2021 ONSC 3235
COURT FILE NO.: CV-18-609728-OJ COURT FILE NO.: CV-18-609729-OJ COURT FILE NO.: CV-18-611732-OJ
DATE: 20210430
SUPERIOR COURT OF JUSTICE - ONTARIO
RE: COURT FILE NO.: CV-18-609728-OJ
NUYORK INVESTMENTS LIMITED C.O.B. 20 KING WEST INVESTMENTS, Plaintiff - and - TORONTO HYDRO-ELECTRIC SYSTEM LTD. and THE CITY OF TORONTO, Defendants
AND COURT FILE NO.: CV-18-609729-OJ
DR. JAMES CHARLES PAUPST, Plaintiff - and - TORONTO HYDRO-ELECTRIC SYSTEM LTD. and THE CITY OF TORONTO, Defendants
AND COURT FILE NO.: CV-18-611732-OJ
ROYAL BANK OF CANADA, Plaintiff - and - TORONTO HYDRO-ELECTRIC SYSTEM LTD., TORONTO HYDRO CORPORATION and THE CITY OF TORONTO, Defendants
BEFORE: Kimmel J.
COUNSEL: Elizabeth Bowker, Christopher Afonso and Christian Breukelman, for Dr. James Charles Paupst and Nuyork Investments Limited c.o.b. 20 King West Investments, Respondents on Motion
John C. Teal and Oliver Hutchison, for Royal Bank of Canada, Respondent on Motion
Paul Tushinski and Albert Wallrap, for the Defendant, Toronto Hydro Electric System Ltd. and Toronto Hydro Corporation, Moving Parties
Richard Oliver and Alison Barclay, for the Defendant, The City of Toronto, Moving Party
HEARD: In-writing motion materials filed the week of March 8, 2021(in accordance with prior endorsements and directions)
ENDORSEMENT (Motions to add third parties)
Background
[1] These three actions are being case managed together by me under the Case Management Pilot Project – One Judge Model in Toronto.
[2] These proceedings arise out of an explosion and fire that is alleged to have originated in or around an electrical hydro vault, concrete duct bank with electrical cables, and an electrical room in a 12 storey commercial building at 20 King Street West, Toronto, Ontario (the "Building") on or about May 1-2, 2017 (the "Incident"). The hydro vault and duct bank connect the Building to the power distribution grid operated by Toronto Hydro. The City of Toronto Fire Department responded to the Incident and eventually put out the fire.
[3] The plaintiffs, Nuyork (the owner of the Building), Dr. Paupst (a tenant in the Building), and the Royal Bank of Canada ("RBC") (also a tenant in the Building) each commenced actions for damages due to smoke spread around the building arising from this fire in and around the hydro vault, duct bank and electrical room and the subsequent efforts to put it out.
[4] The defendants, Toronto Hydro-Electric System Ltd. and Toronto Hydro Corporation (collectively, "Toronto Hydro") and the City of Toronto seek leave to issue third party claims in each of these three related actions, naming the plaintiffs Nuyork and RBC as third parties in each other’s and in Dr. Paupst’s actions, and naming certain former owners and third party property managers in RBC’s action (who have already been named as third parties, without objection, in the other two actions).
[5] The plaintiff in each action opposes the addition of the proposed third parties in their respective actions. This opposition is based on the terms of the leases (that contain covenants to insure and waivers of rights of subrogation, collectively referred to as the “insurance covenants”) requiring that one or both of the tenant and landlord obtain insurance against the type of losses and damages arising from the Incident, thereby relieving them of responsibility to each other for these losses based on a trilogy of cases in the Supreme Court of Canada, the last of which was T. Eaton Co. v. Smith et al., 1977 39 (SCC), [1978] 2 S.C.R 749.
[6] The application of the Supreme Court of Canada’s decision in Giffels v. Eastern Construction, 1978 39 (SCC), [1978] 2 S.C.R. 1346 is then said to preclude the third party claims-over by the defendants for contribution and indemnity against the current landlord/owner and former owner(s) (and their respective representatives) who, by virtue of the insurance covenants, cannot be directly liable to the plaintiffs (tenants).
