ONTARIO

SUPERIOR COURT OF JUSTICE

COURT FILE NO.: 10-47525A1
DATE: 20120614

BETWEEN:

CASTONGUAY CONSTRUCTION (2000) LTD. Plaintiff – and – COMMONWEALTH PLYWOOD CO. LTD. – LA COMPAGNIE COMMONWEALTH PLYWOOD LTÉE Defendant

AND BETWEEN:

COMMONWEALTH PLYWOOD CO. LTD. – LA COMPAGNIE COMMONWEALTH PLYWOOD LTÉE Plaintiff by Counterclaim – and – CASTONGUAY CONSTRUCTION (2000) LTD. Defendant by Counterclaim – and – LAFARGE CANADA INC., MAURICE YELLE EXCAVATION LIMITED, 3632024 CANADA INC. c.o.b. as A.B.L. CONSTRUCTION INC., INSPEC-SOL INC., ZENIX ENGINEERING LTD., GENIVAR INC., and GENIVAR CONSULTANTS LIMITED PARTNERSHIP Third Parties

Eric R. Williams and Kelly Hart, for Castonguay Construction (2000) Ltd., the Responding Party

J. Stephen Cavanagh, for Zenix Engineering Ltd., Genivar Inc. and Genivar Consultants Limited Partnership, the Moving Parties

HEARD: May 31, 2012 (Ottawa)

DECISION ON MOTION

tOSCANO rOCCAMO j.

Nature of Proceedings

Nature of Proceedings

1Zenix Engineering Limited, Genivar Inc., and Genivar Consultants Limited Partnership (hereinafter collectively referred to as “Zenix”) move under Rule 21.01(3)(d) of the Rules of Civil Procedure for an order dismissing the Third Party Claim advanced against them by Castonguay Construction (2000) Ltd. (“Castonguay”), on the grounds that it is frivolous, vexatious, and an abuse of the Court’s process.

Background Facts

Background Facts

2On the terms of a Design Build Stipulated Price Contract (the “Main Contract”) with the Defendant, Commonwealth Plywood Co. Ltd. (“Commonwealth”) dated June 28, 2007, Castonguay acted as the general contractor for a project involving the expansion of a 19,500 square foot warehouse facility at 1881 Bantree Street in Ottawa. On completion of the project, Castonguay requested holdback funds from Commonwealth and was denied.

3Castonguay issued an action claiming the holdback funds from Commonwealth. In turn, Commonwealth defended the holdback claim and counterclaimed, alleging deficiencies in the concrete slab of the warehouse. In addition to a Reply and Defence to the Counterclaim, Castonguay issued a Third Party Claim and eventually an Amended Third Party Claim seeking contribution and indemnity from Zenix related to engineering consulting services provided on the project.

4It was a term of the contract between Commonwealth and Castonguay that Castonguay was to obtain liability insurance in relation to the construction project in favour of the parties and unnamed insureds defined by the Main Contract.

5The affidavit evidence of Denis Castonguay revealed that the Main Contract was not drafted by Castonguay or its solicitors but was given to his company to sign by Commonwealth. His company was not made aware of the covenant to obtain liability insurance until litigation was commenced.

6Castonguay did not inform its insurer under a Comprehensive General Liability Policy (the “CGL”), Intact Insurance (previously carrying on business as ING Insurance), of the contract with Commonwealth or ask Intact to issue any other policy covering the construction project. Indeed, at the time that Castonguay and Commonwealth entered into the Main Contract, Zenix had not been retained.

7No evidence was received from any principal of Zenix to the effect that it was a term of any subcontract between Castonguay and Zenix that Castonguay would obtain insurance coverage for Zenix in the event of a loss arising from the project, and that the subcontract would contain a waiver of subrogation against Zenix.

8There was also no evidence received from Castonguay or Zenix to the effect that the cost of liability insurance in favour of Zenix was at all considered in the negotiation of Zenix’ retainer and contract with Castonguay, or that Zenix had given any consideration for the coverage.

9Affidavit evidence was received from Deborah Scrubb, a claims examiner with Intact Insurance, to the effect that Intact was never informed of the contract between Castonguay and Commonwealth. Intact had issued a CGL to cover normal business risks on February 5, 2007, well before Commonwealth and Castonguay entered into the Main Contract. Intact is defending Castonguay on the Counterclaim under a Reservation of Rights Agreement and has advised that the duty to indemnify any of the alleged losses cannot yet be determined.

Position of the Parties

Position of the Parties

10Zenix relies on the express terms of the Main Contract to contend that it was the intention of Commonwealth and Castonguay that Zenix be a third party beneficiary of the contract between them. Had Castonguay purchased the insurance in accordance with its covenant, Zenix would have been entitled to be defended and indemnified against the claim. Zenix maintains the position that, because the Third Party Claim has been issued by Castonguay, the very party that breached its covenant to insure, Castonguay ought not to benefit from its own omission, and the Third Party Claim should be considered frivolous, vexatious, and an abuse of process.

11Zenix concedes that although the CGL policy was not bound with the construction contract and Zenix in mind, the CGL would afford coverage under a Contractor’s Edge Endorsement attached to the CGL.

12Finally, Zenix argues that although there is no privity of contract between Zenix and Intact, the circumstances would justify an exception to the law of privity to extend the benefits of coverage to Zenix. Accordingly, any Third Party Claim could not succeed and would be an abuse of the Court’s process.

13Castonguay’s main argument is that any liability policy obtained by Castonguay would not have covered the kind of loss alleged by Castonguay in its Third Party Claim or, alternatively, that it cannot be known what losses exactly would have been insured under the circumstances by Intact or by any other insurer.

14Castonguay further argues that the CGL excludes coverage for the very losses alleged by Castonguay, and that in any event, the claim over against Zenix would not be the subject of a subrogated claim barred by any alleged waiver of liability.

