Whirlpool Canada Co. v. Chavila Holdings Limited et al.

[Indexed as: Whirlpool Canada Co. v. Chavila Holdings Ltd.]

Ontario Reports Court of Appeal for Ontario Strathy C.J.O., LaForme and Benotto JJ.A. January 31, 2017

134 O.R. (3d) 161 | 2017 ONCA 81

Case Summary

Professions — Barristers and solicitors — Conflict of interest

863 purchased former industrial lands from Whirlpool (through its related companies Outrigger and Chavila) for a reduced price after discovering that soil and groundwater on those lands and on neighbouring lands which Whirlpool's predecessor had leased were contaminated. Outrigger and Chavila agreed to indemnify Whirlpool from liability arising from the condition of the property and to defend any action brought against it. 863 subsequently sued owners of neighbouring lands for costs of remediation. Owners claimed against Whirlpool for contribution and indemnity. The claim triggered the indemnity agreement. Counsel appointed by Outrigger and Chavila for Whirlpool did not have a disqualifying conflict of interest as Whirlpool's immediate interests were not adverse to those of Outrigger and Chavila.

Facts

863 purchased four adjacent properties for development. The owners were CP, Oxford, CN and Whirlpool. Whirlpool's predecessor had historically leased the CN and Oxford lands for commercial activities. Before 863 purchased the Whirlpool-owned lands through 863's related corporations Chavila and Outrigger, it was discovered that the soil and groundwater on all four properties were contaminated. Whirlpool lowered its asking price in exchange for Chavila and Outrigger agreeing to defend it from all liability arising from the condition of the properties and to defend any action brought against it.

863 subsequently commenced an action against CP and Oxford for the costs of remediation of the CP and Oxford lands (the "main action"). CP and Oxford brought claims seeking contribution and indemnity from Whirlpool. Those claims triggered the indemnity agreement, and Chavila and Outrigger appointed counsel to represent Whirlpool.

Whirlpool took the position that the lawyer appointed, S, had a conflict of interest in that he could not represent Whirlpool's interests while taking instructions from Chavila and Outrigger, which were associated with 863, the plaintiff in the main action. Whirlpool argued that it had a limitation defence to the claims of CP and Oxford, and that Outrigger and Chavila would refuse to instruct S to raise that defence because, if successful, it would also bar 863's claim against CP and Oxford in the main action.

Whirlpool brought an application for an interpretation of the indemnity agreement that would preclude that conflict. The application judge concluded that there was no conflict and dismissed the application. Whirlpool appealed.

Held

The appeal should be dismissed.

Per Benotto J.A. (LaForme J.A. concurring): S did not have a conflict of interest as the immediate interests of Whirlpool were not directly adverse to those of Outrigger and Chavila. Oxford and CP had already raised a limitation defence in the main action. Moreover, there was no evidence that S, as an officer of the court, would not pursue a diligent defence for Whirlpool. There was not a substantial risk that S's representation of Whirlpool would be materially and adversely affected by the fact that he would be taking instructions from Chavila and Outrigger, which shared their sole officer and director with 863.

Whirlpool and 863 were not adverse in interest. Whirlpool had no direct interest in the outcome of either the main action or the CP and Oxford actions because its interests were fully protected pursuant to the terms of the indemnity agreement and a confirmation by 863 that it would not seek any damages from Whirlpool. Moreover, the terms of the indemnity agreement, which were negotiated by sophisticated parties, had anticipated the very scenario which had arisen.

The conclusion that there was no conflict was strengthened by an analogy to principles of insurance law. Those principles demonstrated that Outrigger and Chavila -- and S -- had to exercise reasonable care and skill in defending the CP and Oxford actions and had to pursue Whirlpool's best interests by minimizing its liability.

Per Strathy C.J.O. (dissenting): The application judge erred in law by failing to identify a patent conflict between Whirlpool's interests and those of 863. That conflict was not resolved either by the indemnity agreement or by the hold harmless agreement offered by 863. It was in Whirlpool's interests to raise a limitation defence to 863's claim in the main action. It was not in 863's interest that a limitations defence be raised as, if successful, that defence would defeat 863's claim.

Whirlpool's interest went further than minimizing its own liability by maximizing that of CP and Oxford. Its interest was in having CP and Oxford exposed to no liability (by virtue of the limitations defence). In that case, there would be no claim for contribution against Whirlpool, and it would not have to call on either the indemnity agreement or the hold harmless agreement proposed by 863. Whirlpool was entitled to be represented by a lawyer who was free of conflicts and who would raise every viable defence.

