COURT OF APPEAL FOR ONTARIO

DATE: 20000511

DOCKET: C29504

CARTHY, LASKIN and ROSENBERG JJ.A.

B E T W E E N :

CANADIAN PREMIER HOLDINGS LTD. and CANADIAN PREMIER LIFE INSURANCE COMPANY

Respondents

• and -

WINTERTHUR CANADA FINANCIAL CORPORATION and THE CITADEL GENERAL ASSURANCE COMPANY

Appellants

A. Pettingill for the appellants

A. D’Silva for the respondents

Heard: April 17, 2000

On appeal from the judgment of Madam Justice Swinton dated March 10, 1998.

LASKIN J.A.:

[1] This appeal concerns the interpretation of a contract. The respondent Canadian Premier Holdings Ltd. purchased the shares of Canadian Premier Life Insurance Company, formerly The Citadel Life Assurance Company, from the appellant Winterthur Canada Financial Corporation by a share purchase agreement dated January 13, 1994. The issue on the appeal is which party was required by the terms of the agreement to pay industry-wide assessments levied in 1994 and 1995 to indemnify the insureds of two insolvent life insurance companies.

[2] The trial judge, Swinton J., concluded that the terms of the agreement required Winterthur to pay the assessments. To support this conclusion she relied on parol evidence of the negotiations that led to the agreement. In my view, she erred in her interpretation of both the agreement and the parol evidence. I interpret the agreement to require Canadian Premier Life Insurance to pay the assessments and I think the evidence of the negotiations confirms this interpretation. I would therefore allow the appeal.

BACKGROUND FACTS

[3] This dispute arises from J.C. Penny Life Insurance Co.’s entry into the Canadian life and health insurance market. To avoid the time and expense of obtaining its own licences J.C. Penny decided to buy two existing companies – The Citadel and Legacy General – which owned the necessary federal and provincial licences, but wished to withdraw from the Canadian market and had already sold off their blocks of business. J. C. Penny purchased the two Canadian companies through Canadian Premier Holdings for $1,450,000. Only the sale of The Citadel is relevant on this appeal.

[4] Winterthur acknowledged that J.C. Penny intended to buy “clean shell” companies, that is companies with existing licences but no existing business or liabilities. Several provisions of the share purchase agreement required Winterthur to indemnify the respondents and their officers, directors and employees for any liabilities of The Citadel.

[5] Section 4.2 of the agreement dealt with liability for the assessments levied by CompCorp (Canadian Life and Health Insurance Compensation Corporation), an industry association whose purpose is to compensate insureds if their insurance company becomes insolvent. Section 4.2 is the main term of the agreeement in issue on this appeal. It provides:

The Vendors shall pay any 1993 or prior years’ assessments by the Canadian Life and Health Insurance Compensation Corporation in respect of Canadian Premier and the Property and Casualty Insurance Compensation Corporation in respect of Legacy General no matter when they are made.

[6] Every company licensed to sell life insurance in Canada must be a member of CompCorp. CompCorp is funded by three kinds of assessments levied against member companies: administrative assessments to meet operating expenses; loan assessments to fund CompCorp’s extraordinary expenses; and specific assessments to compensate insureds of insolvent insurers. Specific assessments are levied as needed and are calculated by applying a percentage to each member company’s average premium income for the preceding five years.

[7] What precipitated this litigation were several specific assessments levied by CompCorp in 1994 and 1995, largely to pay claims arising out of the insolvencies of Les Coop‰rants and Confederation Life. “1994 Specific Assessment No. 1,” dated June 13, 1994, called on the respondent Canadian Premier Life Insurance to pay $84,157 in connection with the insolvency of Les Coop‰rants. The amount of the assessment was based on the company’s average premium income between 1989 and 1993, when The Citadel operated the business. Canadian Premier Life Insurance paid the special assessment without objection at the time. It did not ask Winterthur to pay the assessment or suggest that Winterthur was responsible for doing so.