15Finally, Castonguay argues that there is no privity of contract between Zenix and the parties to the Main Contract such as to afford Zenix a benefit under the covenant to insure. Castonguay argues the extension Zenix proposes to the law of privity has never been recognized in the case law.

Issues

Issues

1. Having regard to the term in the Main Contract requiring Castonguay to purchase liability insurance in respect of the project, can Zenix invoke the terms of the CGL and attached Contractor’s Edge Endorsement to afford it a defence to and/or indemnity against the losses alleged in the Third Party Claim?

2. Can Zenix rely on any extension to the law of privity to receive the benefits of liability coverage and any waiver of liability arising under the Main Contract?

The Test under Rule 21.01(3)(d)

The Test under Rule 21.01(3)(d)

16Rule 21.01(3)(d) states:

(3) TO DEFENDANT – A defendant may move before a judge to have an action stayed or dismissed on the ground that,

(d) the action is frivolous, vexatious or is otherwise an abuse of the process of the court,

and a judge may make an order or grant judgment accordingly.

17It is the burden of the moving party under Rule 21.01(3)(d) to establish on the face of the action and its circumstances that it is plain and obvious the case cannot succeed. See: Sussman v. Ottawa Sun (The) (1997), 22 O.T.C. 75 (C.J.) at para. 21 .

18There are three independent grounds for dismissing or staying an action under Rule 21.01(3). It may be dismissed if the action is frivolous, vexatious, or otherwise an abuse of the Court’s process. A frivolous action has been defined to include a claim lacking a legal basis or legal merit, which is not serious and not reasonably purposeful. A pleading is vexatious if it is commenced without any reasonable ground. Similarly, a frivolous and vexatious pleading is one where it is plain and obvious it cannot succeed. A vexatious suit has been further defined as one instituted maliciously and without good cause. An abuse of process, on the other hand, calls upon the Court to control its process and prevent the abuse of procedures that would place the administration of justice into disrepute. See: Currie v. Halton (Region) Police Services Board (2003), 2003 7815 (ON CA) , 233 D.L.R. (4th) 657 (Ont. CA) at paras. 14-15 ; and Waterloo (City) v. Wolfraim , 2007 ONCA 732 287 D.L.R. (4th) 65, at para. 5 ; and CIBC Trust Corporation, Trustee v. Clark , 2009 7079 (ON SC) , at paras. 41-42 .

19In my opinion, only if Zenix may invoke the benefits of the Main Contract and coverage under the CGL and its Contractor’s Edge Endorsement thereby extending the law of privity to the circumstances, is it plain and obvious that Castonguay’s Third Party Claim against Zenix cannot succeed.

20Zenix concedes that there is no evidence of any malice or lack of good faith on the part of any party to these proceedings.

21Where there is any potential to support the elements of a cause of action pleaded, the matter should not be resolved under the Rule 21 motion. See: Valenti v. Equitable Trust Co. 2012 ONCA 93 , at para.1.

The Pleadings

The Pleadings

22Castonguay’s Amended Statement of Claim makes it plain Castonguay sues for payment of its holdback. The prayer for relief provides as follows:

I. The Plaintiff claims:

A. Payment of the sum of $132,336.61 representing the balance now due under the contract which was executed by the parties on or about the 28 th day of June, 2007, together with interest, at the contractual rate of 1% per annum, calculated annually, until judgment …

23Commonwealth’s Statement of Defence and Counterclaim against Castonguay is silent with respect to Castonguay’s covenant to obtain liability insurance. The essence of the counterclaim is set out at paras. 7, 10, 14, and 20 of the pleadings. Its allegations clearly relate to a claim based on defective workmanship or materials. The relevant provisions are as follows:

7. The Defendant states that the Plaintiff was a customer of the Defendant. In the past, the Plaintiff has purchased building supplies and materials from the Defendant. Employees and officers of the Plaintiff had been present in the Defendant’s warehouse at 1881 Bantree Street and were aware of the nature of the Defendant’s use of its existing warehouse and its intended use of the addition to the warehouse. The Plaintiff was aware of the loads placed on the floor of the existing warehouse and the anticipated loads that would be placed on the addition to the warehouse.

8. The Defendant states that soon after the completion of the Work, significant problems were observed with respect to the poured concrete floor in the new warehouse. Numerous cracks and gaps, as well as spalling, became evident. The Defendant states that it notified the Plaintiff that no additional funds would be paid or released until the nature of the problem was identified and a solution agreed to by the parties.

9. The Defendant state that the condition of the defective floor in the warehouse addition was caused by the Plaintiff’s failure to perform the Work in accordance with the terms of the Contract, and the failure of the Plaintiff to perform the Work in a good and workmanlike manner. Particulars of the Plaintiff’s breach of contract and negligence are as follows:

(a) It failed to pour the floor to a minimum of 6” thickness as required by the product specifications for Extensia concrete;

(b) If failed to compact the sub-base of the floor in accordance with the specifications;

(c) It failed to design and construct a floor strong enough to handle the loads for use as a warehouse floor;

(d) It used inadequate sub-base material;

(e) It constructed the floor on inadequate soils; and

(f) It failed to perform saw cuts in the floor slab as directed by its Engineer.

20. The Defendant states that the cost to replace the defective concrete floor of the warehouse addition, including engineering fees and other expenses, is estimated to be $300,000.00.

