Court File and Parties

Court File No.: CV-16-0215 Date: 2016-08-24

Ontario Superior Court of Justice

Between: Her Majesty the Queen in Right of Ontario, Applicant Christopher P. Thompson, for the Crown

- and -

Turn-Key Construction Inc., Respondent Douglas Treilhard, for the Respondent

Heard: August 11, 2016, at Thunder Bay, Ontario

Before: Mr. Justice F. Bruce Fitzpatrick

Reasons On Application

1This is an application seeking a declaration that the respondent, Turn-Key Construction Inc. (“Turn-Key”), has a contractual duty to defend the applicant, Her Majesty the Queen in right of Ontario (“Ontario”), in an action (the “Action,” Court File No. CV-15-0109) commenced by G. Prezio Electric Limited (“Prezio”).

2The contract at issue required Turn-Key to supply and install underground fibre cable to the Fort William Historical Park, a facility owned by Ontario and located in Thunder Bay (the “Contract”).

3The parties do not dispute that the Contract contains an indemnity clause that creates a duty to defend on the part of Turn-Key in certain situations (the “Indemnity”). The relevant provisions of the Contract respecting the Indemnity and the duty to defend are as follows:

ARTICLE 7 – INDEMNITY AND INSURANCE

7.01 Supplier Indemnity

The Supplier hereby agrees to indemnify and hold harmless the Indemnified Parties from and against any and all liability, loss, costs, damages and expenses (including legal, expert and consultant fees), causes of action, actions, claims, demands, lawsuits or other proceedings, (collectively, “Claims”), by whomever made, sustained, incurred, brought or prosecuted, including for third party bodily injury (including death), personal injury and property damage, in any way based upon, occasioned by or attributable to anything done or omitted to be done by the Supplier, its subcontractors or their respective directors, officers, agents, employees, partners, affiliates, volunteers or independent contractors in the course of performance of the Supplier’s obligations under, or otherwise in connection with, the Contract. The Supplier further agrees to indemnify and hold harmless the Indemnified Parties for any incidental, indirect, special or consequential damages, or any loss of use, revenue or profit, by any person, entity or organisation, including, without limitation, the Ministry, claimed or resulting from such Claims. The obligations contained in this paragraph shall survive the termination or expiry of the Contract.

7.05 Supplier Participation in Proceeding

The Supplier shall, at its expense, to the extent requested by the Ministry, participate in or conduct the defence of any Proceeding against any Indemnified Parties referred to in this Article and any negotiations for their settlement. The Ministry may elect to participate in or conduct the defence of any such Proceeding by notifying the Supplier in writing of such election without prejudice to any other rights or remedies of the Ministry under the Contract, Agreement, at law or in equity. Each Party participating in the defence shall do so by actively participating with the other’s counsel. No settlement shall be entered into by the Supplier unless it has obtained the prior written approval of the Ministry. If the Supplier is requested by the Ministry to participate in or conduct the defence of any such Proceeding, the Ministry agrees to co-operate with and assist the Supplier to the fullest extent possible in the Proceedings and any related settlement negotiations. If the Ministry conducts the defence of any such Proceedings, the Supplier agrees to co-operate with and assist the Ministry to the fullest extent possible in the Proceedings and any related settlement negotiations. This paragraph shall survive the termination or expiry of the Contract.

4There is no dispute about the legal principles which are applicable to applications of this sort. Principles applicable to a duty defend in an insurance case are equally applicable to those cases involving a commercial contract (Hoang v. Nguyen, 2013 ONSC 6242 at paras. 74-75). The determination of a duty to defend application turns on the pleadings and the contract containing the duty to defend. As set out by Rothstein J. in the Supreme Court of Canada case of Progressive Homes v. Lombard General Insurance Co of Canada, 2010 SCC 33 at paras. 19-20:

An insurer is required to defend a claim where the facts alleged in the pleadings, if proven to be true, would require the insurer to indemnify the insured for the claim… It is irrelevant whether the allegations in the pleadings can be proven in evidence. That is to say, the duty to defend is not dependent on the insured actually being liable and the insurer actually being required to indemnify. What is required is the mere possibility that a claim falls within the insurance policy. Where it is clear that the claim falls outside the policy, either because it does not come within the initial grant of coverage or is excluded by an exclusion clause, there will be no duty to defend…

In examining the pleadings to determine whether the claims fall within the scope of coverage, the parties to the insurance contract are not bound by the labels selected by the plaintiff...The use or absence of a particular term will not determine whether the duty to defend arises. What is determinative is the true nature or the substance of the claim.