[8] In August 1994 Confederation Life became insolvent. The unexpected failure of this large insurer created the risk of a significant liability for the life insurance industry in Canada. “1994 Specific Assessment No. 2,” dated August 19, 1994, called on Canadian Premier Life Insurance to pay $130,771 in connection with the insolvency of Confederation Life and a further $13,024 in connection with the insolvency of Les Coop‰rants. Canadian Premier Life Insurance objected to paying this assessment. In October 1994 it sent the two specific assessments to Winterthur and asked Winterthur to pay them. When Winterthur refused to pay these assessments and additional specific assessments levied by CompCorp in 1995, the respondents started this litigation.

[9] The amount of the specific assessments for Canadian Premier Life Insurance between 1994 and 1996 totalled $485,880. The trial judge granted judgment for the respondents for $449,635, that portion of the specific assessments attributable to The Citadel’s premium income in 1993 and previous years.

DISCUSSION

[10] The trial judge concluded that Winterthur was responsible for the specific assessments levied by CompCorp between 1994 and 1996 for three reasons: s. 4.2 of the share purchase agreement, the evidence of the negotiations that led to the inclusion of s. 4.2, and s. 5.2, a general indemnity provision in the agreement.

[11] The main reason for the trial judge’s conclusion was her interpretation of s. 4.2. For convenience I reproduce that section:

The Vendors shall pay any 1993 or prior years’ assessments by the Canadian Life and Health Insurance Compensation Corporation in respect of Canadian Premier and the Property and Casualty Insurance Compensation Corporation in respect of Legacy General no matter when they are made.

[12] The trial judge held that the phrase “1993 or prior years’ assessments” meant “assessments for those years,” not “assessments in those years.” I agree that was a reasonable interpretation of that phrase. However, the trial judge then concluded that the assessments in issue were assessments for “1993 or prior years” because they were calculated on the company’s premium income for those years. In my view, her conclusion is flawed because it confuses liability for the assessments with the method of calculating them. The CompCorp assessments are not a tax on previous income. They are levied to cover expenses in a particular year. The Citadel had no outstanding liability for assessments when the sale purchase agreement closed in January 1994. The assessments in question were levied to cover the expenses of two insolvencies that took place after closing. They are therefore properly characterized as 1994 and 1995 assessments and the respondents are liable to pay them. The basis for calculating these assessments – the company’s previous five years’ premium income – is irrelevant in deciding which party is liable to pay them under s. 4.2 of the agreement. A court should interpret a plainly worded document by presuming that the parties intended the legal consequences of their words: Eli Lilly & Co. v. Novopharm Ltd., [1998] 2 S.C.R. 129 at 166-167. In my view, the plain wording of s. 4.2 imposes liability for the assessments in question on the respondents.

[13] The trial judge held that her interpretation of s. 4.2, making the appellants liable, made commercial sense because it protected the purchasers, the respondents, from the ongoing burden of assessments calculated on premium income earned while The Citadel was in business. Where the words of a contract are not ambiguous commercial reasonableness may inform the court’s reading of the text, but the interpretation that produces a sensible commercial result is not determinative. Nonetheless, as Iacobucci J. wrote in Eli Lilly v. Novopharm, supra, at 166-167 “it would be absurd to adopt an interpretation which is clearly inconsistent with the commercial interests of the parties, if the goal is to ascertain their true contractual intent.”

[14] In my view, however, the trial judge’s interpretation of s. 4.2 is not commercially reasonable because it fixes the appellants, who are no longer in the insurance business, with an ongoing and undetermined liability for five years in connection with insolvencies not known or contemplated at the time the agreement was made. It seems to make more commercial sense that the respondents, who are now in the insurance business, pay the assessments associated with the insolvencies of others in the industry.

[15] In interpreting s. 4.2, the trial judge considered evidence of the parties’ negotiations. In her view, the phrase “no matter when they are made” in s. 4.2 made the interpretation of this provision “problematic.” Because I do not view the meaning of s. 4.2 to be ambiguous, I think resort to parol evidence was unnecessary. Even so, the evidence of the parties’ negotiations confirms that the parties intended the respondents to pay the CompCorp assessments in issue.

[16] In the negotiations both sides were represented by major Toronto law firms. A draft share purchase agreement was circulated in early January 1994. That draft contained the precursor to what became s. 4.2 of the final agreement, draft s. 4.7, which provided:

4.7 CompCorp and PACICC

In respect of time periods prior to the Closing Time, the Vendors shall prior to Closing pay all amounts due and, after Closing, pay all amounts that become due based on business written prior to the Closing Time to the Canadian Life and Health Insurance Compensation Corporation in respect of Citadel Life and the Property and Casualty Insurance Compensation Corporation in respect of Fire Insurance.