24In Castonguay’s Reply and Defence to Counterclaim, Castonguay alleges it performed the contract in accordance with Commonwealth’s specifications and engaged Zenix to design a concrete slab based on Commonwealth’s representations. Castonguay further pleads that any deficiencies or defects in the floor slab as alleged by Commonwealth were due to Commonwealth’s overloading of the concrete slab and failure to inform Castonguay that it intended to exert the types of load it did on the slab in use. The relevant provisions are set out at paras. 3, 8, 18, and 21 of the Reply and Defence to Counterclaim as follows:

3. Castonguay states that Commonwealth provided it with eight pages of “Specifications and Guidelines for the Warehouse Expansion of Robert Bury & Co. Ltd., Bantree St., Ottawa, Ontario dated January 22, 2007”, drawings of the original building and drawings for the warehouse addition prepared by Alexandre Ouellette, Eng. (the “Commonwealth Specifications and Drawings”), and requested that Castonguay provide a quotation for the construction of a warehouse addition. Commonwealth represented to Castonguay that the warehouse addition would be used in the same manner as Commonwealth’s existing facilities, being the storage of plywood and other building materials using racking systems.

4. Castonguay engaged Zenix Engineering Inc. (now part of Genivar Consulting Group Ltd.) to design the concrete slab based on Commonwealth’s representations that it intended to use the building in the same manner as its existing warehouse facility (i.e. employing racking systems).

5. Castonguay states that it completed all of its work in a good and workmanlike manner. Castonguay denies that the problem with the floor slab is a result of any act or omission on its part. Castonguay states that any deficiencies or defects in the floor slab resulted from Commonwealth’s overloading of the slab and its failure to advise Castonguay prior to construction that Commonwealth intended to exert the type of loads on the slab that are currently being exerted.

6. Castonguay states that if any loss or damage has been sustained by Commonwealth, it is the result of Commonwealth’s own acts and/or omissions, including overloading the slab and refusing to permit Castonguay access to the premises to remove and replace a portion of the slab in May of 2010.

25Castonguay’s Amended Third Party Claim in no way relates to the holdback claim it sought to enforce in its Amended Statement of Claim against Commonwealth. It simply asserts a claim for contribution and indemnity. The relevant allegations pleaded are as follows:

1 a) Full contribution and indemnity for any and all amounts, including interest and costs, found owing by Castonguay to Commonwealth Plywood Co. Ltd. – La Compagnie Commonwealth Plywood Ltée (hereinafter Commonwealth) in respect to the counterclaim advanced by Commonwealth in the main action.

6A. The third party, Zenix Engineering Ltd. (Zenix), is a federally incorporated company providing consulting engineering services in and around Ottawa, Ontario. Zenix was engaged by Castonguay to provide structural engineering services for the construction of an addition to the plaintiff’s warehouse at 1891 Bantree Street, Ottawa (the Project), including the design for the slab-on-grade.

9 d) As to the third parties, Zenix Engineering Ltd., Genivar Consultants Limited Partnership and/or Genivar Inc.:

(i) They failed to properly design the slab-on-grade;

(ii) They failed to design the slab-on-grade to withstand the loads to which it would be subjected given the plaintiff’s intended use of the warehouse addition; and

(iii) They failed to advise Castonguay and/or the plaintiff that the plaintiff’s specifications for the slab-on-grade were inadequate given the plaintiff’s intended use of the warehouse addition and the loads to which the slab-on-grade would be subjected.

The Contract between Commonwealth and Castonguay

The Contract between Commonwealth and Castonguay

26The Main Contract provides that the terms of the contract enure to the benefit of the parties to the contract, Commonwealth and Castonguay, and is silent as to any benefit conferred upon other parties. Article VII provides as follows:

ARTICLE VII SUCCESSION

The General Conditions of the Contract hereto annexed, and all other aforesaid Contract Documents, are all to be read into and form part of this Agreement and the whole shall constitute the Contract between the parties and subject to law and the provisions of the Contract Documents shall ensure to the benefit of and binding upon the parties hereto, their respective heirs, legal representatives successors and assigns.

In witness whereof the parties hereto have executed this Agreement under their respective corporate seals and by the hands of their proper officers thereunto duly authorized.

SIGNED, SEALED AND DELIVERED

In the presence of:

Client

COMMONWEALTH PLYWOOD COMPANY LTD

Contractor

CASTONGUAY CONSTRUCTION (2000) LTD

27In fact, the Main Contract specifically suggests otherwise at Article CC14 pertaining to Subcontracts:

14.8 Nothing contained in the Contract Documents shall create any contractual relationship between any Subcontractor and the Client.

28The provisions of the Main Contract whereby Castonguay, as Contractor, agreed to indemnify Commonwealth, as Client, for any claims, damages, or losses is set out at Article CC17 of the contract. This provision provides for indemnification only in respect to claims for injury or destruction of property, other than the work itself, caused by any subcontractors. Article CC17 provides as follows:

CC17 INDEMNIFICATION

17.1 The Contractor shall indemnify and hold harmless the Client and his agents and employees from and against claims, damages, losses and expense including legal fees arising out of or attributable to the performance of the Work, provided any such claim, damage, loss or expense is:

(a) Attributable to bodily injury, sickness, disease, or death or to injury to or destruction of tangible property (other than the Work itself), and

(b) Is caused by a negligent act or omission of the Contractor, or any subcontractors, their employees or anyone for whose acts they may be liable.

Article CC17 makes no reference to indemnification for defective workmanship or materials.

29Article CC30 to the Main Contract sets out the covenant to obtain liability insurance, specifically cross-referencing indemnification of claims described in Article CC17. Article 30.1 and 30.2 provide as follows:

CC30 LIABILITY INSURANCE

30.1 Without restricting the generality of CC17 – INDEMNIFICATION shall provide and maintain wrap-up liability insurance acceptable to the Client in the minimum provided hereunder. The policies shall be in the joint names of the Client and the Contractor and shall include all subcontractors, the Client’s Consultant and the Contractor’s Consultant as Unnamed insureds. The policies preclude subrogation claims by the Insurer against anyone insured thereunder.

30.2 Comprehensive General Liability Insurance subject to limits of not less than five (5) million dollars inclusive per occurrence for bodily injury, death and damages to property including loss of use thereof, and including coverage for:

(a) Premises and operations liability

(b) Contractor’s contingent liability with respect to the operations of persons, firms or corporations having a contract for the execution of a part or parts of the work included in the Contract.

