Colonial Furniture Company (Ottawa) Limited v. Saul Tanner Realty Limited et al.; C.A. Fitzsimmons Company Limited, Third Party

378096 Ontario Ltd., c.o.b. as Capital Bowling Lanes et al. v. Bond's Décor Limited et al.; C.A. Fitzsimmons Company Limited, Third Party [Indexed as: Colonial Furniture Co. (Ottawa) Ltd. v. Saul Tanner Realty Ltd.]

52 O.R. (3d) 539

[2001] O.J. No. 292

Docket No. C31571

Court of Appeal for Ontario

Carthy, Austin and Rosenberg JJ.A.

February 2, 2001

Insurance--Subrogation--Set-off not available in case of subrogation--Amounts owed by insured to creditor cannot be set off against amounts owed by creditor to insured--As result of subrogation claims sought to be set off do not exist in same right.

The plaintiff suffered losses in a fire. In an action for damages for negligence, the plaintiff obtained judgment against three defendants: B Ltd., T Ltd. and M Ltd. The defendants were found to be entitled to indemnity from each other. The defendants, who had themselves suffered damages in the fire, also obtained judgment against each other. As a result of the judgment, the defendants owed each other various amounts and sought to set off those amounts among each other. B Ltd. was fully indemnified by its own insurer for its own property losses. Thus, B Ltd.'s claim was a fully subrogated claim. B Ltd.'s third-party liability coverage was not, however, sufficient to cover the total liability of B Ltd. to the plaintiffs and to T Ltd. and M Ltd. T Ltd. brought a motion to determine its right to $58,000, which was part of a larger sum made available by M Ltd.'s liability insurer to pay M Ltd.'s share of the damages to the plaintiffs and the other defendants, and was the amount necessary to satisfy M Ltd.'s net obligations to B Ltd, whose insurer claimed that it was entitled to the $58,000 because of its right of subrogation. B Ltd. still owed a large amount to T Ltd. and T Ltd. sought to garnishee the $58,000 owing by M Ltd. to B Ltd. and thus reduce the amount owing by B Ltd. to T Ltd. The motions judge held in favour of the insurer. T Ltd. appealed.

Held, the appeal should be dismissed.

Amounts owed by an insured to a creditor cannot be set off against amounts owed by the creditor to the insured. As a result of subrogation, the claims sought to be set off do not exist in the same right. Once the insured has been fully compensated, the insured holds the judgment and any amounts received from the third party in trust for the insurer.

APPEAL from an order dismissing a motion by a judgment creditor to determine the creditor's right to a sum of money.

Lewenza v. Ruszczak (1959), 1959 CanLII 392 (ON CA), 22 D.L.R. (2d) 167, [1960] O.W.N. 40 (C.A.), folld Best Buy Carpets Ltd. v. 281856 B.C. Ltd. (1987), 1987 CanLII 9913 (BC SC), 28 C.C.L.I. 311, [1987] I.L.R. 1-2197 (B.C.S.C.); Holt v. Telford, 1987 CanLII 18 (SCC), [1987] 2 S.C.R. 193, 41 D.L.R. (4th) 385, 54 Alta. L.R. (2d) 193, [1987] 6 W.W.R. 385, 78 N.R. 321, 21 C.P.C. (2d) 1, 46 R.P.R. 234, 37 B.L.R. 241, consd Other cases referred to Castellain v. Preston (1883), 11 Q.B.D. 380, 52 L.J.Q.B. 366, 49 L.T. 29, 31 W.R. 577 (C.A.); Ledingham v. Ontario (Hospital Services Commission) (1974), 1974 CanLII 9 (SCC), [1975] 1 S.C.R. 332, 46 D.L.R. (3d) 699, 2 N.R. 32 (sub nom. Ledingham v. Ontario (Minister of Transport), Ledingham v. Di Natale); Lord Napier v. Hunter, [1993] A.C. 713, [1993] 1 All E.R. 385, [1993] 2 W.L.R. 42, [1993] 1 Lloyd's Rep. 197 (H.L.); Miller, Gibb & Co. (Re), [1957] 2 All E.R. 266, [1957] 1 W.L.R. 703, 101 Sol. Jo. 392, [1957] 1 Lloyd's Rep. 258 (Ch. D.); Morley v. Moore, [1936] 2 K.B. 359, [1936] 2 All E.R. 79, 105 L.J.K.B. 421, 154 L.T. 646, 52 T.L.R. 510, 80 Sol. Jo. 424, 55 Ll. L. Rep. 10 (C.A.); National Fire Insurance Co. v. McLaren (1886), 12 O.R. 682 (Ch.); Newfoundland v. Newfoundland Railway Co. (1888), 13 App. Cas. 199, 57 L.J.P.C. 35, 58 L.T. 285, 4 T.L.R. 292 (P.C.) (sub nom. Newfoundland (Attorney General) v. Newfoundland Railway Co.) Statutes referred to Insurance Act, R.S.O. 1950, c. 183, s. 204(2) Insurance Act, R.S.O. 1990, c. I.8, s. 152 Negligence Act, R.S.O. 1990, c. N.1 Authorities referred to Ivamy, E.R.H., General Principles of Insurance Law, 6th ed. (London: Butterworths, 1993) Palmer, K.R., The Law of Set-off in Canada (Aurora, Ont.: Canada Law Book, 1993)

