Court File and Parties

COURT FILE NO.: CV-13-492805 DATE: 20170705 ONTARIO SUPERIOR COURT OF JUSTICE

BETWEEN:

Freyssinet Canada Limitée Plaintiff – and – Dragados Canada, Inc., Acciona Infrastructure Canada Inc., Fluor Canada Ltd. and Parkway Infrastructure Constructors Defendants

AND BETWEEN:

Dragados Canada, Inc., Acciona Infrastructure Canada Inc., Fluor Canada Ltd. and Parkway Infrastructure Constructors Plaintiffs by Counterclaim – and – Freyssinet Canada Limitée, Freyssinet International Company, Tierra Armada S.A. and HGS Limited Defendants by Counterclaim

COUNSEL: Bruce A. Thomas and Ramon Andal, for the Plaintiff and the Defendant by Counterclaim, Freyssinet Canada Limitée Sharon Vogel and Webnesh Haile, for the Defendants and Plaintiffs by Counterclaim Tom Donnelly and Joyce Tam, for the Defendant by Counterclaim, Tierra Armada S.A. Iain Peck, for the Defendant by Counterclaim, HGS Limited Glenn Ackerley, for the Defendant by Counterclaim, Freyssinet International Company

HEARD: April 28, 2017

E.M. Morgan, J.

Reasons for Judgment

[1] This motion is brought by the Plaintiff/Defendant by Counterclaim, Freyssinet Canada Limitée (“Freyssinet”), supported by the other Defendants by Counterclaim, under Rule 21.01(1)(a) of the Rules of Civil Procedure for a determination of a question of law raised in the counterclaim brought against it by the Defendant/Plaintiff by Counterclaim, Parkway Infrastructure Constructors (“PIC”) and the other Plaintiffs by Counterclaim. Freyssinet submits that resolving this question of law at an early stage will effectively dispose of much or all of the counterclaim.

[2] The government of Ontario contracted Windsor Essex Mobility Group (“Windsor”) to design, construct, finance and provide the maintenance for the Rt. Hon. Herb Gray Parkway in Windsor, Ontario (the “Project”). Windsor, in turn, contracted with PIC to perform the design and construction duties involved in the Project.

[3] Freyssinet is the subcontractor engaged by PIC to fabricate and install just under 1,000 concrete girders for some 11 tunnels and 14 bridges entailed in the construction of the Project. Freyssinet fabricated, delivered, and installed roughly 500 girders, but PIC claimed they were defective and on May 23, 2013 directed Freyssinet to suspend all work on the Project.

[4] On October 31, 2013, PIC advised Freyssinet that it was rejecting the girders that had already been delivered due to deficiencies in their manufacture. It also advised Freyssinet that it was cancelling its order for the balance of the girders for the project. The next day, November 1, 2013, it formally terminated its subcontract with Freyssinet. Freyssinet commenced action against PIC for breach of contract, seeking $11 million in damages. PIC has counterclaimed, seeking over $192 million for property damage and other losses occasioned by the defective girders.

[5] The relationships relevant to the litigation are set out in three separate contracts:

a) the agreement between the government of Ontario and Windsor (“Project Agreement”). Schedule 25 of the Project Agreement requires Windsor to obtain, among other things, a Builder’s Risk insurance policy. This policy names as insureds Ontario, Windsor, PIC, and all subcontractors;

b) the contract between Windsor and PIC under which PIC was obliged to design and build the Project (“Design Build Contract”). Section 5.5 of the Design Build Contract provides that PIC “shall have no obligation whatsoever…to obtain and maintain the insurances required to be obtained and maintained by [Windsor]. This presumably includes the Builder’s Risk policy obtained by Windsor under the Project Agreement; and

c) the subcontract between PIC and Freyssinet and its partners (the “Subcontract”). Freyssinet pleads that the Subcontract is not binding. The Subcontract reflects Windsor’s obligation under the Project Agreement to purchase insurance for the protection of the government of Ontario (which also insured the subcontractors), but it does not itself oblige PIC to obtain insurance for Freyssinet’s or the other subcontractors’ benefit. Section 4.1 of Schedule I of the Subcontract also provides that Freyssinet is to satisfy itself as to the adequacy of the insurance coverage.

