CITATION: Minto Commercial Properties Inc. v. Modern Niagara Group Inc., 2015 ONSC 2350

COURT FILE NO.: 14-61947

DATE: 2015/04/20

ONTARIO

SUPERIOR COURT OF JUSTICE

BETWEEN:

MINTO COMMERCIAL PROPERTIES INC., MINTO (ISLAND PARK) LIMITED, MINTO MANAGEMENT LIMITED and MINTO GROUP INC.

Applicants

– and –

MODERN NIAGARA GROUP INC., MODERN NIAGARA OTTAWA INC., MODERN NIAGARA HVAC SERVICES INC. and LOMBARD GENERAL INSURANCE COMPANY OF CANADA

Respondents

Christine A. Powell, for the Applicants

Karyn Shapira, for the Respondents, except Lombard General Insurance Company of Canada

Steven Stieber and Grace Leung, for the Respondent, Lombard General Insurance Company of Canada

HEARD: March 26, 2015 (at Ottawa)

REASONS FOR decision

Kane J.

1This is a Rule 14.05(3)(d) Application to interpret and determine rights under a contract. The contract is between the building developer and its mechanical trade contractor.

2In the Application, the developer seeks:

(a) A Declaration that the commercial general liability insurance policy issued to the Respondents, Modern Niagara Group Inc. (“Niagara Group”), Modern Niagara Ottawa Inc. (“Niagara Ottawa”), Modern Niagara HVAC Services Inc. (“Niagara HVAC”) (and collectively referred to as “Modern Niagara”) by the Respondent, Lombard General Insurance Company of Canada (“Lombard”), (being the Lombard Policy”), is a valid and subsisting insurance policy binding on Lombard in favor of Modern Niagara in respect of the construction project being a condominium development of the Applicant Minto (Island Park) Limited located at 38 Metropole Private, Ottawa (“the Project”);

(b) A Declaration that the Lombard Policy covers and indemnifies Modern Niagara in respect of any and all claims for damages arising from the Project claimed against them in two Superior Court of Justice proceedings in Ottawa, being Court File No. 12-55753 and 12-53990 (jointly referred to as the “Underlying Actions”);

(c) An Order requiring the Respondents to assume the Applicants’ defences in the Underlying Actions and to save the Applicants harmless from all legal costs incurred by them in the defence of the Underlying Actions; and

(d) An Order awarding the Applicants costs of this Application and costs incurred to date in defending the Underlying Actions, on a full indemnity basis.

3Upon argument of this Application, the Minto Applicants advised that the above requested relief is amended as follows:

(a) This court is to consider this Application is brought solely by Minto (Island Park) Limited (“Minto IP”);

(b) The Application against Lombard is discontinued on consent and without costs. The relief sought in the above sub-paragraphs (a) and (b) accordingly are withdrawn;

(c) The claim herein against Niagara HVAC is withdrawn; and

(d) The Underlying Action by Arsenault, No. 12-55753, has been settled and the orders sought in relation thereto are withdrawn. The relief as to the Underlying Actions is accordingly limited to one proceeding, being Action No. 12-53990, (the “CCC 687 Action”).

4Minto IP therefore submitted this court should accordingly limit its consideration to the relief sought against Niagara Ottawa and Niagara Group and therefore:

(a) Determine whether Niagara Ottawa and Niagara Group are contractually required to defend the CCC 687 Action on behalf of Minto IP, or save Minto IP harmless for its legal costs in defending the claims against it in the CCC 687 Action; and

(b) Determine whether Niagara Ottawa and or Niagara Group are required to indemnify Minto IP on a full indemnity basis in relation to the claims against it for damages in the CCC 687 Action, including its past and ongoing legal costs in defending that proceeding.

BACKGROUND

5Minto IP developed a 32-storey residential condominium (the “Project”), caused the registration of CCC 687 on September 23, 2004, and sold the units therein to purchasers, one of whom is Mr. Moonje. Mr. Moonje and CCC 687 are the plaintiffs in the underlying CCC 687 Action.

6CCC 687 and Mr. Moonje commenced the underlying CCC 687 Action in March, 2012, on behalf of the condominium and all unit owners. They seek damages therein for breach of contract, breach of warranties and/or negligence resulting from significant water leaking within the building on October 23, 2010.

7The defendants in the CCC 687 Action are Minto Commercial Properties Inc., Minto IP, Page + Steele Incorporated ( “P+S”), IBI Group Architects (“IBI”), MCW Consultants Ltd. (“MCW”), Adjeleian Allen Rubeli Limited (“Adjeleian”), the City of Ottawa, Aecon Group Inc. (“Aecon”) ZW Group Inc. (“ZW”), Niagara Group and Niagara Ottawa.

