Ledcor Construction Limited Appellant v. Northbridge Indemnity Insurance Company,, 2016 SCC 37

SUPREME COURT OF CANADA Citation: Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co., 2016 SCC 37, [2016] 2 S.C.R. 23 Appeal heard: March 30, 2016 Judgment rendered: September 15, 2016 Docket: 36452 Between: Ledcor Construction Limited Appellant and Northbridge Indemnity Insurance Company, Royal & Sun Alliance Insurance Company of Canada and Chartis Insurance Company of Canada Respondents And Between: Station Lands Ltd.

Appellant and Commonwealth Insurance Company, GCAN Insurance Company and American Home Assurance Company Respondents Coram: McLachlin C.J. and Abella, Cromwell, Moldaver, Karakatsanis, Wagner, Gascon, Côté and Brown JJ. Reasons for Judgment: (paras. 1 to 97) Reasons Concurring in the Result : (paras. 98 to 128) Wagner J. (McLachlin C.J. and Abella, Moldaver, Karakatsanis, Gascon, Côté and Brown JJ. concurring) Cromwell J.

Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co., 2016 SCC 37, [2016] 2 S.C.R. 23 Ledcor Construction Limited Appellant v. Northbridge Indemnity Insurance Company, Royal & Sun Alliance Insurance Company of Canada and Chartis Insurance Company of Canada Respondents - and - Station Lands Ltd. Appellant v. Commonwealth Insurance Company, GCAN Insurance Company and American Home Assurance Company Respondents Indexed as: Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co. 2016 SCC 37 File No.: 36452. 2016: March 30; 2016: September 15.

Present: McLachlin C.J. and Abella, Cromwell, Moldaver, Karakatsanis, Wagner, Gascon, Côté and Brown JJ. on appeal from the court of appeal for alberta Insurance — Property insurance — All risks policy — Exclusion clauses —

Interpretation — Builders’ risk policy excluding from coverage cost of making good faulty workmanship — Windows of building under construction scratched by contractor hired to clean them and windows needing replacement — Whether faulty workmanship exclusion to coverage applicable. Appeals — Courts — Standard of review — Contractual

interpretation — Standard of appellate review applicable to trial judge’s

interpretation of standard form insurance contract. During construction, a building’s windows were scratched by the cleaners hired to clean them. The cleaners used improper tools and methods in carrying out their work, and as a result, the windows had to be replaced. The building’s owner and the general contractor in charge of the construction project claimed the cost of replacing the windows against a builders’ risk insurance policy issued in their favour and covering all contractors involved in the construction.

The insurers denied coverage on the basis of an exclusion contained in the policy for the “cost of making good faulty workmanship”. The trial judge held the insurers liable, finding that the exclusion clause was ambiguous and that the rule of contra proferentem applied against the insurers. The Court of Appeal reversed that decision. Applying the correctness standard of review to the

interpretation of the policy, the court held that the trial judge had improperly applied the rule of contra proferentem because the exclusion clause was not ambiguous. The court devised a new test of physical or systemic connectedness to determine whether physical damage was excluded as the “cost of making good faulty workmanship” or covered as “resulting damage”.

Based on this test, the court concluded that the damage to the windows was physical loss excluded from coverage, because it was not accidental or fortuitous, but was directly caused by the intentional scraping and wiping motions involved in the cleaners’ work. Held : The appeals should be allowed. Per McLachlin C.J. and Abella, Moldaver, Karakatsanis, Wagner, Gascon, Côté and Brown JJ.: The appropriate standard of review in this case is correctness. The

interpretation of a standard form contract should be recognized as an exception to the Court’s holding in Sattva Capital Corp. v. Creston Moly Corp. , 2014 SCC 53 , [2014] 2 S.C.R. 633, that contractual

interpretation is a question of mixed fact and law subject to deferential review on appeal. 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. Indeed, while a proper understanding of the factual matrix of a case is crucial to the

interpretation of many contracts, it is less relevant for standard form contracts because the parties do not negotiate the terms. The contract is put to the receiving party as a take-it-or-leave-it proposition. 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, but they are generally not inherently fact specific and will usually be the same for everyone who may be a party to a standard form contract.

Moreover, the

interpretation of a standard form contract itself has precedential value and can therefore fit under the definition of a pure question of law. In general, the

interpretation of a contract has no impact beyond the parties to a dispute. While precedents interpreting similar contractual language may be of some persuasive value, it is often the intentions of the parties, as reflected in the particular contractual wording at issue and informed by the surrounding circumstances of the contract, that predominate. In the case of standard form contracts, however, judicial precedent is more likely to be controlling. Establishing the proper

interpretation of a standard form contract amounts to establishing the correct legal test, as the

interpretation may be applied in future cases involving identical or similarly-worded provisions. The mandate of appellate courts — ensuring consistency in the law — is also advanced by permitting them to review the

interpretation of standard form contracts for correctness. The result of applying the

interpretation in future cases will of course depend on the facts of those cases. In this case, while the base coverage under the relevant clause of the policy is for physical loss or damages, the exclusion clause need not necessarily encompass physical damage because perfect mutual exclusivity between exclusions and the initial grant of coverage is neither provided for under the policy nor required when interpreting the exclusion clause. Accordingly, the physical or systemic connectedness test established by the Court of Appeal was unnecessary. While the language of the exclusion clause is ambiguous, the general principles of contractual

interpretation lead to the conclusion that the exclusion clause serves to exclude from coverage only the cost of redoing the faulty work, that is, the cost of recleaning the windows. The damage to the windows and therefore the cost of their replacement is covered. Given that the general rules of contract construction resolve the ambiguity, it is not necessary to turn to the contra proferentem rule. This

interpretation is consistent with the reasonable expectations of the parties and reflects and promotes the purpose of builders’ risk policies. The broad coverage provided in exchange for relatively high premiums provides certainty, stability and peace of mind, and ensures construction projects do not grind to a halt because of disputes and potential litigation about liability for replacement or repair amongst various contractors involved. An

interpretation of the exclusion clause that precludes from coverage any and all damage resulting from a contractor’s faulty workmanship merely because the damage results to that part of the project on which the contractor was working would undermine the purpose behind builders’ risk policies and would deprive insureds of the coverage for which they contracted. Moreover, 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. Such an

interpretation is also consistent with the jurisprudence. Per Cromwell J.: There is agreement as to the disposition of the appeals. The trial judge made no legal error because he properly described and applied the Court’s decision in Progressive Homes Ltd. v. Lombard General Insurance Co. of Canada , 2010 SCC 33 , [2010] 2 S.C.R. 245. However, the applicable standard of review is that of palpable and overriding error. As the Court held in Housen v.

Nikolaisen , 2002 SCC 33 , [2002] 2 S.C.R. 235, the general principles of appellate review in civil cases turn on characterizing the nature of the question being reviewed as one of fact, law or mixed fact and law. Questions of law are reviewed for correctness and questions of fact are reviewed for palpable and overriding error. Applying a legal standard to the facts is a question of mixed fact and law and is generally reviewable on appeal for palpable and overriding error.

In rare cases, where the basis for a finding under review can be traced to a pure legal error, such as a wrong characterization of the legal test or the failure to consider a required element of the applicable standard, the reviewing court can extricate a purely legal question from the trial court’s analysis and apply the correctness standard to it. The Court’s recent decision in Sattva brought appellate review in contract cases within this general framework.

Applying the text of a contract to a particular fact situation involves applying the legal standard set by the contract to the facts of the situation at hand. Accordingly, a trial judge’s

interpretation of the contract generally gives rise to a mixed question of law and fact and should be reviewable on appeal for palpable and overriding error. Contractual

interpretation is generally not 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 between the parties, and the market in which the parties are operating. There is no reason for the

interpretation of certain types of contracts such as standard form contracts to be excluded from the general principles that apply to appellate review in civil cases. Whether or not a contract is a standard form does not indicate anything about the degree to which it is concerned with a general legal proposition so as to attract correctness review. To ask the question in terms of precedential value rather than the generality of the legal principle in issue simply sends the analysis back to the question of the degree of generality. The more general the principle, the more the precedential value.