(c) Products or completed operations liability

(d) Blanket contractual liability

(e) Cross liability

(f) Elevator and hoist liability

(g) Contingent employer’s liability

(h) Personal injury liability

(i) Shoring, blasting, excavating, underpinning, demolition, pile driving and caisson work, work below ground surface, tunnelling and grading, as applicable.

(j) Liability with respect to non-owned licensed vehicles

(k) Liability with respect to owned and non-owned aircraft and watercraft, as applicable.

There is no issue between the parties that the contract defines “Client’s Consultant” and “Contractor’s Consultant” at Articles 1.6 and 1.7 of the Main Contract to include any engineering firm engaged by Castonguay to consult and provide other services within the scope of work they are engaged to provide.

30The terms of the Main Contract addressing damages and mutual responsibility does not preclude all claims between the parties by the provision of liability insurance. Article CC34 provides as follows:

CC34 DAMAGES AND MUTUAL RESPONSIBILITY

34.1 If either party to this Contract should suffer damages in any manner because of any wrongful act or neglect of the other party or anyone employed by him, then he shall be reimbursed by the other party for such damage. The party reimbursing the other party shall be subrogated to the rights of the other party in respect of such wrongful act or neglect if it be that of a third party.

31The Main Contract does not preclude liability on the part of Castonguay, as contractor, for claims arising from defective workmanship or materials. Article CC36 provides as follows:

CC36 WARRANTY

36.1 The Contractor shall correct, at his own expense:

(a) any Work which is found to be not in accordance with the Contract Documents,

(b) any defects in the Work due to faulty products and/or workmanship appearing within a period of one year from the date of Substantial Performance of the Work.

The Comprehensive General Liability Policy

The Comprehensive General Liability Policy

32It is a provision of the CGL Commercial Building and Contents Broad Form to exclude coverage for faulty or improper design. Article 6D sets out this exclusion as follows:

D. OTHER EXCLUDED LOSSES :

This form does not insure:

(a) (i) wear and tear;

(ii) rust or corrosion;

(iii) gradual deterioration, hidden or latent defect or any quality in property that causes it to damage or destroy itself.

(b) the cost of making good:

(i) faulty or improper material;

(ii) faulty or improper workmanship;

(iii) faulty or improper design …

Contractor’s Edge Endorsement

33## Contractor’s Edge Endorsement

Item 4 of the Contractor’s Edge Endorsement sets out exclusions for which no coverage is provided.

Item 4 – LIMITED COVERAGE FOR FAILURE OF WORK TO MEET WRITTEN SPECIFICATIONS

EXCLUSIONS

This insurance does not apply to:

(1) Any claim arising out of or relating to “bodily injury”, “personal injury” or “advertising injury”;

(2) Any claim arising out of or relating to “property damage.” This exclusion does not apply to loss of use of tangible property that is not physically damaged if the loss of use results from the failure of “the Named Insured’s Work” to meet the “Written Specifications.”

(3) Any claim for costs or expenses incurred by any insured for the repair or replacement of defective materials or workmanship in “the Named Insured’s Work”.

(18) Any “error” due to the rendering of or failure to render by the Named Insured or on the Named Insured’s behalf of any “professional services” for others, or any error or omission, malpractice or mistake in providing those services. This exclusion does not apply to coverage provided by this endorsement because of an “error” committed in the course of the Named Insured’s “business operations” to which this insurance applies;

DEFINITIONS

The following additional definitions are added to the Commercial General Liability Form:

(1) “Business operations” means the Named Insured’s operations described in the Declarations.

(2) “Error” means any error, omission or negligent act by or on behalf of any insured which results in the failure of “the Named Insured’s work” to meet the specifications described in the “Written Specification”, after installation, testing and final acceptance of “the Named Insured’s work” by the Named Insured’s customer.

(3) “Written Specifications” means written specifications as to the nature and content of “the Named Insured’s work” to be purchased from the insured, which are provided in advance by an Insured to the customer to whom “the Named Insured’s work” is being offered for sale.

ANALYSIS AND CONCLUSIONS

Can Zenix invoke the benefits of the Main Contract and acquire coverage under the CGL and the Contractor’s Edge Endorsement to preclude any claim by Castonguay for contribution and indemnity advanced in the Third Party Claim?

Analysis and Conclusions

34Zenix agrees that Intact has no apparent duty to defend under the CGL as Zenix was not a named insured. However, Zenix contends that the primary issue is not whether it may benefit from coverage under the CGL, but whether Castonguay may benefit from breach of its covenant to obtain liability insurance as required by the Main Contract. Zenix further contends that, as it should have been an insured in another policy providing liability coverage, Castonguay should be precluded from advancing its Third Party Claim. In support of its position, Zenix relies upon the reasoning in Fraser Jewellers (1982) Ltd v. Dominion Electric Protection Co ., 1997 4452 (ON CA) at para. 30 , as follows:

As a general proposition, in the absence of fraud or misrepresentation, a person is bound by an agreement to which he has put his signature whether he has read its contents or has chosen to leave them unread. Cheshire, Fifoot & Furmston’s Law of Contract , 13th ed. (1996) at p. 168. Failure to read a contract before signing it is not a legally acceptable basis for refusing to abide by it. A businessman executing an agreement on behalf of a company must be presumed to be aware of its terms and to have intended that the company would be bound by them. The fact that Mr. Gordon chose not to read the contract can place him in no better position than a person who has. Nor is the fact that the clause is in a standard pre-printed form and was not a subject of negotiations sufficient in itself to vitiate the clause. L’Estrange v. F. Graucob Ltd. , [1934] 2 K.B. 394 at 403, [1934] A11 E.R. Rep. 16 (D.C.); Craven v. Strand Holidays (Canada) Ltd. (1982), 1982 1859 (ON CA) , 40 O.R. (2d) 186 at 194, 142 D.L.R. (3d) 31 (C.A.).