[17] This draft provision would have required the appellants to pay the assessments in issue because they were “based on business written prior to the closing time.” But the wording of the clause changed in the subsequent negotiations. Counsel for the respondents, believing that CompCorp made retroactive assessments, wanted the appellants to pay for these assessments. He made this point in a letter to the appellants’ counsel:

In respect of Section 4.7, my understanding is that CompCorp and PACICC make assessments retroactively, i.e. at the end of 1994, they could levy the assessment for 1993. If that is the case, it is up to the Vendors to pay such an assessment.

[18] The appellants were willing to pay for any assessments for 1993 or previous years but not for assessments after closing. Thus, counsel for the appellants revised draft s. 4.7 to its final wording in s. 4.2, including the phrase “no matter when they are made” to deal with retroactive assessments. He wrote counsel for the respondents about the revision:

We have revised section 4.7 to attempt to make it clear that the Vendors will be responsible for any CompCorp and PACICC assessments made for 1993 or prior years, but that the Vendors will not be responsible for any assessments made for subsequent years.

[19] Therefore the wording of s. 4.2 reflected the respondents’ concern not to be responsible for retroactive assessments for 1993 or earlier years and the appellants’ concern not to be responsible for assessments after 1993. The trial judge rejected the suggestion that the phrase “no matter when they are made” was meant to cover retroactive assessments. She did so because a representative of CompCorp testified that up to the closing of the transaction in January 1994 CompCorp had never levied a retroactive assessment. It seems to me, however, that what CompCorp had done or not done was immaterial. What mattered was what was in the minds of the negotiators. Counsel for the respondents was obviously concerned about retroactive assessments and his concern was reflected in the final wording of s. 4.2. The negotiations that led to the agreement therefore confirm that the respondents were to be responsible for the CompCorp assessments in issue on this appeal.

[20] Finally, the trial judge found that s. 5.2(f) of the share purchase agreement imposed an obligation on the appellants to indemnify the respondents for assessments calculated on premium income in 1993 or previously. Section 5.2(f), a general indemnity provision, required the appellants to indemnify the respondents for any losses arising from The Citadel’s book of business before closing:

5.2 The Vendors shall, jointly and severally, indemnify, defend and save harmless the Purchaser and its Affiliates and each of their directors, officers and employees from and against any and all Loss suffered or incurred by them, as a direct or indirect result of, or arising in connection with:

(f) any and all books of business, Assets or liabilities of any nature whatsoever of the Companies on or before Closing, whether or not disclosed to the Purchaser, and regardless of whether the circumstances giving rise to a right of indemnification in connection with said books of business, Assets or liabilities may, or may be said to, give rise to a right of indemnification under another Subsection of this Section 5.2.

[21] In my view, the trial judge erred in relying on s. 5.2(f) for two reasons. First, the section does not apply to assessments levied by CompCorp. The parties addressed liability for CompCorp assessment separately and specifically in s. 4.2. I therefore think it reasonable to conclude that they did not intend liability for these assessments to be governed by s. 5.2(f). See Novopharm v. Apotex Inc. (1995), 1995 7310 (ON SC), 60 C.P.R. (3d) 345 (Ont. Gen. Div.), affirmed (1996), 1996 1283 (ON CA), 68 C.P.R. (3d) 238 (Ont. C.A.).

[22] Second, even if s. 5.2(f) applies, it does not make the appellants liable for the assessments in question. Section 5.2(f) calls for indemnification for any liabilities arising from The Citadel’s book of business before closing. But the appellants were not liable for any assessments before closing. The liability for the assessments in question arose after closing. Again, the method for calculating those assessments is irrelevant to when liability for them arose.

[23] I therefore conclude that the terms of the agreement require the respondents to pay the assessments levied by CompCorp between 1994 and 1996. I would allow the appeal, set aside the judgment at trial, and dismiss the action. The appellants are entitled to their costs of the trial and the appeal.

“J.I. Laskin J.A.”

“I agree: J. Carthy J.A.”

“I agree: M. Rosenberg J.A.”

Released: May 11, 2000