Moreover, the absence of a factual matrix is not of much assistance, because like all contracts, standard form contracts have many surrounding circumstances — they have a purpose, they create a relationship of a particular nature between the parties, and they frequently operate within a particular market or industry — which must be taken into account in interpreting the text of the contract. The question the present case raises involves applying a legal standard to a set of facts and does not give rise to any extricable question of law.

The legal principle is that “making good faulty workmanship” means “the cost of redoing the faulty work”. This principle does not operate at a very high level of generality. Applying that principle turns on the scope of the faulty work and the nature of redoing it, and its application in other cases will ultimately be decided on a case-by-case basis in light of the particular circumstances of the particular case. Cases Cited By Wagner J. Distinguished: Sattva Capital Corp. v. Creston Moly Corp. , 2014 SCC 53 , [2014] 2 S.C.R. 633; referred to: Heritage Capital Corp. v.

Equitable Trust Co. , 2016 SCC 19 , [2016] 1 S.C.R. 306; King v. Operating Engineers Training Institute of Manitoba Inc. , 2011 MBCA 80 , 270 Man. R. (2d) 63; Housen v. Nikolaisen , 2002 SCC 33 , [2002] 2 S.C.R. 235; Vallieres v. Vozniak , 2014 ABCA 290 , 5 Alta. L.R. (6th) 28; Portage LaPrairie Mutual Insurance Co. v. Sabean , 2015 NSCA 53 , 386 D.L.R. (4th) 449; Precision Plating Ltd. v. Axa Pacific Insurance Co. , 2015 BCCA 277 , 387 D.L.R. (4th) 281; Stewart Estate v. 1088294 Alberta Ltd. , 2015 ABCA 357 , 25

Alta. L.R. (6th) 1; MacDonald v. Chicago Title Insurance Co. of Canada, 2015 ONCA 842, 127 O.R. (3d) 663; Monk v. Farmers’Mutual Insurance Co., 2015 ONCA 911, 128 O.R. (3d) 710; Daverne v. John Switzer Fuels Ltd., 2015 ONCA 919, 128 O.R. (3d) 188;True Construction Ltd. v. Kamloops (City), 2016 BCCA 173; Sankar v. Bell Mobility Inc., 2016 ONCA 242; Kassburg v. Sun LifeAssurance Co. of Canada, 2014 ONCA 922, 124 O.R. (3d) 171; Anderson v. Bell Mobility Inc., 2015 NWTCA 3, 593 A.R. 79; VanCamp v.

Chrome Horse Motorcycle Inc., 2015 ABCA 83, 599 A.R. 201; Industrial Alliance Insurance and Financial Services Inc. v.Brine, 2015 NSCA 104, 392 D.L.R. (4th) 575; Ontario Society for the Prevention of Cruelty to Animals v. Sovereign General InsuranceCo., 2015 ONCA 702, 127 O.R. (3d) 581; Acciona Infrastructure Canada Inc. v. Allianz Global Risks US Insurance Co., 2015 BCCA347, 77 B.C.L.R. (5th) 223; GCAN Insurance Co. v. Univar Canada Ltd., 2016 QCCA 500; Canada (Director of Investigation andResearch) v.

Southam Inc., (SCC), [1997] 1 S.C.R. 748; Association des parents ayants droit de Yellowknife v.Northwest Territories (Attorney General), 2015 NWTCA 2, 593 A.R. 180; Tenneco Canada Inc. v. British Columbia Hydro and PowerAuthority, 1999 BCCA 415, 126 B.C.A.C. 9; Co-operators Life Insurance Co. v. Gibbens, 2009 SCC 59, [2009] 3 S.C.R. 605;Progressive Homes Ltd. v. Lombard General Insurance Co. of Canada, 2010 SCC 33, [2010] 2 S.C.R. 245; Non-Marine Underwriters,Lloyd’s of London v. Scalera, 2000 SCC 24, [2000] 1 S.C.R. 551; Consolidated-Bathurst Export Ltd. v.

Mutual Boiler and MachineryInsurance Co., (SCC), [1980] 1 S.C.R. 888; Commonwealth Construction Co. v. Imperial Oil Ltd., (SCC), [1978] 1 S.C.R. 317; Guarantee Co. of North America v. Gordon Capital Corp., (SCC), [1999] 3 S.C.R. 423;Privest Properties Ltd. v. Foundation Co. of Canada Ltd. (1991), (BC SC), 57 B.C.L.R. (2d) 88; Sayers & AssociatesLtd. v. Insurance Corp. of Ireland Ltd. (1981), (ON CA), 126 D.L.R. (3d) 681; Ontario Hydro v. Royal Insurance,[1981] O.J. No. 215 (QL); Bird Construction Co. v. United States Fire Insurance Co. (1985), (SK CA), 24 D.L.R.(4th) 104; Greene v.

Canadian General Insurance Co. (1995), (NL CA), 133 Nfld. & P.E.I.R. 151; British Columbiav. Royal Insurance Co. of Canada (1991), (BC CA), 7 B.C.A.C. 172; Algonquin Power (Long Sault) Partnership v.Chubb Insurance Co. of Canada (2003), 50 C.C.L.I. (3d) 107; Simcoe & Erie General Insurance Co. v. Royal Insurance Co. of Canada(1982), (AB KB), 36 A.R. 553; Foundation Co. of Canada v. Aetna Casualty Co. of Canada, [1976] I.L.R. ¶ 1-757;Commercial union cie d’assurance du Canada v. Pentagon Construction Canada Inc., (QC CA), [1989] R.J.Q. 1399. By Cromwell J. Applied: Sattva Capital Corp. v.

Creston Moly Corp., 2014 SCC 53, [2014] 2 S.C.R. 633; referred to: Housen v.Nikolaisen, 2002 SCC 33, [2002] 2 S.C.R. 235; Vallieres v. Vozniak, 2014 ABCA 290, 5 Alta. L.R. (6th) 28; Precision Plating Ltd. v.Axa Pacific Insurance Co., 2015 BCCA 277, 387 D.L.R. (4th) 281; Stewart Estate v. 1088294 Alberta Ltd., 2015 ABCA 357, 25 Alta.L.R. (6th) 1; MacDonald v. Chicago Title Insurance Co. of Canada, 2015 ONCA 842, 127 O.R. (3d) 663; Monk v. Farmers’ MutualInsurance Co., 2015 ONCA 911, 128 O.R. (3d) 710; True Construction Ltd. v. Kamloops (City), 2016 BCCA 173; Sankar v.

BellMobility Inc., 2016 ONCA 242; Reardon Smith Line Ltd. v. Hansen-Tangen, [1976] 3 All E.R. 570; Investors Compensation Scheme Ltd.v. West Bromwich Building Society, [1998] 1 All E.R. 98; Canada (Director of Investigation and Research) v. Southam Inc., (SCC), [1997] 1 S.C.R. 748; Industrial Alliance Insurance and Financial Services Inc. v. Brine, 2015 NSCA 104, 392 D.L.R. (4th)575; Ontario Society for the Prevention of Cruelty to Animals v. Sovereign General Insurance Co., 2015 ONCA 702, 127 O.R. (3d) 581;Acciona Infrastructure Canada Inc. v.

Allianz Global Risks US Insurance Co., 2015 BCCA 347, 77 B.C.L.R. (5th) 223; GCANInsurance Co. v. Univar Canada Ltd., 2016 QCCA 500; Greene v. Canadian General Insurance Co. (1995), (NLCA), 133 Nfld. & P.E.I.R. 151; Bird Construction Co. v. United States Fire Insurance Co. (1985), (SK CA), 24D.L.R. (4th) 104; Ontario Hydro v. Royal Insurance, [1981] O.J. No. 215 (QL); Progressive Homes Ltd. v. Lombard General InsuranceCo. of Canada, 2010 SCC 33, [2010] 2 S.C.R. 245. Authors Cited Audet, Maurice. “All Risks — a promise made or a promise broken?” (1983), 50:10 Canadian Underwriter 34.

