DATE: 20030515
DOCKET: C37899
COURT OF APPEAL FOR ONTARIO
MACPHERSON, SIMMONS and CRONK JJ.A.
B E T W E E N:
TRANSCANADA PIPELINES LIMITED
Plaintiff
(Respondent, Appellant by way of Cross-Appeal))
Warren H. O. Mueller, Q.C.
for the appellant
Commonwealth Insurance Company of Canada Limited
- and -
Richard H. Krempulec, Q.C.
for the respondent
POTTER STATION POWER LIMITED PARTNERSHIP
TransCanada Pipelines Limited
Defendant
(Respondent in support of the appeal)
- and -
THE ROYAL INSURANCE COMPANY OF CANADA LIMITED and COMMONWEALTH
INSURANCE COMPANY OF CANADA LIMITED
Third Parties
(Commonwealth, Appellant in its capacity as third party defending the main action, Respondent by Cross- Appeal)
Heard: October 25, 2002
On appeal from the judgment of Justice Dennis G. Lane of the Superior Court of Justice dated February 7, 2002. Reported at 2002 49642 (ON SC), [2002] O.J. No. 429.
SIMMONS J.A.:
[1] In 1995, a natural gas compressor station owned by TransCanada Pipelines Limited (“TCPL”) was damaged when the land on which it sits subsided. Relying on an indemnity provision in a contract, TCPL sued Potter Station Power Limited Partnership (“Potter Power”) for the damages that it suffered as a result of this incident.
[2] Commonwealth Insurance Company[^1] (“Commonwealth”) is one of Potter Power’s insurers. Commonwealth brought a summary judgment motion to dismiss TCPL’s action, claiming that the indemnity provision is restricted to claims against TCPL by third parties and that it does not cover first party losses suffered by TCPL directly.
[3] The main issue on this appeal is whether the motion judge erred in declaring that the indemnity provision extends to damages suffered by TCPL directly.
[4] For the reasons that follow, I would dismiss the appeal. I would dispose of the cross-appeal in the manner agreed upon by the parties.
I. Background
[5] For many years, TCPL has operated a natural gas pipeline between Alberta and Ontario. Its facilities include a series of compressor stations that produce exhaust gas (“waste heat”) as part of the natural gas transmission process.
[6] On May 3, 1990, Potter Power’s predecessor (both entities will be referred to collectively as “Potter Power”) entered into an agreement with TCPL granting Potter Power the exclusive right to purchase the waste heat produced by compressor station 102. It also permitted Potter Power to construct an electrical power generating facility (the “Facility”) on the adjacent land and to connect it to station 102 using a duct system.
[7] On May 21, 1993, the parties entered into a further agreement (the “Waste Heat Agreement”), which included provisions requiring each of TCPL and Potter Power to indemnify the other in certain circumstances. The indemnity in favour of TCPL (the “Indemnity”) is in issue on this appeal. The specific terms of the Indemnity are as follows:
- Potter Power shall indemnify and save harmless TransCanada from and against all liability, actions, claims, losses, costs and damages which may be brought against or suffered by TransCanada and which TransCanada may incur, sustain or pay arising out of or in connection with:
(a) construction, operation and maintenance of the Facility (including the Duct System);
(b) the negligence or willful misconduct of Potter Power, its directors, officers, employees, agents, servants, contractors and subcontractors arising out of or incidental to this Agreement; or
(c) a breach by Potter Power of any of the terms and conditions set forth in this Agreement,
except to the extent that such losses or damages, result from the negligence or willful misconduct of TransCanada [emphasis added].
[8] On August 16, 1995, the lands upon which station 102 sits subsided, damaging the compressor station, its associated equipment, and the Facility.
[9] Relying on the Indemnity, TCPL issued a statement of claim against Potter Power on May 26, 1998 in which it claimed that Potter Power caused the subsidence by removing groundwater from an underlying aquifer in order to operate the Facility.
[10] On October 23, 1998, Potter Power delivered a statement of defence, denying that it caused the subsidence and counterclaiming against TCPL under its indemnity in the Waste Heat Agreement.
[11] Potter Power added Commonwealth to the proceeding as a third party. Commonwealth, in turn, defended the main action and brought a summary judgment motion to dismiss it. In particular, it claimed that the Indemnity relates only to claims against TCPL by third parties and that it does not extend to first party claims, that is, to damages suffered by TCPL directly.
[12] In response to Commonwealth’s motion TCPL delivered an affidavit from a solicitor formerly employed in its legal department (the “TCPL solicitor”). In his affidavit, the TCPL solicitor confirmed that he “was involved” in drafting the Waste Heat Agreement and gave evidence about TCPL’s motivation for seeking the Indemnity, and its intentions and instructions concerning the nature of the Indemnity. The TCPL solicitor also indicated that he had “no recollection” of specific discussions or correspondence with Potter Power concerning the wording of the Indemnity.
