Court of Appeal for Ontario

Docket: C65425

Judges: Hourigan, Miller and Paciocco JJ.A.

Parties

Between

Elaine Marguerite Marie Paulin Plaintiff

and

Keewatin Patricia District School Board Defendant (Respondent)

and

The Corporation of the Municipality of Red Lake Third Party (Appellant)

Counsel and Hearing

Counsel:

• K. Dearlove, for the appellant
• D. Lester, for the respondent

Heard: February 6, 2019

On appeal from: The order of Justice Terrence A. Platana of the Superior Court of Justice, dated May 7, 2018, with reasons reported at 2018 ONSC 2848.

Decision

Paciocco J.A.:

Overview

[1] In 2010, a daycare employee injured herself from a fall in a daycare classroom operated by the appellant, the Corporation of the Municipality of Red Lake ["Red Lake"]. Red Lake leased the daycare space from the Keewatin Patricia District School Board ["the School Board"].

[2] A law suit followed. Only the School Board was sued.

[3] The School Board joined Red Lake in the action through a third party claim. Specifically, the School Board claimed that under the terms of their commercial lease agreement ["the Lease"], Red Lake is required to defend and indemnify the School Board. The School Board contends that Red Lake assumed the risk that allegedly occurred when the daycare employee was injured, by agreeing to insure against that risk, and through related provisions in the Lease.

[4] Red Lake disagreed with the School Board's position. It urged that, properly interpreted, the Lease actually requires the School Board, and not Red Lake, to insure against and bear the relevant risk.

[5] Both parties brought overlapping r. 21.01 motions to settle their disagreement over the proper interpretation of the Lease, as a question of law. Red Lake also moved to strike the School Board's third party claim.

[6] This is an appeal by Red Lake from the motion judge's decision on those motions, ordering Red Lake to defend and indemnify the School Board in respect of the daycare employee's claim, and dismissing Red Lake's motion to strike. Red Lake claims that the motion judge erred in law in numerous respects in interpreting the Lease, and asks that his decision be set aside and the relief it requested in its motions be granted.

[7] I disagree. For the reasons that follow, I would dismiss Red Lake's appeal.

The Material Facts

[8] Red Lake and the School Board entered into the Lease dated December 16, 2008. Pursuant to the Lease, Red Lake, as tenant, obtained the use of 2,420 square feet of the Red Lake Madsen Public School where it operated the daycare facility.

[9] In July 2010, Elaine Paulin, an employee at the daycare facility, allegedly slipped and fell on a wet floor while in a daycare class room. She injured her knee and secured benefits from the Workplace Safety and Insurance Board [the "WSIB"].

[10] In the spring of 2012, the WSIB commenced a subrogated action against the School Board in Ms. Paulin's name pursuant to Workplace Safety and Insurance Act, 1997, S.O. 1997, c. 16, s. 30(1). The heart of Ms. Paulin's claim was that the School Board was liable because "it failed to maintain the subject portion of the premises in accordance with reasonable standards".

[11] The School Board chose to defend the action and brought the third party claim against Red Lake, asserting that a declaration should be made directing Red Lake to defend and indemnify the School Board regarding Ms. Paulin's claim.

[12] The School Board contended that these obligations arise from covenants in the Lease.

[13] It urged that under the Lease, Red Lake is required to insure against the kind of claim Ms. Paulin advances. The School Board relied on a long line of authority holding 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": Deslaurier Custom Cabinets Inc. v. 1728106 Ontario Inc., 2016 ONCA 246, 130 O.R. (3d) 418, at para. 36 ["Deslaurier"], citing Madison Developments Ltd. v. Plan Electric Co. (1997), 152 D.L.R. (4th) 653 (C.A.), at para. 9, leave to appeal refused, [1997] S.C.C.A. No. 659. See also: Orion Interiors Inc. v. State Farm Fire and Casualty Company, 2016 ONCA 164, 57 C.C.L.I. (5th) 73; Cummer-Yonge Investments Ltd. v. Agnew Surpass Shoe Stores Ltd., [1976] 2 S.C.R. 221 ["Cummer-Yonge"]; Pyrotech Products Ltd. v. Ross Southward Tire Ltd., [1976] 2 S.C.R. 35 ["Pyrotech"]; T. Eaton Co. v. Smith et al., [1978] 2 S.C.R. 749 ["T. Eaton Co."]; D.L.G. & Associates Ltd. v. Minto Properties Inc., 2015 ONCA 705, 341 O.A.C. 50. The School Board argued that since Red Lake was to insure the relevant risk, as a matter of law Red Lake agreed to bear the risk of loss and must therefore indemnify and defend the School Board against Ms. Paulin's claim.