Cases Referred To

• 1298417 Ontario Ltd. v. Lakeshore (Town), 2014 ONCA 802, 122 O.R. (3d) 401
• Amato v. Welsh, 2013 ONCA 258, 305 O.A.C. 155
• Appin Realty Corp. v. Economical Mutual Insurance Co., 2008 ONCA 95, 89 O.R. (3d) 654
• Brockton (Municipality) v. Frank Cowan Co., 57 O.R. (3d) 447
• Canadian National Railway Co. v. McKercher LLP, [2013] 2 S.C.R. 649, 2013 SCC 39
• Ernst & Young Inc. v. Chartis Insurance Co. of Canada, 2014 ONCA 78, 118 O.R. (3d) 740
• Fredrikson v. Insurance Corp. of British Columbia, 69 D.L.R. (4th) 399
• Hoang (Litigation guardian of) v. Vicentini, 2016 ONCA 723
• Kingscourt Auto Enterprises Inc. v. General Accident Assurance Co. of Canada, 8 C.C.L.I. (2d) 21
• R. v. Neil, [2002] 3 S.C.R. 631, 2002 SCC 70
• Richcraft Homes Ltd. v. Urbandale Corp., 2016 ONCA 622
• Sattva Capital Corp. v. Creston Moly Corp., [2014] 2 S.C.R. 633, 2014 SCC 53
• Shea v. Manitoba Public Insurance Corp., 55 B.C.L.R. (2d) 15
• Whirlpool Canada Co. v. Chavila Holdings Ltd., 2015 ONSC 2080

Appeal

APPEAL from the order of Dow J., 2016 ONSC 58 (S.C.J.) dismissing an application for finding of a conflict of interest.

Counsel:

• Jennifer Dahany and Gary D. Graham, for appellant
• Allan Sternberg and Joseph Figliomeni, for respondents

Decision

BENOTTO J.A. (LAFORME J.A. concurring):

Overview

[1] This appeal concerns an alleged conflict of interest between parties to an action arising out of the sale of contaminated land.

[2] In the early 1990s, an area of land on the western edge of downtown Toronto was being assembled for development. It is now known as Liberty Village. The land consisted of four adjacent properties, which I refer to (by the names of their original owners) as the CP lands, the Oxford lands, the CN lands and the Inglis lands.

[3] In 1990, 863800 Ontario Limited ("863") purchased the CP and Oxford lands. In 1991, 863 sought to purchase Whirlpool's parcel (the Inglis lands) through its related corporations Chavila and Outrigger. It was discovered that the soil and groundwater on all four properties were contaminated. Negotiations ended but resumed years later when Whirlpool lowered its asking price in exchange for Chavila and Outrigger agreeing to indemnify it for all liability arising from the condition of the property, and to defend any actions brought against it. The terms of the sale and indemnity are central to the issues in this appeal.

[4] In 2004, 863 commenced an action against CP and Oxford for contamination of the CP and Oxford lands. In 2012, CP and Oxford brought claims seeking contribution and indemnity from Whirlpool. These claims triggered Chavila and Outrigger's agreement to defend the action and to indemnify Whirlpool. Chavila and Outrigger said they would honour the agreement and appointed counsel to represent Whirlpool.

[5] Whirlpool challenged Chavila and Outrigger's choice of counsel, alleging a conflict of interest. It says that counsel cannot represent Whirlpool's interests while taking instructions from Chavila and Outrigger. Whirlpool brought an application in the Superior Court for an interpretation of the indemnity agreement that would preclude this conflict.

[6] The application judge concluded that there was no conflict and dismissed the application. Whirlpool appeals. For the following reasons, I would dismiss the appeal.

Background

[7] Between 1990 and 1997, 863 purchased and assembled former industrial lands for redevelopment. In 1990, it purchased the CP and Oxford lands. Inglis had historically leased the CN and Oxford lands for commercial activities, including manufacturing appliances.

[8] 863 had affiliate corporations: 921424 Ontario Limited ("921"), which became Outrigger, and 941600 Ontario Limited ("941"), which became Chavila.

[9] Outrigger had initially sought to purchase the Inglis lands from Whirlpool in 1990. The purchase price was $25.6 million. David Moscovitz was counsel representing Outrigger/921. 921 carried out due diligence examinations of Whirlpool's land and the lands that its predecessor Inglis had been leasing from CN, 863 and Oxford. All four parcels of land were found to be contaminated. The soil and groundwater contained elevated levels of the carcinogen trichloroethylene. On behalf of 921, Mr. Moscovitz terminated the purchase.

[10] Years later, negotiations resumed and Mr. Moscovitz again acted as counsel for Outrigger. Gowlings acted as counsel for Whirlpool. A sale was negotiated in 1997. The purchase price was now $4 million and the property was being sold "as is". In 1998, the parties signed an agreement of purchase and sale and an indemnity agreement.