Summary of Outcome
[7] For the reasons that follow, the motions for leave to issue the third party claims are granted in part and dismissed in part. Only some of the claims against the Proposed Third Parties have been demonstrated to be legally untenable under the Supreme Court of Canada jurisprudence. Leave is granted for the others to proceed.
The Factual Foundation for the Proposed Third Party Claims
[8] The pleadings provide the factual context for a motion at this early stage of the proceedings, in which only pleadings and initial productions have been exchanged.
[9] At all material times, Toronto Hydro operated the electrical hydro vault at issue, located under the sidewalk and adjacent to the Building and King Street West. At the time of the Incident, Nuyork was and continues to be the Building owner. Also, at the time of the Incident, RBC was and continues to be the primary tenant occupying the floors with the electrical room and mechanical equipment, among others. RBC was previously an owner and the major tenant of the Building. Paupst was a minor tenant. The plaintiffs allege that the Incident resulted in fire and smoke entering into the electrical duct bank, electrical room, and that the smoke spread throughout the Building, causing damage.
[10] The defendants allege that the fire or smoke was caused or contributed to by the building owners or their tenants, or their agents. Specifically, it is alleged that water accumulated in a Toronto Hydro-owned hydro vault, which damaged electrical equipment therein and led to the fire and the expulsion of smoke.
[11] The defendants further plead that the construction, repair, maintenance and inspection of the Building, including its electrical and mechanical ventilation systems, among others, caused or contributed to the fire and smoke spread. They assert that each of the proposed third parties were directly involved with maintenance, inspections, construction, or repairs of the Building which may have caused or contributed to the Incident.
[12] Toronto Hydro and the City of Toronto seek leave to add the following third parties (the “Proposed Third Parties”):
a. In the Nuyork action, they seek to add RBC as a third party.
b. In the Paupst action, they seek to add Nuyork and RBC.
c. In the RBC action, they seek to add the following third parties: Nuyork and various former landlords and third party property managers, namely: Nasjjec Investments Limited ("Nasjjec"); RW Commercial Property Management ("RW Commercial"); Minto Rip Inc. ("Minto"); Oxford Properties Group Inc. ("Oxford"); Orec Goldengate Investments Inc. formerly Multi-Tenant Properties Canada Incorporated ("Multi-Tenant Properties"); and 3660184 Canada Inc. ("366"). Nasjjec, Oxford, Multi-Tenant Properties, and 366 are “former Building owners”. RW Commercial and Minto are present and former property managers for the Building. RW Commercial was the property manager for Nuyork, Nasjjec, and previously, Oxford, Multi-Tenant Properties and 366.
Each of these former landlords and third party property managers have already been named as third parties on consent in the Nuyork and Paupst actions.
[13] None of the Proposed Third Parties is new to the litigation, and none of them will be removed entirely from the litigation if this motion is unsuccessful.
[14] Toronto Hydro and the City of Toronto assert that the Proposed Third Parties in each action are or may be liable to indemnify Toronto Hydro and/or the City of Toronto for all or part of the plaintiffs' claims.
[15] In the City of Toronto’s proposed third party claim, it claims against the Proposed Third Parties for: “contribution, indemnity and relief over with respect to any damages for which the City may be found liable to the plaintiff.”
[16] In its proposed fresh as amended third party claim, Toronto Hydro claims against the Proposed Third Parties for:
a. contribution and indemnity for any and all losses, damages, costs, and interest awarded to the plaintiff ... and found payable by Toronto Hydro, including any crossclaims made in connection therewith;
b. a declaration that the alleged losses and damages sustained by the plaintiff in the Main Action were caused by the fault, negligence and/or breach of contract or duty of one or more of the Third Parties;
c. a declaration and determination of the portion of any alleged losses and damages sustained by the plaintiff [that] were caused by the fault, negligence and/or breach of contract or duty of one or more of the Third Parties.
