• https://www.canlii.org/en/sk/skqb/doc/2019/2019skqb77/2019skqb77.html

• Atwater Investment LP v BMO Life Assurance Company, 2019 SKQB 77 (CanLII)

• [139]                              Atwater argues that since the contract specifies minimum premiums and does not specify maximum premiums that can be paid, when coupled with the statement the insured may make additional premium payments at any time, informs the meaning of “premiums” in this contract as being any monies paid to the insurer and, when read together, creates a contractual right to pay monies for investment outside the accrual tax‑exempt provisions of the policy. It argues that the absence of such words may be and should be considered in interpreting a contract and that the insurer having not specified a maximum premium that can be paid, coupled with the express provision that additional premiums may be paid at any time, has created a contractual right.

• (h)      The Side Account provisions state in the first paragraph the following:  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.

• (i)        There is nothing in the language of the policies to this point that suggests an independent or stand‑alone right of the insured to pay premiums directly into the Side Account, which is what Atwater says it is entitled to do. As I read the policies, all premiums paid are to go into Investment Accounts in accordance with the insured’s allocations. From those Investment Accounts, charges for cost of insurance, premium taxes and monthly deductions are deducted, with the balance residing in the selected Investment Accounts as savings pool. If the amounts remaining in those Investment Accounts put the policy offside of exempt status, the insurer will then transfer those excess amounts to the Side Accounts in accordance with the insured’s allocation choices so as to maintain exempt status.

• (l)        Atwater’s foundation for its interpretational argument rests on the sentence, “You may make additional premium payments at any time while this policy is in force.” That sentence is found under the heading Payment of Premiums, which is located within the General Provisions found at page 6.1. In its entirety, this provision reads as follows:  The initial planned premium, as shown in the Policy Information Pages, is due o the Policy Effective Date and must be paid before any coverage becomes effective. You may then pay premiums annually, or by a monthly automatic payment system. You may make additional premium payments at any time while this policy is in force. We will not refuse any premium payment required to prevent the policy from terminating as described in the Lapse provision.

• (p)      It is my opinion that this other purpose and meaning is the proper interpretation to be given to this phrase. In my opinion, the ordinary insured would understand the word “premium” as used in the subject sentence as having the dictionary and judicially held meaning discussed above and not a meaning consistent with the right to make additional payments for stand‑alone investments in Side Accounts.

  (q)      The additional premium payments that can be made at any time must be for premiums, i.e., for present and future cost of insurance, associated deductions and premium taxes and for investment in the accrual tax‑exempt investments permitted by the Income Tax Act for the particular policy.

  (r)        Interpretation requires the interpreter to harmonize, if possible, all words and phrases used in contracts. Given the language and structure of the policy as a whole that:

  (i)        contemplates all premium payments initially going to Investment Accounts from which the cost of insurance charges, premium taxes and monthly deductions will be deducted and the remainder, Investment Accounts, as savings to the extent permitted to maintain accrual tax‑exempt status;

  (ii)      any excess beyond the permitted tax‑exempt limits are transferred to Side Accounts from which it could either be withdrawn by the insured or maintained there earning interest or other potential returns; and

  (iii)     monies from the Side Account be transferred back to Investment Accounts to pay future premiums or maintain the Investment Accounts at their maximum permitted amount while maintaining tax‑exempt status;

  I conclude that the interpretation I have settled upon is the interpretation that effects harmonization and is the understanding an ordinary insured would have of his or her rights and entitlements under the subject policies.

Given the meaning that “premiums” has in an insurance context and applying the general rules of contract construction, I come to the same conclusion as I have in my discussion in Stage 1 above. The meaning properly to be given to “premiums” is significant in deciding what the reasonable expectations of the parties would have been when entering into the contract.

3.       Precedent and prior case law

[156]                              The only Canadian decisions relating to a universal life insurance policy that counsel cited or that I have been able to identify are Fehr v Sun Life Assurance Company of Canada, 2018 ONCA 718, 84 CCLI (5th) 124 [Fehr], and Kang v Sun Life Assurance Company of Canada, 2013 ONCA 118, 19 CCLI (5th) 171 [Kang], and the trial level decisions that preceded them. The Kang decision is not instructive to any measure.

[24]      These policies were fairly complex financial instruments. The manner in which they operated was not obvious from the policy language. It is not surprising, therefore, that MetLife’s sales agents frequently used standard sales pitches and illustrations to demonstrate the operation of the policies to their clients.

[25]      Many of these policies were sold during times of high interest rates. Most projections given to prospective policyholders were based on those rates continuing. Everything was rosy when interest rates were high. Premiums were low, accumulation funds grew, and policyholders were happy. But when interest rates began to fall in the mid-1990s and into the 2000s, MetLife’s profits also fell. As did the income on policyholders’ accumulation funds. Correspondingly, premiums and administration costs charged by MetLife and its successors went up. Some of these increased charges were paid out of policyholders’ accumulation funds.

…

[64]      I have noted that the policies are relatively complex financial instruments. They are also relatively complex contracts. The language is technical and legalistic, and important terms are undefined. For example, there is no definition of “minimum premium” or “maximum premium”. The actual meaning of those terms is a matter of controversy. According to Sun Life, “minimum premium” does not mean the lowest premium that a policyholder is required to pay in order to keep the policy in good standing. And “maximum premium” does not mean the highest premium that can ever be charged to a policyholder. Some technical terms, such as “non-rated classification”, are undefined. Other terms, such as “premium”, “monthly cost of insurance” and “monthly insurance charge”, are confusing. Key provisions, such as the manner in which Sun Life could adjust the COI from time to time, are opaque.

[65]      The motions judge himself required extensive additional evidence, including expert evidence, before he could determine whether Sun Life had breached the policy by adjusting the COI based on factors not enumerated in the policy. He was unable to do so by simply interpreting the policy and comparing it to what Sun Life claimed it was entitled to do. This was a key breach of contract issue, to which I now turn.

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Atwater Investment LP v BMO Life Assurance Company, 2019 SKQB 77 (CanLII)

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• History (7)
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• Treatment  (5)
• CanLII Connects (1)

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Date:

2019-03-15

File number:

QBG 1775 of 2017; QBG 1823 of 2017

Other citation:

92 CCLI (5th) 204

Citation:

Atwater Investment LP v BMO Life Assurance Company, 2019 SKQB 77 (CanLII), <https://canlii.ca/t/hzn3n>, retrieved on 2023-09-10

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QUEEN’S BENCH FOR SASKATCHEWAN

Citation: 2019 SKQB 77

Date:                     2019 03 15

Docket:                  QBG 1775 of 2017 / QBG 1823 of 2017

Judicial Centre:        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         for Atwater Investment LP

      Munaf Mohamed and Christine A. Viney               for BMO Life Assurance Company

      Eliot N. Kolers and Sinziana R. Hennig                  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

1.       The Fundamental precepts of contract interpretation.................................................  41
2.       Principles of interpretation specific to insurance contracts........................................  46

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

(a)        Sattva ..............................................................................................................  49

(b)        Ledcor .............................................................................................................  53

(c)        Sabean ............................................................................................................  63

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

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

1.       Atwater’s position on the interpretative principles to apply........................................  69
2.       BMO’s position on the interpretive principles to apply...............................................  74
3.       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.       Atwater’s Stage 1 interpretation..................................................................................  98
2.       BMO’s Stage 1 interpretation.....................................................................................  99

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

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

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

1.       The insurance context meaning of “premiums”.........................................................  128
2.       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.       Subsequent conduct considerations..........................................................................  150
2.       Parties are presumed to intend the legal consequences of their words and the use of

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

3.       Precedent and prior case law....................................................................................  156
4.       Commercial certainty.................................................................................................  161
5.       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

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

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

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

(a)        Affidavit evidence in other proceedings ........................................................  264

(b)        The affidavits filed in this proceeding ...........................................................  265

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

1.       The interpretation of regulations – an overview of the law and applicable principles 290
2.       The Regulation..........................................................................................................  310

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

1.       On the variable insurance contract issue..................................................................  312
2.      Whether the Regulation has other than prospective effect .........................................  321

(a)        Is the Regulation declaratory of the law? ............................................................  321

(b)        The vires issue .....................................................................................................  328

(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 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 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)      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;

(b)      “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 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)      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

(b)      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)      to interpret the Regulation as the insurers argue would make the Regulation ultra vires of the Lieutenant Governor in Council;

(b)      on a proper interpretation of the Regulation, it is prospective in operation only and does not affect their vested rights; and

(c)      in any event, if the Regulation has any retroactive or retrospective operation, there remain issues to be decided within their various applications.