Donald J. Ross, for appellant Multi-Maintenance Ltd. John C.F. Hunt, for respondent Bond's Decor Limited.

The judgment of the court was delivered by

1ROSENBERG J.A.:--This appeal turns on the interplay between an insurer's right of subrogation and a defendant's right of equitable set-off. The very issue involved in this case was determined in favour of the insurer by this court in Lewenza v. Ruszczak (1959), 1959 CanLII 392 (ON CA), 22 D.L.R. (2d) 167, [1960] O.W.N. 40. On a motion by a judgment creditor, Panet J. followed Lewenza and held in favour of the insurer that amounts the insured owed to the creditor could not be set off against amounts owed by the creditor to the insured. The creditor now appeals and argues that in light of subsequent decisions concerning equitable set-off, particularly the decision of the Supreme Court of Canada in Holt v. Telford, 1987 CanLII 18 (SCC), [1987] 2 S.C.R. 193, 41 D.L.R. (4th) 385, this court should overrule Lewenza. For the reasons that follow, I have not been persuaded that this court should depart from its earlier decision. Accordingly, I would dismiss the appeal.

The Facts

2The facts of this case are somewhat complex. Fortunately, because of the narrow legal issue involved, for the purpose of these reasons they can be distilled to the following. In 1987, a building owned by Saul Tanner Realty Limited caught fire. At the time of the fire, employees of the appellant Multi Maintenance Ltd. were working on the building's roof. The fire was probably caused by the act of an employee of Multi tossing a lit cigarette down a chimney. The respondent Bond's Decor Limited was a tenant of the building. As part of its business it spray-painted furniture. It is likely that the Multi employee's cigarette ignited over-spray residue from Bond's operation, which was vented through the chimney, and this led to the fire. Tenants of the building and adjoining buildings commenced actions for damages caused by the fire. They sued Tanner, Bond's and Multi. In addition, Bond's sued Tanner and Multi and Tanner counterclaimed against Bond's. Following a trial in 1995, Sedgewick J. found Bond's, Tanner and Multi liable in negligence for the damages suffered by the plaintiffs and the plaintiffs obtained judgment against Bond's, Tanner and Multi. He found each of them to be one-third at fault. Bond's, Tanner and Multi were held jointly and severally liable for the damages suffered by the plaintiffs. They were also entitled to indemnity as amongst them in equal proportions. Bond's, Tanner and Multi themselves suffered damages from the fire and each obtained judgment from the other two. The two were jointly and severally liable to the third and entitled to indemnity between them in equal proportions.

3Tanner and Multi appealed to this court. While this court did not disturb the findings of liability, it did adjust the degrees of fault. Bond's was held 70 per cent liable, Tanner 20 per cent and Multi 10 per cent. Bond's, Tanner and Multi remained jointly and severally liable, but the proportions of their entitlement to indemnity were adjusted accordingly.

4As a result of the trial judgment, as varied by the Court of Appeal, Bond's, Tanner and Multi owe each other various amounts. Not surprisingly, they seek to set off those amounts amongst each other. The problem presented by this appeal arises because Bond's was fully indemnified by its own insurer for its own property losses. Thus, Bond's claim was a fully subrogated claim. Bond's third-party liability coverage was not, however, sufficient to cover the total liability of Bond's to the plaintiffs and Tanner and Multi.

5The issue before the motions judge revolved around the sum of approximately $58,000. This is part of a larger sum made available by Multi's liability insurer to pay Multi's share of the damages to the plaintiffs and the other defendants, and is the amount necessary to satisfy Multi's net obligations to Bond's. (It was arrived at by setting off the amount that Bond's owed to Multi from the amount that Multi owed to Bond's.)

