Simon's Megalomaniacal Legal Resources

Contracts - Liability Allocation

It is common to contractually allocate or disclaim any liability that arises in the course of the activities of the contract, or for one party to require an indemnification of liability from third parties by the other. As well, sometimes the contract requires that one party take out insurance against risk, payable to one party or the other.

. James Dick Construction Limited v. Courtice Auto Wreckers Limited

In James Dick Construction Limited v. Courtice Auto Wreckers Limited (Ont CA, 2024) the Ontario Court of Appeal dismissed an appeal, here from a trial dismissal of a fire damage action by the LL plaintiff involving both the landlord's and the tenant's duties to insure.

Here court addresses contractual (lease) interpretation issues regarding the duty to insure and resultant party liability:

(1) Standard of Review

[23] At issue in this appeal is whether the trial judge adopted the correct legal test to interpret the landlord JDC’s covenant to insure the leased buildings. Additionally, the covenant to insure is drafted using language that is standard form in commercial tenancy agreements. Accordingly, the review of the trial judge’s interpretation of the clause comes within the Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, [2014] 2 S.C.R. 633, exception, making that issue reviewable on a standard of correctness: Royal Host GP Inc. v. 1842259 Ontario Ltd., 2018 ONCA 467, 422 D.L.R. (4th) 661, at paras. 12-13, leave to appeal refused, [2018] S.C.C.A. No. 316. If the trial judge adopted the correct test, then her application of it to these facts is a question of mixed fact and law that is reviewed using the standard of palpable and overriding error: Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co., 2016 SCC 37, [2016] 2 S.C.R. 23, at para. 21.

(2) Interpreting the contract - the covenant to insure

[24] Contractual interpretation is a matter of ascertaining the rights and obligations the parties agreed to undertake. In understanding what parties intended when including a covenant to insure in a lease agreement, as with any contractual covenant, “it is necessary to discern the intentions of the parties in accordance with the language they have agreed to in the contract”: Royal Host, at para. 16; Sanofi Pasteur Limited v. UPS SCS, Inc., 2015 ONCA 88, 124 O.R. (3d) 81, at para. 48, leave to appeal refused, [2015] S.C.C.A. No. 152.

[25] Reflecting on more than 50 years of jurisprudence interpreting covenants to insure, this court noted in Capital Sewer Servicing Inc. v. Crosslinx Transit Solutions Constructors, 2022 ONCA 10, 30 C.L.R. (5th) 249, at para. 26, that “[i]n many, if not most circumstances, a promise to insure against a certain risk will lead to the logical conclusion that the party undertaking to insure against the risk had agreed to be responsible for any damages should the risk ensue.” But “that inference can only properly be drawn after a reading of the contract as a whole in the factual context of the particular circumstances”: Crosslinx, at para. 26. This court repeated the holding from Royal Host, that “there is no legal rule that a party’s covenant to insure against a risk must mean it was intended that the party undertaking to insure assumed the risk of the harm insured against”: Crosslinx, at para. 26, citing Royal Host, at para. 16.

[26] In this case, alongside a survey of the relevant Supreme Court jurisprudence interpreting the effect of covenants to insure, the trial judge quoted a passage from Madison Developments, at p. 84, that stated in part that “[a] contractual undertaking by the one party to secure property insurance operates in effect as an assumption by that party of the risk of loss or damage caused by the peril to be insured against.” Drawing from this passage, the trial judge concluded that: “[w]hile the presence of a covenant to insure is not an absolute bar to claims by the covenantor against the covenantee, the covenant does have presumptive effect unless the covenantor is able to establish something specific that displaces it.”

[27] The focal point of the appellants’ argument is that Crosslinx, which had not been decided at the time of trial, constitutes a change in the law respecting the meaning of covenants to insure, a change which has flowed from more general developments in the law of contractual interpretation from cases such as Sattva. The appellants argue that the trial judge erred by treating the existence of the covenant to insure like a ‘decoder ring’ that translates that obligation directly to an obligation to assume the risk of the peril insured against, without any further consideration of what the other textual provisions of the agreement or contextual circumstances may have to say about the matter.

