COURT FILE NO.: 14-60545 DATE: 2018/10/15 ONTARIO SUPERIOR COURT OF JUSTICE

B E T W E E N:

Mississippi River Power Corporation Plaintiff – and – WSP Canada Inc., Genivar Inc., William R. Walker Engineering Inc., Wm. R. Walker Engineering Inc., Douglas Leask, M. Sullivan & Son Limited, Michael Dent, Dent Engineering, 1009044 Ontario Ltd., Harrington Plumbing & Heating Limited operating as Harrington Mechanical Defendants

Counsel: Helmut R. Brodmann, for the Plaintiff Stephen Cavanagh, for the Defendants WSP Canada Inc., Genivar Inc., William R. Walker Engineering Inc., Wm. R. Walker Engineering Inc. and Douglas Leask David A. Tompkins, for the Defendant M. Sullivan & Son Limited David M. Adams and Matthew Taft, for the Defendants Michael Dent, Dent Engineering Ltd. and 1009044 Ontario Ltd. Christopher F. Reil, for the Defendant Harrington Plumbing & Heating Limited operating as Harrington Mechanical

HEARD: May 30, 2018

REASONS FOR DECISION

RYAN BELL J.

Overview

[1] In 2007, Mississippi River Power Corporation (“MRPC”) entered into a contract with Wm. R. Walker Engineering Inc. for the provision of professional consulting services in connection with a new hydroelectric generating facility to be constructed on the Mississippi River in Almonte, Ontario. MRPC’s action arises as a result of the failure that occurred in one of the penstocks – large diameter concrete encased steel pipes designed to channel water from the Mississippi River to hydraulic turbines located downstream in a powerhouse.

[2] WSP Canada Inc., Genivar Inc., William R. Walker Engineering Inc., Wm. R. Walker Engineering, and Douglas Leask (collectively, “Walker”) move for partial summary judgment and seek an order limiting their potential liability to MRPC to $2,000,000, in accordance with the insurance covenant found in s. 1.11 of the professional services contract. Walker also seeks confirmation that its liability to the other defendants (all of whom claim contribution or indemnity from Walker) is limited to $2,000,000.

[3] MRPC’s position in response is twofold. First, MRPC asserts that there were two distinct contracts – one for the design of the new penstock system and a second contract for the construction of the penstock system – and that the professional services contract has no bearing on the construction phase of the project.

[4] Second, MRPC submits that even if the professional services contract applies to the construction phase of the project, the insurance covenant as written does not limit claims to a maximum of $2,000,000.

[5] The remaining defendants have brought responding motions for consequential relief in the event that Walker is successful on its motion to have MRPC’s claim contractually limited to $2,000,000. Specifically, they seek orders extending the benefit of the contractual limitation of liability to them and a declaration that MRPC is barred from seeking any damages attributable to Walker, in excess of $2,000,000, from the remaining defendants.

[6] MRPC asserts that the remaining defendants are not entitled to benefit from the insurance covenant because the professional services contract was limited to design services and the remaining defendants were not contemplated as being beneficiaries of that contract when it was executed.

[7] No party objected to the motion proceeding by way of summary judgment. I am satisfied that the applicability of the insurance covenant in s. 1.11 of the professional services contract can be efficiently disposed of on a motion for summary judgment. I am satisfied that as to this issue, there is no genuine issue requiring a trial.

[8] For the reasons that follow, I grant partial summary judgment in favour of Walker and order that Walker’s potential liability to MRPC be limited to $2,000,000. I also order that the potential liability of the remaining defendants to MRPC be limited to $2,000,000 and that MRPC is not entitled to seek any damages attributable to Walker in excess of $2,000,000 from the remaining defendants.

The Facts

(i) The Professional Services Contract

[9] On February 22, 2007, and following a feasibility study conducted by Walker, MRPC entered into an agreement for professional consulting services with Walker. The services to be provided by Walker pursuant to the contract are set out in s. 2.1: (i) preparation of bid documents, obtaining and reviewing bids; (ii) preparation of detailed designs, working drawings, specifications and bid documents for a general contract; (iii) assistance in the pre-qualification of general contractors; (iv) preparation of approval applications; (v) assistance in negotiating purchase agreements for energy generated by the project; (vi) preparation of cost breakdowns; and (vii) preparation of updated energy output estimates.