[6] As indicated, the main Project Agreement between Windsor and PIC required Windsor to insure Freyssinet and other subcontractors as named insureds under a Builder’s Risk policy. This obligation was further referenced in the Subcontract with PIC and Freyssinet. A Builders’ Risk policy was ultimately issued to PIC covering the property of the Project, and expressly including PIC and all subcontractors as named insureds, with a policy limit of $1 billion.

[7] In addition to counterclaiming against Freyssinet, PIC has brought a separate action against the Builder’s Risk insurers claiming losses of over $135 million for damages that include the cost of repairing, replacing, reconstructing, and making good the property loss, with other losses for expenses and delays. Although the insurance claim is put forward on a different legal and contractual basis than the present claim, the losses claimed in both actions at least partially overlap.

[8] In bringing this Rule 21 motion, Freyssinet asks the following question:

Is the Defendant/Plaintiff by Counterclaim, Parkway Infrastructure Constructors (‘PIC’ hereinafter) precluded in law from recovering those sums claimed in the Counterclaim against Freyssinet and the co-defendants for the resultant damages and losses allegedly caused by defective girders fabricated and installed by Freyssinet in the construction of the Project which are the same damages and losses PIC has claimed against the Builders Risk insurers, who insured PIC and its subcontractors including Freyssinet?

[9] Under Rule 21.01(1)(a), an order disposing of all or part of the action is to be granted where the answer to the question sought to be determined is “plain and obvious”. Where material facts are in dispute and the question thus requires a full factual record, or where facts are assumed or hypothetical, Rule 21.01(1)(a) is not a proper basis for disposing of the question posed: Law Society of Upper Canada v. Ernst & Young, 2003 ONCA 14187, [2003] O.J. No. 2691, at paras 22-23 (Ont CA). As D. Brown, J. observed in Portuguese Canadian Credit Union Ltd. v. CUMIS General Insurance Co. (2010), 2010 ONSC 6107, 104 OR (3d) 16, at para 22, the Rule “is not designed to answer questions of law where materials facts are in dispute or, put another way, where no agreement exists on the material facts which underpin the question of law posed.”

[10] In the case at bar, the question of whether the Subcontract is enforceable is in dispute; this dispute, in turn, rests on material facts that are themselves in dispute. The pleadings make it clear that at trial the court will have to determine facts relating to the negotiations between the parties, their respective conduct in delivering and relying on various documents (including a Limited Notice to Proceed which PIC sent to Freyssinet in November 2011, pursuant to which Freyssinet commenced its supply and installation work), and the negotiations surrounding the Project Agreement and the Subcontract in order to determine the relationship between the two and the proper interpretation of each in light of the other. In addition, the trial court will have to determine whether, in fact, there were defects in the girders supplied by Freyssinet.

[11] Moreover, Freyssinet has pleaded that the Subcontract is not only in need of interpretation but is not enforceable at all. The basis for this claim is that, according to Freyssinet, the negotiations between the parties with respect to the specific terms of the Subcontract were incomplete – in particular, the terms relating to insurance. This, of course, raises material facts without which the contract questions at issue cannot be determined by a court. Freyssinet’s pleading has put into issue the existence and enforceability of the Subcontract, and Freyssinet has disputed the terms of the Subcontract invoked by PIC with respect to the insurance for Freyssinet’s work; with these central issues in dispute, a Rule 21 motion based on facts as pleaded is not a feasible way to proceed.