35A closer look at Fraser reveals the case pertains to the interpretation of terms of a Purchase Order and Service Agreement which purported to limit the liability between parties to the Agreement. The Court of Appeal overturned the trial judge’s finding that a clause in the Agreement purporting to limit liability was unfair, unreasonable and unconscionable. In the case at bar, however, there is no evidence as to the terms of any subcontract between Castonguay and Zenix in which it could be said the express terms purport to limit liability as between these parties.

36As a secondary argument, Zenix contends that, because Intact is defending Castonguay on a Reservation of Rights, it cannot be said this is a case in which no insurance applies. In particular, Zenix argues that the Contractor’s Edge Endorsement provides more generous coverage than the CGL. Zenix argues that the exclusion found in Article 18 of the Contractor’s Edge Endorsement does not completely withdraw coverage dealing with professional services, but creates an exception restoring coverage in circumstances that are present in this case.

37Zenix notes the specific wording in Article 18 as follows:

This insurance does not apply to…any “error” due to the rendering of or failure to render by the Named Insured or on the Named Insured’s behalf of any “professional services” for others, or any error or omission, malpractice or mistake in providing those services. This exclusion does not apply to coverage provided by this endorsement because of an “error” committed in the course of the Named Insured’s “business operations” to which this insurance applies. [Emphasis added.]

38Zenix cites the definition of “error” in the policy which includes “ any error, omission or negligent act by or on behalf of any insured which results in the failure of ‘the Named Insured’s work’ to meet the specifications described in the ‘Written Specifications’, after installation, testing and final acceptance of ‘Named Insured’s work’ by the Named Insured’s customer.”

39Zenix further notes that the term “business operations” is defined as “Named Insured’s operations described in the Declarations”. In this case, the “Insured’s Business Operations” are “Commercial Building Renovations (including carpentry and drywall)”.

40Zenix thus argues that the exclusion in Article 18 withdraws coverage for “any error, omission or negligent act by or on behalf of any Insured which results in the failure of ‘the Named Insured’s work’ to meet the specifications described in the ‘Written Specifications’, after installation, testing and final acceptance of ‘ the Named Insured’s work’ by the Named Insured’s customer”. However, Zenix further argues that Article 18 restores it where the “error, omission or negligent act by or on behalf of any insured which results in the failure of ‘the Named Insured’s work’ to meet the specifications described in the ‘Written Specifications’, after installation, testing and final acceptance of ‘the Named Insured’s work’ by the Named Insured’s customer”, was committed in the course of Castonguay’s “Commercial Building Renovations (including carpentry and drywall)”.

41In my view, the debate is not whether coverage for a claim against the Intact policy is fully barred by the “Professional Services” exclusion. The issue is whether it is plain and obvious that a Third Party Claim is precluded, based on the terms of the Main Contract with Commonwealth as well as the terms of the CGL and its Contractor’s Edge Endorsement.

42I find that it is not at all clear that the claim for contribution and indemnity would be among those risks covered by the “Wrap-up” liability insurance contemplated by Article 30.1 of the Main Contract. If the loss described in the Third Party Claim is not a covered risk, the claim over by Castonguay could not be the subject of a subrogated action of the kind that would necessarily be precluded by “Wrap-up” liability coverage. Indeed, the description of “Wrap-up” liability coverage Zenix relies upon is set out in the article of Samantha Ip, Clark Wilson LLP “Consultant’s Liability Insurance: An Overview”, at p. 3 as follows:

Wrap-up insurance is a form of project insurance and is a type of general liability policy. It allows owners and contractors the convenience of dealing with one insurer for claims arising from general liability claims associated with one individual project. Each policy can be tailor made to the particular project to insure all project participants including the owner, the general contractor, subcontractors, architects and engineers. Wrap-up insurance usually provides all project participants with high limit insurance.

The policy is intended to insure third party exposures for all participants of a project and can provide cross liability against each party to the policy. [Emphasis added.]

43Where there is a potential for cross liability, the “Wrap-up” liability policy does not necessarily preclude all claims for contribution and indemnity.

44I also find that the terms of the Main Contract between Commonwealth and Castonguay provide no waiver of any right to claim over as between the parties, where allegations rest on defective workmanship or materials. I accept the argument advanced by Castonguay that the provisions of the Main Contract, including Article CC17 – Indemnification to which Article 30.1 makes specific mention, contemplate that the “Wrap-up” liability policy would only address claims for personal injury or destruction of tangible property, not claims for defective workmanship and materials as alleged by Commonwealth in its counterclaim for deficiencies.

45In addition, the provisions in Article CC34 – Damages and CC36 – Warranty leave open claims between the parties for inadequate workmanship and materials. I accept the argument of Castonguay that, in the circumstances, it cannot be argued that the undefined terms of liability coverage contemplated by Article 30.1 of the Main Contract would necessarily include coverage for inadequate workmanship and materials.

46I find the terms of the CGL coverage appear to exclude, in the Commercial Building and Contents Broad Form policy, claims for professional services based on faulty design. I accept the argument that, if Castonguay had purchased “Wrap-up” liability coverage, its undefined terms and any associated Contractor’s Edge Endorsement would not provide coverage for any underlying action based on inadequate workmanship or defective materials.

47I find that, whatever coverage is arguably afforded by the CGL and Contractor’s Edge Endorsement, its terms must be read in conjunction with the terms of the Main Contract, which arguably precludes claims other than those related to personal injury or destruction of tangible property.

48In the circumstances, I find that it is not at all clear or plain and obvious that a claim for contribution and indemnity by Castonguay related to the professional services of Zenix for faulty design, inadequate workmanship and materials would be precluded in all of the circumstances.