[11] The agreement of purchase and sale provided that Whirlpool would receive a full and final release from the purchasers for any liability relating to the condition of the CN lands. The indemnity agreement provided that Chavila and Outrigger would indemnify Whirlpool for any claims against Whirlpool in relation to the lands it had owned or leased, and that Chavila and Outrigger would defend any actions brought against Whirlpool. Section 15 of the agreement of purchase and sale provides:

The Vendor leases certain lands from [863] which lands were formerly owned by [CP]. . . The Purchaser acknowledges the possibility of a claim . . . for the remediation of contamination of the CP Lands. The Purchaser and [Chavila] assume as of Closing any and all responsibility and liability whatsoever relating to the condition of the CP Lands . . . This Agreement is conditional . . . upon . . . [an indemnity by the Purchaser and [Chavila] to save the Vendor harmless from and against any and all Claims whatsoever relating in any manner to the contamination to, in or under or the remediation of the CP Lands[.]

[12] Section 7 of the recitals to the indemnity agreement has a similar provision. Section 5 of the indemnity agreement provides:

[Outrigger and Chavila], at their own expense, shall be obligated to assume the carriage of and the diligent prosecution or defence of any legal or administrative proceeding, mediation or arbitration in connection with any and all Claims against one or both of Inglis and Whirlpool, to pay all costs and expenses of Inglis and Whirlpool of any nature whatsoever in relation to each such proceeding[.]

[13] All the land purchased by Outrigger and Chavila was reconveyed to 863 and developed into Liberty Village -- a mixed residential, commercial and office development.

[14] In 2004, 863 commenced an action (amended in 2010) against CP and Oxford seeking private law remedies for the costs of remediation of the contaminated Liberty Village lands. I will refer to this action as the "main action". In 2012, CP and Oxford each commenced an action against Whirlpool, seeking contribution and indemnity in respect of the environmental contamination claims made by 863.

[15] The CP and Oxford actions against Whirlpool triggered the indemnity agreement. Outrigger and Chavila agreed to honour the indemnity and to appoint counsel to conduct Whirlpool's defence against CP and Oxford. Outrigger and Chavila further committed not to seek payment of any judgment against CP or Oxford to the extent that Whirlpool is found liable.

[16] Mr. Moscovitz, the real estate lawyer who represented 863, Outrigger and Chavila throughout the period from 1990 to 1997, is also the sole officer and director of 863, Outrigger and Chavila. On behalf of 863, he instructs Ricketts Harris, counsel of record to 863 in the main action against CP and Oxford. He has appointed Simon Schneiderman to act for Whirlpool in its defence of the CP and Oxford actions. Mr. Schneiderman has not acted for 863, Outrigger or Chavila before. He has no affiliation with Ricketts Harris.

[17] Gowlings is counsel of record for Whirlpool in the CP and Oxford actions. Gowlings has sought reimbursement from Outrigger and Chavila for costs of approximately $80,000 for defending the CP and Oxford actions, although no statement of defence has yet been delivered.

[18] Whirlpool challenged Outrigger and Chavila's appointment of counsel to defend it in the CP and Oxford actions. Whirlpool took the position that Mr. Schneiderman was in a prohibited conflict of interest by representing Whirlpool while taking instructions from Outrigger and Chavila, which are associated with 863, the plaintiff in the main action.

[19] Whirlpool, still represented by Gowlings, launched an application in the Superior Court for an interpretation of the indemnity agreement that would preclude Mr. Schneiderman from acting. Before the application was heard, CP and Oxford brought a motion before the master for intervenor status within the application. Master Short dismissed the motion and commented:

Why does [Whirlpool's representation] matter to [CP]? They will have to defend and assert their arguments regardless of who is instructing counsel. . . .

It is also argued that the proposed arrangement by 863 for legal representation of Whirlpool "gives rise to a conflict of interest and impacts the public perception of the administration of justice in that [863] will be instructing on the conduct of the third party defence."

The potential for this result turns on the meaning of the parties' agreements. If this potential result was a real concern, it could have been addressed when the agreements were entered more than 15 years ago.

[20] The master compared the situation to that of an insurer added as a third party with potential conflicts in the main action.

The Application

[21] The application requested an interpretation of the indemnity agreement that would prohibit Mr. Schneiderman from representing Whirlpool in the CP and Oxford actions. Whirlpool argued that allowing Mr. Schneiderman to represent it on the instructions of Outrigger and Chavila would put Mr. Schneiderman in a prohibited conflict of interest. Whirlpool wanted to be able to instruct counsel itself.

[22] The application judge dismissed the application. He found that there was no conflict of interest because the immediate interests of Whirlpool were not adverse to those of Outrigger and Chavila.

[23] Moreover, the indemnity agreement itself contemplated the actions by CP and Oxford; the possibility of such actions was known to the parties when they signed the agreement. The application judge also noted that the intent and effect of the indemnity agreement was for 863 to forebear collection of any award it received against CP or Oxford to the extent that Whirlpool is required to indemnify CP and Oxford. If such an award were made and 863 collected it, it would have to be paid by Outrigger and Chavila, affiliates of 863, pursuant to the agreement.