[12] Counsel for Freyssinet relies on the fact that the Project Agreement contains a covenant to insure by PIC, and submits that this covenant effectively allocates the risk of loss away from Freyssinet. Citing Sanofi Pasteur Limited v. UPS SCS, Inc., 2015 ONCA 88 and Deslaurier Custom Cabinets Inc. v. 1728106 Ontario Inc., 2016 ONCA 246, they further submit that the Court of Appeal has declared the question of whether a covenant to insure in a contract confers immunity from suit on a contracting party is one that may be undertaken on a summary judgment basis.

[13] The problem with this position is that Freyssinet is not a party to the Project Agreement. Accordingly, Freyssinet faces the challenge of implying a parallel covenant to insure in the Subcontract – a contract whose very existence and enforceability it denies.

[14] Counsel for PIC concedes that the Subcontract makes reference to the Builder’s Risk insurance purchased by PIC in that it attaches as a schedule the insurance schedule from the Project Agreement. They submit, however, that this reference on its own does not constitute a separate covenant to insure in the Subcontract. They compare the present situation to that in Active Fire Protection 2000 Ltd. v. BWK Construction Co., 2005 ONCA 24266, where the party who had undertaken to obtain insurance and was therefore deemed to have assumed the risk of the losses that would be covered in that insurance policy, did so in both the main contract and the subcontract. The Court of Appeal in Active Fire went out of its way to emphasize, at para 20, that “the appellant gave a separate and distinct covenant under the Subcontract in favour of the respondent to obtain fire insurance.”

[15] It would not, of course, be impossible for Freyssinet to imply a term such as this in the Subcontract, assuming that it can get over the dilemma of denying the Subcontract and relying on it at the same time. However, it is indisputable that a full factual record will be necessary to do so. The court will need a factual basis other than a contract that is ambiguous on its face in order to come to any conclusion as to whether the Subcontract contains an implied term that allocates risk to PIC and away from Freyssinet and renders it and the other Defendants who piggy-back on Freyssinet’s legal position immune from liability.

[16] The Court of Appeal has specifically found that “courts must be careful to [imply a contractual term] based on actual evidence”: Venture Capital USA Inc. v. Yorkton Securities Inc. (2005), 2005 ONCA 15708, 75 O R (3d) 325, at para 31. Indeed, the Supreme Court of Canada has instructed that in such a situation, “if there is evidence of a contrary intention, on the part of either party, an implied term may not be found on this basis”: M.J.B. Enterprises Ltd. v. Defence Construction (1951) Ltd., 1999 SCC 677, [1999] 1 SCR 619, at para 29.

[17] While I make no comment here with respect to the strength of any evidence to be adduced by either side, I have little doubt that Freyssinet and PIC, and their respective supporting parties, will each present a substantial amount of evidence at trial in an effort to establish whether or not a covenant to insure, with the attendant immunizing effect, can be implied in the Subcontract. Such evidence will be a necessary ingredient in the making of a successful case for either side of the question.

[18] Counsel for PIC also points out that section 16.7 of the Subcontract provides that Freyssinet is liable for “any physical loss of or damage to all or any part of the Subcontract Work or any equipment, assets or other property related thereto”, and that Freyssinet indemnify PIC “for any Direct Losses suffered by [PIC] as a result of [such loss] that is not an accidental loss.” This provision in the very Subcontract that Freyssinet relies on in making its covenant-to-insure immunity claim (but which it denies in its overall position as set out in its pleadings) suggests that the allocation of risk in the Subcontract is a complicated matter. Certainly, non-insured risks appear to be allocated to Freyssinet rather than to PIC, and there is an argument that the parties intended for Freyssinet to assume all risks. Only a full factual record will tell.

[19] The losses in issue in the counterclaim may or may not be covered by the Builder’s Risk policy that PIC has taken out pursuant to the Project Agreement. If the losses do not fall within that coverage, it is unclear whether any covenant to insure will operate to allocate the risk of those losses. While there appears to be little Ontario jurisprudence on the point, the Nova Scotia Supreme Court has opined that losses falling outside of the insurance coverage are not necessarily allocated in the same way as those falling within the covenant to insure: Sable Offshore Energy Inc. v. Ameron International Corp., 2008 NSSC 250, at para 71. As the court there put it, at para 60, “Each contract must be interpreted based upon its own wording.”