The Procedural Context
[17] Rule 29 states as follows:
WHERE AVAILABLE
29.01 A defendant may commence a third party claim against any person who is not a party to the action and who, (a) is or may be liable to the defendant for all or part of the plaintiff's claim; (b) is or may be liable to the defendant for an independent claim for damages or other relief arising out of, (i) a transaction or occurrence or series of transactions or occurrences involved in the main action, or (ii) a related transaction or occurrence or series of transactions or occurrences; or (c) should be bound by the determination of an issue arising between the plaintiff and the defendant.
TIME FOR THIRD PARTY CLAIM
Issuing
29.02 (1) A third party claim (Form 29A) shall be issued within 10 days after the defendant delivers a statement of defence, or at any time before the defendant is noted in default.
Exceptions, consent and leave
(1.2) A third party claim may be issued at any time with the plaintiff's consent or with leave, which the court shall grant unless the plaintiff would be prejudiced thereby.
[18] The proposed third party claims were not issued within ten days of the delivery of defences in these actions. While not an uncommon occurrence, it means that the defendants need leave of the court to issue them. It places an initial onus on them to establish that the third party claims meet the requirements of Rule 29.01 and 29.02(1.2). The plaintiffs are not opposing the third party claims on the basis of prejudice under Rule 29.02(1.2). Rather, they are arguing that the proposed third party claims do not meet the requirements of Rule 29.01 (a) or (b) because, as a matter of law, the Proposed Third Parties cannot be liable to the defendants for their claims for contribution and indemnity and, fairly read, they do not assert an independent claim for damages or other relief.
[19] If the third party claims had been issued within the ten days prescribed under Rule 29.02(1), this would have been a Rule 21.01(1)(b) motion to strike rather than a Rule 29.02(1.2) motion for leave. The plaintiffs argue, however, that they should not have to wait until an untenable third party claim is issued before bringing a Rule 21 motion to strike it - such a requirement would be contrary to Rule 1.04 of the Rules of Civil Procedure, which calls for the most just and expeditious resolution of a proceeding. They argue that the Rule 21.01 considerations can and should be addressed as part of the Rule 29.01 leave test.
[20] The parties have all approached these motions with regard to the test to be applied under Rule 21.01. This test is not controversial and gives rise to the following considerations:
(a) the judge must assume that all facts pleaded in the statement of claim are true, unless they are patently ridiculous or incapable of proof, or the allegations amount to bald conclusory statements of fact or legal conclusions unsupported by material facts;
(b) the judge must determine if the claim has any prospect of success, assuming that all facts alleged are true. A claim is untenable if the allegations could not give rise to the judgment sought by the plaintiff in the action; and,
(c) a motion to strike a pleading can succeed only in the clearest of cases. The statement of claim must be read generously, and the motion will be granted only if it is plain and obvious that the plaintiff cannot succeed. A claim should not be struck just because it is novel, or because the underlying law is unsettled, or because the plaintiff's odds of success seem slim. If it is plausible that the plaintiff could succeed, the court should allow the lawsuit to go ahead.
See Doyle Salewski Inc. v. Scott et al., 2020 ONSC 7725, at para. 15.
The Positions of the Parties
Moving Parties: Toronto Hydro and City of Toronto
[21] The moving defendants argue that the plaintiffs (who oppose the issuance of claims against the Proposed Third Parties in each of their respective actions) will suffer no non-compensable prejudice from the issuance of the third party claims. Given that the Proposed Third Parties who are plaintiffs in different capacities will continue to be involved in these proceedings regardless of the outcome of these motions, it is not surprising that they have not focussed on prejudice in their opposition to these motions.