[28] The appellants argue that the trial judge, in effect, stopped reasoning once she read the covenant to insure, and then placed an onus on the landlord to disprove that the intention of the parties was that the landlord carry the risk of loss by fire. What the trial judge ought to have done, the appellants argue, is read the agreement as a whole – relating all of the relevant clauses to each other – along with the surrounding circumstances, and only then come to a conclusion about how the parties agreed to allocate risk.

[29] I do not agree that the trial judge made the error complained of. The trial judge framed the analysis of the “the effect of the covenant to insure” as “ultimately a matter of contractual interpretation that will be sensitive to the particular language of the agreement and the surrounding circumstances.” The appellants agree with this statement of the law. The trial judge continued: “[i]n general, a covenant to insure will represent an intention by the parties to allocate the risk of the peril insured against to the covenantor.” Again, this is unobjectionable. It describes what parties to this type of contract usually intend to accomplish when they use this type of clause. Finally, the trial judge noted that “[i]t is recognized that this is a presumption that may be rebutted by evidence of some other intention”, a statement drawing on Deslaurier Custom Cabinets Inc. v. 1728106 Ontario Inc., 2016 ONCA 246, 130 O.R. (3d) 418, and stated:

While the presence of a covenant to insure is not an absolute bar to claims by the covenantor against the covenantee, the covenant does have presumptive effect unless the covenantor is able to establish something specific that displaces it.

[30] There is reason to avoid the language of presumption used by the trial judge; although this language has been used by this court in several decisions, including Deslaurier, it carries a connotation of an exclusionary rule that is not intended. But what is genuinely at issue in this appeal is not the terminology used in the case law but the reasoning process of the trial judge. When one attends to the 12 paragraphs the trial judge devotes to the interpretation of the clause in the context of the agreement as a whole, it is abundantly clear that the trial judge was not approaching the interpretation of the contract as though she were applying an exclusionary rule. She was attentive to the text of the clause, the broader text of the contract as a whole, and the factual context in which the agreement was made. Her focus throughout was on ascertaining what agreement the parties actually reached. To be sure, she treated the covenant to insure as a significant datum in ascertaining how the parties had allocated risk between themselves, which it was. She did not, however, treat it as determinative in isolation from the rest of the contract and therefore did not apply an incorrect principle.

[31] Any substantive difference between what the trial judge – following Cronk J.A. in Deslaurier – refers to as a presumptive interpretation, and what Doherty J.A. refers to in Crosslinx as “the logical conclusion” of the choice to include a covenant to insure would have to be exceedingly subtle. Neither embrace what Crosslinx was at pains to reject: that there is a rule of law that a covenant to insure indefeasibly allocates risk.

[32] The live issue, then, is not so much that the trial judge made an extricable error of law, which she did not, but whether she made an error in how she applied the law to the facts. That question is assessed using the standard of palpable and overriding error.

[33] The appellants argue that the trial judge erred in concluding that the landlord JDC agreed to bear the risk of loss of fire given that: the respondent tenant CAW had an obligation to heat the premises; CAW undertook to maintain the fire suppression system; CAW did not notify JDC that it was shutting off the fire suppression system; JDC covenanted to pay for the maintenance of the fire suppression system; and the parties agreed to indemnify each other from third party suits.

[34] Some of these submissions – such as that the tenant CAW undertook to maintain the fire suppression system – contradict findings of the trial judge that are supported in the record. Others relate to provisions of the contract that the trial judge canvassed and that she concluded did not displace the inference that the agreement allocated risk of fire to the landlord JDC. It is not the role of this court on a question of mixed fact and law to redo factual findings and findings applying the facts to the law. I would reject the submission that the trial judge made a reviewable error in her interpretation of the agreement.