49In my opinion, unless it can be said that it would be an implied term of any subcontract between Castonguay and Zenix that Castonguay provided a waiver of any subrogated claim based on allegations of professional negligence including faulty design, inadequate workmanship and materials, the Third Party Claim is not frivolous, vexatious or otherwise an abuse of court process. In any event, I am mindful of the outcome in Valenti v. Equitable Trust Co. , supra , where the Court of Appeal held that whether or not a party has a complete defence to a claim based on an implied term is not a matter that can be resolved on a Rule 21 motion.

Is there an exception to the law of privity granting Zenix the benefits of liability coverage contemplated by the Main Contract?

Is there an exception to the law of privity granting Zenix the benefits of liability coverage contemplated by the Main Contract?

50Zenix contends that, although it was not one of the parties to the Main Contract, the Supreme Court of Canada’s decision in London Drugs Ltd. v. Kuehne & Nagel International Ltd. , 1992 41 (SCC) , [1992] 3 S.C.R. 299 and its subsequent interpretation by the Ontario Court of Appeal in such cases as Madison Developments Limited v. Plan Electric Co. (1997), 1997 1277 (ON CA) , 36 O.R. (3d) 80 (C.A.), and Tony and Jim’s Holdings Ltd v. Silva (1999), 1999 969 (ON CA) , 43 O.R. (3d) 633 (C.A.) make it clear that a covenant to insure can be enforced by someone who, although not a contracting party, was intended to receive the benefit of the covenant.

51Zenix relies on the line of jurisprudence summarized by the Court of Appeal in Tony and Jim’s Holdings Ltd , supra , at para. 34 , to bring its position in line with those decisions finding that a landlord’s covenant to insure a leased premise operates as a bar to a claim by the landlord against a tenant. See: Tony and Jim’s Holdings Ltd. v. Silva , supra , at pp. 637 and 644; Cummer-Yonge Investments Ltd . v. Agnew-Surpass Shoe Stores Ltd. , 1975 26 (SCC) , [1976] 2 S.C.R. 221; Ross Southward Tire Ltd. v. Pyrotech Products Ltd ., 1975 25 (SCC) , [1976] 2 S.C.R. 35; T. Eaton Co. v. Smith , 1977 39 (SCC) , [1978] 2 S.C.R. 749; and Greenwood Shopping Plaza Ltd. v. Beattie , 1980 202 (SCC) , [1980] 2 S.C.R. 228.

52Zenix concedes there is no case on point where a principled exception has been found to apply to the circumstances before me, and to that extent would represent a finding made in as yet uncharted waters in Canada. However, Zenix suggests the reasoning of the Pennsylvania Superior Court in Borough of Wilkinsburg v. Trumble-Denton Joint Venture , 568 A.2d 1325 (Pa. Super. Ct. 1990) , offers support for the proposition that a party in Zenix’s position would be entitled to be reimbursed by a party in Castonguay’s position against liability for a Third Party Claim. Zenix further argues that in the present case, however, it is Castonguay that is advancing a claim against Zenix, which Zenix would not have to defend but for Castonguay’s breach of the covenant in the Main Contract.

53I have already found that the terms of the Main Contract, as well as the CGL and the Contractor’s Edge Endorsement, do not make it plain and obvious that all claims for contribution and indemnity of the kind advanced by Castonguay would necessarily have been precluded by the undefined terms of a “Wrap-up” liability policy.

54In addition, I conclude that the law of privity does not provide for a principled exception that should extend to the circumstances of this case.

55A discussion on this subject must begin with the reasoning of Justice Iacobucci in London Drugs , supra , where he set out the general principles of privity of contract at pp. 415-18:

The doctrine of privity of contract has been stated by many different authorities sometimes with varying effect. Broadly speaking, it stands for the proposition that a contract cannot, as a general rule, confer rights or impose obligations arising under it on any person except the parties to it: see, for example, Anson's Law of Contract (25th ed. 1979), at p. 411, cited by McIntyre J. for this Court in Greenwood Shopping Plaza Ltd. , supra, at p. 236; G. H. Treitel, The Law of Contract (8th ed. 1991), at pp. 523-75; Cheshire, Fifoot and Furmston's Law of Contract (12th ed. 1991), at pp. 450-68; and Chitty on Contracts (25th ed. 1983), vol. 1, at pp. 662-91. It is now widely recognized that this doctrine has two very distinct components or aspects. On the one hand, it precludes parties to a contract from imposing liabilities or obligations on third parties. On the other, it prevents third parties from obtaining rights or benefits under a contract; it refuses to recognize a jus quaesitum tertio or a jus tertii . This latter aspect has not only applied to deny complete strangers from enforcing contractual provisions but has also applied in cases where the contract attempts, either expressly or impliedly, to confer benefits on a third party. In other words, it has equally applied in cases involving third party beneficiaries.

The decisions most often cited in Canadian courts in support of the doctrine of privity are: Tweddle v. Atkinson (1861), 1 B. & S. 393, 121 E.R. 762 ; Dunlop Pneumatic Tyre Co. v. Selfridge & Co. , [1915] A.C. 847 (H.L.) ; Scruttons Ltd. v. Midland Silicones Ltd. , supra; Canadian General Electric , supra; and Greenwood Shopping Plaza , supra. As confirmed by these and other decisions, privity of contract is an established principle of contract law. It is not, however, an ancient principle. As noted by this Court in Greenwood Shopping Plaza , at p. 237, the doctrine "has not always been applied with the rigor which has developed during modern times". Indeed, many have noted earlier decisions in the English common law which have allowed third party beneficiaries to enforce contracts made for their benefit: see, for example, the review of the history by Windeyer J. in Coulls v. Bagot's Executor and Trustee Co. , [1967] Aust. Argus L.R. 385 (H.C.), at pp. 407-9; R. Flannigan, "Privity -- The End of an Era (Error)" (1987), 103 L.Q. Rev. 564, at pp. 565-68; and Carver's Carriage by Sea (13th ed. 1982), at pp. 241-47. It is generally recognized that the law in this respect was not "settled" until the mid-nineteenth century. It is also accepted that there are certain exceptions to the doctrine of privity such as trust and agency: see Greenwood Shopping Plaza , supra, at pp. 238-41 and ITO-International Terminal Operators , supra, at pp. 784-94.

