ONTARIO
SUPERIOR COURT OF JUSTICE
COURT FILE NO.: 07-CV-327652 PD3
DATE: 20130314
BETWEEN:
Bank of Nova Scotia
Plaintiff
– and –
Lockerbie & Hole Industrial Inc., Modern Niagara Toronto Inc., M.A. Stewart & Sons Ltd., and PCL Constructors Canada Inc.
Defendants
Lee Samis and John Bradbury, for the Plaintiff
John L. Davis and R. Lee Akazaki, for the Defendants, Lockerbie & Hole Industrial Inc. and PCL Constructors Canada Inc.
HEARD: January 16, 2013
Morgan J.
[1] This motion for summary judgment raises a variation of the long-debated role of the stranger to a contract: can a Defendant that is not a party to a land lease invoke a provision in that lease as a bar to the lessee/Plaintiff’s action against it?
I. The Underlying Claim
[2] The action revolves around repair and upgrade work done at the Scotia Plaza building, a 68 story office tower, with a 6 story retail concourse and parking garage below grade, in downtown Toronto. The work commenced in April 2004 and lasted until February 2007.
[3] The Plaintiff owns the Scotia Plaza building. It is a long term lessee of the lands on which the building is situated, the owner of which is its own wholly-owned subsidiary, Scotia Realty Limited (“Scotia Realty”). The Defendant, PCL Constructors Canada Inc. (“PCL”), was the lead contractor for this work on the water systems. The other Defendants were its subcontractors.
[4] The 2004 contract between PCL and the Plaintiff was a “cost plus” contract for the replacement and upgrade of the mechanical systems in the Scotia Plaza building (the “2004 Contract”). It was an extensive and carefully drafted contract, comprised of a series of documents, and containing, among other things, 113 pages of engineering specifications.
[5] The fee structure contained in the 2004 Contract contemplated the overall cost of the project exceeding $20,000,000. For present purposes, the relevant portions of the 2004 Contract are contained in the document entitled “General Conditions of the Cost Plus Contract” (the “General Conditions”), as well as in the “Supplementary Conditions” that modify the General Conditions.
[6] Article A-12 of the 2004 Contract provides that it prevails over all prior contracts of any kind:
The Contract supersedes all prior negotiations, representation or agreements, either written or oral, including the bidding documents. The contract may be amended only as provided in the General Conditions of the Contract.
[7] Further, article 21.1 of the General Conditions made PCL, as contractor, responsible for the work on the building and for any damage caused as a result of the work:
The Contractor shall carry out the Work by means and in whatever manner necessary to safeguard the Work and all persons, property and rights… The Contractor shall be responsible for making good at his own expense any damage to the Work and/or the Owner’s property and/or the property of any third party as may arise out of the Contractor’s operations.
[8] The 2004 Contract initially required that PCL take out an insurance policy that covers the value of the project, and that it also take out liability insurance of $1,000,000. This latter figure was specifically amended in the Supplementary Conditions, article 33 of which requires PCL to take out $20,000,000 in builder’s risk insurance.
[9] Phase 2 of the work under the 2004 Contract was subcontracted by PCL to the Defendant, Lockerbie & Hole Industrial Inc. (“Lockerbie”). In its tender documentation for this subcontract, PCL represented to its sub-trades that it was responsible for insuring the Work, the building, and the overall project. In addition, the contract between PCL and Lockerbie contains a provision which states that there exist no other agreements, representations, warranties, etc. other than those contained within that contract.
[10] PCL, Lockerbie and other subcontractors performed work under the 2004 Contract. During the course of that work there was a large leak, causing substantial damage to the Plaintiff’s property. The damage resulting from the leak is the subject matter of the underlying action herein.
II. The 1985 Land Lease
[11] As indicated above, the Plaintiff is a lessee under a long-term land lease, the lessor of which is Scotia Realty. On December 1, 1985, Scotia Realty entered into a land lease with Campeau Corporation (“Campeau”), under which Campeau had the right to construct a building on the leased land (the “Land Lease”). Once constructed, the ownership of the building was to remain with Campeau for the duration of the Land Lease, which terminates in 2079.