6Bond's insurer claims that it is entitled to the $58,000 because of its right of subrogation. However, Bond's still owes a large amount to Tanner and Tanner sought to garnishee the $58,000 owing by Multi to Bond's and thus reduce the amount owing by Bond's to Tanner. Tanner brought the motion before Panet J. to determine its right to this amount. As indicated, it was unsuccessful and accordingly appealed to this court. A further complication arising since the decision of the motions judge is that Multi, pursuant to its obligations as a joint tortfeasor under the Negligence Act, R.S.O. 1990, c. N.1, satisfied Bond's outstanding liability to Tanner and took an assignment of all of Tanner's rights against Bond's. Thus, the appellant is now Multi rather than Tanner. The issue is therefore whether Bond's insurer or Multi's liability insurer is entitled to the $58,069.10. Bond's former solicitors hold this amount in their trust account. The solicitors also hold the sum of $126,357.17 in their trust account, being an amount that Tanner owed Bond's. Both amounts are held pending the outcome of the appeal. However, as I understand it, the only amount dealt with by the motions judge is the amount owed by Multi to Bond's, which Tanner had sought to garnishee and to which Multi now claims it is entitled. Thus, it is only that amount that is directly in issue on this appeal.

The Issue

7The appellant submits that the issue to be determined depends upon principles of subrogation and set-off. Put simply, is Bond's subrogated insurer entitled to the sum due from Multi, or is Multi entitled to set off that amount against what Bond's owes it (formerly owed to Tanner)? The respondent does not necessarily accept this characterization of the issue. It submits that set-off is a defence that arises at the pleading stage and is not a remedy available after judgment when questions of contribution and indemnity under the Negligence Act are in issue. In view of my conclusion that set-off is not available to the appellant, even on the appellant's characterization of the issue, I have not found it necessary to consider this alternative argument by the respondent.

The Reasons of the Motions Judge

8The motions judge held that the amount owing by Multi to Bond's was encumbered by the subrogated claim by Bond's' insurers and thus could not be used to reduce the indebtedness of Bond's to Tanner (now Multi). The motions judge considered that he was bound by the Lewenza decision. In Lewenza, this court held that equitable set-off was not available because of lack of mutuality. I will make reference to Lewenza in greater detail below.

Analysis

The two principles: subrogation and indemnity

9The appellant submits that this case presents a conflict between two established principles. The first principle relates to the nature of subrogation. The appellant submits that where an insurer has paid the loss it is entitled to be placed in the position of the insured. It argues that the insurer not only acquires all the rights and remedies against a third party in respect of the subject-matter of the insurance but is also subject to any defence that the third party might raise. Thus, the third party should be entitled to set off a debt owed to the insured.

10The second principle relates to the nature of indemnity insurance and was described with great confidence by Brett L.J. in Castellain v. Preston (1883), 11 Q.B.D. 380 at p. 386, 52 L.J.Q.B. 366 (C.A.):

The very foundation, in my opinion, of every rule which has been applied to insurance law is this, namely, that the contract of insurance contained in a marine or fire policy is a contract of indemnity, and of indemnity only, and that this contract means that the assured, in case of a loss against which the policy has been made, shall be fully indemnified, but shall never be more than fully indemnified. That is the fundamental principle of insurance, and if ever a proposition is brought forward which is at variance with it, that is to say, which either will prevent the assured from obtaining a full indemnity, or which will give to the assured more than a full indemnity, that proposition must certainly be wrong.

(Emphasis added)

11Under this principle of full indemnity, but no more, there should be no set-off. Otherwise, Bond's has not only been fully indemnified by its own insurer but has been able to eliminate a debt by, in effect, using money that should have gone to the insurer.

The decision in Lewenza v. Ruszczak

12To succeed in this appeal, the appellant must persuade this court not to follow its decision in Lewenza v. Ruszczak. That case arose out of a motor vehicle collision. The plaintiff was successful in his claim and recovered judgment against the defendants for $145. The defendants were successful in their counterclaim and recovered judgment against the plaintiff for $50. The defendants subsequently moved to set off the amount owing to them on the counterclaim against the amount owing by them to the plaintiff on the claim. It would appear that, subject to a $100 deductible, the plaintiff's insurer was subrogated to his rights under the Insurance Act, R.S.O. 1950, c. 183, s. 204(2). Section 204 is now s. 152 of the Insurance Act, R.S.O. 1990, c. I.8. The wording has been slightly changed but not in any way material to this case.