Ituna, Mosten and Atwater say that, in any event, I should decline to exercise any discretion I have to dismiss their application on the grounds of mootness and render my decisions on the applications heard before me in September 2018.

[8]                                       The parties’ positions with respect to the proper interpretation of the Regulation and their “mootness” positions were argued before me the week of February 11, 2019. There are, in effect, competing mootness issues that arise. As will be apparent, the issues the insurers take in respect of the effect of the Regulation are themselves effectively moot if I interpret the contracts as they argue I should.

[9]                                       Much concern was recently expressed of the need for “efficient use of judicial resources” and how and where that should factor into my decision on whether to render decisions on the grounds of mootness. I cannot help but observe the parties seem to be late converts to the dogmas concerning the efficient use of judicial resources.

[10]                                 Having regard to the following considerations:

(a)      the time and investment made by the litigants and the court in the proceedings to date are, to use an accounting concept, “sunk costs”;

(b)      appeals will likely be pursued given the very significant financial implications for all parties;

(c)      given my interpretation conclusions, I could have taken an early exit and stopped my analysis at the end of my Stage 1 interpretation of the contract. However, I concluded it to not be in the interests of the final resolution of the disputes nor an efficient use of judicial resources for me to not address the full range of the issues placed before me.

(d)      the potential combination and permutations of differing opinions or conclusions a court of appeal may have on the various issues could well result in an appeal court returning issues back to this Court to address or hear if a decision was not made in the first instance.

(e)      courts of appeal have frequently stated that they find helpful, perhaps even necessary, trial judges’ assessments of all issues.

Given the sequence of the decisions or opinions I have expressed, I concluded that it would not be an efficient use of judicial resources nor fulfillment of the responsibilities I have for me to not provide a trial judge’s analysis and conclusions on the bulk of the issues addressed before me.

[11]                                 I appreciate that, given what could be described as threshold conclusions, some of my following conclusions or opinions could be viewed as essentially obiter dicta. I do not view my conclusions following threshold conclusions as obiter. Rather, I view my judgment as a whole as addressing and deciding positions and arguments presented in the alternative that needed to be decided. In any event, I have chosen to engage on all issues and provided decisions on each with the objection of providing the Court of Appeal with the ability to make a final determination on each issue that might be raised in an appeal.

Core Issues to Decide

[12]                                 The central and overarching issue is the proper interpretation to be given to the standard form contracts in issue. More specifically, the core issue is whether:

(a)      the contracts are life insurance policies that permit limited investment within the “exempt from accrual taxation” criteria established under the Income Tax Act; or

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

(b)      How is purpose to be determined? What, if any, “surrounding circumstance” evidence can be considered in determining the purpose(s) of the contracts?

(c)      What is the meaning to be given to the undefined terms “premiums” and “premium payments” as used in the contracts?

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

(b)      3. Tax Exempt Option – opposite Face Amount Adjustment, the option Increase and Reversals was selected;

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

(d)      5. Universal Life Riders – none of the available options were selected;

(e)      7. Investment Allocations – five different Market Indexed Accounts in various percentages totalling 100% were selected; and

(f)        8. Investment Allocation–Side Account – the same Market Indexed Accounts selections were made.

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)      the plan being Universal Life;

(b)      the total annual minimum premium as $5,895.94;

(c)      the total monthly minimum premium as $491.33;

(d)      the planned premium as $5,417.00;

(e)      the death benefit option as Sum Insured;

(f)        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.

[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 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 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.

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 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 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.

[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 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.

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 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 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 (thecontra 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 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 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.

[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), 1997 CanLII 4085 (BC CA), 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 CanLII 791 (SCC), [1998] 2 S.C.R. 129, at paras. 54‑59, per Iacobucci J.). The purpose of the parol evidence rule is primarily to achieve finality and certainty in contractual obligations, and secondarily to hamper a party’s ability to use fabricated or unreliable evidence to attack a written contract (United Brotherhood of Carpenters and Joiners of America, Local 579 v. Bradco Construction Ltd., 1993 CanLII 88 (SCC), [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. 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 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 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 CanLII 385 (SCC), [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.

                        [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., 1979 CanLII 10 (SCC), [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:

[78]      In discussing the interpretation of insurance policies in Consolidated‑Bathurst [1979 CanLII 10 (SCC), [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 CanLII 664 (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 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:

                        [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 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 CanLII 385 (SCC), [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).

(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.

[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 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 the maximum each year, as permitted under the currentIncome 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 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 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)      create the Side Accounts as special accounts to hold any premiums paid that exceed the maximum allowable tax exempt value in the Investment Accounts;

(b)      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;

(c)      the insured has elected to have funds in the Side Account accumulate under a 10‑year term guaranteed investment account option; and

(d)      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 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)      the interpretation should be consistent with the reasonable expectations of the parties that are supported by the language of the contract;

(b)      the interpretation should not give results the parties would not have contemplated in the commercial atmosphere in which the contract was made; and

(c)      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.

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 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.

[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 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 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., 1979 CanLII 10 (SCC), [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.

[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:

[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 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)      the language of the contract within the permitted context;

(b)      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)      relevant legislative provisions; and

(e)      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 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)      if surrounding circumstances specific to the subject contracts were considered, the objective of consistent interpretations would be compromised and precedential value lost; and

(d)      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;

(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)      the contracts meet the definition of life insurance as defined by The Saskatchewan Insurance Act;

(d)      “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.

2.       BMO’s Stage 1 interpretation

[99]                                 BMO’s interpretive position, in brief, is:

(a)      The purpose of life insurance is to provide protection against the mortality risk with death benefits paid on the death of the insured life.

(b)      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)      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.

(e)      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 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)      The interpretation advanced by BMO is what the average person applying for a universal life insurance policy would expect.

(h)      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 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)      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.

(c)      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?

(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. …

[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 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:

(a)      the policy provides for life insurance protection;

(b)      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 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)      anything paid to BMO is a premium. There is no other descriptor used in the contracts for payments to the insurer; and

(b)      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 theCanadian 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 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 definitionof “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]                              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;

[118]                              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:

(a)      Is the purpose of the contracts limited to providing insurance and tax exempt investment connected with that life insurance, or do the contracts have a wider purpose of taxable investment opportunities as well?

(b)      What meaning is to be given to the provision, “You may make additional premiums at any time while this policy is in force”?

[120]                              Counsel for both sides, in detailed and comprehensive arguments, relied upon specific language throughout the contracts to support their respective core positions. Atwater’s position is that:

(a)      the purpose of the contracts is to provide life insurance, limited investments in the tax‑sheltered Investment Account and unlimited investment in the Side Account;

(b)      the contracts permit it to pay additional premium payments at any time; and

(c)      premiums in the context of contracts that contemplate both insurance and investments must be interpreted as meaning any payments made by the insured.

BMO’s position is that:

(a)      the purpose of the contracts is to provide life insurance and investment options limited to the tax‑sheltered investments available within the exempt account and investments to fund future policy premiums which would be within either the Investment Accounts or the Side Account;

(b)      the word “premiums” must be given its insurance context meaning and, thus, any payments proffered which are not for the purposes stated above are not premiums, and BMO is under no obligation to accept same.

Stage 1 Conclusion

[121]                              As stated in Ledcor and in Sabean, at para 13:

At the first step of the analysis for standard form contracts of insurance, the words used must be given their ordinary meaning “as they would be understood by the average person applying for insurance, and not as they might be perceived by persons versed in the niceties of insurance law” ….