[22] The defendants contend that it is not plain and obvious that their claims against the Proposed Third Parties cannot succeed, and that they pass this low threshold at the pleadings stage. The alleged bar to these claims arises from the terms of lease agreements between the Proposed Third Party landlords/owner/former owner and their tenants. For these contractual covenants between landlord and tenants, to which the defendants were not party, to render the third party claims untenable or incapable of success, the defendants argue that they would have to be demonstrated to: (a) come within the principles underlying Giffels; (b) clearly apply to the circumstances at issue, and (c) not be invalid as contrary to public policy.
[23] The defendants urge the court to equate the covenants to insure as exclusion clauses and to apply the three part test set out by the Supreme Court of Canada in Tercon Contractors Ltd. v British Columbia (Minister of Transportation & Highways), 2010 SCC 4, for determining when the effects of an exclusion of liability clause will not apply (at paras. 121-123), the first and third of which are potentially relevant in the circumstances of this case:
a. The first issue is whether, as a matter of interpretation, the exclusion clause even applies to the circumstances established in evidence. This will depend on the court's interpretation of the intention of the parties as expressed in the contract.
b. If the exclusion clause applies, the second issue is whether the exclusion clause was unconscionable and thus invalid at the time the contract was made.
c. If the exclusion clause is held to be valid at the time of contract formation and applicable to the facts of the case, a third enquiry may be raised as to whether the court should nevertheless refuse to enforce the exclusion clause because of an overriding public policy.
[24] Further, the defendants contend that the interests of justice favour allowing them to add the plaintiffs as third parties. They argue that public policy considerations are raised by the plaintiffs’ reliance upon insurance covenants as a bar to claims by non-contracting public entities (such as Toronto Hydro and the City of Toronto) which should not be decided at the pleadings stage, particularly in the circumstances of this case where all of the Proposed Third Parties are already participating in these proceedings. At a minimum, the defendants urge the court to allow the third parties to be added so that any determination of this issue can be made on a complete factual record.
[25] Alternatively, if the Court declines leave or strikes the proposed third party claims, it has been suggested that the court should only do so on the basis that the plaintiffs be declared to be themselves responsible at law for any damages in each action caused by the fault, neglect or breach of duty of the Proposed Third Parties, and that the plaintiffs not be permitted to pursue the defendants for any portion of any liability that a court may or could determine to be attributable to the fault, neglect or breach of duty of the Proposed Third Parties in each action. In other words, limiting the plaintiffs’ claims in each action to the several liability of the named defendants.
The Responding Parties: Paupst, Nuyork Investments Limited, Royal Bank of Canada
[26] The plaintiffs argue that the line of authority from the Supreme Court of Canada under the Giffels decision establishes that a precondition of the ability of the defendants to claim contribution and indemnity from the Proposed Third Parties is that those parties must have direct liability to the plaintiff in the action to which they would be added.
[27] The plaintiffs argue that the Proposed Third Parties, in their capacities as owner/landlord (Nuyork) and/or tenant (RBC) of the Building, have effectively contracted out of liability to each other and Dr. Paupst through the insurance contained in their leases (between Nuyork and each of RBC and Dr. Paupst). These insurance covenants are said to insulate these parties from liability to each other under the Negligence Act, based on the decision of the Supreme Court of Canada in T. Eaton Co., thereby rendering the proposed third party claims legally untenable.
[28] The objection to Nuyork being named as a Proposed Third Party in the Paupst and RBC actions is that Nuyork cannot, as the owner of the Building at the time of the Fire and under the terms of the operative leases, be liable to those plaintiffs who have sued in their capacities as tenants of the Building, and Nuyork therefore cannot be liable for contribution and indemnity to the defendants either.[^1] The objection to RBC being named as a Proposed Third Party in the Nuyork action is similarly premised on the contractual limitations on its liability as a tenant at the time of the Fire. There is no objection raised by Dr. Paupst to RBC being named as a Proposed Third Party in the Paupst action.
[29] Toronto Hydro and the City of Toronto also seek leave to issue third party claims against certain current and former property managers and former Building owners. Nuyork and Dr. Paupst have not objected to these third party claims in their actions, but RBC continues to object to them based on the provisions of its lease agreements.
