Court File and Parties

COURT FILE NO.: CV-20-00648092-00CL DATE: 20210202 SUPERIOR COURT OF JUSTICE – ONTARIO (COMMERCIAL LIST)

RE: CROSSLINX TRANSIT SOLUTIONS CONSTRUCTORS, Applicant/Respondent to Counter-Application AND: CAPITAL SEWER SERVING INC., Respondent/Applicant by Counter-Application

BEFORE: Koehnen, J.

COUNSEL: Adrian Visheau, Daniel Schwartz, Counsel, for the Applicant Ramon Andal, Counsel, for the Respondent

HEARD: February 1, 2021

Endorsement

[1] This application arises out of property damage that occurred as a result of work done on the Crosstown LRT project in Toronto in February 2018.

[2] It appears that the respondent, Capital Sewer Servicing Inc. (improperly named Capital Sewer Serving Inc. in the style of cause) was doing work on the sewer lines at approximately 11 PM on February 21, 2018. That same evening a sewage backup occurred damaging two properties in the vicinity in which Capital was working. The property owners have brought a claim against a number of parties including the applicant Crosslinx Transit Solutions Constructors and Capital Sewer Servicing Inc. (“Capital”).

[3] After being served with a claim, Crosslinx demanded that Capital honour its obligations under the subcontract to indemnify and hold Crosslinx harmless. Capital has not done so. As a result, Crosslinx brings this application.

[4] Capital brings its own cross application seeking a declaration that that it has no obligation to indemnify or defend Crosslinx in the underlying actions. Capital bases its position on the principle that a covenant by one party to secure insurance operates as an assumption by that party of the risk of loss or damage caused by the peril to be insured against.

[5] The application requires me to resolve a potential conflict between the contractual indemnity that Capital gave Crosslinx on the one hand and a covenant by Crosslinx to parties higher up in the contractual pyramid that it would obtain a “Wrap Up” CGL policy that covered all of its contractors and subcontractors as Named Insureds.

[6] For the reasons set out below, I grant Crosslinx’s application and dismiss Capital’s cross-application.

The Contracts at Issue

[7] In July 2015, Metrolinx and Infrastructure Ontario entered into a Project Agreement with Crosslinx Transit Solutions General Partnership (“Project Co.”), the parent of Crosslinx, to complete the Eglinton Crosstown Light Rail Transit project in Toronto. Project Co. entered into a contract with Crosslinx to carry out the construction work for the project. Crosslinx retained a number of subcontractors to carry out a variety of work, including Capital which was retained to carry out sewer lining work in the area of the Avenue Road station.

[8] Schedule 25 of the Project Agreement provides, among other things:

10.1 Project Co shall require that all Subcontractors are covered by, or obtain, the insurance described in this Schedule 25, provided that Project Co shall determine the applicable limits to be obtained for such insurance.

[9] Schedule 25 also includes all subcontractors as Named Insureds under the Wrap Up CGL policy and that:

The Wrap Up Insurance is primary without right of contribution of any other insurance carrier by any Named Insured.

[10] Project Co. and Crosslinx entered into a Construction Contract which paralleled these provisions. Attachment 25 of the Construction Contract provided:

“Project Co shall, at its own expense, obtain and maintain the following insurances as further described in Appendix A to Schedule 25 to the Project Agreement . . . (b) ‘Wrap Up’ Commercial General Liability . . . ”

[11] Appendix A to the Construction Contract reproduced schedule 25 of the Project Agreement and reiterated that all subcontractors were to be included as Named Insureds and that the Wrap Up insurance was to be “primary without right of contribution of any other insurance carried by any Named Insured.”

[12] The subcontract between Crosslinx and Capital referred to the benefit of the Wrap Up policy indirectly in section 2.1 which provides:

2.1 Intent of Subcontract: …Therefore, the Parties further acknowledge that the terms and conditions of the Construction Contract [and the Interface Agreement] are incorporated by reference into and form part of this Subcontract mutatis mutandis and are applicable to and govern the performance of the Subcontract Work by Subcontractor, with the changes necessary to give full effect to the Intent of the Parties as set out in this Subcontract, and subject to the express terms and conditions hereof.

