Policy Information

Pages, is due on the Policy Effective Date and must be paid before

any coverage becomes effective. You may then pay premiums

- Atwater 39 -

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.

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

contract.]

The Parties’ Positions on the Proper Interpretation

[67] The position of each of the parties is that the contracts are unambiguous

and should be interpreted as they propose. Each says that if the contracts are found to

be ambiguous, the relevant and properly admissible evidence of the surrounding

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

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

these decisions support the interpretation they propose.

[68]

Atwater says the bulk of the affidavit evidence filed by BMO is

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

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

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

evidence of Atwater should be similarly struck. BMO has brought its own application

to strike affidavit evidence of Atwater. Before considering these issues, I will deal

with what has been designated the Stage 1 interpretive exercise.

1.

Atwater’s position on the interpretive principles to apply

[69]

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

in particular in paragraphs 49 and 50 quoted at paragraph 58 above. Atwater points

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

[70]

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

- Atwater 40 -

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.

[71]

Applying these principles, Atwater says there is no ambiguity and the

proper interpretation is the one they advance, which is that since the contracts:

(a)

(b)

(c)

(d)

create the Side Accounts as special accounts to hold any

premiums paid that exceed the maximum allowable tax exempt

value in the Investment Accounts;

provides that any premiums paid that cause the maximum

allowable tax-exempt value in the Investment Accounts to be

exceeded will be credited to the Side Account;

the insured has elected to have funds in the Side Account

accumulate under a 10-year term guaranteed investment account

option; and

the contracts specifically state that the investment income in the

Side Account is subject to annual accrual taxation;

the ordinary insured would understand the contracts to provide life insurance,

investment that is exempt from an annual accrual taxation within the Investment

- Atwater 41 -

Account and additional investment opportunities subject to annual accrual taxation in

the Side Account, i.e., the contracts provide both insurance and independent

investment rights.

[72]

Atwater says you do not need to consider anything but the clear

language of the contracts. 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 premium payments at any time and that premiums in excess of the

exempt policy rules are invested in the Side Accounts.

[73]

The alternative Atwater position is that if ambiguity is found to exist,

then the applicable principles of general contract interpretation to apply are:

(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.

Application of these principles, it says, resolves the interpretation in their favour. If

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

will construe the contract contra proferentem against the insurer.

- Atwater 42 -

2.

BMO’s position on the interpretive principles to apply

[74]

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

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

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

BMO says the overriding concern is 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 50 and take the position that the text cannot be interpreted

without regard to the context.

[75]

BMO 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.

[76]

BMO 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 Atwater now

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

and understood and does not include payments made for investments not connected

with the life insurance purpose. Should the contracts be found to be ambiguous, they

say the factual evidence they have presented is admissible to resolve that ambiguity

- Atwater 43 -

and clearly demonstrates what the intent of the parties was.

3.

The parties’ disagreement on the applicable interpretive principles

[77]

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. They disagree on what is the proper scope of such

surrounding circumstances to consider within a Stage 2 interpretation should

ambiguity be found.

[78]

Atwater 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 BMO’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.

- Atwater 44 -

[79]

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

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

interpretation of standard form contracts. BMO 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, and 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 Atwater.

[80]

The Supreme Court was not absolute in its statement in Ledcor. It said,

at paragraph 32, 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. BMO says that the Court can look to the evidence they have proffered to

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

market or industry in which it operates.

[81]

Atwater says that to the extent to which the purpose of the contract, the

nature of the relationship and the market in which it operates can be considered, these

factors are, in this case, “the most benign of factors” and that the assistance to be

gained from them in the interpretive process is “wafer thin”. There is, they say, no

objective evidence of relevant surrounding circumstances at the time the contracts

were formed which assists in the interpretation. 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 is irrelevant. Atwater says the purpose of the

contracts is clearly expressed within the contracts as providing life insurance and

investment options.

[82]

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

- Atwater 45 -

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.

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

[83]

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 outlines 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 since 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.

[84]

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

- Atwater 46 -

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

context permitted by the decisions in Ledcor and Sabean.

[85]

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

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

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.

[86]

The interpretation of standard form contracts proceeds in two distinct

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

read and understood within that limited context identified in paragraph 31 of Ledcor.

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.

Resort to the general rules of construction in Stage 2 is only if ambiguity remains at

the conclusion of Stage 1.

[87]

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.

- Atwater 47 -

[88]

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

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

rules of construction where 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.

[89]

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.

[90]

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.

[91]

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

its decision in Ledcor:

- Atwater 48 -

[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.

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.

[92]

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.

[93]

The conclusion I draw from the foregoing decisions is that the

interpretation of standard form insurance contracts is subject to the distinct

interpretive process 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.”

[94]

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

- Atwater 49 -

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

be considered when assessing the purpose of the contract.