8The Statement of Claim in the CCC 687 Action makes allegations against each of the defendants including the relationship among those defendants within the common construction pyramid and their responsibility for matters such as design, plans, drawing, specifications, supervision, electrical matters, mechanical matters, construction and warranties. It was accordingly necessary to review several of the underlying construction documents referred to in the claim which is appropriate pursuant to Monenco Ltd. v. Commonwealth Insurance Co., 2001 SCC 49, [2001] 2 S.C.R. 699, paras. 36-39 and filed by both parties in this proceeding.

9This Application to interpret rights under a contract similarly requires consideration of the contractual documents.

CONSTRUCTION MANAGEMENT – MINTO IP AND AECON

10To develop and construct the Project, Minto IP entered into a Construction Management Agreement with Aecon Buildings (“Aecon”) on September 18, 2002, pursuant to which Aecon was engaged as construction manager of the Project and agent of Minto IP to manage construction of the Project until the registration of the condominium Declaration on October 1, 2004, after which date Minto IP assumed that responsibility (the “Construction M-A” Agreement).

11The Construction M-A requires Aecon to award contracts as to labour and materials with trade contractors and suppliers.

12Pursuant to the Construction M-A, Minto IP is required to consult as to change orders, retain the architect of the Project and other consultants to design and prepare construction documents for the Project and to conduct periodic inspections.

ARCHITECTURAL CONTRACT – MINTO IP AND P+S

13Minto IP on January 16, 2003, entered into an architectural service contract with P+S to develop a master plan for the development of the Project (the “P+S Contract”). The P+S Contract included all mechanical/electrical engineering services as normally provided by a mechanical and engineering consultant.

14Under the P+S Contract, “Contractors” are defined as parties contracting directly with Minto IP, or Aecon on its behalf, to provide labour, materials or equipment for the execution of the Project, para. 1.5.

15“Contract Documents” are defined in para. 1.4 as agreements between Minto IP and Contractors engaged to provide labour, services, materials or equipment for the execution of the work.

16The responsibilities in the P+S Contract require P+S:

(a) To provide structural, mechanical, electrical and acoustic professional engineering services; and

(b) To engage and provide structural, mechanical, electrical and acoustical engineering services and other consulting services for matters such as elevators, fire protection, interior design etc.

17Para. 2.1.8 of the P+S Contract lists the consultants of P+S required and engaged to complete the services to be provided by P+S. Those listed consultants include the following defendants in the 687 Action:

(a) IBI - Architect Consultant;

(b) Adjeleian - Structural Engineers; and

(c) MCW - Mechanical and Electrical Engineering Consultants.

18The responsibilities of Minto IP in the P+S Contract as per paras. 3.1.8 and 3.3.1, include providing a building science consultant to undertake general review and comment on the working drawings of P+S and its consultants, field inspections of the work of Contractors to verify compliance with the Contract Documents and obtaining at its cost, seven years of $5 million error and omission insurance coverage of P+S and its consultants for all claims in negligence, errors, omissions or attributable to them. P+S was required itself to obtain Project specific insurance as per para. 2.9.1(c).

MCW

19Schedule C-3 of the P+S Contract lists the scope of work to be provided by P+S’s Mechanical and Electrical Engineering Consultant, namely MCW.

20The scope of work of MCW includes:

(a) All mechanical/electrical engineering services as are normally provided including:

(b) All schematic design plans, design development plans, drawings, trade specifications, shop drawing review, site reviews, manuals, design plans, contract documents including preparation of full mechanical and electrical Contract Documents; and

(c) Review of construction services during construction, including field reviews and testing compliance to determine conformity to Contract Documents and review of changes for additions.

21MCW on behalf of P+S, prepared the mechanical specifications of the Project dated October 24, 2002 (“MCW M-S”) which includes plumbing, heating, cooling and air distribution.

22The MCW M-S state the work includes all labour materials and equipment to complete the mechanical requirements, materials, methods including plumbing, heating and cooling. The mechanical contractor is required to prepare drawings, including shop and as built drawings, in conjunction with all concerned trades.

23The MCW M-S include a basic list of materials and methods for matters such as pipe fittings and installation, hangers and piping support, sleeves, equipment connections as well as heating, cooling and condenser piping systems.