[24] The application judge analogized the relation between Chavila and Outrigger and Whirlpool to that between an insurer and an insured. He noted that Mr. Schneiderman, as an officer of the court, had acknowledged that he would act in the best interests of Whirlpool in fulfilling the indemnity agreement. There were no instructions that could be given to him that would harm Whirlpool to the benefit of 863. Whirlpool, Chavila and Outrigger had the same interest: to minimize Whirlpool's liability.

[25] The application judge held that it was not necessary to read into the indemnity agreement an implied term prohibiting Schneiderman from acting for Whirlpool. The indemnity agreement had the exact effect in the circumstances at hand that the parties intended it to have. In exchange for expunging its potential liability for contamination, Whirlpool had given up the right to direct its defence against CP and Oxford.

The Appeal

[26] The issue on appeal is simply this: did the application judge err in finding that Mr. Schneiderman's representation of Whirlpool does not place him in a prohibited conflict of interest?

Positions of the Parties

[27] Whirlpool submits that Mr. Schneiderman is in a conflict of interest if he represents Whirlpool in the action with CP and Oxford because Mr. Schneiderman will be instructed by Outrigger and Chavila -- companies affiliated to 863. 863 is the plaintiff in the main action against CP and Oxford. Whirlpool argues that it has a limitation defence to the claims of CP and Oxford, and that Outrigger and Chavila will refuse to instruct Mr. Schneiderman to raise this defence because, if successful, it would also bar 863's claim against CP and Oxford in the main action.

[28] Outrigger and Chavila submit that there is no conflict of interest because Whirlpool has no legitimate interest in the outcome of the main action. Indeed, Whirlpool has no interest in the CP and Oxford actions because it is fully indemnified. The indemnity agreement constitutes express or implied consent to have Outrigger and Chavila choose and instruct Whirlpool's counsel. With respect to the limitation defence, this submission is academic because the limitation defence has already been raised by CP and Oxford. Lastly, they submit that deference is owed to the application judge's interpretation of the indemnity agreement.

Analysis

Standard of Review

[29] Whirlpool's application was framed in contractual interpretation. Whirlpool asked for a determination of rights arising out of the agreement of purchase and sale and indemnity agreement. The contracts were anything but standard form: they arose in a unique set of circumstances after a series of negotiations. All parties were sophisticated entities represented throughout by experienced counsel. The application judge's interpretation should be reviewed on the deferential standard described in Sattva Capital Corp. v. Creston Moly Corp., [2014] 2 S.C.R. 633, 2014 SCC 53.

[30] As I will explain, I have concluded that the application judge did not err in law.

A Lawyer's Duty to a Client

[31] A lawyer has a duty to avoid conflicts of interest when representing a client. This is established both by the Law Society of Upper Canada in its Rules of Professional Conduct and by the courts. As McLachlin C.J.C. wrote in Canadian National Railway Co. v. McKercher LLP, [2013] 2 S.C.R. 649, 2013 SCC 39, at para. 16:

Both the courts and law societies are involved in resolving issues relating to conflicts of interest -- the courts from the perspective of the proper administration of justice, the law societies from the perspective of good governance of the profession.

[32] A lawyer may not represent a client in one matter while representing that client's adversary in another matter. This is a bright line rule, as articulated in R. v. Neil, [2002] 3 S.C.R. 631, 2002 SCC 70, at para. 29:

The bright line is provided by the general rule that a lawyer may not represent one client whose interests are directly adverse to the immediate interests of another current client -- even if the two mandates are unrelated -- unless both clients consent after receiving full disclosure (and preferably independent legal advice), and the lawyer reasonably believes that he or she is able to represent each client without adversely affecting the other.

[33] However, as the court writes in McKercher, at para. 41, the rule in Neil is limited in scope:

It applies only where the immediate interests of clients are directly adverse in the matters on which the lawyer is acting. It applies only to legal -- as opposed to commercial or strategic -- interests. It cannot be raised tactically. And it does not apply in circumstances where it is unreasonable for a client to expect that a law firm will not act against it in unrelated matters. If a situation falls outside the scope of the rule, the applicable test is whether there is a substantial risk that the lawyer's representation of the client would be materially and adversely affected.

[34] The application judge found, and I agree, that the "immediate interests" of Whirlpool are not "directly adverse" to those of Outrigger and Chavila. Whirlpool states that Mr. Schneiderman is not pursuing a limitation defence in the main action. First, Whirlpool is not yet a party to the main action. Second, Oxford and CP have already raised a limitation defence. Third, there is no evidence that Mr. Schneiderman, as an officer of the court, would not pursue a diligent defence for Whirlpool. Indeed, the application judge accepted the evidence that Mr. Schneiderman would act in Whirlpool's best interests. Any suggestion to the contrary is speculative at best and does not meet the test in McKercher. This case therefore falls outside the scope of the bright line rule.

[35] I turn to consider whether there is a substantial risk that Mr. Schneiderman's representation of Whirlpool would be materially and adversely affected by the fact that he would be taking instructions from Chavila and Outrigger, which share their sole officer and director with 863.