Audet, Maurice G. “Part II — Insurance” (2002), 12 C.L.R. (3d) 100. Billingsley, Barbara. General Principles of Canadian Insurance Law, 2nd ed. Markham, Ont.: LexisNexis, 2014. Boivin, Denis. Insurance Law, 2nd ed. Toronto: Irwin Law, 2015. Brown, Craig. Insurance Law in Canada. Toronto: Thomson Reuters, 2002 (loose-leaf updated 2016, release 2). Canadian College of Construction Lawyers. Insurance & Surety Committee. “‘Covered for What?’: Faulty Materials and WorkmanshipCoverage under Canadian Construction Insurance Policies” (2007), 1 J.C.C.C.L. 101.

Dolden, Eric A. “All Risk and Builders’ Risk Policies: Emerging Trends” (1990-91), 2 C.I.L.R. 341. Hall, Geoff R. Canadian Contractual

Interpretation Law, 3rd ed. Toronto: LexisNexis, 2016. Lichty, Mark G., and Marcus B. Snowden. Annotated Commercial General Liability Policy. Toronto: Canada Law Book, 2015(loose-leaf updated December 2015, release 24). McCamus, John D. The Law of Contracts, 2nd ed. Toronto: Irwin Law, 2012. Poitras, Pierre-Stéphane. “L’assurance et l’industrie de la construction”, dans Service de la formation permanente du Barreau du Québec,vol. 147, Développements récents en droit des assurances. Cowansville, Qué.: Yvon Blais, 2001, 181. Reynolds, R. Bruce, and Sharon C. Vogel. A Guide to Canadian Construction Insurance Law.

Toronto: Carswell, 2013. Ricchetti, Leonard, and Timothy J. Murphy. Construction Law in Canada. Markham, Ont.: LexisNexis, 2010. Vogel, Sharon C. “Recent Developments in Construction Insurance Law”, in Glaholt LLP and Borden Ladner Gervais LLP, Review ofConstruction Law: Recent Developments. Toronto: Carswell, 2012, 169.

APPEALS from a judgment of the Alberta Court of Appeal (Côté, Watson and Slatter JJ.A.), 2015 ABCA 121 , 599 A.R. 363, 42 B.L.R. (5th) 190, 386 D.L.R. (4th) 482, 16 Alta. L.R. (6th) 397, 47 C.C.L.I. (5th) 218, [2015] 8 W.W.R. 466, [2015] A.J. No. 338 (QL), 2015 CarswellAlta 511 (WL Can.), setting aside a decision of Clackson J., 2013 ABQB 585 , [2013] I.L.R. ¶ I-5495, [2013] A.J. No. 1088 (QL), 2013 CarswellAlta 1943 (WL Can.) . Appeals allowed. Eugene Meehan , Q.C. , and Stacey Boothman , for the appellant Ledcor Construction Limited. Dennis L.

Picco , Q.C. , and Marie-France Major , for the appellant Station Lands Ltd. Gregory J. Tucker , Q.C. , and Scott H. Stephens , for the respondents. The judgment of McLachlin C.J. and Abella, Moldaver, Karakatsanis, Wagner, Gascon, Côté and Brown JJ. was delivered by Wagner J. — I. Introduction [ 1 ] The outcome of these appeals hinges on the

interpretation of an exclusion clause in a common form of all-risk property insurance, variably referred to as “builders’ risk”, “contractors’ risk”, “all risks”, “multi-risk” or “course of construction” insurance. [1] This type of insurance covers physical damage on a construction site. It is usually issued to the owner of the property under construction and the general contractor, providing coverage for them as well as for all contractors and subcontractors working on the project.

The exclusion clause at the heart of these appeals is a standard form clause that denies coverage for the “cost of making good faulty workmanship” but, as an exception to that exclusion, nonetheless covers “physical damage” that “results” from the faulty workmanship. [ 2 ] In the present case, a contractor was hired to clean the windows of a building under construction. In the course of the cleaning, the contractor scratched the building’s windows, which ultimately needed to be replaced.

The windows’ replacement cost was claimed by the building’s owner and the general contractor in charge of the project under a builders’ risk policy issued in favour of the owner and all contractors involved in the construction, but the insurers denied coverage on the basis of the “cost of making good faulty workmanship” exclusion.

The issue before the courts was thus to determine, where windows of a construction project are damaged from post-installation cleaning by a contractor responsible for only their cleaning, if the cost of the windows’ replacement was excluded from coverage under the faulty workmanship exclusion. [ 3 ] After determining that the work performed by the contractor amounted to faulty workmanship, the trial judge applied the contra proferentem rule against the insurers and concluded that the faulty workmanship exclusion did not exclude from coverage the damage that the contractor had caused to the building’s windows.

Applying a correctness standard of review to the

interpretation of the insurance policy, the Court of Appeal of Alberta overturned the trial judge’s decision and declared that the damage to the building’s windows was excluded from coverage, as the damage was physically or systematically connected to the very work the contractor had performed. [ 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. II. Facts [ 6 ] Station Lands Ltd. (“Station Lands”) is the owner of the recently built EPCOR Tower (“Tower”), an office building in Edmonton.

Ledcor Construction Limited (“Ledcor”) was the general contractor for the Tower’s construction. [ 7 ] During construction, the Tower’s installed windows were dirtied with paint specks, dirt and concrete splatter. To clean these windows prior to the completion of construction, Station Lands hired Bristol Cleaning (“Bristol”). The service contract between Station Lands and Bristol stipulated that Station Lands would provide all-risk property insurance for the project, which Station Lands did in the form of a builders’ risk policy (the “Policy”).

The scope of Bristol’s work under the service contract was to “[p]rovide all necessary equipment, manpower, [and] materials required to complete a construction clean” of the Tower’s exterior windows. [ 8 ] Unfortunately, Bristol used improper tools and methods in carrying out its cleaning work, scratching the Tower’s windows, which consequently had to be replaced. Station Lands estimated the replacement cost of the windows to be $2.5 million.

Both Station Lands and Ledcor claimed this replacement cost against the Policy through their insurers at the time, the respondents Commonwealth Insurance Company, GCAN Insurance Company, and American Home Assurance Company (together, the “Insurers”). [2] The Insurers denied the claim on the basis of clause 4(A)(

b) of the Policy (the “Exclusion Clause”), which is an exclusion for faulty workmanship. [ 9 ] The relevant coverage provisions of the Policy provide that all risks of direct physical loss or damage to the property undergoing construction are insured, subject to certain outlined exclusions:

1. Property Insured (

a) Property undergoing site preparation, demolition, construction, reconstruction, fabrication, installation, erection, repair or testing (hereinafter called the “Construction Operations”) while at the risk of the insured and while at the location of the insured project(s), provided the value thereof is included in the declared estimated value of construction operations; . . . 2. Perils Insured and Territorial Limits This policy

section insures against “All Risks” of direct physical loss or damage except as hereinafter provided. [ 10 ] The Exclusion Clause excludes from coverage the “cost of making good faulty workmanship”, but provides an exception for “resulting damage”: 4(

A) Exclusions This policy

section does not insure: (

a) Any loss of use or occupancy or consequential loss of any nature howsoever caused including penalties for non-completion of or delay in completion of contract or non-compliance with contract conditions; (

b) The cost of making good faulty workmanship , construction materials or design unless physical damage not otherwise excluded by this policy results , in which event this policy shall insure such resulting damage . [Emphasis added.] [ 11 ] Station Lands and Ledcor (together, the “Insureds”) submitted their statement of claim before the Court of Queen’s Bench of Alberta, seeking enforcement of the Policy and coverage for the replacement cost of the damaged windows. III. Decisions Below A.

Court of Queen’s Bench of Alberta, 2013 ABQB 585 , [2013] I.L.R. ¶ I-5495 [ 12 ] The trial judge concluded that the cleaning work Bristol had carried out constituted “workmanship” and that it had been faulty. He declared, however, that the Exclusion Clause did not exclude from coverage the damage that Bristol’s faulty workmanship had caused to the Tower’s windows. In coming to this determination, he found the Exclusion Clause ambiguous and the

interpretations of “making good” advanced by the Insureds and Insurers equally plausible. He therefore applied the rule of contra proferentem against the Insurers. The Insureds had argued that the “cost of making good” encompassed only the cost of redoing the cleaning work, whereas the Insurers had argued that it encompassed both the cost of redoing the cleaning work and the damage to the windows, as they were the very thing on which Bristol had performed the faulty workmanship. B.

