CITATION: Guelph (City) v. Super Blue Box Recycling Corp., 2009 ONCA 481
DATE: 20090616
DOCKET: C47680
COURT OF APPEAL FOR ONTARIO
Doherty, Blair and Lang JJ.A.
BETWEEN
The Corporation of the City of Guelph
Plaintiff
Defendant by Counterclaim (Respondent)
and
Super Blue Box Recycling Corp.
Defendant
Plaintiff by Counterclaim (Appellant)
and
Eastern Power Limited
Third Party
(Appellant)
Joseph C. D’Angelo and Mark Wiffen, for the appellants
J. Gregory Richards, Michael Statham and Nikiforos Iatrou, for the respondent
Heard: June 9, 2009
On appeal from the judgment of Justice Donald MacKenzie of the Superior Court of Justice dated August 10, 2007 and reported at 2007 CanLII 38941 (Ont. S.C.).
R.A. Blair J.A.:
BACKGROUND AND FACTS
[1] Eastern Power Limited had created and lab-tested a technology for the transformation of municipal solid waste (“MSW”) into recyclable products. If successful, the technology would enable municipalities to divert more MSW from landfill sites into recyclable processes. It was therefore an attractive possibility.
[2] Eastern was looking for a municipal “partner” willing to help demonstrate the new technology and with a site where it could build a demonstration plant in order to take the technology to the next step and show that it was workable and economically viable. Eastern found an interested party in the City of Guelph, which had a Wet-Dry Facility that could accommodate Eastern’s proposed plant. Eastern made a formal Proposal to the City and, after a period of negotiation, persuaded Guelph to enter into an agreement with Eastern’s wholly-owned subsidiary, Super Blue Box Recycling Corp. (“Subbor”). Subbor holds the patents for the technology in question, but otherwise has no assets. It was a theme of Eastern’s pitch in the negotiations that Guelph would not incur any costs or liabilities in connection with the proposed project.
[3] The agreement between Guelph and Subbor is dated November 6, 1998 (“the Agreement”). It had two aspects: (a) a lease granting Subbor a leasehold interest to the site on which the demonstration facility was to be built, and (b) a portion setting out the respective rights and obligations of Guelph and Subbor with respect to the demonstration project. In addition, the Agreement included the Eastern Proposal referred to above as a schedule and provided that was “incorporated into and form[ed] part of [the] Agreement.” Eastern was not a party to the Agreement. However, the Eastern Proposal contained an undertaking that “Eastern Power will indemnify the City of Guelph against liability that may arise as a result of the pilot demonstration project.”
[4] The Agreement was for a period of three years, subject to an automatic extension for a further three years in the event that the project facility accepted MSW during the first three years of the term.[^1] This provision is at the core of the lawsuit and the appeal because the central dispute between the parties is whether the automatic three-year extension was triggered on January 28, 2000 leading to a termination date of January 28, 2003, as the City asserts, or on October 30, 2001 or some later date, as Subbor and Eastern assert. The trial judge found in favour of the City on this issue.
[5] Article 4(1) of the Agreement states:
The term of this lease shall be for three (3) years from the date of execution of the Agreement and Lease by both parties. Should the Demonstration Plant accept MSW Feedstock within the first three (3) years of this lease, the lease shall then be automatically extended for a further three (3) years from the date such MSW Feedstock is accepted.
[6] “Demonstration Plant” and “MSW Feedstock” are both defined in the Agreement:
“Demonstration Plant” shall mean any and all equipment required for a facility to demonstrate the SUBBOR Technology and any associated structures including material handling, digestion, biogas collection and energy conversion equipment, Utilities Interfaces and other related equipment as deemed appropriate and supplied by the Company to demonstrate their SUBBOR Technology.
“MSW Feedstock” shall mean any municipal solid waste material supplied to the Demonstration Plant.
[7] “Company” is also defined:
“Company” shall mean Super Blue Box Recycling Corp. an Ontario Company and a wholly owned subsidiary of Eastern Power Limited. “Company” shall also mean and include any successor of the Company or any permitted assignee of the Company.
[8] The development of the project led to a number of disputes between the parties. The nature of these disputes is not material to the appeal. Suffice it to say, they led to the City taking the position that the Agreement had an early termination date – January 28, 2003 – and seeking a court declaration to that effect.
[9] The appellants took a different view. They argued for a later termination date (October 30, 2004 or later). They also asserted that the City had itself breached the Agreement in various ways including its early termination, which allegedly deprived the appellants of the reasonable period of time they required to develop the project for demonstration purposes. The appellants counterpunched for $30 million in damages.