[36] In my view, the situation does not generate such a risk. I say this for three reasons: (i) 863 and Whirlpool are not adverse in interest; (ii) the terms of the indemnity agreement anticipated this very scenario; and (iii) by analogy to insurance law principles, there is no conflict.

Not Adverse in Interest

[37] Whirlpool has no direct interest in the outcome of either the 863 action or the CP and Oxford actions because its interests are fully protected pursuant to the terms of the indemnity agreement and the confirmation by 863 that it will not seek any damages from Whirlpool. If 863 recovers damages from CP or Oxford, and CP or Oxford are awarded indemnity from Whirlpool, 863 will forebear collection of the amount otherwise payable by Whirlpool. The interests of 863 and Whirlpool are fully aligned. This alignment makes it unlikely that Mr. Schneiderman's representation of Whirlpool will be adversely affected by his taking instructions from companies associated with 863.

The Indemnity Agreement

[38] The indemnity agreement was negotiated in a specific context. Whirlpool agreed to sell its property at a significant discount in return for an indemnity with respect to all claims arising out of contamination. The parties to the agreement anticipated the very situation that has arisen. They knew there was contamination on all four lots. They anticipated the main action and the potential parties to that action. Whirlpool knew that 863, Outrigger and Chavila were affiliated; nonetheless, with the benefit of counsel, it agreed to the indemnity which by its very nature gave Outrigger and Chavila the right to instruct counsel in Whirlpool's defence. In sum, Whirlpool anticipated that 863 would be involved in litigation with CP and Oxford and that Outrigger and Chavila would be conducting Whirlpool's defence of any claims for contribution and indemnity. The agreement by Outrigger and Chavila to provide a "diligent defence" is read in this context.

[39] Paragraphs 6 and 7 of the recitals provide:

[Outrigger] acknowledges the possibility of a claim against Inglis by one or all of [CN] . . . and [Chavila] relating to contamination or remediation of the CN Lands. [Outrigger] and [Chavila] have agreed to assume as of Closing all responsibility and liability whatsoever relating to the condition of the CN Lands.

[Outrigger] acknowledges the possibility of a claim against Inglis by one or all of [CP], [Oxford], [863] and [Chavila] relating to contamination or remediation of the CP Lands. [Outrigger] and [Chavila] have agreed to assume as of Closing any and all responsibility and liability whatsoever relating to the condition of the CP Lands.

[40] The agreement provided that Outrigger and Chavila would assume the carriage of and the diligent defence of all legal proceedings. It further provided that Whirlpool would not negotiate, settle, compromise or pay any claims except with the consent of Outrigger and Chavila. Inherent in these provisions is the right of Outrigger and Chavila to retain and instruct counsel.

[41] Knowing all this, Whirlpool agreed to accept the terms of the indemnity agreement in return for the sale of its land. It now submits that the party that it agreed would take over its defence may not act in its best interests. It raises the spectre of reputational damage, damage to its credit rating and the risk of enforcement proceedings. These were all known to Whirlpool as potential outcomes of litigation. They are not new. If it believed these risks were substantial, Whirlpool would not have entered into the agreements. In my view, these matters cannot now be relied upon to ground a claim of conflict of interest such that the terms of the indemnity do not apply.

Insurance Law Principles

[42] The parties and the application judge looked to insurance law principles for guidance in the present case. My conclusion that there is no conflict does not depend upon, but is strengthened by, the analogy to principles of insurance law.

[43] In respect of Whirlpool's liability to CP and Oxford, the relation between Whirlpool and Chavila and Outrigger is analogous to that between an insured and an insurer. As this court recently stated, "[t]here is no doubt that a liability insurer owes a duty of good faith to its insured in the defence of a claim": Ernst & Young Inc. v. Chartis Insurance Co. of Canada, 2014 ONCA 78, 118 O.R. (3d) 740, at para. 70. The insurer's contractual obligation to defend an action carries with it an obligation to exercise reasonable care and skill in so doing: Kingscourt Auto Enterprises Inc. v. General Accident Assurance Co. of Canada, 8 C.C.L.I. (2d) 21, at p. 34 C.C.L.I., citing Fredrikson v. Insurance Corp. of British Columbia, 44 B.C.L.R. (2d) 303, at p. 329 B.C.L.R. In Shea v. Manitoba Public Insurance Corp., 55 B.C.L.R. (2d) 15, at para. 154, the court stated that "[t]he duty to defend includes a duty to attempt to minimize the amount of any damages to be assessed against the insured".

[44] These insurance law principles demonstrate that Outrigger and Chavila -- and the counsel they appoint for Whirlpool -- must exercise reasonable care and skill in defending the CP and Oxford actions and must pursue Whirlpool's best interests by minimizing its liability.