Court of Appeal of Alberta, 2015 ABCA 121 , 599 A.R. 363 [ 13 ] On appeal, the Court of Appeal reversed the trial judge’s decision and declared that the damage to the Tower’s windows was excluded from coverage. Applying a correctness standard of review to the

interpretation of the Policy, the court held the trial judge had improperly applied the rule of contra proferentem because the Exclusion Clause was not ambiguous. [ 14 ] The Court of Appeal proceeded from the premise that because the base coverage under the Policy was for “physical loss or damage”, as provided by clause 2, the Exclusion Clause had to exclude physical damage of some kind, or else it would be redundant.

For the court, then, the key was to determine the dividing line between the physical damage that was excluded as the “cost of making good faulty workmanship” and the physical damage that was covered as “resulting damage”.

To establish this dividing line, the court devised a new test of physical or systemic connectedness, based on three primary considerations, outlined at para. 50 of its reasons: (1) the “extent or degree to which the damage was to a portion of the project actually being worked on at the time, or was collateral damage to other areas”; (2) the “nature of the work being done, how the damage related to the way that work is normally done, and the extent to which the damage is a natural or foreseeable consequence of the work”; and (3) “[w]hether the damage was within the purview of normal risks of poor workmanship, or whether it was unexpected and fortuitous.” [ 15 ] In applying this newly formulated test, the Court of Appeal concluded that the damage to the windows was physical loss excluded as the “cost of making good faulty workmanship”, because it was not accidental or fortuitous but was directly caused by the scraping and wiping motions involved in Bristol’s cleaning work.

According to the court, Bristol intentionally applied these motions to the windows, a core part of the work to be done, and the damage was not only foreseeable but highly likely. IV. Issues on Appeal [ 16 ] The Exclusion Clause in the standard form builders’ risk insurance policy at issue in these appeals raises two questions that this Court must answer. [ 17 ] First, what standard of appellate review applies to a trial judge’s

interpretation of a standard form insurance contract?

[18] Second, what is the proper

interpretation to be given to the faulty workmanship exclusion clause and the “resultingdamage” exception to that exclusion contained in builders’ risk insurance policies? V. Analysis A. The Standard of Review Is Correctness [19] In my view, the trial judge’s

interpretation of the Policy should be reviewed for correctness. [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. [21] In Sattva, Rothstein J. held that “[c]ontractual

interpretation involves issues of mixed fact and law as it is an exercisein which the principles of contractual

interpretation are applied to the words of the written contract, considered in light of the factualmatrix” (para. 50). As a result, the palpable and overriding error standard of review applies to a trial court’s

interpretation of a contract:Heritage Capital Corp. v. Equitable Trust Co., 2016 SCC 19, [2016] 1 S.C.R. 306, at paras. 21-24. However, Rothstein J. acknowledgedthat the correctness standard of review still applies to the “rare” extricable questions of law that arise in the

interpretation process, such as“the application of an incorrect principle, the failure to consider a required element of a legal test, or the failure to consider a relevantfactor”: Sattva, at paras. 53 and 55, quoting King v. Operating Engineers Training Institute of Manitoba Inc., 2011 MBCA 80, 270 Man.R. (2d) 63, at para. 21. This is consistent with the jurisprudence on the standard of review for questions of mixed fact and law: Housen v.Nikolaisen, 2002 SCC 33, [2002] 2 S.C.R. 235, at para. 36. However, in this case, the Court of Appeal did not purport to identify anextricable question of law that arose in the

interpretation process. Rather, it concluded that the

interpretation of the contract itself shouldbe reviewed for correctness, despite Sattva’s holding that contractual

interpretation is a question of mixed fact and law and is oweddeference on appeal: paras. 18-19. [22] Appellate courts have disagreed on whether this Court’s holding in Sattva on the standard of review of contractualinterpretation applies to standard form contracts. Many appellate courts have held that Sattva does not apply, and have conductedcorrectness review: Vallieres v. Vozniak, 2014 ABCA 290, 5 Alta. L.R. (6th) 28, at paras. 11-13; Portage LaPrairie Mutual InsuranceCo. v. Sabean, 2015 NSCA 53, 386 D.L.R. (4th) 449, at para. 13; Precision Plating Ltd. v.

Axa Pacific Insurance Co., 2015 BCCA 277,387 D.L.R. (4th) 281, at paras. 28-30; Stewart Estate v. 1088294 Alberta Ltd., 2015 ABCA 357, 25 Alta. L.R. (6th) 1, at para. 273, perMcDonald J.A.; MacDonald v. Chicago Title Insurance Co. of Canada, 2015 ONCA 842, 127 O.R. (3d) 663, at paras. 40-41; Monk v.Farmers’ Mutual Insurance Co., 2015 ONCA 911, 128 O.R. (3d) 710, at paras. 22-24; Daverne v. John Switzer Fuels Ltd., 2015 ONCA919, 128 O.R. (3d) 188, at paras. 12-14; True Construction Ltd. v.

Kamloops (City), 2016 BCCA 173, at para. 34 ; and Sankar v.Bell Mobility Inc., 2016 ONCA 242, at para. 26 . [23] In other cases, however, courts of appeal have applied Sattva and have deferred to trial courts’

interpretations ofstandard form contracts: Kassburg v. Sun Life Assurance Co. of Canada, 2014 ONCA 922, 124 O.R. (3d) 171, at para. 33; Anderson v.Bell Mobility Inc., 2015 NWTCA 3, 593 A.R. 79, at paras. 9 and 33-35; Van Camp v. Chrome Horse Motorcycle Inc., 2015 ABCA 83,599 A.R. 201; 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 para. 35; and GCAN Insurance Co. v. Univar Canada Ltd., 2016 QCCA 500, at para. 40 . See also Stewart Estate, at para. 63,per Rowbotham J.A. (dissenting on this point). [24] I would recognize an exception to this Court’s holding in Sattva that contractual

interpretation is a question of mixedfact 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 theinterpretation process, this

interpretation is better characterized as a question of law subject to correctness review. [25] The statements made in Sattva on the standard of review of contractual

interpretation must be considered in their fullcontext. That case concerned a complex commercial agreement between two sophisticated parties — not a standard form contract.Professor John D. McCamus has described standard form contracts as follows: . . . the document put forward will typically constitute a standard printed form that the party proffering the document invariably useswhen entering transactions of this kind. The form will often be offered on a “take it or leave it” basis.

In the typical case, the other party,then, will have no choice but either to agree to the terms of the standard form or to decline to enter the transaction altogether. Standardform agreements are a pervasive and indispensable feature of modern commercial life. It is simply not feasible to negotiate, in anymeaningful sense, the terms of many of the transactions entered into in the course of daily life. (The Law of Contracts (2nd ed. 2012), at p. 185) Sattva did not consider the unique issues that standard form contracts raise. [26] Moreover, the Court in Sattva gave two reasons for concluding that contractual

interpretation is a question of mixedfact and law subject to deferential review on appeal. As a general matter, those reasons are less compelling in the context of standardform contracts.

(1) Factual Matrix [27] The first reason is that the surrounding circumstances of the contract, or the factual matrix in which it was formed,are important considerations in contractual

interpretation: Sattva, at para. 46. Rothstein J. stated that determining the intention of theparties is a “fact-specific goal” that requires a trial court to “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”:paras. 47 and 49. [28] While a proper understanding of the factual matrix is crucial to the

interpretation of many contracts, it is often lessrelevant 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, at para. 33.

Standard form contracts are particularly common in the insurance industry, asProfessor 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 andconditions 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 enteringinto any insurance agreements, an insurer typically drafts a series of pre-fabricated contracts outlining the terms upon which particularkinds of coverage will be provided. These contracts are known as “standard form policies”.

The insurer then provides the appropriatestandard 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 theinsurance 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 surroundingcircumstances relating to negotiation (para. 106).