[20] PIC submits that while it has commenced litigation against its insurer in order to recover its losses under the Builder’s Risk policy, the fact that it has done so does not establish that those losses are or were intended to be covered. PIC’s counsel go on to argue that PIC is entitled to seek alternative avenues of recovery, subject only to the general prohibition on double recovery. In this it is correct. In the event that PIC is successful in recovering against the insurer, its losses will simply be reduced in accordance with that recovery. The insurance claim, however, does not bar the present claim – certainly not at this stage.

[21] Likewise, the fact that Freyssinet, like other subcontractors, is a named insured under the Builder’s Risk policy, does not bar PIC’s counterclaim against it. PIC is not an insurer and has not brought a subrogated claim against its own insureds such as would be barred by the insurable interest rule: see Commonwealth Construction Co. v. Imperial Oil Ltd., 1976 SCC 138, [1978] 1 SCR 317. The British Columbia Court of Appeal has reasoned that the insurable interest line of cases is “based on a different analytical foundation” than the covenant to insure cases; the former “turns on the terms of an insurance policy while the other cases turn on lease-covenants dealing with insurance without regard to the policies themselves”: Lafarge Canada Inc. v JJM Construction Ltd., 2011 BCCA 453, at para 36.

[22] The principles underlying the bar against bringing subrogated claims against a party with an insured interest do not apply here. PIC is not in a position that is the equivalent of an insurer who has either expressly or impliedly waived a right of action against a third-party beneficiary of its own insurance: Fraser River Pile & Dredge Ltd. v. Can-Dive Services Ltd., 1999 SCC 700, [1999] 3 SCR 10, at paras 40-41. It is a contracting party with Freyssinet under the Subcontract and is itself an insured under an insurance policy not directly in issue in this litigation. As a matter of law, there is nothing here to bar PIC’s counterclaim.

[23] The issues raised by Freyssinet on this motion, and by PIC in the counterclaim, require a full factual record for proper adjudication. They cannot be answered on the basis of the pleadings and law alone. The motion rests on disputed material facts, requires the implication of contractual terms, demands evidence of the circumstances surrounding the Subcontract which Freyssinet itself both relies on and rejects, and engages no legal bar to the counterclaim by PIC.

[24] For all of these reasons, the Rule 21.01 motion by Freyssinet is dismissed.

[25] I have received correspondence from counsel for the Defendant by Counterclaim, Freyssinet International Company (“FIC”), indicating that FIC has agreed with all of the Plaintiffs by Counterclaim not to seek costs against each other regardless of the outcome of the motion. I am also inclined to exercise my discretion under section 131 of the Courts of Justice Act not to award costs in respect of any of the other parties, with the exception of Freyssinet and PIC. They are the parties that carried the ball in this motion, while the others played a minor, supporting role on each side. Accordingly, there shall be no costs awarded for or against any of FIC, Dragados Canada, Inc., Acciona Infrastructure Canada Inc., Fluor Canada Ltd., Tierra Armada S.A. and HGS Limited.

[26] PIC deserves its costs as against Freyssinet. Counsel for PIC has submitted a Costs Outline seeking a total of $44,749.84. For its part, counsel for Freyssinet has submitted a Costs Outline indicating that if successful it seeks a total of $108,874.77 on a partial indemnity basis.

[27] Under Rule 57.01 (1)(0.b), I am authorized to take into account the amount of costs that Freyssinet, as the unsuccessful party here, “could reasonably expect to pay in relation to the step in the proceeding for which costs are being fixed.” Given that PIC’s costs request is less than half of what Freyssinet’s would have been, Freyssinet cannot be anything but pleasantly surprised by PIC’s Costs Outline.

[28] Freyssinet shall pay PIC costs in the amount of $44,749.84, inclusive of fees, disbursements, and HST.

Released: July 5, 2017 Morgan, J.