5There is no dispute that a mere possibility of a claim falling within the terms of an indemnity will trigger a duty to defend.

6There is no dispute that while providing work pursuant to the Contract, a subcontractor of Turn-Key accidently severed a major electrical power line to the Fort William Historical Park. This is specifically pleaded in the statement of claim to the Action (the “Claim”) at paragraph 9. The accident happened at the beginning of November 2013. This created significant problems of freezing for the facilities of Fort William in Thunder Bay.

7Ontario had to have the power restored quickly. This is pleaded in paragraph 12 of the Claim. Prezio did the work. This is pleaded at paragraphs 15 through 17 of the Claim. Turn-Key refused to pay Prezio. This is pleaded at paragraph 32 of the Claim. Prezio sued Ontario and Turn-Key in the Action.

8Turn-Key resists the application arguing that Prezio’s pleadings do not engage the Indemnity. Turn-Key argues there is no duty to defend in this case.

9I disagree.

10I am granting the application for the following reasons.

11In my view, it is plain and obvious from the language of the Contract that the matter underlying the Claim is precisely the type of matter contemplated by the Indemnity. The weight of the jurisprudence provided by the parties directs the court to take a common sense approach, as opposed to a technical and hypothetical approach to the interpretation of commercial contracts. The true nature of the claim is determinative.

12The authorities also indicate that the threshold is low when determining whether there is a duty to defend.

13In this application, I am not called upon to determine whether or not Turn-Key must indemnify Ontario for any and all costs or losses arising from a judgment in the Action. I am determining if Turn-Key has a contractual duty to pay for Ontario’s defence to the Action.

14In this matter, Turn-Key characterizes the essential issue as follows: Whether Turn-Key is obliged to defend Ontario against a claim which, Turn-Key asserts, is based entirely on Ontario’s voluntarily assumed liabilities to a third party, Prezio. I disagree with this characterization by Turn-Key.

15Turn-Key has advanced five principles of contractual interpretation which, if applied, should lead the court to dismiss this application. Turn-Key argues:

1. General contractual terms are to be narrowly construed.
2. Contracts are to be interpreted in a commercially reasonable fashion.
3. Contracts are to provide commercial certainty.
4. Contracts of indemnity are presumed not to provide indemnity against one’s own negligence.
5. Contra proferentum applies.

16In general, these propositions are sound. However, in my view, their application does not lead to the result Turn-Key proposes for the following reasons.

The Narrow Construction Argument

17I have underlined what I view as the key words in the Indemnity at issue in the Contract:

7.01 Supplier Indemnity

The Supplier hereby agrees (1) to indemnify and hold harmless the Indemnified Parties from and against (2) any and all liability, loss, costs, damages and expenses (including legal, expert and consultant fees), causes of action, actions, claims, demands, lawsuits or other proceedings, (collectively, “Claims”), by whomever made, sustained, incurred, brought or prosecuted, including for third party bodily injury (including death), personal injury and property damage, in any way (3) based upon, occasioned by or attributable to anything done or omitted to be done by the Supplier, its subcontractors (numbers and emphasis added).

18The portions of the Indemnity fall into three specific sections that I have numbered. The language is plain, clear, and easily understood. I do not find the words ambiguous.

19In section (1), the words used indicate that the scope of the Indemnity is quite broad. This is because Turn-Key contracted to “indemnify and save harmless” Ontario. In Stewart Title Guaranty Co. v. Zeppieri, [2009] O.J. No. 322, D.M. Brown J. considered the meaning of the phrase “indemnify and save harmless.” At paragraph 20, Brown J. concluded that “the language ‘save harmless’ imposes an additional obligation that goes beyond the obligation ‘to indemnify.’”