The issues to be decided
[30] The parties have variously described the issues that arise on these motions. I have distilled the issues to be as follows:
a. Could the Proposed Third Parties be liable to the defendants for all or part of the plaintiffs’ claims? [Are the proposed third party claims – to the extent that they are advanced as claims for contribution and indemnity under the Negligence Act - tenable at law, or is it plain and obvious that they cannot succeed?]
i. Do the claims in these actions come within the principles laid down by the Supreme Court of Canada in T. Eaton Co. and Giffels?
ii. Do the insurance covenants cover the pleaded claims in negligence against the Proposed Third Parties?
Do the insurance covenants purport to cover the risks and losses for which recovery is sought in these actions?
Do the insurance covenants extend to property managers and former owners (third party beneficiaries)?
iii. Are the insurance covenants exclusion clauses and, if so, do they come within the public policy or any other exceptions under the Supreme Court of Canada’s three-part test in the Tercon case?
iv. Are there other public policy considerations that could apply and, if so, should the court have a more complete factual record before making a determination about the potential public policy considerations that have been raised?
b. Has Toronto Hydro asserted independent contractual claims against the Proposed Third Parties, outside of the Negligence Act, that are not dependent on contribution and indemnity claims based on the third party’s liability to the plaintiff?
c. If the claims-over under the Negligence Act against the Proposed Third Parties are precluded by the insurance covenants, can the court impose restrictions on the plaintiffs’ claims in these actions, as against the defendants, to the several liability of the named defendants and exclude amounts that would be attributable to the Proposed Third Parties who the plaintiffs have chosen to relieve of responsibility and, if so, is it in the interests of justice for the court to do so?
Analysis of Issues
[31] I will address each of the issues to be decided in turn.
a) Is it Plain and Obvious that the Claims Against the Proposed Third Parties Cannot Succeed Based on the Principles Laid Down by the SCC in the T. Eaton Co. and in Giffels?
i) Do the claims in these actions come within the principles laid down by the Supreme Court of Canada in T. Eaton Co. and Giffels?
[32] The plaintiffs’ claims are for damages caused by the smoke from the explosion and fire that is alleged to have originated in or around an electrical hydro vault, concrete duct bank with electrical cables, and transformer.
[33] The two lease agreements between Nuyork (as assignee of the former landlord) and RBC as tenant that were in effect at the time of the explosion and fire contain similar provisions. The Branch Lease, which concerned the “banking hall portion” of the building and the Office Lease which concerned the office premises of the building. In subsection 16.1(a) of the lease agreements, RBC as tenant agreed to maintain “all risks” insurance on all of RBC’s property or property installed on or on behalf of RBC. Subsections 16.2(2) of the lease agreements required RBC to include the landlord as an additional insured and contained a waiver of rights of subrogation which the insurer may have against the landlord and for those whom the landlord is in law responsible. Under subsection 16(3) the landlord agreed to effect and maintain “all risks” insurance and contained a similar waiver of rights of subrogation against the tenant.
[34] Although these leases were signed by RBC with the previous owner, Nuyork assumed these leases when it purchased the building in 2001. Nuyork correspondingly relies on these same lease provisions.
[35] Dr. Paupst relies upon an insurance provision in his lease agreement wherein he agreed (as the tenant) to provide insurance and name the landlord, Nuyork, as an additional insured.
[36] All plaintiffs in these three related actions rely on the T. Eaton Co. for the proposition that a covenant to insure precludes liability between landlord and tenant. They then rely on the Giffels decision and related jurisprudence to claim that, without direct liability, the defendants cannot claim against the proposed third parties under the Negligence Act.
[37] The Supreme Court of Canada has consistently held that a covenant to insure in a lease, which places the onus on one or the other party to the lease to obtain insurance is for the benefit of both parties. In T. Eaton Co. (at p. 754) the landlord’s covenant to insure was held to be a covenant that runs to the benefit of the tenant, thereby preventing the landlord’s insurance company from exercising a right of subrogation against the tenant for the negligence of its employee after making a payment under the landlord’s fire insurance. The existence of a covenant to insure relieves the party who might otherwise be liable for the loss and requires the insuring party to deal instead with the insurer.