While the structure and language of the policies is complex and the exercise of giving the words used their ordinary meaning as they would be understood by the average person applying for insurance in this form of policy is challenging, the interpretation starts with giving the words their ordinary meaning as they would be understood by the average person applying for insurance.

[122]                              From the outset of my hearing of this matter, I have focused on the issue of what is the purpose of this contract. Relying on language of the contract itself, Atwater says the purpose is both to provide life insurance and investment opportunities beyond those tied to the accrual tax exempt investment opportunities. It says the language of the policy clearly indicates this to be so.

[123]                              I have concluded the purpose of these contracts are to provide life insurance and investment opportunities within the accrual tax exempt opportunities permitted by the Income Tax Act; not investment opportunities unrelated to the fundamental life insurance purpose of the contract. Factors that lead me to this conclusion include:

(a)      the insurer, nominally and licensed as a life insurance company, sold to the insured what is clearly identified as a life insurance policy, albeit a universal life insurance policy;

(b)      there is nothing in the factual matrix related to the initial acquisition of this policy that in any way suggests the insured was seeking investment opportunities unconnected to the life insurance purpose of the policy;

(c)      the meaning that I find must be given to the words premium and premiums within life insurance policies;

(d)      attributing such a purpose to the policy and meaning to premiums harmonizes the language of the policy as a whole; and

(e)      in my opinion, the ordinary insured person would so understand the word “premiums” and the policy to be providing life insurance and tax‑exempt investment opportunities; but not the extended opportunities the applicant here says the policy provides.

[124]                              I have concluded that any apparent conflicts or ambiguity in the language of the policies raised by counsel are resolved and the various provision of the contracts are harmonized by giving to the word “premiums” its commonly understood meaning in the context of insurance policies. In doing so, I reject the argument that since premiums is an undefined word, it must encompass all payments made by the insured to the insurer.

[125]                              It is my conclusion that the words “premium” or “premiums” as used in this contract would be understood by the ordinary insured to be monies paid by the insured to the insurer:

(a)      to cover the cost of insurance, premium taxes and policy maintenance fees as they come due; and

(b)      for savings or investment within the Investment Accounts to the extent to which such savings or investments were permitted within this policy while maintaining its status as an accrual income tax‑exempt life insurance policy.

[126]                              The ordinary insured would understand the statement, “You may make additional premium payments at any time while this policy is in force” found in the Payment of Premiums section of the contract as permitting prepayment of future premiums.

[127]                              I also conclude that the ordinary insured would understand that the purpose of the Carrier Fund as outlined in the contract was a fund, distinct from the Insurance Policy:

(i)        to which excess premiums would be transferred to maintain the tax‑exempt status of the policy;

(ii)      within which those premiums and additional prepayments of future premiums could be held for future transfer back into the policy and while therein so held would be invested, but that the income thereon would be subject to accrual income taxation; and

(iii)     from which premium payments could be withdrawn by the insured.

I conclude that the ordinary insured would not understand the policy as permitting investment within Side Accounts of monies not infused with the character of being premiums for the life insurance benefits.

My Reasons for This Interpretation and Conclusions

1.       The insurance context meaning of “premiums”

[128]                              I have had the benefit of many days of submissions by very capable advocates as to what “premiums” means in the context of this contract, with multiple reasons why “premiums” means precisely what each says it means. Given the limited scope of the factual matrix available to me to be considered in the interpretation of this standard form contract, the applicable fundamental precepts of contract interpretation and the general rules of contract interpretation, I have concluded that “premiums has a singular and established meaning in the insurance context generally, with a refinement thereof in the context of a life insurance policy.

[129]                              There is, in my opinion, no question but that in a general insurance context, “premiums” has a universally understood meaning, being the sum paid by the insured to the insurer to purchase insurance against the insured against risk. When purchasing fire, theft, liability or other forms of fortuity insurance, premiums are quite simply the price or cost of the specific insurance purchased. When used in a general insurance context, everyone understands precisely what premiums are. I conclude that beyond having a commonly understood meaning, in the insurance context “premiums” has attained such a status and specific meaning that it has become a legal term of art that must be adhered to when interpreting an insurance policy.

[130]                              This meaning and understanding of “premiums” necessarily gets modified when purchasing a life insurance policy where the Income Tax Act permits there to be an accrual tax‑exempt element to the policy. Here, the ordinary purchaser of the life insurance would understand that the term “premiums” relates not only to the cost of the life insurance per se, but also the amount permitted to be paid for the permitted and associated tax‑exempt investment. Given the universally understood meaning of “premiums” in the insurance context generally, the ordinary insured, purchasing life insurance, would not interpret or understand premium or premiums to include investment in opportunities not associated with or tied to the prerequisite life insurance purpose or requirements of the policy.

[131]                              The Alberta Court of Appeal decision in IFP Technologies (Canada) Inc. v EnCana Midstream and Marketing, 2017 ABCA 157, [2017] 12 WWR 261 [IFP], leave to appeal to SCC denied, 2018 CanLII 28111 (SCC), provides significant guidance to me. The decision was rendered subsequent to the Supreme Court’s decisions in both Sattva and Ledcor and applied those decisions in the interpretation before it.

[132]                              IFP dealt with the interpretation of contracts in the oil and gas industry and the meaning to be given to the phrase “working interest” in those contracts. In its decision, the Court of Appeal held that the term “working interest” was a legal term of art that had an accepted meaning and usage in the oil and gas industry and interpreted the contracts in question using that accepted meaning and usage. It held that while the customary meaning could be modified by parties to an agreement, in the absence of such modification a trial judge cannot ignore the customary meaning or usage of a phrase within an industry and to do so would be an error in law.

[133]                              In the course of her reasons, Fraser C.J.A. said a number of things that are instructive with respect to the law of contractual interpretation generally and how to interpret a word or phrase that may be a term of art within a particular industry. Thus, I quote extensively:

[60]      Where a standard form contract is involved, the standard of review that applies to its interpretation is usually correctness: Ledcor Construction Ltd. v Northbridge Indemnity Insurance Co., 2016 SCC 37 at paras 4, 24, 46, 48, [2016] 2 SCR 23 [Ledcor]. As the Supreme Court noted, these are highly specialized contracts typically sold widely to customers without negotiation of their terms and their interpretation could affect a large number of people. As a result, it would be undesirable for courts to interpret identical standard form provisions inconsistently.

[61]      By analogy, this reasoning applies with equal force to legal terms of art which have a common meaning to participants in a given industry. In such event, there is no identified need to define what such terms mean. Participants in the oil and gas industry rely on the commonly accepted usage of many terms: see, for example, the Glossary of Land Terms published by the Canadian Association of Petroleum Land Administration (CAPLA): CAPLA, “Glossary of Land Terms 2016”, NEXUS (September 2016) 9 at 15.5 “Working interest” is one of them. Since this term has an accepted meaning and usage in this sector, and its interpretation has precedential value, it must therefore be interpreted consistently. Thus, where the issue involves the meaning of a legal term of art – in this case, “working interest” as used in the oil and gas industry – the standard of review with respect to the meaning of that term is correctness.

[62]      While a legal term of art may be modified by the parties to an agreement, that does not permit a trial judge to ignore the meaning attributable to it in the absence of such modification. To do so is tantamount to failing to take into account a key term of a contract or relevant factor or ignoring applicable principles and governing authorities. That, in turn, is a question of law reviewable for correctness: Sattva [2014 SCC 53] at para 53; Deslaurier Custom Cabinets Inc. v 1728106 Ontario Inc., 2017 ONCA 293 at paras 65-68. Accordingly, a trial judge’s failure to recognize that a legal term of art has a certain meaning is, by itself, an error of law reviewable for correctness. That is what happened here.

…

[79]      I now turn to a brief overview of the applicable principles of contractual interpretation. The goal of contractual interpretation is to determine the objective intent of the parties at the time the contract was made through the application of legal principles of interpretation: Sattva, supra at para 49. To this end, “the exercise is not to determine what the parties subjectively intended but what a reasonable person would objectively have understood from the words of the document read as a whole and from the factual matrix”: Geoff R. Hall, Canadian Contractual Interpretation Law, 2nd ed (Markham: LexisNexis, 2012) at 33 [Hall]. Accordingly, disputed contractual terms must be interpreted, not in isolation, but in light of the contract as a whole: Tercon Contractors Ltd. v British Columbia (Transportation and Highways), 2010 SCC 4 at para 64, [2010] 1 SCR 69.