13Speaking for the court, Schroeder J.A. held that there is a distinction between subrogation and assignment. In a case of subrogation, set-off was not available because while the judgment was in the name of the plaintiff, any amounts paid on the claim were for the benefit of the insurer. He reasoned, at pp. 168-69 D.L.R., as follows:

In the present case, although the judgment is nominally held by the plaintiff, it is quite manifest that it is encumbered by the insurer's claim secured to the insurer through the operation of s. 204 of the Insurance Act. The plaintiff therefore holds the debt in part for himself but also impressed with a charge in favour of the insurer. Set-off can only arise where the claims to be set off against each other exist in the same right and here that situation does not obtain, and the claim to set-off fails because of the want of mutuality between the two claims.

(Emphasis added)

14The appellant argues that this decision has now been overtaken by the decision of the Supreme Court of Canada in Holt v. Telford concerning equitable set-off. It also submits that the decision displays a mistaken view of the nature of subrogation. I will deal with each of these contentions in turn.

Holt v. Telford

15The appellant submits that as a result of Holt v. Telford, the strict view of mutuality in equitable set-off taken in Lewenza no longer applies. In my view, the decision in Holt v. Telford has limited application to this case. In Holt, Wilson J. reviewed the existing state of the law of equitable set-off and stated, at p. 206 S.C.R., that "There is no requirement of mutuality." The most important example of the application of equitable set off where there is no mutuality is when the plaintiff is pursuing the claims through an assignment. Holt was an assignment case. Wilson J. went on to hold that an individual may not only set-off against an assignee a money sum that accrued and became due prior to the notice of assignment, but also a sum that arose out of the same contract or series of events that gave rise to the assigned sum or was closely connected with that contract or series of events. However, permitting equitable set-off where there is no mutuality because of an assignment was not a new development in the law. Thus, Wilson J. relies upon an 1888 decision of the Privy Council (on appeal from the Supreme Court of Newfoundland), Newfoundland v. Newfoundland Railway Co. (1888), 13 App. Cas. 199, 57 L.J.P.C. 35, where equitable set-off was allowed in an assignment case. The question in Holt concerned whether the transactions were "closely connected", not lack of mutuality due to the assignment.

16I am not convinced that there is anything in Holt to cast doubt on the result in Lewenza, a subrogation case. However broad some of the statements in Holt, it would seem that, for example, set-off will not be allowed where a trustee in its personal capacity owes a debt to a third party and that third party in turn owes a debt to the trustee on behalf of the trust. In K.R. Palmer, The Law of Set-Off in Canada (Aurora, Ont.: Canada Law Book, 1993) at p. 226, the author states that set-off is denied in such cases "not because the same parties are not involved but because the debts are not owed in the same right". As I have pointed out, the Court of Appeal refused set- off in Lewenza because the claims "did not exist in the same right", and not simply because of a lack of mutuality. As the Lewenza court said, at p. 168 D.L.R., the plaintiff held the debt in part for himself "but also impressed with a charge in favour of the insurer". Thus, the result in Lewenza was driven not so much by the nature of equitable set-off, but by the nature of subrogation. There is authority, some of it binding on this court, for the view taken by the Court of Appeal as to the effect of subrogation. I will now turn to that aspect of the case.

Subrogation in insurance cases

17In this aspect of the case, the appellant relies upon the decision of Hogarth J. in Best Buy Carpets Ltd. v. 281856 B.C. Ltd. (1987), 1987 CanLII 9913 (BC SC), 28 C.C.L.I. 311, [1987] I.L.R. 1-2197 (B.C.S.C.). In Best Buy, the plaintiff sought to strike out a paragraph of the defence raising a set-off as against the plaintiff's claim. The plaintiff was a tenant of the defendant. The plaintiff suffered considerable damage to its inventory when water pipes burst. The plaintiff made a claim for the loss under its policy of insurance and was paid by the insurer. The insurer then exercised its right of subrogation and commenced an action, in the name of the plaintiff, against the defendant under the terms of the lease and for negligence. In a prior action the landlord had claimed against the tenant for arrears in rent. As part of its defence it pleaded a set-off in the amount of the arrears. Hogarth J. refused to strike out this part of the defence. He held at p. 313 C.C.L.I. that where an insurer exercises a right of subrogation and pursues a third party in the name of the insured, the third party "may raise any defence that was open to it as if the action had been brought by the insured". Then, after examining many authorities, including Lewenza, Hogarth J. held that any defence including an equitable defence such as equitable set- off must be available to the defendant. He therefore refused to follow Lewenza.