[38] In Giffels, the Supreme Court of Canada found that, because Eastern (the general contractor engaged to construct a roof) had contracted out of liability to the plaintiff, Giffels (the engineer contracted to provide engineering services in respect of the roof construction) could not then seek contribution from Eastern, despite the potential inequities that may result from this (at page 1355):
Moreover, whether Giffels bases its claim for contribution on s. 2(1) or outside of that provision, the same result adverse to Giffels must follow. I am prepared to assume, for the purposes of this case, that where there are two contractors, each of which has a separate contract with a plaintiff who suffers the same damage from concurrent breaches of those contracts, it would be inequitable that one of the contractors bear the entire brunt of the plaintiff’s loss, even where the plaintiff chooses to sue only that one and not both as in this case. It is, however, open to any contractor (unless precluded by law) to protect itself from liability under its contract by a term thereof, and it does not then lie in the mouth of the other to claim contribution in such a case. The contractor which has so protected itself cannot be said to have contributed to any actionable loss by the plaintiff. This result must follow whether the claim for contribution is based on a liability to the plaintiff in tort for negligence or on contractual liability. In either case there is a contractual shield which forecloses the plaintiff against the protected contractor, and the other contractor cannot assert a right to go behind it to compel the former to share the burden of compensating the plaintiff for its loss.
[39] In the present case, the relevant lease agreements contain insurance covenants. Both of the tenants, RBC and Paupst, covenanted to insure different components of the Building. The landlord, Nuyork, also covenanted to insure under the RBC lease. All three plaintiffs are asserting these covenants to insure as a “contractual shield” to prevent the City of Toronto and Toronto Hydro from reaching beyond it and forcing the Proposed Third Parties (who the plaintiffs claim were intended to be protected from liability by that covenant) to share in compensating the plaintiffs for their losses.
[40] In an attempt to distinguish Giffels, the defendants argue that, unlike the two contracting parties in Giffels, they never had the option to contractually protect themselves from liability to the tenants who suffered the loss. This argument was rejected by the British Columbia Court of Appeal in Laing Property Corp. v. All Seasons Display Inc., 2000 BCCA 467 (sub nom Orange Julius et al. v. Surrey et al.), who adopted the following excerpt from the summary trial judge’s decision, at para 54:
I am unable to accept that the principle stated in Giffels can be so restricted. The precondition was not said to arise because both the engineer and the contractor were party to contracts with the plaintiff, but only because, having protected itself, one of them had no liability to the plaintiff and could not be said to have contributed to any actionable loss it suffered. In my view, the precondition can exist regardless of whether there was a contractual relationship between the plaintiff and the defendant who seeks to make a claim for contribution and indemnity. (emphasis added)
[41] The lease covenants in Laing required the tenant to maintain and effect insurance in the joint names of the tenant and landlord for fire, and required that such policies waive rights of subrogation against the landlord. These were claims by tenants against the manufacturer of materials that caught fire and caused damage. The manufacturers tried to third party the landlord Laing and those claims were found to be precluded. The British Columbia Court of Appeal upheld the trial judge’s application of T. Eaton Co. and Giffels in that case and the finding that, by virtue of the covenants to insure, the landlord Laing could never be held liable to the tenants and therefore could not be liable to the manufacturer defendants who sought to third party the landlord.
[42] The Laing decision involved an insurance covenant by a tenant, similar to the covenants under the lease agreements given by RBC and Dr. Paupst in these proceedings. In addition, the Laing case directly addressed the points that the defendants have raised in these proceedings in an attempt to distinguish Giffels: First, as already indicated, the British Columbia Court of Appeal concluded that a contractual relationship between the plaintiff and defendant and between the plaintiff and third party is not necessary for Giffels to apply. I agree with that as a general proposition. The underlying rationale of Giffels does not require that contractual relationship, even though it existed and was considered in Giffels. Second, at the pleadings stage, the existence of the contractual insurance covenants as between the landlord and tenants under the relevant leases is the paramount consideration and the actual nature and scope of the actual insurance coverage obtained does not enter into the analysis. I will come back to this second point later in this endorsement.