[80]      One aspect of the current law on contractual interpretation engaged by this appeal relates to the relevance of the factual matrix. In Sattva, the Supreme Court finally clarified that courts ought to “have regard for the surrounding circumstances of the contract – often referred to as the factual matrix – when interpreting a written contract” (para 46). Why? As the Supreme Court noted, “ascertaining contractual intention can be difficult when looking at words on their own, because words alone do not have an immutable or absolute meaning” (para 47).

[81]      Considering the surrounding circumstances of a contract does not offend the parol evidence rule. That rule precludes admission of evidence outside the words of the written contract that would add to, subtract from, vary, or contradict a contract. However, evidence of surrounding circumstances is not used for this purpose but rather as an objective interpretive aid to determine the meaning of the words the parties used: Sattva, supra at paras 59-61. Therefore, while the factual matrix cannot be used to craft a new agreement, a trial judge must consider it to ensure the written words of the contract are not looked at in isolation or divorced from the background context against which the words were chosen. The goal is to deepen the trial judge’s understanding of the mutual and objective intentions of the parties as expressed in the words of the contract. This approach is in keeping with Lord Steyn’s famous admonition in Regina v Secretary of State for the Home Department, Ex Parte Daly, [2001] UKHL 26 at para 28 that “[i]n law context is everything”.

[82]      Thus, in interpreting a contract, a trial judge must consider the relevant surrounding circumstances even in the absence of ambiguity: Hall, supra at 24-25; John D. McCamus, The Law of Contracts, 2nd ed (Toronto: Irwin Law, 2012) at 751 [McCamus]; Bighorn [2015 ABCA 127] at para 10; Directcash Management Inc. v Seven Oaks Inn Partnership, 2014 SKCA 106 at para 13, 446 Sask R 89; Nexxtep Resources Ltd v Talisman Energy Inc, 2013 ABCA 40 at para 31, 542 AR 212 [Nexxtep], citing Dumbrell v The Regional Group of Companies Inc., 2007 ONCA 59 at para 54, 85 OR (3d) 616; Hi-Tech Group Inc. v Sears Canada Inc., 2001 CanLII 24049 at para 23, 52 OR (3d) 97 (CA) [Hi-Tech]; Eco-Zone Engineering Ltd. v Grand Falls-Windsor (Town), 2000 NFCA 21 at para 10, 5 CLR (3d) 55.

[83]      Determining what constitute properly surrounding circumstances is a question of fact. As to what is meant by surrounding circumstances, this consists of “objective evidence of the background facts at the time of the execution of the contract ... that is, knowledge that was or reasonably ought to have been within the knowledge of both parties at or before the date of contracting”: Sattva, supra at para 58. Examples of relevant background facts include: (1) the genesis, aim or purpose of the contract; (2) the nature of the relationship created by the contract; and (3) the nature or custom of the market or industry in which the contract was executed: Sattva, supra at paras 47-48; Geoffrey L. Moore Realty Inc. v The Manitoba Motor League, 2003 MBCA 71 at para 15, 173 Man R (2d) 300; King v Operating Engineers Training Institute of Manitoba Inc., 2011 MBCA 80 at para 72, 270 Man R (2d) 63; Ledcor, supra at paras 30, 106. Ultimately, the surrounding circumstances can include “absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man”: Sattva, supra at para 58, citing Lord Hoffman [sic] in Investors Compensation Scheme Ltd. v West Bromwich Building Society, [1998] 1 WLR 896 at 913 (UKHL).

…

[138]   In interpreting the JOA, the Trial Judge also erred in his approach to the issue of primary production at Eyehill Creek. Unfortunately, here too, he asked himself the wrong question, that is whether the JOA prohibited primary production. It is an improper leap for a court to conclude that because something has not been expressly forbidden under a contract, it follows that it is permitted. That is not necessarily so. There are many things parties to a contract cannot do even if they are not expressly prohibited. As the Supreme Court noted in BCE Inc. v 1976 Debentureholders, 2008 SCC 69 at para 71, [2008] 3 SCR 560, reasonable expectations “looks beyond legality to what is fair, given all of the interests at play” to address conduct that is “wrongful, even if it is not actually unlawful.” The mere fact the JOA did not explicitly prohibit PCR from undertaking primary production does not mean that the JOA was intended to address, or addressed, the terms under which PCR, as operator, could engage in new primary production, and still less unconstrained primary production.

[134]                              It is clear from statutory definitions, legal decisions and dictionaries of the English language that within the insurance industry and among persons participating in that industry by purchasing insurance, “premiums” has a well defined meaning. When used in an insurance contract, the word “premium” is a legal term of art.

[135]                              This legal term of art (or accepted meaning and usage in the industry) can be altered by the express words of the contract; however, absent such modification, as stated by Chief Justice Fraser at paragraph 62 of her reasons in IFP, it would be tantamount to failing to take into account a key term of a contract or relevant factor.

[136]                              An ordinary insured must be taken to know and understand the word “premiums” in its insurance context as defined in dictionaries and indeed by The Saskatchewan Insurance Act. In the insurance context, the meaning of “premiums” is clear. The Saskatchewan Insurance Act, s 2(1)(yy), states:

… the single or periodical payment under a contract for the insurance, and includes dues, assessments and other considerations;

This definition makes it clear that a premium is a payment “for the insurance”. The statutory definition is entirely consistent with dictionary and judicially generated definitions of the word in the insurance context. See also:

(a)      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, sv “premium”.

the consideration paid in money or otherwise for a contract of 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, sv “premium”.

(b)      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, sv “premium”.

The ordinary person entering into an insurance contract in Canada that provided for both an insurance amount on the life insured and for connected or associated accrual tax‑exempt savings payable on the death of the life insured would understand “premiums” to mean the monies he or she would be paying for that insurance and the additional death benefits thereby provided by the tax exempt savings provisions. Given this understanding of the word “premiums”, it follows that an ordinary insured would not understand a phrase stating that an insured may “make additional premium payments at any time” as giving him or her the right to invest unlimited amounts in a fund or accounts that did not have a life insurance purpose.

[137]                              Proceeding from the premise that the word “premiums” has the meaning ascribed to it in The Saskatchewan Insurance Act and in conventional dictionary definitions, it logically follows that premiums would not include monies paid solely for the purpose of accessing those interest rate investment returns provided by the Guaranteed Interest Accounts within the Side Account. The reasonable person would understand that the purpose of the Side Account was to maintain tax‑exempt status while accommodating the prepayment of future premiums earning the same rate of return as funds invested within the Investment Accounts.

[138]                              Payments of monies whose intended purpose is not to fund the provision of the policies’ death benefits (the sine qua non of a life insurance policy) are not premiums and the insurer has no obligation to accept them unless a contract between the insurer and the insured creates such an obligation as a distinct topic of agreement.

[139]                              Atwater argues that since the contract specifies minimum premiums and does not specify maximum premiums that can be paid, when coupled with the statement the insured may make additional premium payments at any time, informs the meaning of “premiums” in this contract as being any monies paid to the insurer and, when read together, creates a contractual right to pay monies for investment outside the accrual tax‑exempt provisions of the policy. It argues that the absence of such words may be and should be considered in interpreting a contract and that the insurer having not specified a maximum premium that can be paid, coupled with the express provision that additional premiums may be paid at any time, has created a contractual right.

[140]                              Apart from the fact that this argument ignores the insurance industry meaning of “premiums”, IFP addresses the argument that the absence of words limiting the amount of premiums should be considered in the interpretation of the contract. At paragraph 138 of IFP, the Court states it is an improper leap of logic for a court to conclude that because something has not been expressly forbidden under a contract, it follows it is permitted.

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

[141]                              As stated above (paragraph 45), 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 should be considered in harmony with the rest of the contract and in light of its purposes and commercial context.