18The appellant submits that Hogarth J. has identified the true nature of subrogation and that, like an assignee, the subrogated insurer not only succeeds to all of the insured's rights and remedies against third parties, but is subject to all defences that the defendant could raise against the insured. The appellant submits that this view of subrogation is not inconsistent with the fundamental principle of insurance that the insured is entitled to be fully indemnified but no more. Rather, this latter principle governs the relationship between the insurer and the insured and should have no impact on relationships with third parties. Where set-off is allowed, the insurer can take action against its own insured to recover the amount that would have been paid to the insured (and then to the insurer) but for the set-off. The right to bring such an action would presumably flow out of one of the obligations imposed on the insured, namely, to do no act by which the subrogated insurer may be prejudiced. See E.R. Hardy Ivamy, General Principles of Insurance Law, 6th ed. (London: Butterworths, 1993) at pp. 505-06.

19While I think there is merit to the approach taken by Hogarth J. in Best Buy, I have not been persuaded that the decision in Lewenza has been overtaken by binding authority or that it was decided per incuriam. To the contrary, there is authority, binding on this court, supporting the Court of Appeal's view of the effect of subrogation. In Ledingham v. Ontario (Hospital Services Commission) (1974), 1974 CanLII 9 (SCC), [1975] 1 S.C.R. 332 at p. 337, 46 D.L.R. (3d) 699, Judson J., speaking for the court, adopted the following definition of subrogation [from National Fire Insurance Co. v. McLaren (1886), 12 O.R. 682 at p. 687 (Ch.), Chancellor Boyd]:

The doctrine of subrogation is a creature of equity not founded on contract, but arising out of the relations of the parties. In cases of insurance where a third party is liable to make good the loss, the right of subrogation depends upon and is regulated by the broad underlying principle of securing full indemnity to the insured, on the one hand, and on the other of holding him accountable as trustee for any advantage he may obtain over and above compensation for his loss. Being an equitable right, it partakes of all the ordinary incidents of such rights, one of which is that in administering relief the Court will regard not so much the form as the substance of the transaction. The primary consideration is to see that the insured gets full compensation for the property destroyed and the expenses incurred in making good his loss. The next thing is to see that he holds any surplus for the benefit of the insurance company.

(Emphasis added)

20Similar statements, that the insured is trustee for any advantage obtained over and above full compensation, were made more recently in Lord Napier v. Hunter, [1993] A.C. 713, [1993] 1 All E.R. 385 (H.L.). For example, at p. 738 A.C. Lord Templeman said the following:

I am not prepared to treat authorities which span over two centuries in a cavalier fashion. The principles which dictated the decisions of our ancestors and inspired their references to the equitable obligations of an insured person towards an insurer entitled to subrogation are discernible and immutable. They establish that such an insurer has an enforceable equitable interest in the damages payable by the wrongdoer. . . . Equity will not allow the insured person to insist on his legal rights to all the damages awarded against the wrongdoer and will restrain the insured person from receiving or dealing with those damages so far as they are required to recoup the insurer under the doctrine of subrogation.

In order to protect the rights of the insurer under the doctrine of subrogation equity considers that the damages payable by the wrongdoer to the insured person are subject to an equitable lien or charge in favour of the insurer.

(Emphasis added)

21Similarly, Lord Browne-Wilkinson held at p. 749 that the basis upon which equity enforced rights of subrogation was not merely a personal obligation of the insured to account to the insurers for benefits received from third parties but "a proprietary right in the damages recovered". [See Note 1 at end of document]

22All of this supports the view taken by the Court of Appeal in Lewenza that as a result of subrogation the claims sought to be set off do not exist in the same right. Once the insured has been fully compensated the insured holds the judgment and any amounts received from the third party in trust for the insurer. There is no obvious reason why in those circumstances the Court of Appeal was wrong to prefer the insurer's equitable rights arising out of subrogation over the creditor's right to equitable set-off. As the respondent points out, the inability of the appellant in this case to set off does not deprive it of the benefit of the trial judgment. It can demand payment from Bond's or take whatever other steps are available to it in execution of that part of the judgment in favour.

Disposition

23Accordingly, I would dismiss the appeal with costs.

Appeal dismissed.

Notes

Note 1: Also see Morley v. Moore, [1936] 2 K.B. 359 at p. 366, [1936] 2 All E.R. 79 (C.A.), where the court held that if the insured recovers from the defendant "he is obliged to hand that sum over to the insurance company because it is impressed with a trust on their behalf." Similarly, Re Miller, Gibb & Co., [1957] 2 All E.R. 266 at p. 271, [1957] 1 W.L.R. 703 (Ch. D.).