. Ferraro v. Neilas

In Ferraro v. Neilas (Ont CA, 2023) the Court of Appeal considers a clause whereby parties purport to allocate liability risk:

[52] The “Relationship” clause is a limitation of liability clause. As such, its meaning and effect fall to be determined in accordance with the analytical approach summarized in Tercon Contractors Ltd. v. British Columbia (Transportation and Highways), 2010 SCC 4, [2010] 1 S.C.R. 69, at paras. 62 and 122-123. The Tercon analysis requires a court to consider first whether, as a matter of interpretation, the exclusion clause even applies to the circumstances established in evidence. This will depend on the Court’s assessment of the intention of the parties as expressed in the contract: at para. 122. When interpreting whether an exclusion clause applies in the circumstances, the key principle of contractual interpretation is that 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: at para. 64.

. 10443204 Canada Inc. v. 2701835 Ontario Inc.

In 10443204 Canada Inc. v. 2701835 Ontario Inc. (Ont CA, 2022) the Court of Appeal considered the effect of fraud on a contractual provision that would otherwise limit liability for misrepresentation (a 'disclaimer clause'):

(2) The Effect of Disclaimer Clauses

[21] A clause in a contract that purports to limit remedies arising from a misrepresentation does not immunize the maker of a fraudulent misrepresentation from the remedies available to the innocent party: Fea Investments, at paras. 49-54.

[22] In Hasham v. Kingston (1991), 1991 CanLII 7236 (ON SC), 4 O.R. (3d) 514 (Div. Ct.), the clause in issue excluded liability for all representations outside the terms of the contract. The Divisional Court found that the clause could not apply to a misrepresentation that was found to be fraudulent: at p. 524.

[23] The reasoning in Hasham was applied by this court in Fea Investments to conclude that a clause in a contract that limited remedies for misrepresentation did not apply to fraudulent misrepresentations: at paras. 52-54.

. Chuang v. Fogler Rubinoff LLP

In Chuang v. Fogler Rubinoff LLP (Ont CA, 2022) the Court of Appeal considered a leading case in contractual liability allocation:

[10] To understand the dispute in the underlying litigation, it is necessary to consider the leading case on the enforcement of exclusion clauses – Tercon Contractors Ltd. v. British Columbia (Transportation and Highways), 2010 SCC 4, [2010] 1 S.C.R. 69. Writing for the Court on this issue (but in dissent in the result), Binnie J. at paras. 122-123 set out the framework for determining when exclusion clauses are enforceable. It involves the following three lines of inquiry: (a) does the exclusion clause apply on the facts as found?; (b) if it applies, was the clause unconscionable at the time the parties entered into the agreement?; and (c) if the exclusion clause applies and it was not unconscionable, should the court for public policy reasons which are sufficiently strong to outweigh the public interest in the enforcement of contracts, decline to enforce the contract?

. Capital Sewer Servicing Inc. v. Crosslinx Transit Solutions Constructors

In Capital Sewer Servicing Inc. v. Crosslinx Transit Solutions Constructors (Ont CA, 2021) the Court of Appeal, in a large public venture involving several contractors, considered the duty of those contractors who insure against risk (and those who don't) and the ultimate allocation of risk between them:

[25] Relying on a line of authority from the Supreme Court of Canada and this court, Capital argues that a covenant to insure against a certain peril constitutes an assumption of the risk of harm or damage caused by that peril. As Crosslinx undertook to provide the requisite insurance, it assumed responsibility for any damages caused when the harm insured against occurred: see Agnew-Surpass v. Cummer-Yonge, 1975 CanLII 26 (SCC), [1976] 2 S.C.R. 221, at pp. 251-2; T. Eaton Co. v. Smith et al., 1977 CanLII 39 (SCC), [1978] 2 S.C.R. 749, at p. 755; Ross Southward Tire v. Pyrotech Products, 1975 CanLII 25 (SCC), [1976] 2 S.C.R. 35, at p. 39; Madison Developments Ltd. v. Plan Electric Co. (1997), 1997 CanLII 1277 (ON CA), 36 O.R. (3d) 80 (C.A.), at para. 9, leave to appeal refused, [1997] S.C.C.A. No. 659.