[12] Campeau ultimately developed the land and built the building which has become the Scotia Plaza. The Land Lease was a developer’s lease, and conferred on Campeau, as developer, the duty to repair and maintain the building (Article 9), to rebuild the building in the event of damage (Article 11), and to insure the building (Article 8). Article 8.01(a)(vi)(A) required Campeau to purchase:
…during construction or any re-construction of the Building and substantial replacement or substantial repair of an part thereof, builders’ all risk insurance with respect to the Building and any on-site or off-site work, materials and equipment related thereto protecting the Lessor, the Lessee, and all contractors and subcontractors, in an amount not less than the full Replacement Cost of the Building in the case of on-site, and with customary limits in the case of off-site together with provisions for delayed opening, which policy shall make provision for partial occupancy.
[13] Article 22.07 of the Land Lease provided that the various obligations set out above, and others, are covenants that run with the land and that bind all successors and assigns. At the same time, article 22.15 of the Land Lease provided that either party thereto may waive compliance with any provision that is to its own benefit, and that this waiver may be done at any time or even retroactively.
[14] Through a series of restructurings and acquisitions, the Plaintiff eventually became the owner of the Scotia Plaza building. In 2001, the Plaintiff took formal assignment of the lessee’s interest under the Land Lease. The lessor is still Scotia Realty, so that the Plaintiff’s landlord under the Land Lease is its own wholly-owned subsidiary.
[15] Neither the Plaintiff nor PCL, nor any of the other Defendants, had ever turned their minds to the Land Lease and its insurance provisions when the 2004 Contract and PCL’s subcontracts with the other Defendants were signed. PCL did not find out about the existence of the Land Lease until the discovery stage of the within action. Likewise, the representative of the Plaintiff who was examined for discovery in this action was equally unaware of the ownership of the land and building and the terms of the Land Lease until the question was asked, and an undertaking given and answered, during the discovery process.
[16] PCL’s reliance on the insurance provision of the Land Lease was not contained in its original Statement of Defence. The Plaintiff amended its Statement of Defence to add reference to the Land Lease pursuant to an order of Master Dash dated December 15, 2011. Master Dash, in his endorsement, stated that the Plaintiff derived its ownership of the Scotia Plaza building from the Land Lease.
[17] The 2004 Contract contains in article A-2 a list of contract documents related to the mechanical system repair project covered by that agreement. This list does not include any reference to the Land Lease. Similarly, article 3.2 of the PCL tender document provides to Lockerbie and PCL’s other sub-trades a list of contract documents relevant to the project, and makes no reference to the Land Lease.
[18] PCL’s and the other Defendants’ amended pleadings assert a subrogation bar defence arising from the Plaintiff’s obligation as lessee under the Land Lease to insure the building. PCL submits that as contractor and subcontractors, it and the other Defendants are third party beneficiaries under the Land Lease. PCL further contends that its ability to invoke a subrogation bar arising from the Land Lease was not waived or in any way changed or overridden by the terms of the 2004 Contract.
III. The ‘Entire Agreement’ Clause
[19] The 2004 Contract expressly “supersedes all prior negotiations, representation or agreements, either written or oral.” Moreover, the 2004 Contract makes PCL, and not the Plaintiff, responsible for insuring the project and the work against “builder’s risk”. In its insurance obligations, therefore, the 2004 Contract is directly contrary to the Land Lease.
[20] Of these two contradictory provisions, it was only the 2004 Contract to which the parties actually turned their minds. They both take the position that they were unaware of, and did not contemplate, the Land Lease and its builder’s risk insurance provision.
[21] Generally speaking, a clause that expressly provides that a contract supersedes all previous contracts, representations, promises, etc. is enforceable in its own terms. As this court has noted, “Prima facie, the entire agreement and disclaimer clauses apply, unless the plaintiff can prove collateral material misrepresentations were made, or that to enforce the agreement would be unconscionable.” Machias v. Mr. Submarine Ltd., 2002 CarswellOnt 1176, para 32 (SCJ).
[22] PCL takes the further position that the 2004 Contract did not actually require it to insure against the damage at issue here. In making this argument, PCL relies on a provision of the General Conditions that enumerates the types of insurance coverage that PCL as contractor is obliged to acquire, and does not list insurance for the specific property and equipment (elevator hoist ropes and related equipment) to which the Plaintiff’s claim relates.