[142]                              The core or dominant purpose of these contracts was to provide death benefits by way of the life insured amount and the investment permitted within the tax‑exempt status savings portion of the policy. This purpose, in turn, informs me as to the purpose of the Side Account and supports my conclusion above. My reasons for so concluding are the following:

(a)      The Explanation of Contract provisions of the policies (page 1.5) contain language that is significant in my interpretation of the policies and informs me as to how the policies would have been understood by the ordinary life insurance purchaser. Since this page is headed Explanation of Contract, the ordinary insured would reasonably place emphasis on the language of this section when seeking to understand the policies.

(b)      This explanation states that the policy has been divided into sections and that:

(i)        Section 3 contains the insurance provisions;

(ii)      Section 4 contains the cost of insurance guarantee; and

(iii)     Section 5 relates to the Fund Value.

It is significant that both the Exempt Status provisions and the Side Account provisions are found within Section 3, i.e., the Insurance Provisions of the policies. This placement is consistent with BMO’s argument that the Side Account exists as an administrative feature to support the policy provisions requiring the insurer to maintain the exempt status and not to create stand‑alone investment options unconnected to the insurance purpose of the contracts.

(c)      The statement at the fifth bullet is “Section 5 relates to the Fund Value, which is the money held on deposit within the policy on Your behalf. Your premium payments are directed towards one or more Investment Accounts.” At page 5.3 of Section 5, the contracts state, “The Fund Value for this policy equals the sum of the Account Values of the Investment Accounts.”

(d)      Under the heading Investment Accounts in Section 5, page 5.1, the policies state, “Investment Accounts are savings pools to which Your premiums are directed and from which charges are deducted”. Implicit in this language is that premiums paid are to be directed to one or more of the Investment Accounts and, from those accounts, charges for cost of insurance, premium taxes and monthly deductions will be made, with the balance residing in the selected Investment Accounts as savings pools.

(e)      The definitions of “Cost of Insurance” and “Net Premium” read in conjunction with other provisions of the policies make it clear that the first call on or allocation of premiums paid is to the cost of the insurance provided, the premium taxes levied and a monthly deduction the policies provide for. What remains from whatever premiums have been paid are, by definition, Net Premiums.

(f)        The Premium Allocation provision states, “Premium Allocation is the portion of the Net Premium directed toward a particular Investment Account.” The policies provide the insured the right to make such allocation decisions or direction, but the premium allocation is to be to Investment Accounts. Direct allocation to a Side Account is not contemplated.

(g)      The Exempt Status provisions of the policy (page 3.3) require the insured to take certain actions to maintain the exempt status of the policies, the last option of which is to transfer excess funds to the Side Account. The Side Account provisions immediately follow, on page 3.3, the noted last option of the insurer to transfer premiums paid into Investment Accounts.

(h)      The Side Account provisions state in the first paragraph the following:

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.

(i)        There is nothing in the language of the policies to this point that suggests an independent or stand‑alone right of the insured to pay premiums directly into the Side Account, which is what Atwater says it is entitled to do. As I read the policies, all premiums paid are to go into Investment Accounts in accordance with the insured’s allocations. From those Investment Accounts, charges for cost of insurance, premium taxes and monthly deductions are deducted, with the balance residing in the selected Investment Accounts as savings pool. If the amounts remaining in those Investment Accounts put the policy offside of exempt status, the insurer will then transfer those excess amounts to the Side Accounts in accordance with the insured’s allocation choices so as to maintain exempt status.

(j)        The statements that the Fund Value “is the money held on deposit within the policy on Your behalf” and “Your premium payments are directed towards one or more Investment Accounts” would, in my opinion, convey to the ordinary insured the understanding that the intent and purpose of the policies was that the savings or investment growth that would or could occur under the policies was going to be in the accrual tax‑exempt Investment Accounts.

(k)      The ordinary insured would understand from this language of the policy, coupled with the conventional meaning of premiums in the insurance context, that the policies were not intended to provide stand‑alone investment opportunities. While monies paid in as premiums could end up in the Side Accounts by reason of insurer’s actions taken to maintain tax‑exempt status and be there invested, on a subject‑to‑accrual tax basis, that Side Account investment is limited to funds that were paid in respect of premiums, present or future.

(l)        Atwater’s foundation for its interpretational argument rests on the sentence, “You may make additional premium payments at any time while this policy is in force.” That sentence is found under the heading Payment of Premiums, which is located within the General Provisions found at page 6.1. In its entirety, this provision reads as follows:

The initial planned premium, as shown in the Policy Information Pages, is due o the Policy Effective Date and must be paid before any coverage becomes effective. You may then pay premiums annually, or by a monthly automatic payment system. You may make additional premium payments at any time while this policy is in force. We will not refuse any premium payment required to prevent the policy from terminating as described in the Lapse provision.

(m)      The initial planned premiums on these policies were $50,000, which, given the selected total annual minimum premium of $5,895.94 and the fact that no additional premium payments, beyond the initial $50,000, were made by the original insured, clearly indicates this initial planned premium was intended by the insured as a prepayment of future premiums. To the extent that excess amounts in the Investment Accounts would put the policies offside of the tax‑exempt criteria, the prepayment of future premiums had to be transferred to the Side Accounts, and there they earned interest until applied to currently due premiums.

(n)      Of course, not every insured under this form of policy would make such a significant prepayment of future premiums. The policy does not require prepayments, although it permits it. Indeed, it encourages it by providing for investment or interest returns on such prepayments. The Payment of Premiums section continues to provide that after the payment of the initial planned premium, which must be paid before any coverage becomes effective, the insured “may then pay premiums annually, or by a monthly automatic payment system.” This provision is directed at the insured’s right to prepay the amounts necessary to maintain the desired level of insurance and/or permitted accrual tax exempt savings on an “as the premiums are due” basis.

(o)      The next sentence, foundational to Atwater’s interpretation, reads, “You may make additional premium payments at any time while this policy is in force”, has a logical purpose and meaning other than the meaning Atwater advances. That other purpose and meaning is that the insureds may make prepayments of premiums that will be due in the future and are not limited to paying when due. Since the sentence follows the sentence respecting payment of premiums annually or monthly, when due, its meaning clearly encompasses, at a minimum, the prepayment of future premiums.

(p)      It is my opinion that this other purpose and meaning is the proper interpretation to be given to this phrase. In my opinion, the ordinary insured would understand the word “premium” as used in the subject sentence as having the dictionary and judicially held meaning discussed above and not a meaning consistent with the right to make additional payments for stand‑alone investments in Side Accounts.

(q)      The additional premium payments that can be made at any time must be for premiums, i.e., for present and future cost of insurance, associated deductions and premium taxes and for investment in the accrual tax‑exempt investments permitted by the Income Tax Act for the particular policy.

(r)        Interpretation requires the interpreter to harmonize, if possible, all words and phrases used in contracts. Given the language and structure of the policy as a whole that:

(i)        contemplates all premium payments initially going to Investment Accounts from which the cost of insurance charges, premium taxes and monthly deductions will be deducted and the remainder, Investment Accounts, as savings to the extent permitted to maintain accrual tax‑exempt status;

(ii)      any excess beyond the permitted tax‑exempt limits are transferred to Side Accounts from which it could either be withdrawn by the insured or maintained there earning interest or other potential returns; and

(iii)     monies from the Side Account be transferred back to Investment Accounts to pay future premiums or maintain the Investment Accounts at their maximum permitted amount while maintaining tax‑exempt status;

I conclude that the interpretation I have settled upon is the interpretation that effects harmonization and is the understanding an ordinary insured would have of his or her rights and entitlements under the subject policies.

Stage 2 of the Interpretation

[143]                              While unnecessary, given my conclusion above, I have concluded that it is appropriate to do an alternative analysis. For this alternate analysis, I assume persisting ambiguity and proceed with the Stage 2 interpretive analysis, wherein as directed in Ledcor and Sabean, general rules of contract construction are employed to resolve the ambiguity. The ambiguity I assume is whether the contract could mean what Atwater argues it means – essentially, that premiums are any amounts it chooses to pay.