[26] In many, if not most circumstances, a promise to insure against a certain risk will lead to the logical conclusion that the party undertaking to insure against the risk had agreed to be responsible for any damages should the risk ensue. That conclusion does not however reflect a free-standing legal principal of contractual interpretation but is an example of how the contractual intention of the parties is determined through an objective consideration of all of the circumstances. An undertaking to insure leads to the reasonable inference that the parties intended that the party promising to insure would undertake the risk to be insured against. However, that inference can only properly be drawn after a reading of the contract as a whole in the factual context of the particular circumstances. The language of the contract and the context control the interpretation of the contract, including any insurance covenant in the contract. There is no legal rule that a party’s covenant to insure against a risk must mean it was intended that the party undertaking to insure assumed the risk of the harm insured against: Royal Host G.P. Inc. v. 1842259 Ontario Ltd., 2018 ONCA 467, 422 D.L.R. (4th) 661, at para. 16, leave to appeal refused, [2018] S.C.C.A. No. 316.

[27] The correct approach to the interpretation of insurance covenants is captured by G.R. Hall in Canadian Contractual Interpretation Law, 4th ed. (Markham, Ont.: LexisNexis, 2020), at pp. 340-41:

The interpretation of a covenant to insure as an allocation of risk is not a rule of law, meaning that if the contractual language indicates that the covenant is to insure, not to act as an allocation of risk precluding liability for the event subject to the covenant, the text will prevail and the covenant will not have that effect. Each contract containing a covenant to insure must be interpreted based upon its own wording. Decided cases can be helpful, when the wording considered is similar to that in the agreement in issue. However, differences in the wording between each case can be determinative.

[28] The application judge considered the same authorities the appellant put before this court. He correctly rejected the submission that the risk of loss associated with any peril must as a matter of law be on the party under an obligation to insure against that risk. The application judge, again correctly, held that the effect of the insurance covenant, like the effect of any term in a contract, depended on the objective intention of the parties determined by an examination of the contract as a whole and the consideration of individual terms within that broader context. The application judge correctly applied the applicable law.

. Deswal v. ADT LLC (ADT Security Services)

In Deswal v. ADT LLC (ADT Security Services) (Ont CA, 2021) the Court of Appeal considered a contractual liability limitation provision:

[12] We are not persuaded that the motion judge erred in her application of the three-part analysis set out in Tercon Contractors Ltd. v. British Columbia (Transportation and Highways)), 2010 SCC 4, [2010] 1 S.C.R. 69, to determine the enforceability of the limitation clause for the following reasons:

(i) The Agreement’s limitation of liability clause applied in the circumstances;

(ii) When the motion judge’s oral reasons are read as a whole, it is clear that she held the clause was not unconscionable. That finding was open to her on the evidence: the contractual limitations on liability were clearly set out in several provisions of the Agreement; they were not hidden or concealed in ways that would make it unfair to treat them as part of the contract; immediately above the signature line the contract contained language that the customer had read the entire agreement, including the limitation of liability clause; there was no pre-existing relationship between the appellants and ADT in which the appellants looked to the company for advice; the appellants are sophisticated and educated individuals; there was no evidence of duress or limits placed on the appellants’ time to review the Agreement at the time of its execution; and Ms. Deswal chose not to read the Agreement presented to her, notwithstanding the provision, in bold capital letters just above her signature line, acknowledging that she had “read both sides of this agreement and understands all terms and conditions of both this and the reverse side of this agreement, in particular, paragraph 1, Limited Warranty, and paragraph 7, Limit of Liability”; and

(iii) The motion judge held that public policy favoured upholding the contract on its terms, relying on decisions of this court in Fraser Jewellers and Suhaag Jewellers Ltd. v. Alarm Factory Inc. (AFC Advance Integration), 2016 ONCA 33, at para. 4, leave to appeal to S.C.C. refused, 36887 (June 23, 2016) the latter a post-Tercon decision. The motion judge adopted the public policy rationale supporting the limitation of liability clauses in alarm system service contracts set out by this court in Fraser Jewellers, at paras. 38 and 39, specifically that the service provider is not an insurer and its monitoring fee bears no relationship to the area of risk and the extent of exposure ordinarily taken into account in the determination of insurance policy premiums. We see no error in her so doing.