[10] Section 1.11 of the professional services contract – the insurance covenant – provides:

The Client [MRPC] will accept the insurance coverage amount specified in this clause section (a) as the aggregate limit of liability of the Consultant [Walker] and its employees for the Client’s damages.

a) Comprehensive General Liability and Automobile Insurance

The Insurance Coverage shall be $2,000,000 per occurrence and in the aggregate for general liability and $2,000,000 for automobile insurance. When requested the Consultant shall provide the Client with proof of Comprehensive General Liability and Automobile Insurance (Inclusive Limits) for both owned and non-owned vehicles.

b) Professional Liability Insurance

The Insurance Coverage shall be in the amount of $2,000,000 per claim and in the aggregate. When requested, the Consultant shall provide to the Client proof of Professional Liability Insurance carried by the Consultant, and in accordance with the Professional Engineers Act (RSO 1990, Chapter P. 28) and regulations therein.

c) Change in Coverage

If the Client requests to have the amount of coverage increased or to obtain other special insurance for this Project then the Consultant shall endeavour forthwith to obtain such increased or special insurance at the Client’s expense as a disbursement allowed under Section 3.2.2.

It is understood and agreed that the coverage provided by these policies will not be changed or amended in any way nor cancelled by the Consultant until thirty (30) days after written notice of such change or cancellations has been personally delivered to the Client.

[11] Section 1.08 of the professional services contract provides that with the consent of Walker, MRPC could, “in writing at any time after the execution of the Agreement or the commencement of the Services delete, extend, increase, vary or otherwise alter the Services forming the subject of the Agreement.”

[12] On July 21, 2008, MRPC entered into a CCDC 2 stipulated price contract with the defendant, M. Sullivan & Son Limited, as contractor. The role of Walker, as consultant, is detailed in s. GC 2.2 of the stipulated price contract. Walker continued to provide MRPC with the services described in the stipulated price contract.

(ii) The Hydroelectric Generating Facility and the Defendants’ Roles

[13] Construction on the new hydroelectric generating facility began in 2008. The design of the penstocks for the new generating station included a transition piece which was required due to the rectangular shape of the draft tubes of the old generating station building and the circular shape of the new penstocks. On his examination for discovery, Mr. Walker confirmed that his responsibilities included the design of the penstock and the transition piece.

[14] Sullivan, as general contractor, contracted with Harrington Plumbing and Heating Limited for the fabrication, welding and installation of the penstocks, including the transition pieces, and preparation of the shop drawings pursuant to Walker’s designs. Harrington, in turn, hired Dent Engineering to assist with field measurements with respect to their work on the transition piece. Sullivan’s evidence is that during the construction and placement of the new penstock into the old penstock using the transition piece, it became apparent that additions to the design were required. According to Sullivan, Walker refused to complete the additional design work and Sullivan contracted with Dent Engineering for this work in order to meet the construction time frame.

[15] In October 2008, Walker reviewed and stamped Harrington’s shop drawings for the fabrication and welding of the transition piece. In November 2008, Sullivan provided Walker with Dent Engineering’s design for the transition piece and advised Walker that Sullivan deemed the work to be “extra” to its contract. Walker advised MRPC of the dispute between it and Sullivan concerning the penstock transition piece.

[16] In February 2009, a bulge on the interior flat floor of the transition piece of penstock no. two was discovered following higher flows of water in the river system in the previous December. The bulge and resulting investigation identified the existence of external pressures on the penstock transition piece. Sullivan contracted with Dent Engineering to prepare designs to remedy the bulge in the transition piece.

[17] The new generating station was commissioned and came on line in April 2010.

[18] In April 2012, power interruptions were reported at generator no. two. In June 2012, it was discovered that the steel liner of penstock no. two had buckled inward and separated from its concrete encasement.