24The heating and cooling section of the MCW M-S, include coils and in particular at article 2.08, fan coils with factory installed and condensate risers as detailed in the drawings. These fan coils and risers are specifically referred to in the Statement of Claim.

MECHANICAL CONTRACT – MINTO IP AND NIAGARA OTTAWA

25Niagara Ottawa was selected in the tender process as a mechanical trade contractor.

26Unlike consultants selected and engaged by P+S, Minto IP signed a contract directly with Niagara Ottawa as trade contractor in January, 2003, for the trade of Mechanical regarding the Project (the “Niagara Ottawa Contract”).

27Article 3 of the Niagara Ottawa Contract requires Niagara Ottawa to provide all labour and materials to construct the Project’s complete mechanical system as specified in the MCW M-S, including riser diagrams for plumbing and air conditioning and in the mechanical site service plan. The work of Niagara Ottawa is further identified as specified in particular drawings prepared by P+S, Adjeleian and MCW (collectively the “Niagara Ottawa Contract”).

28Niagara Group is not a party to the above Niagara Ottawa Contract. No contract is alleged between Minto IP, Aecon or P+S with Niagara Group.

29The Niagara Ottawa Mechanical Contract states that Niagara Ottawa:

(a) Has total control of the mechanical work to be performed;

(b) Is solely responsible for construction means, methods, techniques and procedures therein;

(c) Is responsible to Minto IP for acts and omissions in performing portions of the work by itself or its agents;

(d) Is required to provide shop drawings as described in the Contract Documents or as the Construction Manager or the Consultant may reasonably request; and

(e) Shall certify the accuracy of field measurements, field construction conditions and product requirements and deviations therein.

30The above contractual analysis confirms the accuracy of Mr. Perron’s affidavit that:

(a) The design of the mechanical infrastructure of the Project, including the fixed piping (risers) and fan coil systems was determined and specified by MCW; and

(b) MCW prepared the technical mechanical drawings and specifications of the risers and fan coils relied upon by Niagara Ottawa in completing its work.

CCC 687 PROCEEDING

STATEMENT OF CLAIM

31CCC 687 and Moonje claim breach of contract, breach of warranty and negligence and allege that:

(a) The design and construction of the building were defective throughout the Project. In particular there were ongoing problems related to leakage between the fixed pipes or risers, and fan coils;

(b) The design and construction defects include defects in the fan coil system by inadequate securing of the fan coils and risers which stressed the fan coil joints which caused leakage;

(c) Inadequate accommodation for thermal expansion which caused leakage;

(d) Excessive tightening on the compression nuts leading to cracks and leakage;

(e) The above inadequacies resulted in the defendants conducting repairs however leakage continued.

MINTO IP

32The claim against the Minto defendants is pursuant to their express and implied warranty, their duty of care and their negligent failure to properly design, construct and supervise the construction and repair of the Project.

ARCHITECTS

33The claim against P+S is for breach of its duty and express and implied warranty to ensure construction was performed in accordance with the building drawings and specifications and its negligent actions and supervision in relation thereto. It is alleged P+S failed to prepare a design of the construction elements relating to the fan coils to allow trades to understand the required construction.

ENGINEER

34The claim against the engineering firm MCW is that it:

(a) Was responsible for the design, supervision and to ensure the proper construction of mechanical and electrical components including the fan coils system;

(b) Owed a duty of care and provided an express and implied warranty in relation thereto; and

(c) Breached its duty of care to the plaintiffs to design, construct and supervise the design, construction and repair of the Project.

35It is alleged that MCW was negligent in that it:

(a) Failed to prepare a design of the construction elements relating to the fan coils to allow trades to understand the required construction thereof; and

(b) Failed during construction to identify the defects related to the fan coils and the proper repair of such defects.

CONSTRUCTION MANAGERS

36The two construction managers allegedly breached their express and implied warranties that the construction performed was properly carried out. They owed a duty of care and were negligent in failing to properly manage and supervise the construction.

MECHANICAL CONTRACTOR

37It is alleged that Niagara Group and Niagara Ottawa are affiliated and are jointly:

(a) Responsible for the design and installation of the mechanical components;

(b) Were engaged to design and install all mechanical components, including the fan coil system, in conformity with the drawings and specifications;

(c) Provided an express and implied warranty and owed a duty of care that their design and installation of mechanical elements were proper;

(d) Were negligent in failing to properly design and install the mechanical elements.

38The plaintiffs allege that all, some or one of the defendants:

(a) Failed to properly construct the Project as required; and

(b) The plaintiffs incurred damages as a result of the above acts, omissions and breaches.