[144]                              While it might be argued that the Sattva approach to interpretation is part of the general rules of contract construction and, thus, in Stage 2 the scope of the relevant context now extends to absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man, I do not find that conclusion to be justified. Some context is always necessary to interpret the text; but in the case of standard form contracts, that context is restricted, whether looked to within Stage 1 or Stage 2. The logic from Progressive Homes, Ledcor and Sabean restricting the scope of the context to be considered applies, in my opinion, to the interpretation in both Stage 1 and Stage 2.

[145]                              The reasons for restricting the scope of the informing context is based on the fact that standard form contracts are not negotiated, there is no meaningful factual matrix that is specific to the particular parties to assist in the interpretation process and the interpretation at issue is of precedential value. These reasons are applicable at both stages of the interpretive process. That having been said, the permissible context considerations of Stage 1 necessarily need to be reconsidered at Stage 2. It remains to identify what from the general rules of contract construction are applicable and further inform the interpretation.

What are the Applicable Principles of General Contract Construction?

[146]                              The fundamental precepts of contractual interpretation (Chapter 2 of Hall) are summarized by me at paragraph 45 above. Subject to the restricted scope of permissible context, these fundamental precepts are part of the principles of general contract construction. The principles of interpretation specific to insurance contracts as stated by Hall and quoted by me at paragraph 46 above clearly are also applicable.

[147]                              At this point, reference back to paragraph 50 of the Supreme Court decision in Ledcor is instructive. There, Wagner J. made a point of stating that the general rules of contract construction to be employed to resolve ambiguity at this step include that:

[50]      … 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 ….

Given the meaning that “premiums” has in an insurance context and applying the general rules of contract construction, I come to the same conclusion as I have in my discussion in Stage 1 above. The meaning properly to be given to “premiums” is significant in deciding what the reasonable expectations of the parties would have been when entering into the contract.

[148]                              On the matter of reasonable expectations of the parties, the reasoning of Master Prowse in Steer v Chicago Title Insurance Company, 2018 ABQB 28, 73 Alta LR (6th) 296, provides guidance. There, he stated:

[40]      If I am wrong in this conclusion, and the wording were to be considered ambiguous, then paragraph 50 of the Ledcor Construction decision directs me to consider the reasonable expectations of the parties, so as to reach a decision which is not unrealistic or that the parties would not have contemplated in the commercial atmosphere in which the insurance policy was contracted.

[41]      This concept was expressed as follows in Consolidated Bathurst Export Ltd. v Mutual Boiler & Machinery Insurance Co., 1979 CanLII 10 (SCC), [1980] 1 S.C.R. 888 (S.C.C.) at pp. 901‑2:

Said another way, 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.

[42]      In my view, finding coverage for the Steers would allow the Steers to achieve a recovery that could not be sensibly sought from a title insurer.

[43]      This enquiry is not as to the subjective believe of the Steers or CTIC, rather it is as to the general commercial atmosphere.

[149]                              In Chapter 3 of Hall’s text, entitled “Elements of Contractual Interpretation”, he discusses in detail various elements of contractual interpretation. Much of this discussion is an expansion on the fundamental precepts of contractual interpretation and considerations later discussed under the section on principles of interpretation specific to insurance contracts. The following topics therein reviewed are, in my opinion, included within the Supreme Court’s descriptor of principles of general contract construction and are applicable to the Stage 2 interpretation, namely:

3.4      Subsequent Conduct

3.7      Parties are Presumed to Intend the Legal Consequences of Their Words

3.7      Use of Dictionaries

3.12   Precedent and Prior Case Law

3.16   Commercial Certainty

3.19   Illegality and the Use of Interpretation to Avoid it

1.       Subsequent conduct considerations

[150]                              Subsequent conduct evidence is only admissible where it is first determined there is ambiguity in the contract. Assuming ambiguity, Atwater’s position is that I should give weight to the subsequent conduct, i.e. the fact that BMO accepted the payment of additional premiums and their investment in Side Accounts until October 2016 when they returned what BMO then treated as payments which were not properly viewed as permissible premiums.

[151]                              In Shewchuk v Blackmont Capital Inc., 2016 ONCA 912, 404 DLR (4th) 512, the Ontario Court of Appeal held as follows:

[41]   In my view, subsequent conduct must be distinguished from the factual matrix. In Sattva, the Supreme Court stated at para. 58 that the factual matrix “consist[s] only of objective evidence of the background facts at the time of the execution of the contract, that is, knowledge that was or reasonably ought to have been within the knowledge of both parties at or before the date of contracting” (citation omitted and emphasis added). Thus, the scope of the factual matrix is temporally limited to evidence of facts known to the the contracting parties contemporaneously with the execution of the contract. It follows that subsequent conduct, or evidence of the behaviour of the parties after the execution of the contract, is not part of the factual matrix: see Eco-Zone Engineering Ltd. v. Grand Falls – Windsor (Town), 2000 NFCA 21, 5 C.L.R. (3d) 55, at para. 11; and King v. Operating Engineers Training Institute of Manitoba, 2011 MBCA 80, 270 Man. R. (2d) 63, at para. 72.

[42]   There is an additional reason to distinguish subsequent conduct from the factual matrix – a reason rooted in the reliability of the evidence. In Sattva, the Supreme Court stated at para. 60 that consideration of the factual matrix enhances the finality and certainty of contractual interpretation. It sheds light on the meaning of a contract’s written language by illuminating the facts known to the parties at the date of contracting. By contrast, as I will explain, evidence of subsequent conduct has greater potential to undermine certainty in contractual interpretation and override the meaning of a contract’s written language.

[43]   There are some dangers associated with reliance on evidence of subsequent conduct. One danger, recognized in England where such evidence is inadmissible, is that the parties’ behaviour in performing their contract may change over time. Using their subsequent conduct as evidence of their intentions at the time of execution could permit the interpretation of the contract to fluctuate over time. Thus, in James Miller & Partners Ltd. v. Whitworth Street Estates (Manchester Ltd.), [1970] A.C. 583 (H.L.), Lord Reid observed, at p. 603:

I must say that I had thought that it is now well settled that it is not legitimate to use as an aid in the construction of the contract anything which the parties said or did after it was made. Otherwise one might have the result that a contract meant one thing the day it was signed, but by reasons of subsequent events meant something different a month or a year later.

Indeed, in F.L. Schuler A.G. v. Wickman Machine Tool Sales Ltd., [1974] A.C. 235 (H.L.), at p. 261, Lord Wilberforce described reliance on subsequent conduct as “nothing but the refuge of the desperate.”

[44]   Another danger is that evidence of subsequent conduct may itself be ambiguous. For example, as this court observed in Canada Square Corp. v. Versafood Services Ltd. (1981), 1981 CanLII 1893 (ON CA), 34 O.R. (2d) 250 (C.A.), at p. 261 quoting from the writing of Professor Stephen Waddams, “the fact that a party does not enforce his strict legal rights does not mean that he never had them.” As a consequence of the potential ambiguity inherent in subsequent conduct, “some courts have gone so far as to assert that evidence of subsequent conduct will carry little weight unless it is unequivocal”: see Geoff R. Hall, Canadian Contractual Interpretation Law, 3d ed. (Toronto: LexisNexis, 2016), at p. 105.

[152]                              I am of the opinion that this evidence should be given no weight. The interpretive exercise is to determine the intention of the parties at the time the contract was entered into. Had the disputed additional premium payments been made by the original insured and accepted by the insurer, that might be some evidence of what the parties intended at the time the contract was entered into. In the present circumstances, it is my opinion that the proffered evidence of subsequent conduct in no way informs me as to what the intention of the parties was at the time they entered into the contracts.

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

[153]                              Atwater places great reliance on the principle that parties are presumed to intend the legal consequences of their words, pointing to the sentence, “You may make additional premium payments at any time while this policy is in force”, found under the heading Payment of Premiums. Their reliance and argument depend on their related position that the word “premiums” is an undefined term, that everything paid to the insurer is a premium and, thus, the quoted sentence permits them to make additional payments at any time.