[14] The School Board urged that Red Lake's obligation to indemnify finds further support in the Lease. Specifically, s. 9(5) of the Lease required Red Lake to acquire an insurance policy and add the School Board as an "additional insured" under it. The School Board also relied upon s. 9(2) of the Lease that specifically obliged Red Lake to indemnify the School Board.

[15] Red Lake did not contest the legal proposition relied upon by the School Board that a contractual undertaking to secure property insurance against a peril carries with it the assumption of risk from that peril. It disagreed, however, with the School Board's reading of the Lease. The Lease has insurance covenants that bind both parties, and Red Lake contended that, properly interpreted, the obligation to insure against the kind of claim Ms. Paulin advances actually falls to the School Board. It is therefore the School Board that assumed the relevant risk.

[16] Red Lake argued, in the alternative, that even if the Lease can be interpreted to impose on Red Lake an obligation to insure against Ms. Paulin's claim, the Lease is not clear enough, as a matter of law, to oblige Red Lake to assume responsibility for the School Board's own negligence.

[17] Finally, Red Lake argued that the indemnification clause applies only to liability that is not covered by the kinds of insurance provided for in the Lease. The kind of claim Ms. Paulin advances is covered by insurance contemplated under the Lease, making the indemnification clause irrelevant.

[18] In response to the School Board's third party claim, Red Lake therefore brought a r. 21.01 motion for a determination, as a question of law, whether the Lease required Red Lake to defend and indemnify the School Board. The School Board brought a cross-motion seeking essentially the same relief. Red Lake also moved for an order striking out the third party claim on the ground that it discloses no reasonable cause of action.

[19] These are the Lease provisions that required interpretation to resolve the motions:

Lease Provisions

9. INSURANCE

(1) During the Term of this Lease and any renewal thereof the Landlord [School Board] shall maintain with respect to the Premises, insurance coverage insuring against:

(b) liability for bodily injury or death or property damage sustained by third parties up to such limits as the Landlord [School Board] in his sole discretion deems advisable; …

(2) The Tenant [Red Lake] covenants to keep the Landlord [School Board] indemnified against all claims and demands whatsoever by any person, whether in respect of damage to person or property, arising out of or occasioned by the maintenance, use or occupancy of the Premises or the subletting or assignment of same or any part thereof. And the Tenant [Red Lake] further covenants to indemnify the Landlord [School Board] with respect to any encumbrance on or damage to the Premises occasioned by or arising from the act, default, or negligence of the Tenant [Red Lake], its officers, agents, servants, employees, contractors, customers, invitees or licensees;

(a) And the Tenant [Red Lake] agrees that the foregoing indemnity shall survive the termination of this Lease notwithstanding any provisions of this Lease to the contrary.

(5) Liability Insurance

(a) The Tenant [Red Lake] shall maintain comprehensive general liability insurance in the amount of not less than Two million ($2,000,000.00) dollars per occurrence.

i. The Insurance shall include the Tenant's [Red Lake's] legal liability;

ii. The Landlord [School Board] shall be named in the insurance policy as an Additional Insured,

iii. The Insurance policy shall include a cross-liability endorsement;

iv. The insurance policy shall include a 30-day cancellation clause.

(b) Upon signing of the within lease, the Tenant [Red Lake] shall provide the Landlord [School Board] with a certificate of insurance.

[20] On May 7, 2018, the motion judge held in favour of the School Board. He ordered Red Lake to defend and indemnify the School Board in respect of Ms. Paulin's claim, and dismissed Red Lake's motion to strike the third party claim.