[43] The Giffels principles were applied to deny a motion for leave to issue a third party claim on appeal in Chinook Group Ltd. v. Foamex International Inc., 2004 73242 (ON SC), [2004] 76 O.R. (3d) 239 (S.C.). at paras. 6 and 7, on the basis that the Giffels principles raise a complete bar to the success of a third party claim under the Negligence Act for contribution and indemnity (overturning the original decision of the Master who granted leave, in Chinook Group Ltd. v. Foamex International Inc. 2004 33017 (ON SC), [2004] 72 O.R. (3d) 381 at para. 2).
[44] It has been suggested that the court could conclude that the Giffels principles should not be strictly applied in a novel situation such as this where a closed group of plaintiffs in separate but related actions are using insurance covenants to shield themselves (or each other) from liability, while leaving the municipality and public utility exposed for their shares (in different capacities) of the responsibility for what transpired.
[45] However, subject to public policy considerations discussed later in this endorsement, there does not appear to be any room for discretion or equitable considerations in the application of the T. Eaton Co. and Giffels principles, which stand as a bar to preclude the claims that the defendants seek to advance against the Proposed Third Parties who are in the landlord/tenant relationship and privy to the insurance covenants.
[46] This bar does not extend to the claims against the Proposed Third Parties in capacities outside of the landlord/tenant relationship that are not shielded by the insurance covenants. The proposed third party claims in the Paupst and Nuyork actions against RBC in its capacity as a former owner of the Building, and in the Paupst action as another tenant, have not been determined on this motion to enjoy this protection. It has not been suggested that there is a contractual covenant to insure or other agreement between RBC and Paupst that precludes RBC having any liability to Paupst (in either capacity as a former owner of the Building or as another tenant), or between RBC and Nuyork that precludes RBC having any liability to Nuyork in RBC’s capacity as a former owner of the Building.
[47] Accordingly, leave is granted for the issuance of third party claims against RBC in these capacities in the Paupst and Nuyork actions.
[48] The same logic applies to the other Proposed Third Parties in the RBC action who are former owners of the Building, namely Nasjjec, Oxford, Multi-Tenant Properties, and 366, in the absence of clear evidence of insurance covenants to which they were privy that could shield them from liability. It is not been demonstrated to be plain and obvious at this stage that those claims will not succeed. Accordingly, leave is granted for the third party claims against these parties to be issued in the RBC action.
ii) The Scope of the Contractual Covenants
[49] In terms of the claims against RBC in the Nuyork action, and claims against Nuyork in the RBC action, that could come within the liability shield of the insurance covenants, the defendants argue that the scope of that protection is unclear and requires a trial for determination.
[50] The British Columbia Court of Appeal held in Laing that it is the scope of the contractual covenant, not the scope of the actual insurance, that is the relevant consideration. When dealing with contractual allocation of risk this approach makes sense, as parties could not be expected to anticipate and specify in advance the precise language of the eventual insurance policy and all of its inclusions and exceptions.
[51] The defendants argue that the scope of the insurance to be obtained is not expressed in the clearest of terms in the RBC lease agreements, because, for example there is overlap in the insurance covenants (for example, as between the agreements of both the landlord and the tenant to insure against various losses). This, together with the possibility of temporal gaps in insurance coverage, is said to raise doubts about the scope and extent of the coverage that needs to be determined on a more fulsome factual record. They also argue that the insurance covenant in the lease with Dr. Paupst is too general to give rise to a bar to these claims.