[45] In any event, it is unlikely that Outrigger and Chavila, in their capacity as third party liability insurer, will infringe the duty of utmost good faith in defending Whirlpool from the CP and Oxford claims. Their duty to minimize Whirlpool's liability overlaps precisely with 863's interest in maximizing the liability of CP and Oxford. Moreover, Whirlpool will experience no setback to its economic interests because it is insulated from having to pay damages both by the indemnity agreement, which Outrigger and Chavila have pledged to honour, and by 863's undertaking not to collect any portion of any damages against CP and Oxford for which Whirlpool is found liable.

[46] In recognizing the undertaking by 863 to forebear on collection of damages, the application judge did not -- as Whirlpool suggests -- import a new term into the agreement, relating to actions by a stranger to the contract. On the contrary, the undertaking was simply an acknowledgment by 863 that it would respect the indemnity agreement of its affiliated companies, Outrigger and Chavila.

Subsidiary Issues

[47] Whirlpool submits that the application judge erred in determining that Mr. Moscovitz was not the controlling mind of 863, Outrigger and Chavila. I disagree. The application judge accepted the evidence that Mr. Moscovitz is the sole officer and director of the three corporations. There is no evidence that he is their beneficial owner.

[48] Whirlpool seeks to recover the costs outlined in the account rendered by Gowlings. The application judge considered and rejected the amount claimed. He found, at para. 23, that the account includes "vast amounts of time and expense not related to the simple effort required to locate the source documents including the Indemnity Agreement and forward the statement of claim to Chavila and Outrigger requesting confirmation they respond in accordance with the Indemnity Agreement". The application judge reduced the amount sought to $2,395.74. I see no reason to interfere with this discretionary finding.

Disposition

[49] I would dismiss the appeal with costs payable to the respondents fixed at $25,000, inclusive of disbursements and HST.

Dissenting Opinion

[50] STRATHY C.J.O. (dissenting): -- I would allow the appeal for two reasons.

[51] First, the application judge erred in law by failing to identify a patent conflict between the appellant's interests and the interests of the respondent 863. That conflict was not resolved either by the indemnity agreement given by 863's affiliates, the respondents Chavila and Outrigger, or by the hold harmless agreement offered by 863.

[52] Second, the application judge made an extricable error of law in his interpretation of the indemnity agreement by failing to give any effect to the appellant's contractual right to be provided with a "diligent defence" by Chavila and Outrigger. The appellant was entitled to be represented by a lawyer who was free of conflicts and who would raise every viable defence. The lawyer appointed to defend the appellant was not entitled to put the interests of 863, the party who appointed him, ahead of the appellant's interests.

Background

[53] My colleague has set out the factual background. I will summarize what I see as the essential facts.

[54] In 1998, the appellant sold the Inglis lands to Chavila and Outrigger. As part of the agreement of purchase and sale, Chavila and Outrigger executed an indemnity agreement in favour of the appellant.

[55] That agreement contained two separate, but interrelated, obligations. The first was an agreement to indemnify the appellant against all claims associated with the environmental condition of the Inglis lands.

[56] The second was an agreement to defend the appellant against any such claims. That agreement is quoted in my colleague's reasons, but for the sake of reference it provides:

[Chavila] and [Outrigger], at their own expense, shall be obligated to assume the carriage of and the diligent prosecution or defence of any legal or administrative proceeding, mediation or arbitration in connection with any and all Claims against one or both of Inglis and Whirlpool, to pay all costs and expenses of Inglis and Whirlpool of any nature whatsoever in relation to each such proceeding[.]

[57] In 2004, 863 sued CP and Oxford, owners of adjacent lands, claiming that they caused pollution of the Inglis lands. Instead of commencing third party proceedings, CP and Oxford commenced a separate action against the appellant, claiming contribution and indemnity for 863's claims. It is not disputed that the separate action will likely be consolidated with 863's main action, making the appellant a third party in the main action. It is in the appellant's interest for the consolidation to occur because it would have an opportunity to defend 863's claim in the main action.

[58] A significant issue in the main action will be whether 863's claim is time-barred. The appellant wishes to plead, and claims that it can adduce evidence, that 863 discovered pollution on the CP and Oxford lands in 1991 and that the limitation period expired long before the action was commenced in 2004. CP and Oxford have also raised the limitation period as a defence.

[59] 863 retained a lawyer, Simon Schneiderman, to defend the appellant, purportedly pursuant to the indemnity agreement given by Outrigger and Chavila. When the appellant raised the issue of conflict of interest, Mr. Schneiderman stated that the indemnitors had the right to control the defence and that this would "[militate] against Whirlpool assisting the defendants in the main action beyond its obligation to comply with the rules or with the principles of evidence". This statement was a reference to the appellant's desire, as a third party, to defend 863's claim against CP and Oxford based on the expiry of the limitation period. Mr. Schneiderman went on to say that if the appellant did not accept his clients' position, "the indemnitors will thereafter consider their obligation to [the appellant] to be terminated".