[21] In simple terms, the motion judge held that the School Board's insurance obligations under the Lease are limited by other terms of the lease, specifically, Red Lake's obligation to insure under s. 9(5), and Red Lake's covenant to indemnify for damages under s. 9(2). Since, as a matter of interpretation, Red Lake undertook to insure against the risk presented by Ms. Paulin's claim, Red Lake assumed the relevant risk.

Issues

[22] Red Lake advances the following grounds of appeal, which I have reordered for analytical convenience:

(1) The motion judge erred in considering material clauses:

a. The motion judge erred in law by failing to give every clause meaning, and by giving effect to the more general insurance covenant in s. 9(5) instead of the more specific insurance covenant in s. 9(1); and

b. The motion judge erred in law by reading the insurance covenant in s. 9(5) with the indemnification clause in s. 9(2), and considering the indemnification clause over the insurance covenants.

(2) The motion judge erred in law by permitting insurance policy considerations relating to Red Lake's obligation to insure to predominate over the insurance covenants; and

(3) The motion judge erred in law by concluding that Red Lake assumed the risk of the School Board's own negligence, in the absence of specific wording in the Lease to this effect.

[23] The parties agreed before us that since these grounds of appeal raise the governing principles of contract interpretation and the proper application of binding authority, they raise extricable errors of law that attract the correctness standard, as in Deslaurier, at para. 31. We will resolve the appeal on that basis.

Analysis

(1) Errors in Considering Material Clauses

[24] A court is to interpret a commercial contract "as a whole, in a manner that gives meaning to all of its terms and avoids an interpretation that would render one or more of its terms ineffective": Bell Canada v. The Plan Group, 2009 ONCA 548, 252 O.A.C. 71, at para. 37, cited in Deslaurier, at para. 48. Red Lake contends that in finding that s. 9(5) obliged Red Lake to insure against the risk of bodily injury to persons in the daycare, the motion judge improperly failed to give meaning to the School Board's s. 9(1) covenant to insure against liability for bodily injury sustained by third parties.

[25] I disagree. In my view, the motion judge gave meaning to both insurance covenants. He held that the School Board agreed to maintain insurance coverage against bodily injury sustained by third parties generally, but this obligation was "limited by" Red Lake's assumption of liability to insure for bodily injury arising from the maintenance of the leased premises, the very event that allegedly befell Ms. Paulin. The School Board argued for this interpretation and the motion judge accepted it, saying:

I agree with the interpretation of the lease by the landlord. The landlord agreed to maintain general coverage on the leased premises. However, the landlord bargained contractually for the tenant to assume coverage for damages to person arising out of maintenance of the premises.

[26] The reading I have given this passage requires some explanation. In my view, it is clear from the arguments made and the decision as a whole that in this passage the motion judge was using the same term, "premises", to refer to different things. In the case of the School Board's obligation to insure, he used the term "premises" to refer to the school generally. In the case of Red Lake's obligation to insure, he used the term "premises" to refer to the leased premises or space.

[27] This imprecision can be explained by the Lease itself. It, too, uses the undefined term "premises" ambiguously.

[28] For example, the recital to the Lease employs the term "premises" to refer to the entire school, when it refers to a "[l]ease of Space in the premises known municipally as: Red Lake Madsen School Box 5001, 201 Howey St. Red Lake, ON P0V 2M0".

[29] In contrast, the indemnification clause in s. 9(2) uses the term "premises" with obvious reference to the leased space. It says:

The Tenant [Red Lake] covenants to keep the Landlord [School Board] indemnified against all claims and demands whatsoever by any person, whether in respect of damage to person or property, arising out of or occasioned by the maintenance, use or occupancy of the Premises or the subletting or assignment of same or any part thereof. [Emphasis added.]

[30] Even though this indemnification clause does not use the term "space", which is defined in the Lease specifically to accommodate reference to the leased premises, it is obvious that s. 9(2) is about the leased premises. This is so because s. 9(2) speaks of Red Lake's obligations relating to "damage to person … arising out of or occasioned by the maintenance, use or occupancy of the Premises, or the subletting or assignment of same or any part". First, the only area "occupied" by Red Lake is the leased premises. Second, that is the only space that Red Lake has authority to sublet or assign.