[19] MRPC seeks to recover the costs incurred in repairing penstock no. two, including production losses and associated costs. MRPC also seeks to recover the costs associated with repairing and reinforcing penstock no. one. MRPC’s claim for damages is against all defendants, jointly and severally. All defendants have crossclaimed against each other for contribution or indemnity.

(iii) Mr. Newton’s Evidence

[20] Scott Newton is MRPC’s general manager. In his affidavit filed in response to this motion, Mr. Newton states that “no written professional services contract was entered into with Walker Engineering for the construction phase of the project.” Mr. Newton claims:

[I]t was understood by MRPC that it was entering into a new agreement with Walker for services, outside the scope of services included under the Professional Services Agreement of February 2007, to be provided by Walker as “Consultant” during the construction phase of the project in accordance with the CCDC 2 contract with an engineering budget of $1,100,000.00.

[21] Mr. Newton’s evidence on his examination for discovery was that apart from the professional services agreement and the extent to which the stipulated price contract relates to Walker, there were “no formal contracts” entered into by MRPC with Walker. When asked about informal contracts, Mr. Newton answered “[n]o, just discussions at Board meetings, Walker saying, you know, ‘[a]t the next phase of the project we will have an on-site engineer’ and that sort of thing. So it was an extension of that.”

[22] On his discovery, Mr. Newton also confirmed that there were no changes, alterations or additional services referencing s. 1.08 of the professional services contract and nothing formally signed to be “sort of akin to this contract.” The engineering services during the construction process were not reduced to writing: “[i]t’s recorded in our minutes, but there is nothing – no formal, signed document.”

[23] In his affidavit, Mr. Newton proffers MRPC’s understanding on several matters, including s. 1.08 of the professional services contract. I have placed no weight on Mr. Newton’s statement. The parol evidence rule precludes the admission of evidence outside the words of the written contract that would add to, subtract from, vary, or contradict a contract that has been wholly reduced to writing. The rule precludes evidence of the subjective intentions of the parties (Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, 2 S.C.R. 633, at para. 59). Mr. Newton’s statement as to MRPC’s understanding of s. 1.08 offends the parol evidence rule.

[24] For the same reason, I have placed no weight on Mr. Newton’s statement regarding MRPC’s understanding that the application of the insurance covenant was restricted to the detailed design phase of the project and would limit Walker’s liability for damages to $2,000,000 per occurrence and in the aggregate for services rendered during that phase of the project.

[25] Mr. Newton also proffers MRPC’s understanding in relation to the stipulated price contract. Part 11 of the stipulated price contract deals with insurance. A written addendum amends the general liability insurance requirements in the stipulated price contract to increase the limits to not less than $5,000,000 per occurrence. Mr. Newton states in his affidavit that it was understood by MRPC that it was entering into a new agreement with Walker for construction services outside the scope of services included under the professional services contract. Again, Mr. Newton’s statement offends the parol evidence rule. Again, I have placed no weight on his statement.

Applicability of the Insurance Covenant

[26] Walker’s position is that there was one contract between it and MRPC, the professional services contract. Walker asks me to infer from the post-contracting circumstances that the parties intended to extend the professional services contract and expand the scope of services to be provided by Walker to include services during the construction phase of the project. Accordingly, the insurance provision in the professional services contract applies so as to limit MRPC’s claim against Walker.

[27] MRPC asserts that MRPC and Walker entered into a second agreement for the provision of Walker’s services during the construction phase of the project; therefore, the insurance covenant from the first contract – the professional services agreement – does not apply so as to limit MRPC’s claim against Walker. MRPC submits that the professional services contract does not include construction services and that the parties’ ability to vary the services is limited to those services which are the subject of the contract, that is, detailed design. MRPC also points to s. 1.08 of the professional services contract which requires that any changes in relation to the services forming the subject of the contract (restricted to the design phase according to MRPC) must be reduced to writing.

[28] I find that there was one contract between MRPC and Walker, that being the professional services contract. I also find that the professional services contract was extended, by way of the stipulated price contract, so as to apply to services provided by Walker during the construction phase of the project. I have reached these conclusions for the following reasons.