[154]                              Their reliance on the argument that premiums includes everything paid to the insurer is offset by the principle that, when interpreting a contract, a court may use dictionaries to assist in determining the meaning of disputed words. Here, the meaning of “premiums” is disputed. As Hall states at page 112, a dictionary definition of a disputed word will usually be adopted unless the overall context of the contract demonstrates that the parties have adopted their “own dictionary” to ascribe a contract‑specific meaning to a word or phrase.

[155]                              Dictionary definitions of “premium” consistently define premium as an amount paid for a contract of insurance. See paragraph 136 above and other dictionaries generally. Alternative meanings given in relation to signifying superiority, more expensive or something given as a reward or incentive clearly have no applicability. Thus, the dictionary definition of “premium”, when applied to the word and associated phrases in this contract, is most consistent with an insurance intention of the contracting parties and so weighs in the balance.

3.       Precedent and prior case law

[156]                              The only Canadian decisions relating to a universal life insurance policy that counsel cited or that I have been able to identify are Fehr v Sun Life Assurance Company of Canada, 2018 ONCA 718, 84 CCLI (5th) 124 [Fehr], and Kang v Sun Life Assurance Company of Canada, 2013 ONCA 118, 19 CCLI (5th) 171 [Kang], and the trial level decisions that preceded them. The Kang decision is not instructive to any measure.

[157]                              The Fehr case related to a proposed $2.5 billion class action concerning more than 230,000 life insurance policies sold by Metropolitan Life Insurance Company of Canada between 1985 and 1998 and allegations of misrepresentation in the sale of the policies and breach of contractual and other duties relating to premiums and fees charged to the policyholders. There is nothing in the reported decisions that provides any indication as to whether these policies had Side Accounts similar to those in the subject policies or the contractual language relied upon by Atwater in this action.

[158]                              The decision of the Court of Appeal does contain a discussion of the nature or characteristics of the universal life insurance policies there in question. In that respect, the reasons for judgment state the following:

[19]      This action involves four variations of “universal life” insurance policies sold by MetLife in Canada. The four policies had different features, catering to different consumer preferences.

[20]      A traditional “whole life” insurance policy charges fixed premiums to fund a death benefit and an investment account. A universal life policy offers more choice and flexibility to the insured. Like a whole life policy, it has a cash accumulation feature. But it permits the insured to pay premiums in variable amounts on a flexible schedule, to take advantage of different investment options for surplus funds and to vary the death benefit. Premiums paid by the insured are paid into an “accumulation fund”. Cash in the accumulation fund is paid out from time to time to cover: the cost of the insurance (“COI”), that is the cost of insuring the death benefit; the costs of administration; and the acquisition of investments. Income on the investments is added to the policyholder’s accumulation fund.

[21]      Thus, in addition to providing life insurance, the policy serves as an investment vehicle. It has tax advantages, because income in the investment fund accrues on a tax-deferred basis. The policy’s cash value may enable the policyholder to borrow money from the policy. Alternatively, surplus funds can be used to pay future premiums from time to time (a so-called “premium holiday”) or for the remaining life of the policy (sometimes referred to as a “vanishing premium”).

[22]      But universal life insurance is not without risks. Because premiums are not fixed, poor investment returns, due to low interest rates or market declines, can cause premiums to increase and reduce the value of the accumulation fund. If the accumulation fund is depleted, the insured will have to pay increased premiums or see the entire policy lapse.

[23]      It is unnecessary to provide a detailed description of the terms of the various policies in order to address most of the issues on this appeal. I will discuss some of the pertinent provisions of the policies when I examine the motions judge’s analysis of the common issues.

[24]      These policies were fairly complex financial instruments. The manner in which they operated was not obvious from the policy language. It is not surprising, therefore, that MetLife’s sales agents frequently used standard sales pitches and illustrations to demonstrate the operation of the policies to their clients.

[25]      Many of these policies were sold during times of high interest rates. Most projections given to prospective policyholders were based on those rates continuing. Everything was rosy when interest rates were high. Premiums were low, accumulation funds grew, and policyholders were happy. But when interest rates began to fall in the mid-1990s and into the 2000s, MetLife’s profits also fell. As did the income on policyholders’ accumulation funds. Correspondingly, premiums and administration costs charged by MetLife and its successors went up. Some of these increased charges were paid out of policyholders’ accumulation funds.

…

[64]      I have noted that the policies are relatively complex financial instruments. They are also relatively complex contracts. The language is technical and legalistic, and important terms are undefined. For example, there is no definition of “minimum premium” or “maximum premium”. The actual meaning of those terms is a matter of controversy. According to Sun Life, “minimum premium” does not mean the lowest premium that a policyholder is required to pay in order to keep the policy in good standing. And “maximum premium” does not mean the highest premium that can ever be charged to a policyholder. Some technical terms, such as “non-rated classification”, are undefined. Other terms, such as “premium”, “monthly cost of insurance” and “monthly insurance charge”, are confusing. Key provisions, such as the manner in which Sun Life could adjust the COI from time to time, are opaque.

[65]      The motions judge himself required extensive additional evidence, including expert evidence, before he could determine whether Sun Life had breached the policy by adjusting the COI based on factors not enumerated in the policy. He was unable to do so by simply interpreting the policy and comparing it to what Sun Life claimed it was entitled to do. This was a key breach of contract issue, to which I now turn.

[159]                              These reasons demonstrated that complexity appears to be endemic to universal life insurance policies and that, in addition to providing life insurance, universal life insurance policies serve as investment vehicles with tax advantages. There is nothing in the Fehr decision which provides precedential guidance that assists me in the interpretation of the subject policies on the issue of whether the policies were intended to provide investment options beyond the tax‑advantaged investment options within the exempt policy criteria of the Income Tax Act.

[160]                              In the trial level decision of Perell J. (Fehr v Sun Life Assurance Co. of Canada, 2015 ONSC 6931, 56 CCLI (5th) 15), he said the following at paragraph 91:

[91]      Under a universal life insurance policy, the premiums pay for: (a) insurance (a death benefit), for which there are COI [Cost of Insurance] and Administrative Fees; and (b) an investment that earns income. Under a universal life policy, the insured’s premiums are paid into an account that is called an Accumulation Fund. The money in the Fund is used to pay the COI and an Administrative Fee and to purchase the investment. The earnings form the investment are added to the Accumulation Fund.

Perell J.’s statement that the earnings form the investment and are added to the Accumulation Fund provides no guidance to me. His decision did not address the specific issues before me. Nonetheless, there is nothing in his interpretation of the universal life insurance policy before him that suggested it included investment options beyond those permitted under the exempt criteria.

4.       Commercial certainty

[161]                              I will address the commercial certainty element in my discussion below of the specific principles applicable to insurance policies, because the commercial certainty element is best dealt with in conjunction with certain of those specific principles.

5.       Illegality and the use of interpretation to avoid it

[162]                              BMO argues that to interpret the contract as Atwater proposes would make the contracts illegal because in Canada only banks are entitled to take “deposits” and insurance companies are prohibited by s. 467 of the Insurance Companies Act, SC 1991, c 47, from taking deposits. The insurer argues that Atwater’s proposed use of the Side Accounts constitutes, in essence, using the Side Account as a deposit account.

[163]                              Section 467 reads as follows:

467. Except as otherwise permitted by this Act, a company shall not accept deposits.

[164]                              There is significant debate about whether, in fact, Atwater’s proposed use of the Side Accounts would result in BMO breaching s. 467 of the Insurance Companies Act. “Deposit” is an undefined word in the Insurance Companies Act. In Saskatchewan Co-operative Credit Society Ltd. v Canada, 1990 CanLII 13042 (FC), [1990] 2 FC 115 (Fed Ct), the Court stated:

[25]   It became obvious, during the course of this hearing, that a precise definition of the word deposit is a difficult, if not impossible task. To properly define the term in the context of banking business, it is necessary to consider the contractual nature of the banking relationship, which has been characterized in the jurisprudence as one of debtor and creditor. In R. v. Davenport, [1954] 1 W.L.R. 569 (C.A.) at p. 571, Lord Goddard C.J. described the relationship in the following terms:

But although one talks about people having money in a bank, it should be understood that the only person who has money in a bank is a banker. If I pay money into my bank either by paying cash or a cheque, that money at once becomes the money of the banker. The relationship between banker and customer is that of debtor and creditor. He does not hold my money as an agent or trustee; the leading case of Foley v. Hill [(1848) 2 H.L. Cas. 28] exploded that idea. Directly the money is paid into the bank it becomes the banker’s money, and the contract between the banker and the customer is that the banker receives a loan of money from the customer against his promise to honour the customer’s cheques on demand. When the banker is paying out, whether he pays in cash over the counter or whether he is crediting the bank account of somebody else, he is paying out his own money, not the customer’s money; he is debiting the customer’s account. The customer has a chose in action, that is to say, a right to expect that the banker will honour his cheque. Therefore, in the present case, the money paid on these cheques was the banker’s money, but it led to the customer’s account being debited.