However, he observes that other elements of the surrounding circumstances — such asthe purpose of the contract, the nature of the relationship it creates, and the market or industry in which it operates — have a role in theinterpretation process. [31] I agree that factors such as the purpose of the contract, the nature of the relationship it creates, and the market orindustry in which it operates should be considered when interpreting a standard form contract. However, those considerations aregenerally not “inherently fact specificˮ: Sattva, at para. 55.

Rather, they will usually be the same for everyone who may be a party to aparticular standard form contract. This underscores the need for standard form contracts to be interpreted consistently, a point to which Iwill return below. [32] In sum, for standard form contracts, the surrounding circumstances generally play less of a role in the

interpretationprocess, and where they are relevant, they tend not to be specific to the particular parties. Accordingly, the first reason given in Sattvafor concluding that contractual

interpretation is a question of mixed fact and law — the importance of the factual matrix — carries lessweight in cases involving standard form contracts.

(2) The

Definitions of “Question of Law” and “Question of Mixed Fact and Law” [33] In Sattva, this Court gave a second reason for concluding that contractual

interpretation is a question of mixed factand law: contractual

interpretation does not fit within the definition of a pure question of law. Questions of law are “about what thecorrect legal test is”: para. 49, quoting Canada (Director of Investigation and Research) v. Southam Inc., (SCC), [1997]1 S.C.R. 748, at para. 35. For instance, the content of a particular legal principle of contractual

interpretation is a question of law.However, in interpreting contracts, courts apply the legal principles of contractual

interpretation to determine the parties’ objectiveintentions: Sattva, at para. 49. Therefore, according to Sattva, contractual

interpretation is a question of mixed fact and law, which isdefined as “applying a legal standard” (the legal principles of contractual

interpretation) “to a set of facts” (the words of the contract andthe factual matrix): para. 49, quoting Housen, at para. 26. [34] In my view, however, while contractual

interpretation is generally a question of mixed fact and law, in situationsinvolving standard form contracts, it is more appropriately classified as a question of law in most circumstances. [35] The law of standard of review — including the distinction between questions of law and those of mixed fact and law— seeks to achieve an appropriate division of labour between trial and appellate courts in accordance with their respective roles. Themain function of trial courts is to resolve the particular disputes before them: Housen, at para. 9.

Appellate courts, however, “operate at ahigher level of legal generality”: Association des parents ayants droit de Yellowknife v. Northwest Territories (Attorney General), 2015NWTCA 2, 593 A.R. 180, at para. 23. They ensure that “the same legal rules are applied in similar situations”, as the rule of lawdemands: Housen, at para. 9.

Appellate courts also have a law-making function, which requires them to “delineate and refine legalrules”: ibid. [36] These particular functions of appellate courts — ensuring consistency in the law and reforming the law — justifyreviewing pure questions of law on the standard of correctness. By contrast, appellate courts defer to findings of fact in part because theycan discharge their mandate without second-guessing trial courts’ factual determinations: Housen, at paras. 11-14.

For questions of mixedfact and law, the correctness standard applies to extricable errors of law (such as the application of an incorrect principle) because, again,a review on the standard of correctness is necessary to allow appellate courts to fulfill their role. However, where it is “difficult toextricate the legal questions from the factual”, appellate courts defer on questions of mixed fact and law: Housen, at para. 36; see alsoparas. 33-35. [37] In many cases, appellate courts need not review for correctness the contractual

interpretation itself in order toperform their functions — namely, ensuring the consistent application of the law and reforming the law. That is because, in general, theinterpretation of a contract has no impact beyond the parties to a dispute. As Rothstein J. commented in Sattva, at para. 52: . . . this Court in Housen found that deference to fact-finders promoted the goals of limiting the number, length, and cost of appeals, andof promoting the autonomy and integrity of trial proceedings (paras. 16-17). These principles also weigh in favour of deference to firstinstance decision-makers on points of contractual

interpretation. The legal obligations arising from a contract are, in most cases, limitedto the interest of the particular parties. Given that our legal system leaves broad scope to tribunals of first instance to resolve issues oflimited application, this supports treating contractual

interpretation as a question of mixed fact and law.

[ 38 ] For the

interpretation of many contracts, precedents interpreting similar contractual language may be of some persuasive value. However, it is the intentions of the particular parties, as reflected in the particular contractual wording at issue and informed by the surrounding circumstances of the contract, that predominate, and “[i]f that intention differs from precedent, the intention will govern and the precedent will not be followed”: G. R. Hall, Canadian Contractual

Interpretation Law (3rd ed. 2016), at pp. 129-30; see also Tenneco Canada Inc. v. British Columbia Hydro and Power Authority , 1999 BCCA 415 , 126 B.C.A.C. 9, at para. 43 . [ 39 ] These teachings, however, do not necessarily apply in cases involving standard form contracts, where a review on the standard of correctness may be necessary for appellate courts to fulfill their functions. Standard form contracts are “highly specialized contracts that are sold widely to customers without negotiation of terms”: MacDonald , at para. 37 .

In some cases, a single company, such as a bank or a telephone service provider, may use its own standard form contract with all of its customers: Monk , at para. 23 . In others, a standard form agreement may be common throughout an entire industry: Precision Plating , at para. 28. Either way, the

interpretation of the standard form contract could affect many people, because “precedent is more likely to be controlling” in the

interpretation of such contracts: Hall, at p. 131. It would be undesirable for courts to interpret identical or very similar standard form provisions inconsistently, without good reason. The mandate of appellate courts — “ensuring the consistency of the law” ( Sattva , at para. 51) — is advanced by permitting appellate courts to review the

interpretation of standard form contracts for correctness. [ 40 ] Indeed, consistency is particularly important in the

interpretation of standard form insurance contracts. In Co- operators Life Insurance Co. v. Gibbens , 2009 SCC 59 , [2009] 3 S.C.R. 605, at para. 27 , Binnie J. recognized that “‘courts will normally be reluctant to depart from [authoritative] judicial precedent interpreting the policy in a particular way’ . . . where the issue arises subsequently in a similar context, and where the policies are similarly framed”, because both insurance companies and customers benefit from “[c]ertainty and predictability”.

And where an insurance policy is ambiguous, courts “strive to ensure that similar insurance policies are construed consistently”: Progressive Homes Ltd. v. Lombard General Insurance Co. of Canada , 2010 SCC 33 , [2010] 2 S.C.R. 245, at para. 23 . [ 41 ] The definition of questions of law — “questions about what the correct legal test is” ( Southam , at para. 35) — does not preclude classifying some questions of contractual

interpretation as questions of law. There is no bright-line distinction between questions of law and those of mixed fact and law. Rather, “the degree of generality (or ‘precedential value’)” is the key difference between the two types of questions: Sattva , at para. 51. As Iacobucci J. stated in Southam , at para. 37: If a court were to decide that driving at a certain speed on a certain road under certain conditions was negligent, its decision would not have any great value as a precedent.

In short, as the level of generality of the challenged proposition approaches utter particularity, the matter approaches pure application, and hence draws nigh to being an unqualified question of mixed law and fact. . . . Of course, it is not easy to say precisely where the line should be drawn; though in most cases it should be sufficiently clear whether the dispute is over a general proposition that might qualify as a principle of law or over a very particular set of circumstances that is not apt to be of much interest to judges and lawyers in the future. [ 42 ] Contractual

interpretation is often the “pure application” of contractual

interpretation principles to a unique set of circumstances. In such cases, the

interpretation is not “of much interest to judges and lawyers in the future” because of its “utter particularity”. These questions of contractual

interpretation are appropriately classified as questions of mixed fact and law, as the Court explained in Sattva . [ 43 ] However, the

interpretation of a standard form contract could very well be of “interest to judges and lawyers in the future”. In other words, the

interpretation itself has precedential value. The

interpretation of a standard form contract can therefore fit under the definition of a “pure question of law”, i.e., “questions about what the correct legal test is”: Sattva , at para. 49; Southam , at para. 35. Establishing the proper

interpretation of a standard form contract amounts to establishing the “correct legal test”, as the

interpretation may be applied in future cases involving identical or similarly worded provisions. [ 44 ] My colleague Cromwell J. suggests that the

interpretation of a standard form contract will not be of much precedential value because “its application in other cases will ultimately be decided on a case-by-case basis in light of the particular circumstances of the particular case” (para. 120). I respectfully disagree. Settling on a consistent

interpretation of a standard form provision is useful. Of course, the result of applying the

interpretation in future cases will depend on the facts of those cases. The facts are for the trial judge to find, and those findings will be owed deference. [ 45 ] For instance, in this case, the Court of Appeal interpreted the Exclusion Clause as excluding damages physically or systemically connected to the faulty work. For the reasons I will give below, I am of the view that the Exclusion Clause excludes only the cost of redoing the faulty work. These are two different

interpretations of the same standard form language. Selecting one

interpretation over the other as correct will give parties certainty and predictability. This is true even though what constitutes the cost of redoing the faulty work will depend on the facts of future cases.