[23] In making this argument, however, PCL overlooks the Supplementary Conditions negotiated between the parties which specifically add to those insurance obligations contained in the General Conditions. To reiterate one of the salient sections of the Supplementary Conditions quoted in Part I above, article 34 provides that: “The Contractor shall be responsible for making good at his own expense any damage to the Work and/or the Owner’s property and/or the property of any third party as may arise out of the Contractor’s operations.”
[24] Also as set out in Part I above, this increased responsibility on PCL as contractor was accompanied in the Supplementary Conditions by a specifically negotiated and substantially increased requirement for insurance coverage to be carried by PCL. As will be recalled, article 33 of the Supplementary Conditions raised the level of builder’s risk insurance that PCL must maintain from $1,000,000 to $20,000,000.
[25] In accordance with the terms of the 2004 Contract, PCL did, in fact, obtain builder’s risk coverage that insured PCL as the named insured and the Plaintiff and Lockerbie as additional insureds. As the 2004 Contract was done on a “cost plus” basis, the Plaintiff was billed for, and paid, the premiums for this insurance policy. It is PCL’s position, however, that it need not claim under that policy to cover the damages caused by the leak.
[26] As PCL would have it, its third party beneficiary status under the Land Lease allows it to rely on the Plaintiff’s own obligation under that Land Lease to obtain builder’s risk insurance. Further, PCL contends, if no such insurance was obtained by the Plaintiff, PCL is entitled to consider the Plaintiff to have opted to self-insure.
[27] PCL has no answer to the Plaintiff’s argument that the ‘entire agreement’ clause supersedes the insurance clause in the Land Lease. PCL treats the Land Lease not as a contract that allocates risk, since the 2004 Contract clearly allocated the risk of damage to PCL itself by requiring it to insure; rather, it treats the Land Lease as if it were a legislative requirement that cannot be changed or waived by subsequent contract that changes the allocation of risk and places obligations on a different party.
[28] In its recent decision in 9183-7831 Québec Inc. v Location Faubourg Boisbriand Inc., 2011 QCCS 5304, the Québec Superior Court listed six circumstances where it would be appropriate to consider extrinsic evidence and external obligations notwithstanding an ‘entire agreement’ clause. These include: 1) in the event of error; 2) in the event of fraud; 3) when there have been misrepresentations; 4) in a consumer contract; 5) in contracts contrary to public order; or 6) to interpret an ambiguous clause in a contract and determine the common intent of the parties.
[29] None of these circumstances exist here. The parties have specifically and unambiguously set their minds to the risk of damage and insurance obligations in the 2004 Contract, and have agreed that the obligation is on PCL to cover these risks. The common intent of the parties is found in the 2004 Contract. PCL did not know about the Land Lease, and so it was not within the contemplated allocation of risk between the parties for the Land Lease to supersede the 2004 Contract rather than the other way around. There is simply no discernible reason to ignore the ‘entire agreement’ clause in the 2004 Contract.
IV. Third Party Beneficiaries
[30] It is elementary that “a contract cannot, as a general rule, confer rights or impose obligations arising under it on any person except the parties to it.” London Drugs Ltd. v. Kuehne & Nagel International Ltd., 1992 41 (SCC), [1992] 3 S.C.R. 299. As the Supreme Court has stated in London Drugs, ibid., relaxation of the rule of privity of contract is appropriate where its strict enforcement “does not respect allocations and assumptions of risk made by the parties to the contract”.
[31] Thus, in order for a third party to claim rights under a contract in which it is not a party, there must not only be some discernible intention to confer such rights, but they must be the very activity contemplated by the parties. Fraser River Pile & Dredge v Can-Dive, 1999 654 (SCC), [1999] 3 SCR 108, at para 38. This principled exception, which applies to the very activity contemplated in the contract, and not to just the generic type of activity contemplated, is most visible where there is detrimental reliance by the claimant on the contractual provisions.
[32] The article 8.01(a)(vi)(A) insurance provision in the Land Lease reflects the fact that it was drafted at inception in contemplation of the initial development of the Scotia Plaza building. It specifically references the possibility of a “delayed opening” or “partial occupancy” of the building, suggesting a building in its infancy. While it also states that it applies to reconstruction and repairs, there is no suggestion that the insurance clause was intended to foreclose an allocation of the insurance obligation to a contractor or subcontractors in distant future repair works. The lessee under the Land Lease has promised the lessor that the lessor itself will not be responsible for carrying builder’s risk insurance, but beyond that it leaves to the future any arrangement as between the lessor an a contractor or subcontractors.