[13] Section 2.2 of the Subcontract provides:

a. to the extent that any entitlement of Construction Contactor under the Constructions Contract is related to the Subcontract Work, whether or not reflected in this Subcontract as an entitlement of Subcontractor, Subcontractor shall be entitled to receive the benefit of such entitlement to the extent that the Construction Contractor is or becomes entitled under the Construction Contract, but in any event to no greater extent than Construction Contractor’s entitlement under the Construction Contract (“Equivalent Project Relief”).

[14] Capital relies heavily on these provisions for its submissions that it is a Name Insured under the Wrap Up policy, the Wrap Up policy provides primary coverage for any Named Insured and that it is without right of contribution to any other insurance carrier by any Named Insured. Capital says that these factors preclude the applicant’s claim for contribution.

[15] Capital adds to that the principle that a contractual covenant by one party to secure insurance operates as an assumption by that party of the risk of loss or damage caused by the peril to be insured against. It relies on three cases from the Supreme Court of Canada in support of this proposition (the trilogy) and a case from the Ontario Court of Appeal: Agnew-Surpass v. Cummer-Yonge, [1976] 2 SCR 221, at pp. 230 and 248-49; Pyrotech Prod v Ross Southward Tire; T. Eaton Co. v. Smith et al., [1978] 2 SCR 749 at p. 755; and Madison Developments Ltd. v. Plan electric Co. at para. 9.

[16] The Supreme Court of Canada trilogy on which Capital relies all involve landlord and tenant relationships. In each case, the landlord covenanted in favour of the tenant that it would obtain fire insurance. In at least one of the cases, Pyrotech, the tenant paid the fire insurance premiums. After fires broke out, the landlord took the position that the tenant was not entitled to the benefit of the fire insurance policy because the tenant owed an obligation to the landlord to keep the premises in good repair. At a very high level one could read those cases as standing for the proposition that a particular contractual covenant (the landlord’s covenant to provide fire insurance) takes precedence over a more general covenant (the tenant’s covenant to keep the premises in good repair).

[17] Moreover, the trilogy and other cases make clear that the principle on which Capital relies, must be read and applied in the context of the words of the agreement between the parties. By way of example, in Agnew Surpass the court noted at page 230 that:

“Even so, the question of the scope of the indemnity as it arises in this case is not dependent on the policy but, rather, so far as the lessor and lessee are concerned, on the terms of the lease.”

[18] In Royal Host GP Inc. v. 1842259 Ontario Ltd., 2018 ONCA 467 the Court of Appeal made clear in para. 16 that:

The trilogy has not affected the fundamental tenet of contractual interpretation that it is necessary to discern the intentions of the parties in accordance with the language they have agreed to in the contract.

[19] More recently, in Paulin v. Keewatin Patricia District School Board, 2019 ONCA 286 the Ontario Court of Appeal dealt with a situation factually similar to the one before me. In that case, an employee injured herself in a daycare operated by the municipality of Red Lake. Red Lake leased the premises from the defendant School Board. The employee sued the School Board. The School Board joined Red Lake and claimed that under the terms of their lease, Red Lake was required to defend and indemnify the School Board. Red Lake argued that the lease required the School Board to maintain insurance against liability for bodily injury as a result of which the School Board had agreed to accept responsibility for that risk. Both the motions judge and the Court of Appeal disagreed with Red Lake. The Court of Appeal noted at para. 24 that contracts are to be interpreted as a whole in a manner that gives meaning to all terms and avoids an interpretation that would render one or more terms ineffective.

[20] The Court of Appeal also noted that the lease required Red Lake to maintain an insurance policy and that Red Lake agreed in the lease to indemnify the School Board against all claims arising out of Red Lake’s use of the property. In those circumstances, the contract as a whole required Red Lake to indemnify the School Board.

[21] The facts of this case are substantially similar.

[22] The Subcontract required Capital to obtain Commercial General Liability Insurance with a limit of $5,000,000 which named Crosslinx and others as Additional Insureds with respect to any liability arising out of Capital’s arising out of the Subcontract.