[13] On the return of the motion, Commonwealth objected to the admissibility of several elements of the TCPL solicitor’s evidence. Relying on authorities such as Eli Lilly & Co. v. Novopharm Ltd.[^2], it claimed that the impugned elements amounted to inadmissible evidence of the subjective intentions of a contracting party.
[14] In his reasons, the motion judge admitted some parts of the impugned evidence and rejected others. In particular, he admitted the following extract from the TCPL solicitor’s affidavit, on the basis that it was a “description of the background commercial considerations underlying the transaction”.
Potter Limited wished to purchase from TransCanada lands which were contiguous to Station 102 and wished to erect on such lands a waste heat recovery facility for the purpose of electrical power generation… TransCanada would permit the Potter Power Facility next to the TransCanada Facility only if it was satisfied that the construction, operation or maintenance of the Potter Power Facility would not interfere with the operation of [the] TransCanada Facility. That is why TransCanada wanted to approve the plans of the Potter Power Facility, and wanted as a form of insurance, an indemnity from the operators of the Potter Power Facility in the form set out in paragraph 10 of the Waste Heat Agreement... [emphasis added].
[15] The motion judge concluded that the Indemnity extends to damages suffered by TCPL directly and dismissed the summary judgment motion.
II. The Motion Judge’s Reasons
[16] In dismissing Commonwealth’s summary judgment motion, the motion judge found that the relevant caselaw “does not establish a general principle that wherever words of indemnity are found, the obligation created is confined” to third party claims. Rather, he said “[t]he principle exemplified by every case cited is that the obligation is governed by the words chosen, when placed and read in their context”.
[17] The motion judge determined that, when read in context, the specific words used in the Indemnity demonstrate that a broader meaning was intended than simply protection against third party claims. In particular, he found that the emphasized portion of the phrase
indemnify and save harmless TransCanada from and against all liability, actions, claims, losses, costs and damages which might be brought against or suffered by TransCanada
introduces “an alternative to ‘brought against’, namely, ‘suffered’ which is more appropriately associated with damage to TransCanada itself”.
[18] The heart of the motion judge’s reasoning is set out in paragraphs 36-38 of his reasons:
[36] Certainly there are words of indemnity here and the words “which might be brought against” TransCanada may be appropriately associated with an indemnity against claims of third parties. However, the language refers to “losses, costs and damages” and continues “..or suffered by TransCanada ..” which appears to me to introduce an alternative to “brought against”, namely “suffered” which is more appropriately associated with damage to TransCanada itself. When the words are put together to read “..losses, costs and damages which may be suffered by TransCanada”, they are surely appropriately read more broadly than simply claims by third parties. If every word is to be given meaning, and “brought against” covers the claims of third parties, it follows that “suffered” relates to something else, which must be direct damage to TransCanada.
[37] This approach is reinforced when we move to consider the balance of paragraph 10:
“..and which TransCanada may incur, sustain or pay arising out of or in connection with….
[38] Here the parties are directing their minds to the circumstances out of which these liabilities may flow. The words “incur, sustain or pay” are not confined to third party claims; one incurs or sustains or pays regardless of the kind of loss one is dealing with. Then the agreement lists, as (a), (b) and (c), three sources of the obligation of Potter. Far from confining them to claims by third parties, which could easily have been expressly done, they use language which grammatically and logically includes direct claims by TransCanada against Potter arising from breach of contract under (c); from negligence or willful misconduct under (b); and, under (a), from the operation of Potter’s Facility [emphasis added].
III. Grounds of Appeal
[19] Commonwealth contends that the motion judge erred in two separate but related respects in concluding that the Indemnity extends to TCPL’s claim for damages that it suffered directly:
i) he failed to advert to or apply the principle of contra proferentem; and
ii) he failed to find, at a minimum, that the Indemnity is ambiguous concerning whether it covers TCPL’s claim for its own damages.
IV. Analysis
i) Did the motion judge err in failing to advert to or apply the principle of contra proferentem?
[20] Commonwealth submits that because TCPL was the exclusive drafter of the Indemnity, the motion judge erred by failing to recognize that contra proferentem is the governing principle of contractual interpretation in this case, and by failing to resolve any ambiguity in the Indemnity against TCPL’s interest.
[21] I disagree. In my view, it is apparent from the motion judge’s reasons that he did not find the Indemnity ambiguous. For reasons that I will explain in the next section, I agree with that conclusion. Accordingly, it was unnecessary that the motion judge deal with the principle of contra proferentem.