The reasons behind the doctrine of privity have received very little judicial attention. Professor Treitel offers perhaps the most often cited (and debated) justifications for this doctrine in his treatise The Law of Contract , supra, at pp. 527-28. Maintaining a certain distance, he claims that the denial of third party rights under a contract may be justified for four reasons: (1) a contract is a very personal affair, affecting only the parties to it; (2) it would be unjust to allow a person to sue on a contract on which he or she could not be sued; (3) if third parties could enforce contracts made for their benefit, the rights of contracting parties to rescind or vary such contracts would be unduly hampered; and (4) the third party is often merely a donee and a "system of law which does not give a gratuitous promisee a right to enforce the promise is not likely to give this right to a gratuitous beneficiary who is not even a promisee".

Other possible justifications include preventing the promisor from being subject to double recovery and avoiding a floodgate of litigation brought about by third party beneficiaries.

56A recognized exception to the doctrine of privity was clearly present in Madison Developments , supra . This case involved a subrogated action by an insurer on a fire loss caused by the negligence of the employees of the subcontractor. However, in Madison there was an agreement between the contractor and the subcontractor wherein the contractor was expressly obliged to purchase liability coverage in respect of the entire project. Unlike in the circumstances before me, the covenant to insure was set forth in the subcontract. In concluding that the contractor was barred by its agreement with the subcontractor from pursuing a claim against the subcontractor’s employees, and in further concluding the insurer therefore had no right of subrogation, the Court recognized the circumstances to fall squarely within the exceptions to the law of privity contemplated in London Drugs Ltd. v. Kuehne & Nagel International Ltd ., supra , at pp. 366-67.

57At pp. 89-90 of Madison , the Court makes reference to the underlying justification for an exception to the doctrine of privity provided by Iacobucci J. at p. 361 of London Drugs where he said:

The employees of the subcontractor in Madison were afforded the very protection required by the expressed terms of a contract between the contractor and sub-contractor; therefore, this could not give rise to a subrogated action.

58Similarly, in Tony and Jim’s Holdings Ltd ., supra , the Court of Appeal found the circumstances fell within the principles enunciated in London Drugs and barred the insurer’s subrogated claim against an employee of a corporate tenant.

59In Tony , the corporate tenant, by the terms of its lease, was responsible to pay the insurance premium on a fire policy, the purchase of which the landlord agreed to be responsible for under the lease. The Court of Appeal found that the case fell squarely within the principles enunciated in London Drugs and consequently that the insurer’s subrogated claim could not be maintained against an employee of the corporate tenant. On the terms of the lease, the scope of the waiver of the liability was found to extend to the employee of the corporate tenant who was found to have an interest with respect to which insurance was provided on the policy. The Court of Appeal stated at pp. 643-644:

[I]n London Drugs , the court held that a strict application of the doctrine of privity in the circumstances would have the effect of allowing the customer to circumvent the limitation of liability clause to which it had expressly consented. Similarly, it is my view that a strict application of the doctrine in this case would, in effect, allow the insurer to circumvent the waiver of subrogation to which it agreed.

While the language used in [the policy’s] clause is certainly not the clearest, it would seem to me that, in a case such as this one where fire coverage is extended to leased premises for fire caused by the negligence of anyone, the scope of this waiver can reasonably be interpreted to extend to the tenant who, in the words of the clause, has an "interest with respect to which insurance is provided" by the policy. Indeed, the insurer does not assert the right to make a subrogated claim against the tenant. It is my view that the words used are also wide enough to include those individuals through which the corporate tenant, of necessity, must act.

60In Fraser River Pile and Dredge Ltd v. Can-Dive Services Ltd ., 1999 654 (SCC) , [1999] 3 S.C.R. 108, the Supreme Court revisited the principled exceptions to the doctrine of privity. In Fraser River , the subrogated action brought by the insurer of a barge owner against the charterer of a barge that sank was precluded by the terms of the insurance policy which provided an express waiver of subrogation, and extended coverage to affiliated companies and charterers. Unlike the circumstances in this case, the charterer was able to rely on a waiver of subrogation clause in the insurance policy to defend against the subrogated action on the basis of a principled exception to the privity of contract doctrine. Unlike the circumstances before me, the waiver of subrogation did not depend on the barge owner’s initiative in favour of the third party charterer. In Fraser River , the Supreme Court laid out at para. 32, the pre-conditions for the extension of the principled approach to the doctrine of privity as follows:

In terms of extending the principled approach to establishing a new exception to the doctrine of privity of contract relevant to the circumstances of the appeal, regard must be had to the emphasis in London Dru gs that a new exception first and foremost must be dependent upon the intention of the contracting parties. Accordingly, extrapolating from the specific requirements as set out in London Drugs , the determination in general terms is made on the basis of two critical and cumulative factors: (a) Did the parties to the contract intend to extend the benefit in question to the third party seeking to rely on the contractual provision? and (b) Are the activities performed by the third party seeking to rely on the contractual provision the very activities contemplated as coming within the scope of the contract in general, or the provision in particular, again as determined by reference to the intentions of the parties?

In my opinion, in the circumstances before me, it is not plain and obvious that the parties to the Main Contract clearly intended to extend the benefits of insurance coverage to the losses involved. Furthermore, it is not plain and obvious that the professional services performed by Zenix are necessarily the very services within the scope of the Main Contract, for which liability coverage would have been purchased by Castonguay from Intact or any other insurer. Interpretation of the Main Contract suggests the activities for which liability coverage was contemplated would arguably include only claims for personal injury or destruction of property, not claims involving faulty design, defective workmanship or materials.