. Montrose Hammond & Co. v. CIBC World Markets Inc.

In Montrose Hammond & Co. v. CIBC World Markets Inc. (Ont CA, 2020) the Court of Appeal set out the test for interpreting exclusion of liability clauses in a contract:

[9] The trial judge’s interpretation of articles 5.1 and 6.1 was reasonably open to him and reveals no palpable and overriding error or extricable error of law. He referenced and followed the three-part analytical approach articulated by Binnie J. for the Supreme Court in Tercon Contractors Ltd. v. British Columbia (Transportation and Highways), 2010 SCC 4, [2010] 1 S.C.R. 69, at paras. 122, 123: whether the exclusion clause even applies to the circumstances; if it applies, whether the exclusion clause was unconscionable at the time the contract was made; and if valid, whether the exclusion clause should nevertheless not be enforced because of an overriding public policy.

[10] In Tercon, at para. 122, Binnie J. further stated, “If the exclusion clause does not apply, there is obviously no need to proceed further with this analysis.” That was the case here.

. Chuang v. Toyota Canada Inc.

In Chuang v. Toyota Canada Inc. (Ont CA, 2016) the Court of Appeal discussed the factors applicable to interpreting and enforcing a liability exclusion clause, being a contractual clause purporting to limit or exclude a party's liability on breach of the contract:

[24] Tercon Contractors Ltd. v. British Columbia (Minister of Transportation and Highways), 2010 SCC 4 (CanLII), [2010] 1 S.C.R. 69, is the leading Canadian authority on exclusion clauses. Binnie J., at paras. 122-23, speaking for the court on this issue, but in dissent in the result, described a three-step approach to the interpretation of exclusion clauses:

• Does the exclusion clause apply in the facts as found?

• If the clause applies, was the clause unconscionable at the time the parties entered into the agreement?

• If the exclusion clause applies and was not unconscionable, should the court for policy reasons which are sufficiently strong to outweigh the public interest in the enforcement of contracts, decline to enforce the contract?

.....

[26] The first step in the three-step Tercon inquiry engages the general principles of contractual interpretation: see Rankin Construction Inc. v. Ontario, 2014 ONCA 636 (CanLII), 325 O.A.C. 201, at paras. 57-60; 1465152 Ontario Limited v. Amexon Development Inc., 2015 ONCA 86 (CanLII), 330 O.A.C. 344, at paras. 11-18. Contractual interpretation usually raises questions of mixed fact and law. Absent a clearly identifiable error in law, an appellate court will defer to the trial court’s interpretation of the agreement and will only intervene in the case of palpable and overriding factual error or an unreasonable interpretation: see Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53 (CanLII), [2014] 2 S.C.R. 633, at paras. 49-52; Martenfeld v. Collins Barrow Toronto LLP, 2014 ONCA 625 (CanLII), 122 O.R. (3d) 568, at paras. 39-42; Iroquois Falls Power Corporation v. Ontario Electricity Financial Corporation, 2016 ONCA 271 (CanLII), at para. 93; 2123201 Ontario Inc. v. Israel Estate, 2016 ONCA 409 (CanLII), at para. 44; D’Antonio v. Monaco, 2015 ONCA 274 (CanLII), at para. 12.

. D.L.G. & Associates Ltd. v. Minto Properties Inc.

In D.L.G. & Associates Ltd. v. Minto Properties Inc. (Ont CA, 2015) the Court of Appeal considered whether a contractual duty on one party to a contract to obtain liability insurance (here a tenant) immunized the other party (the landlord) from claims that would have been covered by that insurance, where it was not obtained:

The covenant to insure

[16] D.L.G. in para. 7.1 of the lease undertook to obtain “all risks” insurance which specifically included insurance for “sewer back-up”. D.L.G. accepts that a claim in negligence against Minto for failure to properly maintain the plumbing is barred by the covenant to insure, but submits that it is not plain and obvious that the covenant also bars a claim based on Minto’s breach of its “quiet enjoyment” and “good repair” obligations under the lease.