20In section (2), the words clearly indicate that Ontario is indemnified against all liability arising from a lawsuit. This is what Ontario seeks in the request for a declaration of a duty to defend. Of course, this obligation is modified and illuminated by the balance of the paragraph and, in particular, the words in section (3). In their arguments, counsel for both parties focused on the meaning of the words: “based upon, occasioned by or attributable to anything done or omitted to be done by the Supplier, its subcontractors.”

21Counsel for Turn-Key argued for a narrow interpretation of these words. Turn-Key’s narrow interpretation would mean that because Ontario “voluntarily” engaged Prezio, the Action is not “based upon, occasioned by or attributable to anything done by Turn-Key or its subtrade.” I cannot see the logic in such an interpretation. In my view, it is plain and obvious that the Action is completely based upon, occasioned by or attributable to the cutting of the power line by Turn-Key’s subtrade. There was nothing voluntary in Ontario’s action. In the absence of the subcontractor cutting the power line, Ontario would not have engaged Prezio. I find that on the plain language of the Contract and a common sense approach to the true nature and substance of the Claim, there is more than a mere possibility that the Indemnity will ultimately be engaged.

22Much of the argument made by Turn-Key relied on two older authorities which were used to put forward the proposition that the general words of the Indemnity should be narrowly construed. Turn-Key argued that a narrow interpretation leads to the conclusion that it is clear the Indemnity would never be triggered. While these older authorities may be still good law, I did not find them to stand for the propositions argued by Turn-Key. Also, I found more recent authorities to express more clearly and succinctly the manner by which I must interpret this commercial contract.

23In Sattva Capital v. Creston Moly, 2014 SCC 53 at para. 47, the Supreme Court of Canada directed that courts are to interpret commercial contracts “as a whole, giving the words used their ordinary and grammatical meaning, consistent with the surrounding circumstances known to the parties at the time of formation of the contract.” In the recent decision of UPS Supply Chain Solutions Inc. v. Airon HVAC Service Ltd., 2015 ONSC 1734, at para. 89, W. Matheson J. found that this requires a judge to take a practical, common sense approach not dominated by technical rules of construction when interpreting commercial contracts. I agree this accurately and succinctly sets out the most useful and applicable legal principles which bear on this application. These principles do not lead me to accept the narrow construction argument put forward by Turn-Key.

24Counsel for Turn-Key pointed the court to the decision of the Ontario Court of Appeal in Helfand v. Royal Canadian Art Pottery, [1970] 2 O.R. 527. He argued that the principles set out therein should lead this court to a more restricted view of the scope of the Indemnity. He points to paragraphs 16 through 20 of Helfand to argue that the interpretation of general words in a contract cannot be determined by looking at their literal meaning alone. Instead, general words must be interpreted so as to restrict meaning to the nature of the agreement and the intentions of the parties. While Helfand may have held for a more restrictive interpretation of a commercial agreement, the wording at issue involved the meaning of a clause placed in an order form for teapots. The clause stated: “Seller agrees to protect purchaser against all claims, losses, damages, costs, and expenses…” (emphasis added). In my view, a clause requiring a party “to protect” is different and possibly of a more narrow scope than one that requires a party “to indemnify and save harmless.” Helfand is limited to its particular facts and the particular language of the contract at issue. For that reason, the case is of no assistance here. Further, the ratio of the case was directed to the interpretation of an indemnity-like clause, and did not expressly deal with the duty to defend. Accordingly, I did not find Helfand particularly helpful, nor did I find Turn-Key’s argument, that the words in the Indemnity should be narrowly construed, persuasive.

25I also did not find the English Court of Appeal case from 1949, John Lee & Son v. Railway Executive, [1949] 2 All ER 581, of assistance. The decision turned on the issue of the applicability of an indemnity rather than on the duty to defend. Also the court stated at page three that the decision turned on the nature of the landlord and tenant relationship as the context by which the particular indemnity provision should be construed. This is not the kind of relationship we have in this case.