(3) Conclusion on Standard of Review [ 46 ] Sattva should not be read as holding that contractual

interpretation is always a question of mixed fact and law, and always owed deference on appeal. I would recognize an exception to Sattva ’s holding on the standard of review of contractual

interpretation. 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 specific to the particular parties to assist the

interpretation process, this

interpretation is better characterized as a question of law subject to correctness review. [ 47 ] These criteria are met in the present case, so the standard of review applicable to the trial judge’s

interpretation of the Policy is correctness. The trial judge’s underlying factual findings remain subject to deferential review, as mentioned above. [ 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, the line between questions oflaw and those of mixed fact and law is not always easily drawn. Appellate courts should consider whether “the dispute is over a generalproposition” 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). B. The Exclusion Clause (1) Rules Governing the

Interpretation of the Policy [49] The parties agree that the governing principles of

interpretation applicable to insurance policies are thosesummarized by Rothstein J. in Progressive Homes. The primary interpretive principle is that where the language of the insurance policyis unambiguous, effect should be given to that clear language, reading the contract as a whole: para. 22, citing Non-Marine Underwriters,Lloyd’s of London v. Scalera, 2000 SCC 24, [2000] 1 S.C.R. 551, at para. 71. [50] Where, however, the policy’s language is ambiguous, general rules of contract construction must be employed toresolve that ambiguity. These rules include that the

interpretation should be consistent with the reasonable expectations of the parties, aslong as that

interpretation is supported by the language of the policy; it should not give rise to results that are unrealistic or that theparties would not have contemplated in the commercial atmosphere in which the insurance policy was contracted, and it should beconsistent with the

interpretations of similar insurance policies. See Progressive Homes, at para. 23, citing Scalera, at para. 71; Gibbens,at paras. 26-27; and Consolidated-Bathurst Export Ltd. v. Mutual Boiler and Machinery Insurance Co., (SCC), [1980] 1S.C.R. 888, at pp. 900-902. [51] Only if ambiguity still remains after the above principles are applied can the contra proferentem rule be employed toconstrue the policy against the insurer: Progressive Homes, at para. 24, citing Scalera, at para. 70; Gibbens, at para. 25; andConsolidated-Bathurst, at pp. 899-901.

Progressive Homes provides that a corollary of this rule is that coverage provisions in insurancepolicies are interpreted broadly, and exclusion clauses narrowly. [52] It is also important to bear in mind this Court’s guidance in Progressive Homes on the “generally advisable” order inwhich to interpret insurance policies (para. 28). Although that case involved commercial general liability policies and not builders’ riskpolicies, the two types of policies share a similar alternating structure: they set out the type of coverage followed by specific exclusions,with some exclusions containing exceptions.

As such, the insured has the onus of first establishing that the damage or loss claimed fallswithin the initial grant of coverage. The parties in these appeals have conceded that this particular onus has been met: trial judge’sreasons, at para. 9. The onus then shifts to the insurer to establish that one of the exclusions to coverage applies. If the insurer issuccessful at this stage, the onus then shifts back to the insured to prove that an exception to the exclusion applies: see ProgressiveHomes, at paras. 26-29 and 51.

Contrary to the Court of Appeal’s statement at para. 26 of its reasons that the exclusion and exception inthis case must be interpreted “symbiotically”, I see no reason to depart from the generally accepted order of

interpretation in analyzingthe Policy and the Exclusion Clause.

(2) The Court of Appeal’s Approach to the Exclusion Clause [53] Before engaging in the

interpretation of the Exclusion Clause, I believe it necessary to properly set out the Court ofAppeal’s reasoning and explain why its new physical or systemic connectedness test was unnecessary. [54] At paras. 29 and 48 of its reasons, the Court of Appeal explained that because the base coverage under clause 2 ofthe Policy is for “physical loss or damage”, it follows that the Exclusion Clause needs to exclude from coverage some physical loss. Inthe Court of Appeal’s opinion, a different reading of the Exclusion Clause would risk rendering it redundant.

Under this view, the “costof making good faulty workmanship” cannot be limited to the cost of redoing the faulty work. Rather, that exclusion must be construedmore broadly to also exclude from coverage some type of physical loss or damage. [55] As mentioned above, the Court of Appeal’s acceptance of this initial premise led it to search for a dividing linebetween physical damage that is part of the “cost of making good” and therefore excluded from coverage, and physical damage that is“resulting damage” and therefore covered as an exception to the exclusion.

In its quest to establish this dividing line, the court fashioneda new test of “degree of physical or systemic connectedness”, which it said was “the key to determining the boundary between ‘makinggood faulty workmanship’ and ‘resulting damage’”: para. 50. [56] In my respectful view, the premise from which the Court of Appeal proceeded is flawed. The “faulty workmanship”exclusion need not encompass physical damage. Although “[e]xclusions should . . . be read in light of the initial grant of coverage”(Progressive Homes, at para. 27; see also M. G. Lichty and M. B.

Snowden, Annotated Commercial General Liability Policy (loose-leaf),at p. 1-10), this Court has stressed that “perfect mutual exclusivity [between exclusions and the initial grant of coverage] in an insurancecontract is not required”: Progressive Homes, at para. 40. [57] Bearing the above-mentioned principle in mind, the Policy in this case contains exclusions that do not pertain to“physical loss or damage” otherwise covered under clause 2. For instance, clause 4(A)(

a) of the Policy excludes from coverage “[a]nyloss of use or occupancy or consequential loss of any nature howsoever caused including penalties for non-completion of or delay incompletion of contract or non-compliance with contract conditions”. This exclusion deals with a form of pure economic loss stemmingfrom contractual breach, not physical loss or damage. Additionally, clause 28 of the “standard conditions”

section excludes “costs, fines,penalties or expenses” imposed by governments under environmental legislation. This also does not relate to the Policy’s base coveragefor physical loss or damage. [58] As such, perfect mutual exclusivity is neither provided for under the Policy nor should it be required wheninterpreting the Exclusion Clause. The Court of Appeal consequently erred by approaching its analysis of the Exclusion Clause from apremise that was not supported by the text of the Exclusion Clause or the Policy as a whole.

Adopting this premise led the Court ofAppeal down an improper analytical path toward establishing a new and unnecessary test. Indeed, as I will explain below, the generalrules of contractual

interpretation provide the answer to whether the damage to the Tower’s windows is covered under the Policy.

(3) Interpretation of the Exclusion Clause and the Policy (

a) The Language of the Exclusion Clause Is Ambiguous [59] The Insureds argue that the plain language of the Exclusion Clause, read in the context of the Policy as a whole, isunambiguous. They say it leads to the conclusion that only the cost of redoing the faulty work — in this case, cleaning the windows — isexcluded from coverage. The consequences of the faulty work ― here, the damage to the windows, necessitating their replacement —are covered as “resulting damage”. [60] The Insurers similarly argue that the Exclusion Clause is unambiguous, yet they arrive at a different conclusion as toits meaning.

They say that which is excluded is not only the cost of redoing the faulty work, but also the cost of repairing that part of theinsured property or project that is the subject of the faulty work. That which is covered as “resulting damage” is consequential damage tosome other part of the insured property or project. They point to the case law in support, contending that the courts have consistentlyinterpreted the language of the Exclusion Clause to bear this meaning.