[60] Mr. Schneiderman confirmed that 863 would not seek payment from the appellant of any amounts for which the appellant was found to be liable as a result of the claims of CP and Oxford. The terms of the proposed hold harmless agreement to be given by 863 were as follows:

In the event 863 is awarded a judgment in the main action against CPR or Oxford, to the extent that Whirlpool is found to be liable, 863 will not seek payment from either CPR or Oxford of that amount in respect of which Whirlpool is found to be liable. 863 is prepared, if necessary, to document this in further detailed language to be reviewed and agreed upon by Whirlpool's counsel.

[61] When the matter was not resolved, Whirlpool brought an application for a determination of its rights under the indemnity agreement.

Discussion

[62] As stated at the outset, I would allow the appeal for two reasons. I discuss each in turn.

Mr. Schneiderman Has a Conflict of Interest

[63] In my view, 863's appointment of Mr. Schneiderman to defend the appellant, and the instructions it has given to him, have put the interests of the appellant in direct and immediate conflict with the interests of 863, contrary to the bright line rule against conflicts enunciated in Canadian National Railway Co. v. McKercher LLP, [2013] 2 S.C.R. 649, 2013 SCC 39, at para. 33. The application judge erred in failing to identify this conflict and in failing to exercise the court's inherent supervisory power to protect the appellant from prejudice and to preserve the repute of the administration of justice: McKercher, at para. 13.

[64] In the defence of the appellant in the main action, Mr. Schneiderman takes his instructions from 863, the plaintiff in the main action. It is in the appellant's interest to raise a limitation defence to 863's claim. If that defence is successful and 863's claim against Oxford and CP is dismissed, the appellant will have no liability to those parties, and it will not have to call on Outrigger and Chavila for indemnification. Nor will it have to run the risk that Outrigger and Chavila will be unwilling or unable to honour the indemnity agreement. It is equally obviously not in 863's interest for the appellant to raise a limitations defence. If successful, that would defeat 863's claim.

[65] I therefore respectfully disagree with my colleague's conclusion that Mr. Schneiderman's "duty to minimize [the appellant's] liability overlaps precisely with 863's interest in maximizing the liability of CP and Oxford". The appellant's interest goes further than minimizing its own liability by maximizing that of CP and Oxford. Its interest is in having CP and Oxford exposed to no liability (by virtue of the limitations defence). In that case, there will be no claim for contribution against the appellant, and it will never have to call on either the indemnity of Chavila and Outrigger or the hold harmless agreement proposed by 863.

[66] The facts belie the assumption made by the application judge that Mr. Schneiderman would act in the appellant's best interests and that the conflict of interest is speculative. Mr. Schneiderman took the position that the appellant was not permitted to "assist the defendants in the main action" by raising the limitations defence. This position was immediately and directly adverse to the appellant's interest.

[67] It is not speculative to conclude that Mr. Schneiderman will fail to advance the limitation defence. The only reason 863 offered "not to seek payment" from CN and Oxford "of that amount in respect of which Whirlpool is found to be liable" was because it took the position, through Mr. Schneiderman, that it was entitled to decide what defences would be raised on behalf of the appellant. Because Mr. Schneiderman was being instructed to abandon the limitations defence, which was not in 863's interests, 863 offered to cure the problem by giving the appellant an agreement to hold it harmless.

[68] 863's offer was an attempt to avoid the consequences of the conflict between its own interests and the interests of the appellant. It confirms that a conflict exists, because it was an offer by 863 to attempt to mitigate the consequences of the conflict.

[69] The appellant was not obliged to accept 863's offer. Why would it surrender a viable defence in return for a promise from a party with whom it had not contracted (863) and run the risk of a judgment going against it and having to enforce an indemnity? The appellant could have waived the conflict, but it was not obliged to do so.

[70] I disagree with the application judge's conclusion that the failure to raise the limitation defence is of no consequence because of the indemnity agreement. As I have explained, there is an immediate and direct conflict of interest. The abandonment of the limitations defence exposes the appellant to the possibility of a judgment going against it. The appellant has no obligation to accept a promise from a party with which it did not contract (863) in place of a promise of a "diligent defence" from parties with which it did contract (Chavila and Outrigger).

[71] The application judge also dismissed the appellant's concerns about "reputational damage, damage to its credit rating and the risk of enforcement proceedings". Respectfully, the appellant's point was that these concerns may arise if the limitation defence is not advanced on its behalf. A judgment in the third party proceedings may go against it (causing reputational damage and damage to its credit rating) and it will have to enforce the hold harmless agreement against 863 and the indemnity agreement against Chavila and Outrigger, possibly resulting in further litigation. As I have noted, it should be entitled to raise every viable defence to the main action to avoid ever having to call on the indemnity.