[10] MacKenzie J. found in favour of the City on all issues. He declared that the Agreement expired effective January 28, 2003 and required Subbor to discharge any outstanding obligations under the Agreement, to surrender the premises, remove the Demonstration Plant, and restore the site to its original condition. He dismissed Subbor’s counterclaim and ordered Eastern to pay the City’s costs of the proceedings (including any costs Subbor was obliged to pay but did not) and to “indemnify the City for any liabilities arising out of Subbor’s demonstration project, including any damages recoverable by Subbor against the City.”
[11] Subbor and Eastern appeal, attacking the trial judge’s interpretation of Article 4(1) of the Agreement and various of his alternative findings with respect to damages. They also contest his finding that Eastern was liable to indemnify the City.
[12] On the appeal, we did not call on the respondent with respect to the contractual interpretation ground of appeal, which is dismissed for the brief reasons that follow. It is therefore unnecessary to deal with the grounds of appeal relating to damages. We heard argument with respect to the indemnity issue, but on reflection we would dismiss that ground of appeal as well for the reasons that follow.
ANALYSIS
Liability: The Contractual Interpretation Issue
[13] The City argues that the second three-year term of the Agreement began on January 28, 2000 because on that date the Subbor facility first accepted approximately 30 tonnes of MSW. The appellants do not dispute that MSW in those amounts was received at that time. They submit, however – based on the definition of “Demonstration Plant” in the Agreement and the state of evolution of the project at that time – that the project facility had not then evolved to the point where it had reached the status of a “Demonstration Plant” and, accordingly, that it could not have “accepted” MSW as contemplated by Article 4(1) as of January 28, 2000. The reception of waste at that time was merely for purposes of commissioning or testing the “Front End” of the plant.
[14] The appellants contend, in effect, that the facility must have been substantially completed for demonstration purposes – if not for full production – before the automatic extension provisions of Article 4(1) could be triggered. The correct interpretation of the Agreement and of Article 4(1), they say, requires the court to give meaning to all of the words in the definition of “Demonstration Plant”. The triggering event under Article 4(1) – delivery and acceptance of MSW – could only be engaged, then, when “any and all equipment required … to demonstrate the SUBBOR Technology” was in place and “deemed appropriate … by [Subbor] to demonstrate their SUBBOR Technology.”
[15] The trial judge did not accept the appellant’s submissions. He found that the language of the Agreement unambiguously gave effect to the intention of the parties, which was not to limit “acceptance” of MSW to delivery for the purpose of operating the Demonstration Plant as a unitary whole or to create an entirely subjective criterion – open only to Subbor – to establish the triggering event. No commercial absurdity flowed from this conclusion. He also rejected the appellants’ factual contention that the January 28 2000 delivery and acceptance occurred at a time when Subbor was commissioning only the “Front End” of the Demonstration Plant. The trial judge found that this contention was completely at odds with representations being made by Subbor around the same time about the state of development of the project not only to Guelph but to other municipalities, to various trade journals, and to its funding agency.
[16] We agree. It seems to us that the parties intended to engage the automatic extension provision once the project facility was able to accept MSW for processing. Subbor would then have three years to complete the development and testing of the plant and to demonstrate the efficacy and commercial viability of its new technology. Then, as provided in Article 4(2), if Subbor “has deemed the Demonstration Plant a success” and “the City has realized auditable and independently verifiable cost savings or other financial benefits over $250,000 based on criteria established solely by the City”, the parties could extend for a further ten years “as negotiated”.
[17] We would add that, in our view, the appellants’ rigid application of the definition of “Demonstration Plant” to the triggering of the extension provision, and the requirement to apply that same meaning to the term “Demonstration Plant” throughout the Agreement, would themselves lead to commercial absurdities in a number of instances. Two examples of this are the provisions related to insurance and ownership of technology. If the appellants’ argument were to prevail, Subbor would have no obligation to insure the facility, nor would it have any ownership interest in any newly discovered technology, prior to the project being at least in full demonstration mode. This makes no sense.
[18] In our view, the trial judge’s interpretation of the Agreement was correct and in accordance with the applicable principles of contractual interpretation: see Consolidated Bathurst Export Ltd. v. Mutual Boiler and Machinery Insurance Co., 1979 CanLII 10 (SCC), [1980] 1 S.C.R. 888; BG Checo International Ltd. v. British Columbia Hydro and Power Authority, 1993 CanLII 145 (SCC), [1993] 1 S.C.R. 12; Ventas, Inc. v. Sunrise Senior Living Real Estate Investment Trust (2007), 2007 ONCA 205, 85 O.R. (3d) 254 (C.A.).