[33] Used in the way that PCL suggests, the exception to the privity of contract rule that otherwise prevents third parties from invoking contracts to which they are strangers is anything but “principled”. Indeed, as a late-in-the-day discovery, the Land Lease clause relied on by the Defendants here is as little more than a potentially ‘lucky break’ on which they hope to capitalize in the litigation. I can put PCL’s claim that it falls into the exception to the privity rule no better than the British Columbia Supreme Court put a similar claim in Virk v. Sidhu, 2010 BCSC 369, at para 15: “In this case I find no extenuating circumstances motivating a departure from the shield – not a sword feature of the principled exception”.
[34] In interpreting a contract or, as here, two contracts, which appear to require a party to put in place insurance coverage on which another might rely, “the question is upon whom the assumption of risk falls”. Active Fire Protection 2000 Ltd. v. B.W.K. Construction Co., 2005 24226 (ON CA), 200 OAC 275, at para 17 (Ont CA). Where the third party has relied to its detriment on the benefits conferred upon it by others, the relaxation of the privity rule reflects the contractual allocation of risk and is a shield protecting the third party beneficiary. Contrarily, where the third party has not relied on the benefits purportedly conferred upon it by others, deviation from privity of contract as a governing principle would be a sword that slashes destructively at contract doctrine and that undermines the parties’ contractual assumptions of risk.
[35] The purpose of any contractual interpretation is to determine the intention of the parties at the time the contract was entered into, having regard to the objective evidence of the context of the contract. Salah v. Timothy’s Coffees of the World Inc., 2010 ONCA 673, at para 16 (Ont CA). There is, of course, no better evidence of the intention of the parties in entering a contract than to examine their conduct under that very contract. Bank of Montreal v. University of Saskatchewan, (1953) 1953 166 (SK QB), 9 WWR (NS) 193, at para 14 (Sask QB). Where, as here, the parties have specifically turned their mind to the insurance question in the 2004 Contract, it is the provisions of that contract that must provide the answer to the insurance question.
[36] As indicated, the 2004 Contract not only required PCL to obtain builder’s risk insurance coverage, but PCL in fact obtained that coverage. In these circumstances, a prior inconsistent obligation in a contract to which PCL is a stranger, and which was not in the contemplation of the parties, does not, and cannot, provide evidence of the relevant intentions. It is a fortuitous find that was unearthed well after the relevant agreement was reached and acted upon.
[37] What PCL and the other Defendants want is not what they bargained for. Having discovered the Land Lease late in the day, they are hoping for a windfall rather than an objective reading of the contractual obligations and risks to which they agreed. As between the parties to the Land Lease, the Plaintiff as lessee is apparently offside the obligation to have insurance coverage, but that is no concern of the Defendants’. Indeed, since the lessor and lessee are related companies, the allocation of liability between them is probably irrelevant in all respects, including to themselves.
[38] What is certain, however, is that as between the Plaintiff and the Defendants, the 2004 Contract is the entire agreement. PCL and the other Defendants can provide no reason other than their sheer, blind luck of having come across it, for invoking the Land Lease here. They never bargained for it, they in fact explicitly negated anything like it, and they never relied on it to their detriment or in any other way.
V. Disposition
[39] There are no grounds on which to dismiss the Plaintiff’s claim. There are many issues between the parties which must be resolved at trial, and the insurance provision in the Land Lease does not act as a subrogation bar to the within action. It has been expressly superseded by the terms of the 2004 Contract insofar as the Defendants are concerned.
[40] The motion is dismissed. The parties may make written submissions with respect to costs. I would ask that these be sent to the courthouse to my attention within two weeks of the release of these reasons for judgment.
Morgan J.
Released: March 14, 2013
COURT FILE NO.: 07-CV-327652 PD3
DATE: 20130314
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
Bank of Nova Scotia
Plaintiff
– and –
Lockerbie & Hole Industrial Inc., Modern Niagara Toronto Inc., M.A. Stewart & Sons Ltd., and PCL Constructors Canada Inc.
Defendants
REASONS FOR JUDGMENT
E.M. Morgan J.
Released: March 14, 2013