[31] The motion judge therefore did not fail to give meaning to all of the terms of the Lease. Under its s. 9(1) covenant, the School Board is to insure for bodily injury to third parties generally. However, under its s. 9(5) covenant to obtain comprehensive general liability insurance, Red Lake is to insure for bodily injury arising out of or occasioned by the maintenance, use or occupancy of the leased premises. In this way, both insurance covenants operate, and in a commercially reasonable way.

[32] I disagree with Red Lake that this interpretation leaves it without benefits from the School Board's s. 9(1) insurance covenant. This covenant provides Red Lake with the certainty of coverage for loss or damage from bodily injury that occurs in the school but outside of the leased space, and frees Red Lake from responsibility should such loss or damage occur.

[33] This interpretation also answers Red Lake's complaint that the motion judge erred by interpreting Red Lake's s. 9(5) general insurance covenant as carrying a higher obligation to insure against bodily injury to third parties, than the School Board's s. 9(1) covenant to insure specifically against bodily injury to third parties. To the contrary, what the motion judge did was interpret the obligation that Red Lake undertook as applying to a restricted space, making it a more specific insurance obligation than the School Board's responsibility to insure the general school property. The motion judge correctly identified and applied the more specific insurance obligation.

[34] There is no doubt that in coming to this conclusion, the motion judge did consider the indemnification clause, as well as the "additional insured" clause. I do not accept Red Lake's contention that doing so was in error. In my view, the motion judge quite properly considered the Lease as a whole when interpreting the insurance covenants.

[35] Indeed, the indemnification clause, the "additional insured" clause, and the insurance covenants are housed together in s. 9 of the Lease, under the heading "INSURANCE". The clauses were clearly meant to work together to ensure that the contemplated risks, including the risk that occasioned the bodily injury to Ms. Paulin alleged to have arisen from the maintenance of the premises, would be assumed by Red Lake.

[36] For example, the "additional insured" clause properly supports the motion judge's conclusion that under the Lease, the School Board's obligation to maintain general coverage of the school is limited by Red Lake's insurance covenant. By insuring the School Board as well, Red Lake was clearly agreeing that it would assume the insured risks in the leased space on behalf of the School Board. This reinforces, appropriately, the motion judge's understanding of the relationship between the two insurance covenants. Simply put, anything covered by Red Lake's insurance covenant is removed from the School Board's obligation to insure.

[37] What then of the indemnification clause? This clause properly reinforces the intention of the parties to exempt the School Board from liability for the risks Red Lake agreed to insure.

[38] I am satisfied that this is how the motion judge used the indemnification clause. I therefore reject the suggestion made by Red Lake that the motion judge improperly treated the indemnification clause as having been "triggered". The motion judge's order to indemnify and defend arose from Red Lake's agreement to assume the relevant risk, not from the triggering of the indemnification clause.

[39] Red Lake also argues that the motion judge's reasoning erroneously permits the indemnification clause to "overtake" the School Board's s. 9(1) insurance covenant. I disagree. This court's decision in Deslaurier addresses an example of improperly permitting an indemnification clause to overtake an insurance covenant.

[40] In Deslaurier, the lease agreement obliged the tenant to "carry insurance in its own name insuring against the risk of damage to the Tenant's property within the Premises caused by fire," and the tenant was to include the landlord as an additional insured under the policy. Instead of giving effect to this covenant, the motion judge in Deslaurier disregarded it, holding that the landlord had assumed responsibility under the lease in respect of the same damage by agreeing to indemnify the tenant in respect of that same damage. Put otherwise, the indemnification covenant in Deslaurier was not used to assist in interpreting the insurance covenant. It was used to deprive the insurance covenant of meaning, in disregard of the general rule that a contractual undertaking to insure operates as an assumption of risk.