[26]   As I see it, a deposit is a contract by which a customer lends money to a bank. The terms of the loan may vary as agreed upon by the banker and the customer. In the absence of such expressly agreed upon terms, the common law dictates that what is intended is a loan that is repayable on demand.

[27]   The meaning of the word continues to multiply as one turns from the common law to consider its meaning in statutes of general application. As the plaintiff suggests, it is given a very broad meaning in the Canada Deposit Insurance Corporation Act [RSC 1985, c C‑3] and the Financial Institutions Depositors Compensation Act [SC 1985, c 51]. It includes all moneys received by an institution in the usual course of business, that it is obligated to repay either on demand or in accordance with the provisions of any receipt of payment instrument issued by it in exchange for the money received.

[165]                              Given:

(a)      the uncertainty as to the meaning of “deposits”; and

(b)      the principle that 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, as stated in Co‑operators Life Insurance Co. v Gibbens, 2009 SCC 59 at para 21, [2009] 3 SCR 605, “not as they might be perceived by persons versed in the niceties of insurance law”;

it is difficult to see that the illegality argument advances the interpretation BMO proposes.

[166]                              Sections 16 and 1030 of the Insurance Companies Act specifically provide that a violation of the Act does not invalidate a contract. Those sections read as follows:

16        No act of a company or society, including any transfer of property to or by a company or society, is invalid by reason only that the act or transfer is contrary to the company’s or society’s incorporating instrument or this Act.

…

1030   Unless otherwise expressly provided in this Act, a contravention of any provision of this Act or the regulations does not invalidate any contract entered into in contravention of the provision.

[167]                              Assuming that what Atwater seeks to do would constitute BMO accepting deposits contrary to s. 467 of the Insurance Companies Act, that contravention would not make the contracts illegal. Section 1030 of the Act makes it clear that contracts remain enforceable even if in contravention of the Act. Having said that, the fact that the Act prohibits taking deposits is part of the legislative and regulatory context surrounding the contract and is a contextual factor I can consider in my Stage 2 analysis. While not determinative, this legislative context weighs on the side of interpreting the contract as not giving premiums an extended meaning.

The Special Principles for Interpretation of Insurance Policies

[168]                              The principles specifically applicable to the interpretation of insurance contracts are expanded on by Hall in his sections 8.7.2 to 8.7.10 (pages 244 to 255). At page 243, Hall stated the following:

      It is not contradictory to say that the ordinary rules of contractual interpretation apply to insurance contracts but there are also eight special principles, because all eight of the special principles are modified versions of the general principles adapted for the insurance context. The dual character of the eight special principles – an application of general principles applicable to all contracts, but tailored to the insurance context – is instructive in several ways.

[169]                              I left the element of commercial certainty to this discussion. The commercial certainty element of the principles of general contract construction is subsumed within the principles 4, 6, 7 and 8 of Hall’s special principles which state as follows:

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

…

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).

[170]                              I have concluded that the ambiguity I here assume is resolved by consideration and application of the principles 4, 6 and 7 and, with minor input, by special principle 8. Being so resolved, I do not need to turn to the principle of last resort which is the application of contra proferentem.

[171]                              As stated by Hall at page 245:

      Thus an insurance contract is to be interpreted in a manner which harmonizes its various provisions without straining them. As such, the interpretive process should begin with an effort to construe an insurance policy in a commercially reasonable fashion which harmonizes all of its different parts, before resort can be had to other principles of interpretation like the contra proferentem rule.

[172]                              The objective is to construe the contracts in a commercially reasonable fashion which harmonizes all of their different parts. At Stage 1, I was engaged in a focused textual analysis, informed only by the limited context of the relationship of the parties, the market and the purpose. Within Stage 2, my interpretation is to be informed by the concept of commercial reasonableness – a factor that would have informed the ordinary insureds understanding in a more limited manner than the extent to which an interpreting judge needs to be informed at Stage 2 interpretation.

[173]                              The principle that the court should limit the construction of an insurance contract in favour of the insured by reasonableness (Principle 4 above) is a specific application of the general precept of the commercial efficacy or reasonableness which directs that commercial contracts are to be interpreted in accordance with sound commercial principles and good business sense. The commercial efficacy precept could not be applied with its full scope in Stage 1 interpretation because the exercise there was asking how the ordinary insured would have understood the text of the contract. If the meaning was clear, then short of an interpretation resulting in a commercial absurdity, the clear language of the contract should be given effect to.

[174]                              The principle that it is desirable, at least where the policy is ambiguous, to give effect to the reasonable expectation of the parties (Principle 6 above) asks, “Would it have been a reasonable expectation of an ordinary insured, upon entering into such policies in 2002, that there was available to him or her under the policy not only life insurance and tax‑exempt investment growth within Canada Revenue Agency’s exempt policy criteria, but also the opportunity to invest unlimited amounts into Side Account investments wherein the growth would be taxable?”

[175]                              In Scott v Wawanesa Mutual Insurance Co., 1989 CanLII 105 (SCC), [1989] 1 SCR 1445, La Forest J., dissenting, stated the following at pages 1454‑55:

      … [I]n construing an insurance policy, the courts must be guided by the reasonable expectation and purpose of an ordinary person in entering such contract, and the language employed in the policy is to be given its ordinary meaning, such as the average policy holder of ordinary intelligence, as well as the insurer, would attach to it ….

[176]                              I am of the opinion that it would not then or since have been a reasonable expectation of an ordinary insured that this form of universal life insurance policy was intended to or capable of being used as a platform for unlimited stand‑alone investments in the Side Account options. That the policies had a dominant purpose of providing both life insurance and tax‑exempt growth within the limits and criteria established by the Income Tax Act is obvious. I can see no basis in context, language, logic, considerations of sound commercial principles and good business sense or reasonable expectations to conclude that insured persons contracting for these policies would expect there to be a secondary purpose of stand‑alone investment options. They were contracting for life insurance, with the dominant purpose of obtaining life insurance and tax exempt savings added to the death benefit. It is speculation to suggest that a reasonable expectation of an ordinary insured was that a universal life insurance policy also provided stand‑alone investment options.

 

[177]                              I must infer what the reasonable expectation of the ordinary insured would be

[178]                              In the some thirty years since universal life insurance policies have been sold, there is no judicial record of these policies being used in the manner proposed by Atwater (and, indeed, for a short period of time so used by Atwater). For reasons that I will be outlining in a subsequent section of this decision, I have concluded the bulk of the affidavit evidence filed by BMO is not relevant or admissible in these proceedings. However, I do find the evidence that there has been no other instance of insured parties attempting to so use their universal life insurance policies to be relevant and admissible evidence on the issue of the reasonable expectations of an insured.[178]   

[180]                              It is my opinion that no insured should reasonably conclude that the interpretation proposed by Atwater is consistent with the general economic purpose of life insurance. The economic purpose of life insurance is to insure lives and, to the extent permitted by taxing authorities, permit savings to be made that will generate additional funds, payable on death, to supplement the life insurance purchased.

[181]                              Unrestricted investment with the ability to make deposits to and withdrawals from the investment on an ongoing basis is not a use consistent with the general economic purpose of life insurance. To the extent that investments are permitted and made within life insurance policies, such investments are to provide funds, in addition to the insured amount, payable to the insured on the death of the person whose life is insured.