Accordingly, in this case, the Insurers say the Policy excludesboth the cost of recleaning the windows and the cost of replacing the windows, the subject of the faulty work. [61] I am of the view that the language of the Exclusion Clause slightly favours the

interpretation advanced by theInsureds, but is nonetheless ambiguous. The word “damage” figures only in the exception to the Exclusion Clause; it is not included inthe language setting out the exclusion itself, i.e., the “cost of making good faulty workmanship”. As such, “making good faultyworkmanship” can, on its plain, ordinary and popular meaning, be construed as redoing the faulty work, and “resulting damage” can beseen as including damages resulting from such faulty work. [62] That said, the language of the Exclusion Clause does not clearly point to one

interpretation of “cost of making goodfaulty workmanship” and “resulting damage” over the other. The Policy does not define these terms. The general coverage provisions,clauses 1 and 2, do not resolve the ambiguity, and neither do the other provisions in the Policy. [63] Therefore, we must look to the general principles of contract

interpretation. As I will detail below, the application ofthese principles points to one

interpretation that is consistent with the reasonable expectations of the parties and commercial reality: thefaulty workmanship exclusion serves to exclude from coverage only the cost of redoing the faulty work, as the resulting damageexception covers costs or damages apart from the cost of redoing the faulty work. As such, excluded under the Policy is the cost ofrecleaning the windows, but the damage to the windows and therefore the cost of their replacement is covered. This is consistent withprevious

interpretations of similar clauses in the jurisprudence. Indeed, as I explain below, I disagree with the Insurers’ contention thatthe case law consistently supports their

interpretation of the Exclusion Clause. [64] In light of this determination, it is not necessary to turn to the contra proferentem rule to answer the second issueraised in these appeals. (

b) Reasonable Expectations of the Parties [65] Parties’ reasonable expectations with respect to the meaning of a contractual provision can often be gleaned from thecircumstances surrounding the contract’s formation: Sattva, at paras. 46-47. However, as discussed above, there is no factual matrix herethat would assist in ascertaining the parties’ understanding of and intent regarding the Exclusion Clause. The Policy is a standard formcontract.

And, as the Court of Appeal noted at para. 15 of its reasons, there is no evidence that the parties gave any thought to thecleaning of the windows, the relationship of faulty workmanship to resulting damage, or anything else that would help in determiningtheir reasonable expectations. [66] Therefore, in my view, the purpose behind builders’ risk policies is crucial in determining the parties’ reasonableexpectations as to the meaning of the Exclusion Clause. In a nutshell, the purpose of these polices is to provide broad coverage forconstruction projects, which are singularly susceptible to accidents and errors.

This broad coverage — in exchange for relatively highpremiums — provides certainty, stability, and peace of mind. It ensures construction projects do not grind to a halt because of disputesand potential litigation about liability for replacement or repair amongst the various contractors involved. In my view, the purpose ofbroad coverage in the construction context is furthered by an

interpretation of the Exclusion Clause that excludes from coverage only thecost of redoing the faulty work itself — in this case, the cost of recleaning the windows. [67] “The raison d’être of insurance is coverage”: D. Boivin, Insurance Law (2nd ed. 2015), at p. 288. The purpose ofbuilders’ risk policies in particular is to offer broad coverage, which benefits both insureds and insurers: Urbanization and industrialization in the past 100 years have made the concept of an insurance policy covering all conceivable risksadvantageous to both insureds and their insurers.

The insured benefits from the extensive nature and scope of the coverage, and insurersbenefit from the economies of managing and marketing a policy which, in terms of its scope, has certainty. For these reasons, the “all riskpolicy,” which creates a special type of coverage extending to many risks not customarily covered under other types of insurancepolicies, is attractive to both the insurance industry and consumers. (E. A. Dolden, “All Risk and Builders’ Risk Policies: Emerging Trends” (1990-91), 2 C.I.L.R. 341, at pp. 341-42) [68] This Court stated in Commonwealth Construction Co. v.

Imperial Oil Ltd., (SCC), [1978] 1 S.C.R.317, that the purpose of builders’ risk policies is to provide certainty and stability by granting coverage that reduces the need for privatelaw litigation. The Court also recognized the complexity of industrial life and large-scale construction projects that involve manydifferent individual contractors: As already noted, the multi-peril policy under consideration is called . . . a course of construction insurance. In England, it is usuallycalled a “Contractors’ all risks insurance” and in the United States, it is referred to as “Builders’ risk policy”.

Whatever its label, its

function is to provide to the owner the promise that the contractors will have the funds to rebuild in case of loss and to the contractors the protection against the crippling cost of starting afresh in such an event, the whole without resort to litigation in case of negligence by anyone connected with the construction, a risk accepted by the insurers at the outset. This purpose recognizes the importance of keeping to a minimum the difficulties that are bound to be created by the large number of participants in a major construction project, the complexity of which needs no demonstration.

It also recognizes the realities of industrial life. [p. 328] [ 69 ] Although such policies are said to insure against all risks, this description is not entirely accurate. As a general rule, insurance offers protection only for fortuitous contingent risk: Progressive Homes , at para. 45. Moreover, builders’ risk policies contain various exclusions, meaning indemnity is precluded in many circumstances of fortuitous loss: Dolden, at pp. 342-44. [ 70 ] Despite these qualifiers, builders’ risk construction policies are the norm, if not a requirement, on construction sites in Canada.

In purchasing these policies, “contractors believe indemnity will be available in the event of an accident or damage on the construction site arising as a result of a party’s carelessness or negligent acts”, which are the most common source of loss on construction sites: Dolden, at pp. 345-46. And, in selling these policies, insurers are prepared to insure risks relating to problems caused by faulty . . . workmanship, but they are not prepared to insure the quality of . . . the workmanship in a construction project per se.

The argument is that the contractor is responsible for doing [its] job right and the insurance company is not there to provide compensation for inadequate performance by a contractor of the very work the contractor agreed to perform. (Canadian College of Construction Lawyers, report of the Insurance & Surety Committee, “‘Covered for What?’: Faulty Materials and Workmanship Coverage under Canadian Construction Insurance Policies” (2007), 1 J.C.C.C.L. 101, at p. 104) Consequently, an

interpretation of the Exclusion Clause that precludes from coverage any and all damage resulting from a contractor’s faulty workmanship merely because the damage results to that part of the project on which the contractor was working would, in my view, undermine the purpose behind builders’ risk policies. It would essentially deprive insureds of the coverage for which they contracted. [ 71 ] In my opinion, therefore, the Insureds’ position on the meaning of the Exclusion Clause better reflects and promotes the purpose of builders’ risk policies.

In the words of this Court in Commonwealth Construction , it keeps “to a minimum the difficulties . . . created by the large number of participants in a major construction project” and “recognizes the realities of industrial life” (p. 328).

Their position finds additional support in some of this Court’s other comments in that case, at pp. 323-24, where it was emphasized that these policies exist to account for the fact that work of different contractors overlaps in a complex construction site and “there is ever present the possibility of damage by one tradesman to the property of another and to the construction as a whole”. [ 72 ] Further support for the Insureds’ position can be found in commentary contending that all-risk coverage under builders’ risk policies was intended to be broad, and the faulty workmanship exclusion narrow.

For instance, Maurice G. Audet has discussed the original intent of the exclusion, reviewing the case law as well as annotated insurance policies and manuals: “Part II ― Insurance” (2002), 12 C.L.R. (3d) 100 ; and “All Risks ― a promise made or a promise broken?” (1983), 50:10 Canadian Underwriter 34, at pp. 40-42 and 93-96.

He concludes that the faulty workmanship, materials and design exclusion was meant to be narrow, to exclude only the cost of replacing the fault or defect but to provide coverage for damage caused by it. [ 73 ] Other authors have remarked that the trend in the common law jurisprudence interpreting builders’ risk policies has been to widen the scope of the above-mentioned exclusion or narrow the ambit of the exception to the exclusion. See e.g. Dolden, at pp. 350 and 358; R. B. Reynolds and S. C. Vogel, A Guide to Canadian Construction Insurance Law (2013), at pp. 140 and 150; and P.-S.