DEFENCES AND CROSS-CLAIMS IN 687 ACTION

39Minto IP and its related Minto defendants have defended the CCC 687 Action and cross claimed against its co-defendants within this construction pyramid, including Niagara Ottawa, P+S and MCW, for breach of contract and negligence as alleged in the claim, including improper design, drawing, specifications, construction, supervision and repair.

40Niagara Ottawa and Niagara Group have defended and cross claimed in the 687 Action. Their cross-claims are against the other defendants including Minto IP jointly and severally.

INDEMNIFICATION AND REQUIREMENT TO DEFEND

41Minto IP seeks determination that its co-defendants in the 687 Action, Niagara Group and Niagara Ottawa, must assume Minto IP’s defence, or its cost thereof, and indemnify it on the basis of Article 12.1.1 of the Niagara Ottawa Contract.

42That article states:

GC 12.1 Indemnification

12.1.1 The Trade Contractor shall, to the full extent permitted by law, defend, indemnify and save harmless the Owner, the Construction Manager and the Consultant and their respective directors, officers, partners, employees and agents, from and against any and all claims, demands, losses, costs (including, without limitation, legal fees and disbursements), damages, actions, suits or proceedings from third parties directly or indirectly arising or alleged to arise out of or attributable to the Trade Contractor’s performance of or the failure to perform the Work or its obligations under this Agreement. (Emphasis added)

ANALYSIS

NIAGARA GROUP

43Minto IP has presented no evidence of any contractual entitlement to:

(a) Indemnity from Niagara Group in relation to the Project, the Niagara Ottawa Contract; or

(b) A right to be defended by Niagara Group in the CCC 687 Action.

44The construction of the Project involved commercial relationships between sophisticated corporations. Minto IP elected to contract with Niagara Ottawa only.

45This application against Niagara Group is dismissed.

ADVERSE IN INTEREST

46Due to their cross-claims in the CCC 687 Action, Minto IP and Niagara Ottawa are adverse in interest to each other. Counsel for Niagara Ottawa cannot also represent Minto IP in the CCC 687 Action.

OBLIGATION TO INDEMNIFY

47The obligation to indemnity and the obligation to defend are separate obligations.

48The obligation to indemnify is to be determined at trial and is dependent upon the evidence. The obligation to defend arises before trial in response to a claim presented and may be determined prior to trial: Nichols v. American Home Assurance Co., [1990] 1 S.C.R. 801, 1990 144 at p. 808.

OBLIGATION TO DEFEND

49Each party relies on several cases involving the obligation to defend pursuant to an insurance policy obtained as a term in contractual relations such as Minto IP’s engagement in this case of Niagara Ottawa to perform a defined scope of work.

50Determination of the obligation to defend pursuant to an insurance contract is not identical to determining the same obligation pursuant to a contractual term in a construction contract.

51The source of any obligation to defend and the extent thereof in article 12.1.1 of the Niagara Ottawa Contract, as tendered, is a contract prepared by Minto IP.

52The principal purpose of the Niagara Ottawa Contract is development of the Project and in particular, the engagement of that trade contractor to carry out a defined scope of work for the owner in consideration of compensation. As a term of that contractual engagement of and for service and materials, Minto IP inserted article 12.1.1 for its benefit to reduce its potential risk if the trade contractor breached its performance obligations in the contract and as part thereof, Minto IP included an obligation to defend. This is not identical to the obligation and purchase of insurance coverage in an insurance contract, the sole purpose of which is to provide insurance protection against specified risks.

53The principal purpose of these two contracts is different. Defending the insured against a potential loss claimed is inherent to an insurance contract versus the addition of such a provision to a contract for construction of goods and services.

54Unlike the determination pursuant to an insurance contract, the determination of the duty to defend in a construction contract does not engage the general interpretation of insurance contract principles, namely:

(a) The “general principles relating to the construction of insurance contracts”, including the principle that the “pleadings govern the duty to defend”: Nichols, p. 810 and Monenco, paras. 28 and 29;

(b) The policy reasons in insurance contract cases in favour of applying the widest latitude in determine whether the “pleading allegations raise a claim within the policy”: Nichols, p. 812;

(c) The same “broader tenets underlying the construction of insurance contracts, namely the contra proferentem rule, and the principle that coverage provisions should be construed broadly” such that “any doubt as to whether the pleadings bring the incident within the coverage of the policy ought to be resolved in favour of the insured”: Monenco, p.714-715 and Association des hôpitaux du Québec v. Fondation pour le cancer de la prostate, Centre hospitalier de l’Université Laval, 2000 6062 (QC CA), [2000] R.R-A. 78 (Q.C.A.); and

(d) The conventional rule in insurance cases as to whether the insurer is bound to defend, by reliance upon the pleadings filed against the insurer that, if the pleadings allege facts, which if true, would require the “insurer to indemnify the insured for the claim, then the insurer is obligated to provide a defence”: Trafalgar Insurance Co. of Canada v. Imperial Oil Ltd (2001), 2001 21205 (ON CA), 57 O.R. (3d) 425, para. 19. (C.A.)