[22] In Consolidated-Bathurst Export Limited v. Mutual Boiler and Machinery Insurance Company[^3], Estey J., speaking for the majority of the Supreme Court of Canada, made it clear that contra proferentem applies only once a finding of ambiguity is made. At page 901, Estey J. quoted the following excerpt from Cornish v. Accident Insurance Company[^4] with approval:
Lindley L.J. put it this way:
In a case on the line, in a case of real doubt, the policy ought to be construed most strongly against the insurers; they frame the policy and insert the exceptions. But this principle ought only to be applied for the purpose of removing a doubt, not for the purpose of creating a doubt, or magnifying an ambiguity, when the circumstances of the case raise no real difficulty [emphasis added].
[23] As it was therefore unnecessary that the motion judge address the principle of contra proferentem, I would not give effect to this ground of appeal.
ii) Did the motion judge err in failing to find, at a minimum, that the Indemnity is ambiguous concerning whether it covers TCPL’s claim for its own damages?
[24] Commonwealth submits that the motion judge made six errors in interpreting the Indemnity. First, he admitted inadmissible evidence of TCPL’s subjective contractual intentions. Second, he failed to hold that a long history of caselaw demonstrates that the starting point for interpreting the words “indemnify and save harmless” is that they refer to third party claims. Third, he failed to recognize that the language of the Indemnity is equally referable to third party claims and claims for first party losses and that the Indemnity is therefore ambiguous. Fourth, he gave insufficient weight to Mobil Oil Canada Ltd. v. Beta Well Service Ltd.[^5] in which both the Alberta Court of Appeal and the Supreme Court of Canada held that the language of a similarly worded indemnity was restricted to third party claims. Fifth, he failed to recognize that the terms of the Waste Heat Agreement and its surrounding context weigh against interpreting the Indemnity as extending to damages suffered by TCPL directly. Sixth, in interpreting the Indemnity, he relied improperly on Potter Power’s counterclaim.
[25] I find it unnecessary to determine whether the appellants’ first two submissions are correct. Even assuming that Commonwealth’s first two submissions are correct, I agree with the motion judge’s conclusion that the Indemnity is not ambiguous for four reasons.
[26] First, assuming, without deciding, that the motion judge should not have admitted the impugned portions of the TCPL solicitor’s affidavit, on a fair reading of the Waste Heat Agreement and the admissible portions of the affidavit, I agree with the motion judge’s statement concerning the context in which the Waste Heat Agreement must be read (at para. 18):
The problem before me is therefore one of interpretation of paragraph 10 against the context of two sophisticated businesses becoming both commercially and geographically involved with each other. TransCanada became a supplier to Potter and Potter a customer of TransCanada. Potter also became a neighbour of TransCanada with physical connections between them for the conveyance of the heat being purchased and sold. Potter came to a situation where TransCanada had carried on its business for many years.
[27] Second, assuming, without deciding, that the starting point for interpreting the phrase “indemnify and save harmless” is that it refers to third party claims, I agree with the motion judge’s conclusion at paragraph 36 of his reasons that, when read fairly and in context, the language of the Indemnity is “appropriately read more broadly than [covering] simply claims by third parties”.
[28] I will repeat the relevant provisions of the Indemnity for ease of reference:
- Potter Power shall indemnify and save harmless TransCanada from and against all liability, actions, claims, losses, costs and damages which may be brought against or suffered by TransCanada and which TransCanada may incur, sustain or pay arising out of or in connection with:
(a) construction, operation and maintenance of the Facility (including the Duct System) [emphasis added].
[29] In particular, I adopt the motion judge’s reasoning that the words “losses, costs and damages which may be … suffered by TransCanada” introduce an obvious alternative to “all liability, actions, claims … which may be brought against … TransCanada” and that, when read in context, the alternative is “more appropriately associated with damage to TransCanada itself”.
[30] On this issue, I specifically reject Commonwealth’s submission that the motion judge erred in failing to recognize that the emphasized words are equally referable to third party claims and first party claims for direct damages. In particular, Commonwealth contends that a third party claim will involve a “loss suffered” or “damages incurred or paid” either when the claim is settled before formal indemnification is sought or when a judgment in favour of a third party is awarded or paid and that the Indemnity is therefore ambiguous.
[31] In my view, this submission is no more than an attempt to create an ambiguity by attaching an obscure meaning to unambiguous words.
[32] Third, I reject Commonwealth’s submission that the motion judge gave insufficient weight to Mobil Oil and conclude that it is distinguishable from this case for the following reasons.