[23] The subcontract between Crosslinx and Capital contains several indemnity provisions including the following:

9.1 The Parties agree that it is their mutual intent that the Construction Contractor not incur for its own account and without recourse to the Subcontractor any obligation or liability under or in relation to the Subcontract Work …

9.2 Indemnities

9.2.1 Subcontractor shall be liable for, and shall indemnify and hold harmless Construction Contractor and its affiliates and their respective directors, officers and employees (“Indemnified Persons”) from and against, all Claims, including all claims made by Project Co against Construction Contractor under or relating to the Construction Contract, and all arbitration awards and judgments against the Indemnified persons in respect thereof, to the extent caused by or arising out of the performance, non-performance or breach of this Subcontract including any failure of Subcontractor to perform and observe its obligations under this Subcontract, or any act or omission, whether or not negligent, of Subcontractor, its subcontractors of any tier, or their respective directors, officers, agents or employees, in relation to the Project, except only to the extent caused solely by the wrongful act or neglect of Construction Contractor.

9.2.2 Subcontractor shall also indemnify Construction Contractor to the same extent as Construction Contractor has indemnified Project Co in the Construction Contract in respect of the Subcontract Work.

9.2.3 The Subcontractor further agrees to indemnify the Construction Contractor for any deductible value payable by the Construction Contractor with respect to any project-specific insurance policy placed by the Construction Contractor, Project Co and/or the Owner, where the claim triggering the deductible value under the applicable policy is caused by or arises out of the performance or non-performance of this Subcontract by the Subcontractor. This indemnity survives termination of this Subcontract, howsoever arising. Construction Contractor shall give Subcontractor prompt Notice of any claim by Owner, Project Co or any other third party in relation hereto, with reasonable particulars.

[24] I do not see any basis for relieving Capital of its indemnity obligations under the Subcontract.

[25] To begin with, the principle on which Capital relies, namely that a contractual covenant to secure insurance operates as an assumption by that party of the risk of loss caused by the peril to be insured against, is a two-edged sword. Given that Capital agreed to secure insurance against its own negligence, Capital has, on its own argument, assumed liability for the risk of its own negligence.

[26] Although Schedule 25 of the Project Agreement provided that the Wrap Up insurance was primary insurance without a right of contribution of any other insurance carrier, the claim here does not involve a claim by one insurer against another to determine the priority of their respective policies. The claim here is based on contractual indemnity.

[27] While I accept that section 2.1 of the Subcontract incorporates by reference the terms of the Construction Contract it does so “with the changes necessary to give full effect to the intent of the parties as set out in this Subcontract, and subject to the express terms and conditions hereof.” In other words, the provisions of the subcontract take precedence over those of the Construction Contract that are incorporated by reference. That means the specific provisions of the indemnity in the Subcontract take precedence over the more general provisions relating to the Wrap Up policy in the Construction Contract.

[28] The Project Agreement also requires that all subcontractors obtain insurance in the limits established by Project Co. This indicates that subcontractors are required to obtain their own liability policies and cannot simply rely on the Wrap Up policy.

[29] Capital’s assumption of risk for its own liability is made even clearer by the indemnity provisions of the Subcontract. Section 9.1 of the Subcontract makes clear that it was the intention of the parties that Crosslinx not incur any liability for the conduct of Capital. Section 9.2.1 makes clear that Capital would be liable for its own negligence and would indemnify Crosslinx and hold it harmless against claims arising out of Capital’s conduct under the Subcontract. Section 9.2.1 includes within that indemnity any claims made by Project Co. against Crosslinx. Recall that both Project Co. and Crosslinx were Named Insureds under the Wrap Up policy. Section 9.2.1 therefore makes it abundantly clear that Capital would be liable to indemnify Crosslinx for certain types of claims even though the Wrap Up policy covered Crosslinx for those claims.

[30] It is well-established, black letter law that courts must interpret contracts in a way that gives meaning to all of its terms and avoids interpretations that render one or more terms ineffective. To adopt Capital’s interpretation would render ineffective the obligation on Capital to obtain its own $5,000,000 liability policy, and would denude Capital’s contractual indemnity in favour of Crosslinx of almost all utility.

[31] Finally, if there were any doubt remaining as a result of the foregoing, section 12.17 of the Subcontract creates a priority of documents. It provides that in the event there is a conflict, ambiguity or contradiction within the Subcontract documents, then the various documents should be read in a particular priority. That provision makes clear that the terms of the Subcontract rank five tiers ahead of those terms of the Construction Contract that are incorporated mutatis mutandis into the Subcontract.