[17] D.L.G. argues that a trial is necessary to properly interpret the covenant to insure in the context of the entire agreement. I do not accept this argument. The covenant to insure focuses on risk and the responsibility as between D.L.G. and Minto for losses covered should the identified risks materialise during the term of the agreement. The provision is not concerned with the legal characterization of claims for losses arising out of the materialization of the risks.

[18] D.L.G.’s submission runs aground on this court’s judgment in Madison Developments Ltd. v. Plan Electric Co. (1997), 1997 CanLII 1277 (ON CA), 36 O.R. (3d) 80 at para. 9. Carthy J.A., speaking of a situation in which the landlord had covenanted to insure against all risks said:

The law is now clear that in the landlord-tenant relationship, where the landlord covenants to obtain insurance against the damage to premises by fire, the landlord cannot sue the tenant for a loss by fire caused by the tenant’s negligence. A contractual undertaking by one party to secure property insurance operates in effect as an assumption by that party of the risk of loss or damage caused by the peril to be insured against. This is so notwithstanding a covenant by the tenant to repair which, without the landlord’s covenant to insure, would obligate the tenant to indemnify for such a loss. This is a matter of contractual law not insurance law, but of course, the insurer can be in no better position than the landlord on a subrogated claim. The rationale for this conclusion is that the covenant to insure is a contractual benefit accorded to the tenant, which, on its face, covers fire with or without negligence by any person. There would be no benefit to the tenant from the covenant if it did not apply to a fire caused by the tenant’s negligence. [Emphasis added.]

[19] The language from Madison applies here. A covenant to insure is one of several provisions within a lease which allocates risk as between the parties to the lease. The allocation of risk is presumably reflected in the rent to be paid. A covenant to insure would hardly serve the purpose of risk allocation if it were read as allocating the risk to the tenant if the landlord was negligent, but to the landlord if the same act amounted to a breach of a provision in the lease, e.g. the obligation to maintain and repair. As almost any act of negligence would also be a breach of the obligation to maintain and repair, the interpretation urged by the appellant would effectively put the risk on Minto despite D.L.G.’s obligation to obtain “all risks” insurance.

The enforceability of the covenant to insure

[20] D.L.G. submits that the covenant to insure is an exclusion clause and is unenforceable under the principles set down in Tercon. In my view, the covenant to insure cannot be read as a clause excluding Minto from liability it would otherwise carry but for the clause. Instead, the covenant to insure assigns risk for certain losses by requiring that the tenant, D.L.G., obtain insurance coverage for those losses: Smith v. T. Eaton Co., 1977 CanLII 39 (SCC), [1978] 2 S.C.R. 749 at 756, St. Lawrence Cement Inc. v. Wakeham & Sons Limited (1995), 1995 CanLII 2482 (ON CA), 26 O.R. (3d) 321 at paras. 37-39 (C.A.).

[21] As I am satisfied that the covenant to insure cannot be read as an exclusion clause, I need not address the enforceability of that clause. I would, however, observe that in the context of a negotiated lease between arms-length commercial entities I see little room for an argument that a covenant to insure, whether directed at the landlord or the tenant, could be viewed as unconscionable.

[22] Nothing in the pleadings alleges any inherent unfairness in placing the burden of obtaining “all risks” insurance on D.L.G. I reject the argument that the relationship between D.L.G. and Minto during the lease negotiations was one of unequal bargaining power because Minto had knowledge about the plumbing that D.L.G. did not have. Nothing in the pleadings suggests that D.L.G. could not have made the relevant inquiries and conducted the necessary inspections to obtain whatever information about the plumbing it deemed necessary. Although D.L.G.’s claim that it relied on fraudulent/negligent misrepresentations by Minto gives rise to tort claims against Minto, it does not provide the basis for the assertion that D.L.G. was in a position of unequal bargaining power during the lease negotiations: see also the reasons of the motion judge at paras. 85-89.