[33] Contrary to Commonwealth’s submission, the language of the two indemnity provisions is different in a significant way. The Mobil Oil clause provides as follows:
[Beta] shall be liable for and shall indemnify and save harmless Mobil Oil of and from all manner of actions, causes of action, proceedings, claims, demands, loss, costs, damages and expenses whatsoever which may be brought or made against Mobil Oil or which it may sustain, pay, or incur as a result of or in connection with the performance, purported performance or non-performance of this agreement or other work hereunder by [Beta]…
[34] By contrast, the Indemnity provides:
- Potter Power shall indemnify and save harmless TransCanada from and against all liability, actions, claims, losses, costs and damages which may be brought against or suffered by TransCanada and which TransCanada may incur, sustain or pay arising out of or in connection with:
(a) construction, operation and maintenance of the Facility (including the Duct System) [emphasis added].
[35] The key difference between the two provisions is the compelling alternative introduced by the words “which may be brought against or suffered by” in the Indemnity.
[36] In the Mobil Oil provision, there is no similar clear alternative. Rather, in Mobil Oil, the potential alternative is between the words “which may be brought or made against” and the words “which it may sustain, pay, or incur”. However, while the words “which may be brought or made against” appear to be used synonymously, such that each verb applies individually to only some of the preceding nouns, it is not obvious whether the words “which it may sustain, pay, or incur” are to be interpreted synonymously and applied individually to only some of the preceding nouns or whether they are to be interpreted as introducing an alternative by applying each verb individually to all of the preceding nouns. Put another way, in Mobil Oil, the words “which it may sustain, pay, or incur”, when juxtaposed against “which may be brought or made against” and interpreted in conjunction with the rest of the clause, do not produce the same compelling alternative that exists in the Indemnity.
[37] In addition, the commercial context of the two cases is vastly different. Mobil Oil involved an indemnity contained in a repair contract between an oil and gas well servicing company and a well owner. A clause in the repair contract required the servicing company to perform its work in a good and workmanlike manner. It therefore established a standard of performance that was inconsistent with absolute liability on the part of the contractor. Moreover, a schedule stipulated that the contractor would be “held responsible only for its willful misconduct and failure to exercise good faith at all times”.
[38] In contrast, and, in my view, contrary to Commonwealth’s submissions, neither the specific terms of the Waste Heat Agreement nor its surrounding context weigh against interpreting the Indemnity as extending to damages suffered by TCPL directly. In particular, paragraph 6(b) of the Waste Heat Agreement refers only to complying with regulatory standards and obtaining TCPL’s prior approval of all designs and construction drawings. Because neither reference establishes a particular standard of performance, they are not inconsistent with absolute liability on the part of Potter Power. Further, the parallel indemnity in the Waste Heat Agreement in favour of Potter Power is limited to claims arising from the negligence or willful misconduct of TCPL, both of which are specifically excluded from Potter Power’s obligation under the Indemnity. In my view, there is no provision in the Waste Heat Agreement that is inconsistent with absolute liability on the part of Potter Power.
[39] Fourth, I reject Commonwealth’s submission that the motion judge relied improperly on Potter Power’s counterclaim in interpreting the Indemnity. Although the motion judge, when summarizing the positions of the parties, recited TCPL’s argument that Potter Power’s conduct indicated that it shared TCPL’s interpretation of the Indemnity there is no indication in his analysis that he relied on this argument in reaching his decision.
[40] In summary, I conclude that the motion judge did not err in his conclusion concerning the meaning of the Indemnity and I would not give effect to this ground of appeal.
V. Disposition
[41] For the reasons given, I would dismiss the appeal with costs. The respondent may file submissions concerning the quantum of costs within seven days from the date hereof and the appellant may respond thereto within seven days thereafter.
[42] On consent, I would allow the cross-appeal without costs, and amend paragraph 1 of the order dated February 7, 2002 to read:
THIS COURT DECLARES that paragraph 10 of an agreement at issue in this action includes an indemnity against direct loss or damage to TransCanada Pipelines Limited’s property arising out of or in connection with the construction, operation and maintenance of the Potter facility.
Released: May 15, 2003 “JCM”
“Janet Simmons J.A.”
“I agree J. C. MacPherson J.A.”
“I agree E.A. Cronk J.A.”
[^1]: Incorrectly described in the title of proceedings as Commonwealth Insurance Company of Canada Limited. [^2]: 1998 791 (SCC), [1998] 2 S.C.R. 129 at p. 166. [^3]: 1979 10 (SCC), [1980] 1 S.C.R. 888. [^4]: (1889), 23 Q.B. 453 (C.A.) at 456. [^5]: (1974), 1974 ALTASCAD 19, 43 D.L.R. (3d) 745 (Alta. S.C. Appellate. Div.), aff’d 1974 1385 (SCC), 50 D.L.R. (3d) 158 (S.C.C.).