Poitras, “L’assurance et l’industrie de la constructionˮ, in Service de la formation permanente du Barreau du Québec, vol. 147, Développements récents en droit des assurances (2001), 181, at p. 195. I would not go so far as to question the jurisprudence. Consistency of

interpretation is important, and these judicial

interpretations have undoubtedly shaped parties’ reasonable expectations with respect to builders’ risk policies and their exclusion clauses. I simply note that the

interpretation of the Exclusion Clause advanced by the Insureds in these appeals best reflects the original intent of such exclusion clauses, as compared to the

interpretation advanced by the Insurers. [ 74 ] It should be mentioned that the service contract between Station Lands and Bristol has no bearing on the reasonable expectations of the parties to the Policy with respect to the meaning of the Exclusion Clause and whether the damage to the windows would be covered. The Insurers and Ledcor were not parties to that service contract, and it was entered into on June 16, 2011, almost three years after the Policy’s effective date of June 27, 2008.

At most, the service contract could shed light on Station Lands’ understanding of the Policy and the Exclusion Clause, as it was a party to both. Still, the service contract was itself based on a slightly modified standard form contract published by the Canadian Construction Association. [ 75 ] Despite the service contract’s irrelevance to the parties’ reasonable expectations, at various points in its reasons the Court of Appeal seemed to use it to bolster its

interpretation of the Exclusion Clause. For instance, at para. 35, the court determined it was artificial to draw the dividing line between the “cost of making good faulty workmanship” and “resulting damage” as falling between Bristol’s work and the work of other contractors, in part because under the service contract Bristol was responsible for repairing damage it did to the work of other contractors. Further, at para. 49, the court highlighted that an

interpretation of “making good faulty workmanship” that included redoing the work and fixing the damage directly caused by the work was consistent with the service contract, because, again, the contract required Bristol to repair damage it did to the work of other contractors. [ 76 ] Even if the service contract were relevant to the reasonable expectations of the parties to the Policy, there are two other reasons why the Court of Appeal’s reliance on it ― to the extent that there was such reliance — was problematic.

First, a contractor’s or subcontractor’s stipulated responsibility under its work contract to repair or pay for certain damage does not necessarily preclude coverage under a builders’ risk policy, as recognized by this Court in Commonwealth Construction , at p. 330. For instance, insurance policies often have deductible amounts. In fact, clause 5 of the Policy provides that the Insurers’ liability is limited to the

amount by which the loss or damage exceeds the deductible amount, and clause GC 11.1.6 of the service contract provides that Bristolshall be responsible for deductible amounts under the various insurance policies except where such amounts may be excluded from itsresponsibility by other terms of the contract, including those adverted to by the Court of Appeal. The stipulation in the service contractcould thus serve to confirm responsibility for that deductible amount, even where loss or damage is covered under the Policy.

In otherwords, the contract stipulation does not necessarily suggest the parties expected that Bristol would ultimately bear the entire cost ofdamages it caused to the work of other contractors. [77] Second, even if the stipulation did indicate such an expectation, the Court of Appeal’s new physical and systemicconnectedness test does not reflect it. Under the court’s new test, and using its language, certain unforeseeable, collateral damage to areason which Bristol was not working would likely be covered under the resulting damage exception in the Exclusion Clause.

Yet Bristolwould also be responsible for this damage under the service contract, which makes no such distinction with respect to the foreseeabilityor remoteness of the damage caused. In effect, there would be dual responsibility for payment, under both the Policy and the servicecontract, even though, as discussed above, the Court of Appeal stated it would be artificial to draw the dividing line where such dualresponsibility would result. (

c) No Unrealistic Results [78] In discussing the

interpretation of insurance policies in Consolidated-Bathurst, at pp. 901-2, Estey J. stressed theneed to avoid

interpretations that would bring about unrealistic results or results that the parties would not have contemplated in thecommercial 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., (SCC), [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 precludefrom coverage only the cost of redoing the faulty work aligns with commercial reality and leads to realistic and sensible results, givenboth 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 broadcoverage objective underlying builders’ risk policies. These policies are commonplace on construction projects, where multiplecontractors work side by side and where damage to their work or the project as a whole commonly arises from faults or defects inworkmanship, materials or design. In this commercial reality, a broad scope of coverage creates certainty and economies for bothinsureds and insurers. In my opinion, it is commercially sensible in this context for only the cost of redoing a contractor’s faulty work tobe excluded under the faulty workmanship exclusion. Such an

interpretation strikes the right balance between the two undesirableextremes described by Estey J. in Consolidated-Bathurst, at pp. 901-2: “. . . the courts should be loath to support a construction whichwould either enable the insurer to pocket the premium without risk or the insured to achieve a recovery which could neither be sensiblysought nor anticipated at the time of the contract”. Under the Policy, the Insurers did not undertake to cover the “cost of making goodfaulty workmanship”, but they did promise to cover “physical damage [that] results” from that “faulty workmanship”.

It can hardly besaid that recovery for the damages to the Tower’s windows in the circumstances of this case could not have been sensibly sought oranticipated when the Policy was purchased. [80] Furthermore, such an

interpretation does not, in my view, transform the insurance policy into a constructionwarranty. It does not inappropriately spread risk, nor would it allow or encourage contractors to perform their work improperly ornegligently. Importantly, Bristol is precluded from receiving initial payment for its faulty work and then receiving further additionalpayment to repair or replace its faulty work. See C. Brown, Insurance Law in Canada (loose-leaf), at p. 20-31; and Privest PropertiesLtd. v. Foundation Co. of Canada Ltd. (1991), (BC SC), 57 B.C.L.R. (2d) 88 (S.C.).

The cost of redoing faulty orimproper work is excluded from coverage.

The cost can be sizeable; in the instant appeals, for example, Bristol’s contract price forcleaning the windows was $45,000. [81] The Insurers argue that accepting the Insureds’ position would tether the application of the resulting damageexception to how the work is divided among various contractors on a project, a result which they say would not make commercial sense.This argument echoes the Court of Appeal’s concerns at para. 40 of its reasons: This approach might create an incentive to artificially divide up the work as finely as possible, as then the maximum amount of damagewould be covered by insurance.

On the other hand, it would be dangerous for the owner to hire a single contractor to do all the work, asthen nothing would be covered. [82] With respect, I do not find this persuasive. It is premised on a theoretical concern that does not reflect thecommercial reality of construction sites on the ground.

In my view, it is unreasonable to expect that the owner of a property or thegeneral contractor on a construction site will divide up work exclusively on the basis of potential coverage under their insurance policy.Many other considerations, such as costs, subcontractor expertise and the risk of delay, will likely be more relevant in deciding how toallocate work. [83] I also note that interpreting the Exclusion Clause as precluding from coverage only the cost of redoing the faultywork breaks no new ground in the world of insurance, as it mirrors the approach courts have adopted when construing similar exclusionsto comprehensive general liability insurance policies.

These policies cover the risk that the insured’s work might cause bodily injury orproperty damage. However, they generally contain a “work product” or “business risk” exception, which excludes from coverage thecost of redoing the insured’s work: “Covered for What?”, at p. 122. (

d) Ensuring Consistent

Interpretation [84] The purpose of builders’ risk policies and the need to prevent unrealistic results point to an

interpretation of theExclusion Clause that would exclude from coverage only the cost of redoing the cleaning work. Such an

interpretation of the ExclusionClause is also consistent with case law. Though the Court of Appeal stated, at para. 46 of its reasons, that “numerous cases . . . hold thatthe exclusion is not limited to the cost of re-doing the faulty work, but also extends to the cost of repairing the thing actually being

worked on”, with respect, I am of the view that many of these faulty workmanship and faulty design decisions can be read as limiting thefaulty workmanship exclusion to only the cost of redoing the faulty work. As these cases are highly fact-specific, the results that courtsreach will be largely dictated by the particular circumstances of each case.

More specifically, whether certain damage falls within theresulting damage exception to the faulty workmanship exclusion will greatly depend on the scope of the contractual obligation pursuantto which the faulty workmanship was carried out. [85] In the appeals before us, Bristol’s obligation under its service contract with Station Lands was limited to cleaning theTower’s windows after they had been properly installed. Redoing Bristol’s faulty work did not require Bristol to install windows in goodcondition.

As such, the cost of the windows’ replacement represents “resulting damage” and is covered under the Policy. Conversely, ifBristol had been responsible for the windows’ installat

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