The Commercially Reasonable and Commercially Certain Arguments

26In my view, much of the argument put forward by Turn-Key focused on whether or not the Indemnity would apply rather than whether there was a mere possibility it would apply. Counsel for Turn-Key sought to buttress its position by referring to hypotheticals rather than dealing with the case as presented to the court. This was not of assistance to the court in determining the matter. There is enough in the facts of this case to allow the court to deal with both the commercial reasonability and commercial certainty of the contract without the need to resort to arguments based on hypotheticals.

27I agree with Ontario that the essential fact in the Action is as follows: Without Turn-Key’s subcontractor cutting the power line, Prezio would not have done anything for which it now seeks compensation from Ontario.

28Work on an underground fibre cable line is what the Contract between Ontario and Turn-Key was all about. The Contract also contained an indemnification and a duty to defend clause as many commercial contracts do, particularly where sophisticated parties are involved. To my mind, the Indemnity is what the parties contemplated as necessary to determine who would pay for what in the event something went wrong while digging underground. As the result of something going wrong while digging underground, Ontario was sued. On these facts, an interpretation of the Contract wherein Turn-Key has a duty to defend Ontario in the Action is not a commercially unreasonable result nor something that would be considered uncertain or beyond the intentions of the parties.

The No Indemnity for One’s Own Negligence Argument

29It is clear from the Claim that the negligence at issue was not that of Ontario. I cannot see how a court could find Ontario negligent for retaining a contractor to do emergency repairs in the circumstances set out in the Claim. This argument does not support the proposition that it is clear the Claim will not engage the Indemnity.

The Contra Proferentem Argument

30I do not find the terms of the Indemnity ambiguous. This argument was of no assistance.

Conclusion

31In this case, the true nature or substance of the claim is that Ontario is being sued because of alleged negligence of a Turn-Key subcontractor. It is a lawsuit that has and will cost Ontario to defend that is based upon, occasioned by or attributable to the actions of a Turn-Key subcontractor. This creates a mere possibility that the Indemnity will be triggered in the case. Accordingly, Turn-Key has a duty to defend Ontario.

32The application is granted.

33The court therefore declares:

1. Turn-Key Construction Inc. has a contractual duty to defend Her Majesty the Queen in right of Ontario in the action bearing Court File No. CV-15-0109 and related actions;
2. Turn-Key Construction Inc. shall pay Her Majesty the Queen in right of Ontario’s reasonable defence costs to date and going forward along with any costs for related cross or third party claims, and that Her Majesty the Queen in right of Ontario is entitled to separate counsel to represent Ontario from counsel representing Turn-Key at Turn-Key’s expense, and that such counsel may be privately retained by Ontario, or be Crown counsel; and
3. In the event that the issue of the quantum of reasonable defence costs to date and going forward, cannot be resolved within 30 days of the release of these reasons, counsel may make an appointment to address that issue by way of a special date before Fitzpatrick J.

Costs

34In my view, the disposition of this application calls for costs to be awarded to Ontario on a partial indemnity basis. At the commencement of the proceedings, I asked counsel for their best estimate of reasonable partial indemnity costs should they be successful. I found Turn-Key’s estimate most reasonable. Given this observation, I would expect counsel to resolve the costs issue in that neighbourhood. If they cannot do so, they may make an appointment to address that issue before me. Such an appointment shall be requested within 30 days of the release of these reasons failing which the costs will be deemed to be settled such that Turn-Key will pay to Ontario the sum of $7,000.00, inclusive of disbursements and GST.

___________ ”original signed by”_ ___ The Hon. Mr. Justice F.B. Fitzpatrick

Released: August 24, 2016

COURT FILE NO.: CV-16-0215 DATE: 2016-08-24 ONTARIO SUPERIOR COURT OF JUSTICE B E T W E E N: Her Majesty The Queen in Right of Ontario, Applicant - and - Turn-Key Construction Inc., Respondent REASONS ON APPLICATION Fitzpatrick J. Released: August 24, 2016 /mls