Chavila and Outrigger Have Breached Their Duty to Defend

[72] In my view, the application judge failed to recognize and to give any effect to the express contractual promise of Chavila and Outrigger to "assume the carriage [of] and the diligent . . . defence of any legal . . . proceeding" (emphasis added). In so doing, he failed to construe the contract as a whole and fell into extricable legal error: see 1298417 Ontario Ltd. v. Lakeshore (Town), 2014 ONCA 802, 122 O.R. (3d) 401, at paras. 8-9, leave to appeal to S.C.C. refused [2015] S.C.C.A. No. 43; and Richcraft Homes Ltd. v. Urbandale Corp., 2016 ONCA 622, at para. 59.

[73] Properly interpreted, the promise made by Chavila and Outrigger to provide the appellant with a "diligent defence" meant that they had to conduct the defence in good faith and exercise reasonable care and skill in doing so: see Ernst & Young Inc. v. Chartis Insurance Co. of Canada, 2014 ONCA 78, 118 O.R. (3d) 740, at para. 70; and Kingscourt Auto Enterprises Inc. v. General Accident Assurance Co. of Canada, 8 C.C.L.I. (2d) 21, at p. 34 C.C.L.I. As was said in Shea v. Manitoba Public Insurance Corp., 55 B.C.L.R. (2d) 15, at para. 154, "[t]he duty to defend includes a duty to attempt to minimize the amount of any damages to be assessed against the insured".

[74] Chavila and Outrigger have not conducted the appellant's defence in good faith, because they have refused to instruct Mr. Schneiderman to raise the limitation defence against 863's claim.

[75] The fact that the limitations defence is being advanced by Oxford and CP is irrelevant. The appellant was entitled to adduce evidence that 863 knew or ought to have known of facts that triggered the commencement of the limitation period more than six years before the action was commenced. To give up that defence just because another party is raising it is not to provide a "diligent defence" in good faith.

[76] The duty of Chavila and Outrigger to defend also carries with it a duty to be free from conflicts -- a duty not to "steer" the defence in favour of the indemnifying party or to "soft-peddle" defences that are available to the indemnified party: see Appin Realty Corp. v. Economical Mutual Insurance Co., 2008 ONCA 95, 89 O.R. (3d) 654, at para. 14, leave to appeal to S.C.C. refused [2008] S.C.C.A. No. 145; and Amato v. Welsh, 2013 ONCA 258, 305 O.A.C. 155, at para. 60. As discussed, the appellant's viable limitation defence could not be abandoned for the benefit of 863. And the failure to provide a diligent defence could not be remedied by the indemnity agreement or by the hold harmless agreement offered by 863.

[77] Finally, there is nothing in the indemnity agreement or its underlying factual matrix to suggest that the parties contemplated that the appellant would lose the right to a diligent defence against time-barred claims. In my view, there is no reasonable interpretation of that agreement that would support the conclusion that Chavila and Outrigger were not required to advance a viable a limitation period defence if one were available to the appellant. There is nothing in the factual matrix that would warrant overriding the express contractual duty to provide the appellant with a "diligent defence".

[78] While this is not an insurance case, the provisions of the indemnity agreement are akin to the promise given by a liability insurer to defend the insured against claims falling within the policy and to indemnify it against proven claims. In such circumstances, the right of the insurer (the indemnifying party) to control the defence and the right of the insured (the indemnified party) to a full and fair defence may come in conflict: Hoang (Litigation guardian of) v. Vicentini, 2016 ONCA 723, at paras. 73-76. The court's responsibility is to balance these rights. As this court said in Brockton (Municipality) v. Frank Cowan Co., 57 O.R. (3d) 447, at para. 43:

The issue is the degree of divergence of interest that must exist before the insurer can be required to surrender control of the defence and pay for counsel retained by the insured. The balance is between the insured's right to a full and fair defence of the civil action against it and the insurer's right to control that defence because of its potential ultimate obligation to indemnify. In my view, that balance is appropriately struck by requiring that there be, in the circumstances of the particular case, a reasonable apprehension of conflict of interest on the part of counsel appointed by the insurer before the insured is entitled to independent counsel at the insurer's expense. The question is whether counsel's mandate from the insurer can reasonably be said to conflict with his mandate to defend the insured in the civil action. Until that point is reached, the insured's right to a defence and the insurer's right to control that defence can satisfactorily co-exist.

[79] In my view, for the reasons given, this case has reached the point at which the appellant's and the indemnitors' rights can no longer co-exist.

[80] I would therefore allow the appeal and order that the appellant is entitled to retain separate counsel at the respondents' expense. I would award costs to the appellant fixed at $25,000, inclusive of disbursements and all applicable taxes.

Disposition

Appeal dismissed.

Notes

1. The appellant, Whirlpool, is the corporate successor to Inglis. For ease of reference, they will be referred to, when the context permits, as Whirlpool.

2. Negotiations began with 921424 Ontario Limited ("921") and 941600 Ontario Limited ("941"), whose corporate successors are Outrigger and Chavila, respectively. For ease of reference, they are referred to by the latter names where possible.

3. For simplicity's sake, I adopt the abbreviations of the parties' names and other relevant terms established by my colleague.