[41] Indeed, Deslaurier affirms what the motion judge did here. Cronk J.A. cited with approval and relied upon the decision in Lincoln Canada Services LP v. First Gulf Design Build Inc., [2007] O.J. No. 4167 (S.C.), aff'd 2008 ONCA 528, where the motion judge agreed with the landlord that "the effect of the tenant's insurance covenant and the landlord's indemnity covenant, read together, was that the parties intended the landlord to be exempt from liability for the specific matters that were to be insured against by the tenant": Deslaurier, at para. 65.

(2) Errors in Using Insurance Policy Considerations

[42] Red Lake argues that the motion judge erred by permitting insurance policy considerations to predominate over the terms of the Lease when he relied upon the "additional insured" clause. I do not agree.

[43] To be sure, the legal principle Red Lake invokes is correct. The scope of indemnity does not depend on the insurance policy, but rather, on the terms of the lease: Royal Host Limited Partnership (General partner of) v. 1842259 Ontario Ltd., 2018 ONCA 467, 422 D.L.R. (4th) 661, at para. 15. That is why it would be an error for a court to accept an invitation by an insurer, such as the one extended in Pyrotech and Cummer-Yonge, to use the insurance policy to determine the right of an insurer to commence a subrogated claim in the name of one party to a commercial lease, against the other party to that lease, where that lease addresses the risk of loss.

[44] However, the motion judge did not contravene this legal principle here. Red Lake's obligation to add the School Board as an additional insured was a term of the Lease itself. The motion judge was entitled to consider that term and its insurance law implications in deciding whether Red Lake had agreed in the Lease to bear the relevant risk of loss.

(3) The Own Negligence Error

[45] In the alternative, Red Lake appeals against the motion judge's decision on the basis that, even if Red Lake did assume the relevant risk of loss, the indemnification clause is not clear enough to oblige Red Lake to indemnify the School Board for its own negligence. Red Lake relies on the Canada Steamship Lines Ltd. v. R, [1952] UKPC 1, [1952] 2 D.L.R. 786, line of authority, calling for very clear words before a party is exempted from liability for their own negligence.

[46] I would reject this ground of appeal. As I have indicated, the outcome of this case did not turn on the triggering of the indemnification clause. The outcome followed from Red Lake's contractual assumption of the risk of loss through the insurance obligations that it assumed. In T. Eaton Co., Laskin C.J.C. made clear that the Canada Steamship Lines principle does not apply where the claimed exoneration is based not on an exculpatory clause, but on the fact that the other party to a commercial lease has agreed to insure against the relevant negligence. As Laskin C.J.C. said at p. 756, with reference to the kind of policy at issue in that case:

An insurer could not refuse to pay a claim for loss by fire merely because the fire arose from the insured's negligence. I can see no reason why its position can be any better against a tenant, whose negligence caused loss by fire, if the lease with the landlord makes it clear that a policy was to be taken out by the landlord to cover such fires, and a policy is written which does so. In short, the insurer can claim only by subrogation under the lease.

Conclusion

[47] None of the grounds of appeal advanced are persuasive. I would dismiss Red Lake's appeal and uphold the motion judge's order that:

1. The third party, The Corporation of the Municipality of Red Lake, shall defend and indemnity the defendant, Keewatin Patricia District School Board, in respect of the plaintiff's claim for damages; and

2. The motion of the third party to strike out the Third Party Claim is dismissed.

[48] As agreed, Red Lake shall pay costs in this appeal in the amount of $10,000, inclusive of all taxes and disbursements.

Released: April 10, 2019

"David M. Paciocco J.A." "I agree. C.W. Hourigan J.A." "I agree. B.W. Miller J.A."

Footnotes

[1] This rule does not apply if the parties contract otherwise, as in Royal Host Limited Partnership (General partner of) v. 1842259 Ontario Ltd., 2018 ONCA 467, 422 D.L.R. (4th) 661, at paras. 14-16. This limitation does not arise in this case.

[2] The Lease defines "space" as follows: "(1) 'Space' means square footage in the building known as Red Lake Madsen Public School in Red Lake, Ontario. (2) For the purposes of this lease, said Space encompasses 2,420 square feet located in Red Lake Madsen Public School."