Duty to Defend

[32] Crosslinx seeks a declaration that Capital has a duty to defend Crosslinx in the underlying actions and to indemnify Crosslinx for all legal and other costs paid to date.

[33] To determine whether an indemnity triggers a duty to defend, the court should look to the true nature of the claim. If there is a mere possibility of a claim falling within the terms of the indemnity, the duty to defend is triggered: Nichols v. American Home Assurance Co..

[34] The duty to defend is equally applicable to commercial indemnities as to insurance contracts: Hoang v. Nguyen, 2013 ONSC 6242 at paras 74-75.

[35] It is clear that the true nature of the claim disclosed in the statement of claim relates to property damage alleged to have been caused by the negligent conduct of Capital under the Subcontract.

[36] The indemnity provisions exclude from the duty to defend only those damages based solely on Crosslinx’s negligence. That is not the case here.

[37] The indemnity here imposes two obligations on Capital: an obligation to indemnify and an obligation to hold harmless. An obligation to hold harmless imposes an ongoing duty to defend: Stewart Title Guarantee Company v. Zeppieri. As Justice D. M. Brown put it in Stewart Title, a hold harmless provision means that the beneficiary of the clause should “never have to put his hand in his pocket in respect of a claim covered” by the indemnity.

[38] In the case before me, Capital takes the position that the duty to defend is not triggered. In support of its position, Capital relies on UPS Supply Chain Solutions, Inc. v. Airon HVAC Service Ltd., 2015 ONSC 1734 in which the court distinguished Stewart Title. UPS, however, addressed a contract with a different structure and different terms than the one that before me. The indemnity before me is clear. It provides that Capital shall hold Crosslinx harmless from any claim made against it to the extent such claim arises out of Capital’s performance of the Subcontract. I can find no basis for excusing Capital from its duty to defend.

[39] It may be that there are some arguments to be made about the apportionment of defence costs between those portions of the claim that relate to Capital’s alleged negligence and those portions of the claim that relate to any alleged negligence on the part of Crosslinx. If that is the case, the parties can resolve that before me on either a further case conference or separate motion.

Costs

[40] The cost outlines of both parties were relatively similar in quantum, as a result, the amount of costs is not an issue.

[41] In my view, Crosslinx is entitled to costs on a full indemnity scale. Costs of this application flow from the hold harmless provision of the indemnity. Holding harmless, by definition, means full indemnity. As a result, I order Capital to pay Crosslinx its costs of this application which I fix at $38,035.96 including HST.

Disposition

[42] For the reasons set out above, I grant the following orders:

a. The style of cause of this proceeding shall be amended to reflect the respondent’s name as Capital Sewer Servicing Inc.

b. Capital shall reimburse Crosslinx for all its costs and expenses, including all legal costs, disbursements and taxes incurred by Crosslinx, or for which Crosslinx is obligated to pay, in respect of the underlying actions, subject to any arguments about apportionment between claims referenced in paragraph 39 above.

c. A declaration that Capital has a duty to defend Crosslinx in respect of the actions and to indemnify Crosslinx for all legal and other costs paid and/or payable by Crosslinx (and any other persons to whom Crosslinx owes indemnity obligations in respect of the claims), in defending or otherwise responding to the actions on an ongoing basis.

d. A declaration that Crosslinx is entitled to separate counsel of its own choosing to represent it in respect of the Actions.

e. A declaration that Capital has a contractual duty to indemnify Crosslinx in respect of any amounts for which Crosslinx is found liable to the plaintiffs in the Actions, or any parties to whom Crosslinx owes indemnity obligations in respect of the Insurance Claims or the Actions except in so far that liability is based on Cross-link’s own negligence or other misconduct.

f. A declaration that Capital has a contractual duty to indemnify Crosslinx in respect of any deductible paid and/or payable in relation to the Insurance Claims or the Actions by Crosslinx (and/or any other persons to whom Crosslinx owes indemnity obligations in respect of the Claims). This declaration is subject to Crosslinx demonstrating that the payment in respect of which it seeks compensation is a payment that its insurer has ascribed to Crosslinx as part of Crosslinx’s share of the deductible in respect of the actions.

g. Capital shall pay Crosslinx’s costs of this proceeding on a full indemnity basis, which I fix at $38,035.96 including HST.

Koehnen, J. Date: February 2, 2021