[29] First, MRPC has failed to identify the key terms of the second contract it asserts existed, a contract MRPC concedes was not reduced to writing. MRPC points to board meetings at which Walker’s role during the construction phase was discussed and Walker’s presentation to Mississippi Mills’ finance committee, which included a discussion of Walker’s fees. MRPC submits that these interactions constituted an offer which it accepted by subsequently engaging Walker’s services for construction consultation.

[30] I do not agree. In my view, the more reasonable interpretation to be given to these interactions between MRPC and Walker is that the parties were engaged in discussions associated with an extension of the professional services contract. Walker’s services were in fact extended, in writing, by way of s. 2.2 of the stipulated price contract. Walker provided services to MRPC as described in the stipulated price contract.

[31] MRPC also relies on a change in Walker’s invoices as evidencing a second contract. The invoices up to the time Sullivan was named general contractor describe Walker’s services as “project management for background studies, liaison with regulatory authorities and approval for Almonte G.S. Expansion.” Later invoices are given a new job identification number and refer to the services provided as “contract administration.” I find that the changes in job number and in the description of services are consistent with an extension of the professional services contract.

[32] Second, and related to the first reason, MRPC’s claim, as set out in its pleading, is based on the professional services contract. If there were a second contract, MRPC ought to have pleaded and particularized the contract in its statement of claim.

[33] Third, there is nothing in the wording of s. 1.08 of the professional services contract that would limit permitted extensions to design services. Section 1.02 defines “services” broadly as follows: “[t]he services to be provided by the Consultant and by the Client for the Project are set forth in Article 2 and such services as changed, altered or added to under Section 1.08 are hereinafter called the ‘Services.’” In other words, the services are those set out in the professional services contract, including subsequent changes of any nature, provided that the parties agreed to such changes in writing.

The Proper Interpretation of the Insurance Covenant

[34] MRPC submits that even if the professional services contract applies to the construction phase, the insurance covenant does not limit claims to a maximum of $2,000,000.

[35] In my view, MRPC’s interpretation is inconsistent with the wording of s. 1.11 as a whole and the allocation of risk agreed to by MRPC and Walker. Section 1.11 of the professional services contract distinguishes between comprehensive general liability and automobile insurance (clause (a)) and professional liability insurance (clause (b)). Both types of insurance refer to coverage in the amount of $2,000,000. Pursuant to clause (c), in the event that MRPC wished to increase the amount of coverage, Walker was obliged to endeavour to obtain increased insurance at MRPC’s expense.

[36] While the preamble to s. 1.11 states that MRPC will accept the insurance coverage amount “specified in this clause (a)” as the aggregate limit of Walker’s liability, reading s. 1.11 as a whole compels the conclusion that Walker’s aggregate limit with respect to professional liability coverage is restricted to $2,000,000 for MRPC’s damages. The ordinary sense of the provision is that the preamble language was intended to apply to both clause (a) and clause (b), particularly given that MRPC could request a change in coverage at its own expense.

The Remaining Defendants Are Entitled to the Benefit of the Insurance Covenant

[37] The final issue to be determined is whether the remaining defendants are entitled to benefit from the insurance covenant. The same issue was addressed by the Court of Appeal in Sanofi Pasteur Limited v. UPS SCS, Inc., 2015 ONCA 88, 330 O.A.C. 158, leave to appeal refused, [2015] S.C.C.A. No. 152.

[38] In Sanofi, the storage contract between Sanofi and UPS required Sanofi to maintain all-risk property insurance for its personal property. UPS stored Sanofi’s vaccines in a dedicated, temperature-controlled warehouse. When the warehouse cooling system malfunctioned, Sanofi’s vaccines were rendered unsaleable.