The Indemnity Issue
[19] The trial judge gave effect to the City’s third party claim against Eastern for indemnity. Although Eastern was not a party to the Agreement, the claim was based on Eastern’s Proposal as incorporated into the Agreement. The City also emphasized the provisions in the Agreement that make it clear that the intention of the parties to the Agreement was that the City would incur no costs or liabilities arising out of the project.
[20] As the trial judge noted, Eastern resisted the claim on the grounds:
a) that it was not a party to the Agreement;
b) that the enabling resolution of the City of Guelph made no mention of Eastern when authorizing the City to sign a contract between Guelph and Subbor;
c) that in the course of negotiations there had been discussions that Eastern would not be a guarantor of Subbor’s duties and obligations under the Agreement; and
d) that a party cannot be indemnified against the consequences of its own negligence unless the indemnity obligation is imposed in the clearest of terms.
[21] Since the trial judge found no negligence on the part of the City, the latter submission is not relevant to the appeal.
[22] The trial judge concluded at paras. 285-286:
In this case, [Eastern] is involved in the indemnity undertaking through its involvement in a larger transaction and the contractual undertaking of [Eastern] is one of indemnity and not guarantee. Here, the “larger transaction” is the demonstration project for the technology in respect of which Subbor, as a fully owned subsidiary of [Eastern], was the delivery mechanism or vehicle for the technology.
In the result, I conclude that the City has the remedy of indemnification from [Eastern] with respect to any liabilities that may arise as a result of Subbor’s demonstration project.
[23] In our view this result is sustainable on the particular facts of this case.
[24] Eastern was the entity promoting and carrying out the waste processing project, albeit that it was doing the latter through its wholly-owned subsidiary, Subbor. The Proposal called for an agreement between it and the City, and undertook to indemnify the City “against liability that may arise as a result of the pilot demonstration project.” When Gregory Vogt – Eastern’s and Subbor’s representative – spoke to City Council just four days before the Agreement was executed, he assured Council that “we [i.e., Eastern/Subbor] will be providing all of the funding, all the costs, all the risks and liabilities that go with [the demonstration project] (emphasis added)”. He went on to say:
Let’s talk about the costs to Guelph. … We’re not expecting any operational costs or support, no liabilities, and no other costs whatsoever. This is something that’s an initiative that we together with Industry Canada have developed and fully anticipate to pay all costs for. [Emphasis added.]
[25] In the face of these assurances, the Eastern Proposal was made a schedule to the Agreement and was specifically stated in Article 2 to be “incorporated into” and to “[form] part of this Agreement.” While Eastern itself was not made a party to the Agreement – for reasons not anywhere explained – the Agreement specifically underscores, both in the recitals and in the definition of the “Company”, that Subbor is a wholly owned subsidiary of Eastern. The recitals also reflect that the City’s original resolution authorized the development of “a draft agreement between the City and Eastern Power Ltd. for Council’s consideration” and that the agreement was subsequently prepared by Subbor. That the final Council resolution authorizing the agreement with Subbor makes no specific mention of Eastern is inconsequential in our opinion.
[26] Nor is the fact that the parties negotiated to omit a guarantee by Eastern dispositive. The omission of a guarantee and the existence of an indemnity are not incompatible. The City does not say it is entitled to a guarantee of Subbor’s performance under the Agreement. It says it is entitled to be indemnified for any costs and liabilities it may incur in connection with the demonstration project on the basis of Eastern’s separate undertaking to do so.
[27] The trial judge’s view that Eastern was “involved in the indemnity undertaking through its involvement in a larger transaction” is therefore well-founded in the factual matrix underlying the Agreement. Eastern effectively asked the City to accept its proposal (including the indemnity found therein) and to enter into an agreement with its wholly-owned subsidiary to put it into effect. In exchange, it held out that it would give substance to the Proposal and that the City would be indemnified and held harmless against all costs and liabilities associated with or arising out of the demonstration project. The City accepted this proposal by entering into the Agreement with Subbor. This was sufficient offer, acceptance, and consideration to make the undertaking to indemnify enforceable in the circumstances.
DISPOSITION
[28] For the foregoing reasons, the appeal is dismissed.
[29] If the parties are unable to agree on costs, counsel may make brief written submissions in that regard, not to exceed four pages each, within 30 days of the release of this endorsement.
“R.A. Blair J.A.”
“I agree D. Doherty J.A.”
“I agree S.E. Lang J.A.”
RELEASED: June 16, 2009
[^1]: The Agreement also provided a potential further 10-year extension if the project proved successful, but that provision is not at issue in the proceeding.