[95]

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 the 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.

[96]

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

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

analysis of these limited contextual elements does not include consideration of much

of the evidence presented by either side because, 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. My detailed decision on the evidentiary issues is

set forth in a subsequent section of this decision.

[97]

I conclude that the context informing my interpretation at Stage 1

- Atwater 50 -

should be so limited by reason of the following:

(a)

when interpreting a standard form contract, the court can not

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

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 the 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 cannot 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 Contracts

1.

Atwater’s Stage 1 interpretation

[98]

Atwater’s interpretive position, in brief, is:

(a)

universal life [UL] insurance contracts were designed, as stated

in the contracts, to provide flexibility;

- Atwater 51 -

(b)

the purpose of these UL contracts, as stated in the contracts, was

to make available to the insured both life insurance protection

and investment options;

(c)

(d)

the contracts meet the definition of life insurance as defined by

The Saskatchewan Insurance Act;

“premiums” is an undefined term, and as used in the contract, the

word “premiums” necessarily encompasses all sums paid by the

insured to BMO in respect of the contract;

(e)

this meaning must be given to premiums because other

provisions of the contracts provide that premiums can be

invested, withdrawn and invested in the Side Account. Further,

the contracts specify minimum premiums and planned premiums,

but do not specify there is a maximum premium limit;

(f)

the Payment of Premiums provisions of the contracts expressly

state the insured “may make additional premium payments at any

time while this policy is in force”. This language expressly

entitles Atwater to make additional premium payments at any

time, in such amounts as it chooses, for investment in Side

Account accounts; and

(g)

the restrictions BMO has attempted to impose on the payment of

premiums amounts to a rewriting of the contract and to permit

such would undermine the commercial efficacy of standard form

contracts.

- Atwater 52 -

BMO’s Stage 1 interpretation

2.

[99]

BMO’s interpretive position, in brief, is:

(a)

(b)

The purpose of life insurance is to provide protection against the

mortality risk with death benefits paid on the death of the insured

life.

The tax laws of Canada, now and at the time these policies were

entered into, permit insurers to provide within permanent life

insurance policies, as part of the death benefit to be paid, a

permitted level of accrual income tax exempt investments.

(c)

UL insurance is a distinct product within the life insurance

industry that allows policy owners flexibility as regards the type

of the life insurance accessed, available death benefits, premium

payment plans and accrual tax exempt investment options within

specified limits.

(d)

(e)

While a distinct product, UL insurance remains, at its core, life

insurance. The investment opportunities provided are

inextricably linked and flow from the life insurance coverage

accessed.

While not defined in the policies, “premiums” has a clear

meaning in the context of any insurance policy. It is the

consideration paid for the insurance coverage and is not, as

Atwater maintains, so broad as to cover all payments made to the

insurer, including those payments Atwater intends to be used for

- Atwater 53 -

investment which would not be tax sheltered.

(f)

The sentence, “You may make additional premium payments at

any time while this policy is in force”, found under the heading

Payment of Premiums, should not be interpreted as permitting

Atwater to pay any amount of monies it wishes with a view to

accessing unlimited investment options. Rather, it must be

interpreted consistent with the ordinary meaning of premiums in

the insurance context, i.e., permitting additional premiums to be

paid for present and future life insurance coverage costs and the

tax-sheltered investment opportunities permitted for the level of

life insurance coverage insured. Payments beyond this level are

not premiums, and BMO is under no obligation to accept such

excess payments as premiums.

(g)

(h)

The interpretation advanced by BMO is what the average person

applying for a universal life insurance policy would expect.

The literal interpretation Atwater advances would bring about a

commercially unrealistic result that would not have been

contemplated in the commercial atmosphere in which the

contract was formed.

My Stage 1 Interpretation

[100]

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

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

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

industry in which the contracts were obtained. When determining such context

- Atwater 54 -

matters, I will proceed in the manner I outlined in paragraphs 95 to 97 above.

[101]

Adopting the descriptor used by counsel for Atwater, I find the context

to be considered at Stage 1 to be “wafer thin”. Stated briefly, I find the relevant

context to be as follows:

(a)

The purpose of the contracts, which I determine from the

language of the contracts 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 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 AIG and

the corporation 605945, wherein AIG insured the lives of Conrad

Walkom (principal shareholder and officer of 605945) and his

minor daughters and provided for various investment options.

The market or industry involved was the life insurance industry

in Canada.

[102]

The core issues at this stage then are:

(a)

Is the investment purpose of the contracts limited to the tax

sheltered investment permitted by the Income Tax Act, RSC

1985, c 1 (5th Supp), as a function of the amount of life

insurance provided under the policy or is it, as argued by

Atwater, broader and independent investment options?

- Atwater 55 -

(b)

What is the meaning of “premiums” as the word is used in the

contracts?