61In Active Fire Protection 2000 Ltd. v. B.W.K. Construction Co. (2005), O.A.C 275 (C.A.), the Court of Appeal considered a contract between a Town and a general contractor to renovate and add to a building owned by the Town. Under the contract, the general contractor was to obtain at its own expense an “all risks” policy naming the contractor, the Town and a consultant architect as insureds. The contractor entered into a subcontract for the provision of a fire protection system incorporating the very terms of the main contract. The subcontract was found to oblige the contractor to provide fire insurance after a flood which the subcontractor agreed was caused by its own negligence. The action against the subcontractor was barred on the very reasoning which disposed of the action in Madison . In both cases, the subcontractor undertook to obtain insurance for the entire project in both the main contract and the subcontract. Although the contractor failed to meet its obligation under the subcontract to acquire and maintain fire insurance, there was little doubt of the parties’ intentions. The two pre-conditions established by the Supreme Court in Fraser River v. Pile and Dredge Limited , supra , were satisfied by the expressed intention of the parties to the main contract and the subcontract and, secondly, by a finding that the activities performed by the subcontractor were the very activities contemplated within the scope of the contract to furnish fire protection services. In the absence of any evidence of the contract between Castonguay and Zenix expressly incorporating the terms of the Main Contract, and having regard to the very different activities performed by Castonguay as building renovator and Zenix as professional engineers, the circumstances before me are distinguishable.

62Finally, the circumstances in Borough of Wilkinsburg , supra , afford no sound basis for extending an exception to the doctrine of privity to the case before me. In Wilkinsburg , a general contractor was engaged by the state to rehabilitate Highway I-376. The main contract obliged the contractor to take responsibility for handling traffic affected by the road work. The contractor then entered into a subcontract with the Borough to use its off duty police officers to regulate the traffic. It was an express term of the subcontract in Wilkinsburg to obtain public liability insurance naming the Borough as an additional insured to protect the Borough and its agents from claims arising from operations under the main contract. Although the contractor did purchase a comprehensive general liability insurance policy, it failed to have the Borough named as an additional insured. There can be little doubt on the facts that the parties intended the benefit of insurance to be conferred to the Borough and its agents, and secondly, that the very services intended to be performed by the off duty police officers were the very services coming within the scope of the main contract. Therefore, the two pre-conditions to exceptions to the doctrine of privity expressed in Fraser River Pile and Dredge Ltd ., supra , would apply to the circumstances in Wilkinsburg . The facts are materially different in the circumstances before me.

63The case before me goes well beyond the parameters of recognized exceptions to the doctrine of privity, and specifically fails to meet the two criteria in Fraser River . First, there is neither an express or clear term in the Main Contract nor any subcontract between Castonguay and Zenix that Zenix was to be a third party beneficiary of the contract in a case based on faulty workmanship or materials. Second, the professional services performed by Zenix are arguably not the very activities coming within the scope of the Main Contract, and there is therefore no identity of interests between Castonguay and Zenix.

64Consequently, I am not satisfied that the law of privity may be so relaxed as to grant Zenix the remedy it contemplates, that being the waiver of any liability between Castonguay and Zenix arising from professional services provided by Zenix as consulting engineers. In the absence of any evidence of express terms in the subcontract between Castonguay and Zenix contemplating a waiver a liability, it is not plain and obvious the Third Party Claim cannot succeed.

65In the result, the Third Party Claim survives attack, and this motion is dismissed.

Costs

Costs

66Castonguay has been fully successful on this motion and is entitled to costs.

67The Costs Outline delivered on behalf of Castonguay claims actual fees including attendance on the motion of $19,950.00. Castonguay requests partial indemnity fees inclusive of disbursements and taxes of $13,857.30.

68The Costs Outline of counsel on behalf of Zenix claims actual fees including attendance on the motion of $14,808.00 and partial indemnity fees of $11,306.46 inclusive of taxes and disbursements.

69Having regard to the factors set out in subrule 57.01(1), the factors of greatest import in relation to the exercise of discretion to award costs would relate to the significant amount claimed for contribution and indemnity in the sum of $1.85 million dollars, and the issues being of obvious importance to the parties. In addition, the motion was of moderate complexity, requiring extensive analysis of contractual provisions and the case law pertaining to the exceptions to the doctrine of privity.

70Partial indemnity costs claimed by both parties are not significantly different and compromise would be expected. However, in the event the parties are unable to agree on costs, I will receive written submissions of no more than five pages in length on behalf of Castonguay within 30 days, and responding submissions of the same length on behalf of Zenix within 15 days thereafter. Should a reply be necessary, written submissions of two pages in length should follow Zenix’ response.

Madame Justice Toscano Roccamo

Released: June 14, 2012

COURT FILE NO.: 10-47525A1

DATE: 20120614

ONTARIO SUPERIOR COURT OF JUSTICE BETWEEN: CASTONGUAY CONSTRUCTION (2000) LTD. Plaintiff – and – COMMONWEALTH PLYWOOD CO. LTD. – LA COMPAGNIE COMMONWEALTH PLYWOOD LTÉE Defendant AND BETWEEN: COMMONWEALTH PLYWOOD CO. LTD. – LA COMPAGNIE COMMONWEALTH PLYWOOD LTÉE Plaintiff by Counterclaim – and – CASTONGUAY CONSTRUCTION (2000) LTD. Defendant by Counterclaim – and – LAFARGE CANADA INC., MAURICE YELLE EXCAVATION LIMITED, 3632024 CANADA INC. c.o.b. as A.B.L. CONSTRUCTION INC., INSPEC-SOL INC., ZENIX ENGINEERING LTD., GENIVAR INC., and GENIVAR CONSULTANTS LIMITED PARTNERSHIP Third Parties DECISION ON MOTION Toscano Roccamo J.