[39] On appeal, Hoy A.C.J.O., writing for the Court, agreed with the motions judge that the effect of the insurance covenant could be determined on a summary judgment motion. Hoy A.C.J.O. concluded that Sanofi assumed all risk of damages to its vaccines except for damages of up to $100,000 solely due to the negligence of the defendants. Hoy A.C.J.O. also implied that the parties to the agreement intended to extend the benefit of the insurance covenant to the other defendants, concluding that it was necessary to do so in order to give business efficacy to the transaction. To do otherwise would not be in accordance with commercial reality, would subvert the allocation of risk established by the parties, and would either nullify the protection the insurance covenant was intended to provide to UPS or risk injustice to the other defendants (Sanofi, at paras. 58 to 62).

[40] In Fraser River Pile & Dredge Ltd. v. Can-Dive Services Ltd., the Supreme Court of Canada articulated a two-part test to be applied in determining if a third party should be permitted to enforce the benefit of a contractual provision to defend against an action by one of the contracting parties: (i) 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 (ii) 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, as determined by reference to the intentions of the parties (, [1999] 3 S.C.R. 108).

[41] In this case, I find that MRPC and Walker intended to extend the benefit of the insurance covenant to the remaining defendants. To do otherwise would subvert the allocation of risk established by the parties in s. 1.11 of the professional services contract, including clause (c). The insurance covenant required Walker to maintain professional liability insurance and limited Walker’s liability in respect of such claims to $2,000,000. If MRPC had wanted to increase the amount of coverage, it could have done so at its own expense; Walker’s obligation in this regard would have been limited to endeavouring to obtain the increased coverage. Having allocated the risk beyond $2,000,000 to itself and away from Walker, MRPC cannot, at the same time, have intended to allocate the risk to the remaining defendants who were engaged in work contemplated by the professional services contract. Given this, and absent a provision indicating that persons whose negligence is alleged to have caused the loss are intended to be excluded from the benefit of the insurance covenant, I imply that MRPC and Walker intended to extend the benefit of the insurance covenant to the remaining defendants (Sanofi, at para. 59).

[42] Objectively, it would make no sense for Walker to agree to the bargain set out in s. 1.11 of the professional services contract limiting liability, without extending the benefit to other parties who assisted or were involved in fixing the problem with the penstock transition piece. To not extend the benefit of the insurance covenant would expose Walker to claims for contribution and indemnity by third parties in the position of the remaining defendants and would render the protection of s. 1.11 meaningless.

[43] Not extending the benefit of the insurance covenant to the remaining defendants would also render an injustice to those defendants. The other defendants would not be able to claim contribution and indemnity from Walker for claims by MRPC in excess of $2,000,000 (Negligence Act, R.S.O. 1990, c. N.1, s. 2 and Dominion Chain Co. v. Eastern Construction Co., [1978] 2 S.C.R. 1346). Not extending the benefit of s. 1.11 to the remaining defendants would have the effect of imposing liabilities on them which they would not otherwise have (Sanofi, at para. 63).

[44] With respect to the second part of the Fraser River test, I find that the remaining defendants were involved in the activities contemplated by the professional services agreement. The remaining defendants relied on Walker’s designs and specifications to construct the generating station. In particular, Sullivan retained Harrington to fabricate, weld and install the penstocks and the transition pieces pursuant to Walker’s designs. Harrington, in turn, contracted with Dent Engineering. There is also evidence that Sullivan contracted with Dent Engineering to assist with design issues when Walker allegedly refused to remedy issues with its own design. MRPC pleads that the penstock transition piece was designed by Dent Engineering.

[45] I find that the remaining defendants were “involved” in the design work contemplated by the professional services contract.

[46] For these reasons, the remaining defendants are permitted to enforce the benefit of s. 1.11 of the professional services contract.

Disposition

[47] I grant partial summary judgment in favour of Walker and order that Walker’s potential liability to MRPC be limited to $2,000,000. The potential liability of the remaining defendants to MRPC is also limited to $2,000,000 and MRPC is not entitled to seek any damages attributable to Walker, in excess of $2,000,000, from the remaining defendants.

[48] The parties are encouraged to try to reach an agreement on costs of the motions, failing which they may make written submissions limited to a maximum of three pages, double-spaced, exclusive of a costs outline, within 30 days.

Madam Justice Robyn M. Ryan Bell Released: October 15, 2018