55The Niagara Ottawa Contract is a commercial contract. It should be interpreted as that and not as a contract of insurance.

56The application of contra proferentem rule to the Niagara Ottawa Contract operates in favour of Niagara Ottawa and against Minto IP, the author of that contract.

57The obligation to defend contained in Article 12.1.1 is entitled “Indemnification”. It contains the indemnification obligation.

58The Statement of Claim, although not limited thereto, is clear in alleging the loss is related principally to the design, construction, installation and equipment involving the inclusion of fan coils and risers, including the failure up to and including Minto IP to supervise that work.

59The obligation to defend in Article 12.1.1 states it is to:

… defend … all claims … or proceedings from third parties ... arising or alleged to arise … or attributable to the Trade Contractor’s performance … or failure to perform the Work or its obligations under this Agreement. (Emphasis added)

60This wording is general and not specific. Unlike many other terms in this contract, the term “defend” is not defined. The extent of the obligation stated does not:

(a) Specify when that obligation commences and ends;

(b) Whether the obligation to defend includes defending Minto IP for its alleged acts of negligence and those of its agents including P+S and MCW;

(c) Whether it involves independent legal counsel for Minto IP;

(d) Whether it obligates and includes the retaining of experts;

(e) Whether it includes counterclaims and cross-claims and if so, does it include any claims or only those limited to contribution and indemnity; and

(f) Whether it includes applications such as this.

61The phrase “… to the full extent permitted by law,” provides no greater clarity.

62Minto IP drafted Article 12.1.1. The lack of clarity or ambiguity therein should be interpreted against Minto IP, not in its favor.

63Minto IP in the CCC 687 Action may wish to defend other defendants which Niagara Ottawa has no duty to defend.

64Minto IP may as part of its cross-claim argue that responsibility if any is that of Niagara Ottawa and/or other specific defendants. Niagara Ottawa’s duty to defend on the wording of Article 12.1.1 does not include such matters.

65The defending obligation is limited to claims of a third party regarding actions alleged to arise or attributable to Niagara Ottawa and its performance or failure to perform.

66The obligation is limited to defending, not to presenting and advancing claims on behalf of Minto IP, nor defending the alleged actions of negligence of Minto IP, P+S or MCW. If that was the intention of Minto IP, it failed to articulate such obligations in Article 12.1.1.

67These are matters of substance and Minto IP is responsible for the failure to articulate the extent of the obligation to defend.

68It is inappropriate to conclude that Niagara Ottawa is financially responsible to fund the full extent of Minto IP’s “defence” of this claim against it and its many construction agents, as well as its cross-claims against the other defendants, because Minto IP has failed to specify with clarity the nature and extent of this obligation against Niagara Ottawa. Several of the cases argued caution against giving the party entitled to the defence being granted a “blank cheque”.

69The fan coils and risers are specified in the mechanical specifications and are the subject of drawings prepared by and subject to the supervision and direction to be performed by other defendants.

70At this early point in the proceeding, this general statement by Minto IP in Article 12.1.1 of the obligation to defend should be limited to its defence only. It does not include its many construction agents or the cross-claims it has presented. The trial judge will have jurisdiction on conclusion of the trial to determine cost entitlement.

71Based on the number of other consultants involved in the design, specification and supervision of the fan coils and risers, as well as the other interests and claims Minto IP may be pursuing in the CCC 687 Action, Niagara Ottawa’s obligation to defend that proceeding on behalf of Minto IP shall consist of its payment of 33.33% of the reasonable legal fees and disbursements of Minto IP in the CCC 687 Action. That more accurately represents the limited obligation to defend Minto IP, separate of its cross-claims and other interests or parties Minto IP may elect to defend or pursue in the CCC 687 Action.

COSTS

72Any party claiming costs of this application shall serve and forward brief written submissions within 20 days from the date hereof. The other party shall reply thereto in writing within 20 days thereafter.

Kane J.