[103]

The insureds are 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.

[104]

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. …

- Atwater 56 -

[105]

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 contracts are clearly intended to

access the accrual tax exemptions permitted by the Income Tax Act, it logically

follows that the policies fall within the category of being primarily life insurance-type

policies.

[106]

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.

[107]

Under the Exempt Status heading, page 3.3, 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

[108]

The first sentence of the Investment Accounts section tells the insured

that Investment Accounts are savings pools to which his or her premiums are directed.

The reader would understand that his or her premium payments under these contracts

- Atwater 57 -

provided not only life insurance but also limited income tax-exempt 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 savings or

investments. There is nothing in the contracts that expressly states the only

permissible investments are those specified under the heading Investment Accounts.

However, by contrast, the language of Side Account provisions does not describe this

Account as a savings pool.

[109]

Immediately following the Exempt Status heading at page 3.3 is the

heading Side Account. The first sentence thereunder states, “The Side Account is a

special account that holds funds in excess of the maximum allowable tax exempt

value calculated by the annual exempt test.” The provision goes on to state premiums

that exceed the maximum premium on the Policy Effective Date will be credited to it.

Atwater argues that the statement that this Side Account 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 stand-alone investment options not

tied to the life insurance policy portion of the contracts.

[110]

The third sentence states, “You may elect to have funds in the Side

Account accumulate under either the Daily Interest Account, the Guaranteed Interest

Account or Market Indexed Account as determined by you.” The last sentence of the

next paragraph states, “The investment income of the Side Account is subject to

annual accrual taxation.” An average insured reading this language would understand

that funds held in this Side Account would generate income, but that such income is

taxable.

[111]

At this stage in the interpretive process, I am satisfied the contracts are

unambiguous in the following respects:

- Atwater 58 -

(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 Side Account and that

income accruing there will be taxed.

[112]

Atwater says its contractual right to pay “additional premiums” and,

thus, to have them invested in the Side Account arises from the plain language of the

Payment of Premiums provisions found at page 6.1. 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?”

[113]

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 Effective Date and any subsequent annual or monthly premiums. There

can be little doubt that the initial planned premium and the subsequent annual or

monthly paid premiums would relate to the premiums needed to both maintain the life

insurance and fund the permitted tax-sheltered investment connected to that life

insurance contemplated.

[114]

The policies expressly contemplate 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

- Atwater 59 -

premium. In addition, there are provisions for the amount of life insurance coverage

to be increased to maintain the exempt status of the policies. Payment of additional

premiums, beyond the initial planned premiums, would trigger such increases.

Additional premium payments would also include prepayment of future premiums.

[115]

Atwater says additional premium payments may also include monies

paid to access taxable investments because:

(a)

(b)

anything paid to BMO is a premium. There is no other descriptor

used in the contracts for payments to the insurer; and

There is no language which limits additional premium payments

to funding investments within the Investment Account and which

limits the amount of premiums that can be paid. The general

permissive language must be given effect to. 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.

[116]

BMO says that in the context of an insurance policy, premiums has a

well understood meaning that restricts premiums to monies paid for insurance. It cites

the following dictionary definitions in its written submissions:

81. Both the Canadian Oxford Dictionary and Webster’s Third

New International Dictionary link “premium” directly to

“insurance”, through the following definitions:

an amount to be paid for a contract of insurance

The Canadian Oxford Dictionary, (Don Mills: Oxford

University Press, 2001) at page 1142 (“Canadian Oxford

Dictionary”) [Authorities, Tab 11]

the consideration paid in money or otherwise for a contract of

- Atwater 60 -

insurance in the form of an initiation fee, an admission fee, an

assessment, or a stipulated single or periodic payment

according to the nature of the insurance

Webster’s Third New International Dictionary, (Springfield:

Merriam-Webster Inc., 1992) at page 1789 [Authorities,

Tab 12]

82. Black’s Law Dictionary contains a similar definition of

“premium” as:

The amount paid at designated intervals for insurance; esp., the

periodic payment required to keep an insurance policy in

effect.

Black’s Law Dictionary, 10th ed. (St. Paul: Thomson Reuters,

2014) at page 1371 (“Black’s Law Dictionary”) [Authorities,

Tab 13]

[117]

[118]

The Saskatchewan Insurance Act defines “premium” as:

… the single or periodical payment under a contract for the

insurance, and includes dues, assessments and other considerations;

BMO says that by reason of the commonly understood 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 contracts. It argues that to be a

premium, the payment must be limited to the life insurance purpose of the contract.

Investments or savings within the permitted tax-exempt limits and investment of

monies to fund the payment of future life insurance premiums and future permitted

tax-exempt investments or savings would be understood by insured parties to be

within the meaning of “premiums”.

[119]

BMO’s position or argument on the limited meaning of premiums

engages two questions: