Court File and Parties

COURT FILE NO.: CV-19-00621835-0000 DATE: 20200309 SUPERIOR COURT OF JUSTICE - ONTARIO

RE: PANASONIC ECO SOLUTIONS CANADA INC. Applicant AND: XL SPECIALTY INSURANCE COMPANY Respondent

BEFORE: Koehnen J.

COUNSEL: Jeffrey A. Brown, Callum Micucci, for the Applicant Anthony Gatensby, for the Respondent

HEARD: December 16, 2019

Endorsement

[1] Panasonic Eco Solutions Canada Inc. seeks a declaration that its insurer, XL Specialty Insurance Company (“XL”), owes it a duty to defend an underlying arbitration that Solar Flow-Through Fund commenced against Panasonic.

[2] The arbitration claim is based on two monetary demands. One for liquidated damages of $92,309.62 arising out of an Engineering, Procurement and Construction Agreement (the “Engineering Agreement”) and another for damages estimated at $1,300,000 arising out of what the parties have referred to as the Proceeds Agreement.

[3] The insurance policy at issue is what is commonly referred to as an errors and omissions policy. It excludes coverage for claims arising out of Panasonic’s assumption of liability in a contract or for breach of contract unless the liability is one that the insured would have in the absence of the contract.

[4] XL has denied coverage. It asserts that Solar Flow’s claims against Panasonic are contractual and do not arise out of an act, error or omission by Panasonic in its provision of services.

[5] For the reasons set out below, I grant the application in respect of the liquidated damages claim and dismiss the application in respect to the claim under the Proceeds Agreement. In granting the application in part, I am in no way adjudicating upon the duty to indemnify. My reasons go solely to the duty to defend.

The Underlying Claim

[6] In the arbitration, Solar Flow alleges that the Engineering Agreement required Panasonic to, among other things, supply, construct and install roof-mounted solar electricity generating systems. Solar Flow in turn planned to sell the electricity to Ontario’s Independent Electricity System Operator (the “IESO”) for a 20-year term pursuant to contracts between Solar Flow and the IESO.

[7] The Engineering Agreement required Panasonic to achieve “Substantial Completion” by a “Guaranteed Date” which Panasonic failed to do. The arbitration claim alleges that Panasonic’s failure to achieve Substantial Completion by the Guaranteed Date led the IESO to terminate seven contracts between Solar Flow and IESO.

[8] In the arbitration, Solar Flow pleads that Panasonic failed to achieve Substantial Completion “in breach of its contractual obligations” as a result of which the Engineering Agreement provides for liquidated damages of $92,309.62.

[9] In addition, Solar Flow pleads in the arbitration that shortly after IESO terminated the contracts, Panasonic and Solar Flow entered into a team negotiation to have IESO reconsider the termination. As a result of those negotiations, IESO reinstated two of the seven contracts. The remaining five contracts were reissued as new agreements between IESO and Panasonic. Solar Flow alleges that it reached an agreement with Panasonic pursuant to which Solar Flow would provide its expertise for the reissued contracts. In exchange, Panasonic would pay Solar Flow a portion of the proceeds from Panasonic’s sale of the projects (the “Proceeds Agreement”). Solar Flow’s share of the proceeds of sale would equal least $1,300,000, reflecting the sunk costs on its initial contracts with IESO.

[10] With respect to the Proceeds Agreement, Solar Flow claims damages for breach of contract or, in the alternative, for negligent misrepresentation or, in the further alternative, damages for unjust enrichment.

[11] Panasonic has received invoices from its defence counsel for costs of $492,965.25 to defend the arbitration. The arbitration continues and the defence costs have continued to increase.

The Insurance Policy

[12] XL insured Panasonic under a Professional and Contractor’s Pollution Legal Liability Policy (the “Policy”), commonly known as an errors and omissions policy.

[13] By way of summary, the policy provides that XL will pay monetary judgments which Panasonic becomes legally obligated to pay because of a claim “resulting from an act, error or omission” in “Professional Services.” It is not in dispute that the claim arises out of the delivery of Professional Services.

[14] The Policy also imposes on XL a duty to defend any claim against Panasonic “to which this insurance applies .… even if any of the allegations are groundless, false or fraudulent”.

[15] XL relies primarily on the Policy’s “Contractual Liability” exclusion, which provides:

“This Policy does not apply to any claim…

arising from the Insured’s:

1. assumption of liability in a contract or agreement; or
2. breach of contract or agreement.

This exclusion does not apply to: (i) liability that the Insured would have in the absence of the contract or agreement; …”

[16] XL submits that Panasonic’s liability arises out of an allegation of breach of contract which liability Panasonic would not have in the absence of the contract, as a result of which no duty to defend arises.

Principles of Interpretation

[17] The principles applicable to the duty to defend are not in dispute and can be summarized as follows:

(a) The duty to defend is distinct from, and broader than, the duty to indemnify. There may be a duty to defend even if the insurer may not ultimately be required to indemnify the insured.

(b) The court assumes that the pleaded facts are true.

(c) The court applies the pleaded facts to the policy wording.

(d) The duty to defend arises if the underlying complaint alleges any facts that might fall within coverage under the policy.

Monenco Ltd v Commonwealth Insurance Co., 2001 SCC 49 at paras. 28, 33.

[18] Where pleadings are not precise enough to determine whether the claims are covered by a policy, “the insurer's obligation to defend will be triggered where, on a reasonable reading of the pleadings, a claim within coverage can be inferred”: Monenco at para. 31.

The Liquidated Damages Claim

[19] Paragraph 36 of the arbitration claim asserts that Solar Flow is entitled to liquidated damages pursuant to article 13 of the Engineering Agreement which in turn provides:

“if a System has not reached Substantial Completion by the Guaranteed Substantial Completion Date solely due to Contractor’s acts or omissions, Owner shall be entitled to receive as daily liquidated damages from Contractor…”.

[20] In other words, Solar Flow claims liquidated damages arising out of Panasonic’s “acts or omissions”. Panasonic’s policy with XL provides coverage for an “act, error or omission”.

[21] XL argues that the contractual exclusion obviates the duty to defend because any liability Panasonic has for liquidated damages arises out of its “assumption of liability in a contract” or out of its “breach of contract.” Panasonic’s failure to achieve Substantial Completion by the Guaranteed Date is a liability assumed in contract and arises out of a breach of contract.

[22] While I agree that XL is not the guarantor of Panasonic’s performance and the policy of insurance should not be used as a performance bond, there can nevertheless be delay which results in Panasonic’s failure to achieve Substantial Completion by the Guaranteed Date which is insured by the Policy.

[23] In Hollowcore Incorporated v. Visocchi, 2016 ONCA 600 at paras. 36–44 the Ontario Court of Appeal found that damages for delay could be covered by an errors and omissions policy depending on the reason for the delay. In that case, the trial judge had attributed 45% of the damages to uninsurable delay and 55% to errors that were insured.

[24] I am not able to determine on the record before me that the damages Solar Flow seeks are not attributable to negligence by Panasonic. I would need significantly more information to form a conclusion in that regard. As a result, it is possible that the claims may fall within coverage. Whether they ultimately do will turn on what the cause of the delay is.

[25] In further support of its position that it has not duty to defend, XL notes that Solar Flow has not pleaded negligence in the arbitration.

[26] While that may be the case, the Supreme Court of Canada has pointed out that, in deciding whether there is a duty to defend, the court should focus on the facts alleged in the underlying pleading and not on the pleading’s legal characterization of the claim. Simply because the underlying pleading alleges breach of contract does not mean that an insurer under an errors and omissions policy does not have a duty to defend. If the facts alleged are capable of supporting a tort, then the duty to defend is triggered, regardless of whether the claim pleads tort: Non-Marine Underwriters, Lloyd’s London v. Scalera, 2000 SCC 24 at para. 83.

[27] Presumably one issue in the arbitration may be whether the failure to achieve Substantial Completion was due solely to Panasonic’s acts or omissions or whether the delay was attributable to circumstances beyond Panasonic’s control. If it is the former, it will be up to Panasonic and XL to determine whether the acts or omissions that led to the failure of Substantial Completion by the Guaranteed Date are acts of negligence which are insurable or whether the delay is attributable to deliberate choices by Panasonic such as diverting staff from work under the Engineering Agreement to other, perhaps more profitable, projects which would not fall within coverage under the Policy.

The Proceeds Agreement Claim

[28] The claim on the Proceeds Agreement falls into a different category. Solar Flow alleges that it reached an agreement with Panasonic under which Panasonic would pay Solar Flow a share of the proceeds of the sale of the projects arising out of the reissued contracts. Panasonic failed to do so. In paragraph 30 of the Arbitration Claim, Solar Flow explains Panasonic’s failure to pay as:

“tactical and meant to sidestep its obligations to pay Solar Flow anything for its work under the Proceeds Agreement.”

[29] Panasonic’s liability in this regard clearly arises out of an “assumption of liability in a contract” and arises out of a “breach of contract”. It therefore falls squarely within the contractual exclusion under the Policy.

[30] It is, in effect, a debt claim. It is not a liability that Panasonic would have had in the absence of a contract and is therefore not caught by the saving provision found in the contractual exclusion.

[31] The fact that the Arbitration Claim includes an alternative claim for negligent misrepresentation, adds nothing. The alleged negligent misrepresentation is not a misrepresentation at large but a misrepresentation of an intention to pay under a contract. The Arbitration Claim makes the following allegations in this regard:

“42. Given the long-term business relationship between Solar Flow and Panasonic, marked by weekly team meetings and regular communication, it was reasonable for Solar Flow to rely on Panasonic’s representations regarding its intentions under the Proceeds Agreement. Panasonic was well aware that Solar Flow would do so.

43. Solar Flow reasonably relied on Panasonic’s representations that it would make payment pursuant to the Proceeds Agreement, in exchange for Solar Flow’s help in achieving the sale of the Reissued Projects. Solar Flow has suffered damages as a result, including but not limited to the costs associated with its efforts on Panasonic’s behalf in relation to the completion and sale of the Projects.”

[32] These paragraphs make clear that the negligent misrepresentation claim is based solely on Panasonic’s breach of the Proceeds Agreement by failing to make payments under it.

[33] The words of the Ontario Court of Appeal in Rashid v. Intact Insurance Company, 2011 ONCA 806 at para. 7 are apposite here:

“In our view, the claims for negligence in this case are simply labels. The substance of the allegations are breaches of contract. The only duties underlying the negligence claims are the duties found in the contracts pleaded. Thus, we agree with the application judge that the insurance policy does not cover the claims of negligence.”

[34] Nor does Solar Flow’s further alternative claim of unjust enrichment trigger a duty to defend.

[35] Unjust enrichment is an equitable remedy. The Policy excludes liability for equitable relief. This exclusion arises through the defined terms in the policy. As noted earlier, the policy provides coverage for “Professional Loss which the insured becomes legally obligated to pay because of a claim resulting from an act error or omission in professional services.” Professional loss is defined in the policy. The conclusion of the definition provides “Professional Loss does not include: (i) injunctive or equitable relief…”

[36] Moreover, the whole purpose of insurance is to provide protection against fortuitous risk. The nature of the unjust enrichment claim here is not one that arises because of fortuitous risk that Panasonic has incurred. Instead it arises out of conscious, intentional, deliberate conduct to deprive Solar Flow of a sum of money that Solar Flow alleges it is entitled to. In this light, the claim for unjust enrichment is a substitute for a contract claim in the event that the elements of contract are not made out. That does not, however, turn it into a claim on account of a fortuitous risk.

Is XL Entitled to Control of The Defence

[37] XL asks me to find that, if it has a duty to defend, it has the right to control the defence.

[38] I order that XL does have the right to control the defence of the liquidated damages claim but not of the claim under the Proceeds Agreement.

[39] Section VII(C) of the Policy, provides that XL “has the right and the duty to defend any Claim against the Insured seeking Professional Loss […] to which this insurance applies, including the right to select counsel”. That is fairly clear language that gives XL the right to appoint counsel and direct the defence.

[40] To avoid any possible allegation of conflict of interest between the insurer or the insured given that XL has denied both coverage and a duty to defend, XL has offered that the adjuster with carriage of the defence will be different from the adjuster who had carriage of the coverage issue, and that new defence counsel will not have any discussions with the coverage counsel, the coverage adjuster or other XL personnel involved in the coverage issues to date. The terms of that offer should be incorporated into the provisions of the formal order arising out of these reasons.

[41] Given that the liquidated damages claim and the claim under the Proceeds Agreement are quite discrete, there should be no great difficulty in having XL take carriage of the liquidated damage claim while Panasonic’s counsel continues with carriage of the claim under the Proceeds Agreement.

[42] I expect there may also be an issue about the proper allocation of the approximately $500,000 in defence costs that Panasonic has incurred to date. My sense based purely on the size of the claims is that the lion share of those defence costs would be attributable to the claim under the Proceeds Agreement.

[43] If the parties cannot reach agreement on how to allocate past defence costs, I will remain available to fashion a process whereby that issue can be determined efficiently although I will not necessarily be the one making that determination.

Costs

[44] Panasonic has pointed me to authorities for the proposition that an insured who succeeds on a duty to defend application should be entitled to its costs on a full indemnity scale: M (E) v Reed, 2003 CarswellOnt 1723 at para 22, [2003] ILR I-4191 (Ont. CA); Godonoaga (Litigation Guardian of) v Khatambakhsh (Guardian of), , 50 OR (3d) 417 at para. 4 (Ont. CA).

[45] I do not believe that would be appropriate here. As noted above, the real economic battle was not about the duty to defend a liquidated damages claim. That claim should be capable of relatively easy resolution. The real issue concerns the duty to defend against the allegations under the Proceeds Agreement; an issue on which Panasonic failed.

[46] Given that success has been divided and given that XL succeeded on the more important portion of the application, it is more than fair to Panasonic to have each party bear its own costs.

Koehnen J. Date: March 9, 2020