[52] The cases in which insurance covenants have been found to give rise to protection from liability under the T. Eaton Co. principles involved “all risk insurance”. That is the type of insurance that RBC covenanted to obtain. Considering the type of insurance, as opposed to the specific insurance that was obtained, “all risk insurance” conceptually would be expected to cover claims for damages arising from an explosion and fire such as occurred in the electrical hydro vault, concrete duct bank with electrical cables, and transformer during the Incident.[^2] The covenant to insure by Dr. Paupst to obtain insurance and name the landlord as an additional insured, while less specific, is not limited and does not appear to exclude any particular type of loss. These insurance covenants are broad enough to cover the general types of risks and losses arising from the Incident which is all that is required to bring them within the principles of the T. Eaton Co. and Giffels cases, with respect to the claims against Nuyork and RBC as Proposed Third Parties in their capacities as landlord and tenant.
[53] The leases clearly encompass the landlord and tenant as intended beneficiaries of the insurance covenants. RBC wants to extend this shield of protection to former owners (as discussed in the previous section of this endorsement, in respect of whom an evidentiary foundation of a direct insurance covenant has not been established) and also to third party property managers (RW Commercial and Minto are present and former property managers for the Building) who are said to be the landlord’s authorized representatives and to fall within the definition of “Landlord” under the applicable lease agreements.
[54] For the Proposed Third Parties who are property managers to benefit from the shield of protection afforded by the principles in Giffels, they would have to meet the test of intended third party beneficiaries outlined first in London Drugs Ltd. v. Kuehne & Nagel International Ltd., 1992 41 (SCC), [1992] 3 S.C.R. 299 and revisited in Fraser River Pile & Dredge Ltd. v. Can-Dive Services Ltd., 1999 654 (SCC), [1999] 3 SCR 108, at para. 31. This doctrine allows a third party to rely on a contractual benefit, even though they were not privy to the contract. The test to determine if the third party can benefit is:
(a) 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
(b) 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, again as determined by reference to the intentions of the parties?
[55] It may be possible to find some foundation for the inclusion of the property managers under the first part of this test in various provisions of the RBC lease agreements, such as the definition of “Landlord” that includes its authorized representatives, and the definition of “Landlord Parties” that references managers. However, that could depend upon an interpretation of the relevant contracts and consideration of the factual matrix that would require an evidentiary foundation.
[56] Furthermore, and in any event, there is no foundation in the pleadings from which the court can properly analyze the second part of this test that requires a consideration of the intentions of the parties and what activities were within the intended scope of the relevant contractual provisions. The record on this motion is not sufficient for me to find that these Proposed Third Party property managers were clearly involved in activities that were contemplated would be carried out by the landlord under the lease agreements, such that they can be found to be intended beneficiaries of the protection against liability that the landlord may enjoy. That determination will require a better developed factual record.
[57] It is not plain and obvious at this stage that the third party claims against the Proposed Third Party property managers in the RBC action will not succeed. Accordingly, leave is granted for the issuance of third party claims against R.W. Commercial and Minto in the RBC action.
iii) Are the Covenants to Insure Exclusion Clauses and do any of the Tercon Exceptions Apply?
[58] Although no case is cited in which a covenant to insure is equated with an exclusion clause, both Toronto Hydro and the City of Toronto argue that they can and should be analyzed as such. On the strength of that assertion, they urge the court to apply the Supreme Court of Canada’s three-part test for determining when the effects of an exclusion of liability clause will not apply, laid down in the case of Tercon Contractors Ltd. v. British Columbia (Minister of Transportation & Highways), 2010 SCC 4, at paras. 121-123, namely:
a. Whether, as a matter of interpretation, the exclusion clause even applies to the circumstances established in evidence. This will depend on the court's interpretation of the intention of the parties as expressed in the contract.
b. If the exclusion clause applies, whether the exclusion clause was unconscionable and thus invalid at the time the contract was made.
c. If the exclusion clause is held to be valid at the time of contract formation and applicable to the facts of the case, a third enquiry may be raised as to whether the court should nevertheless refuse to enforce the exclusion clause because of an overriding public policy.
[59] The plaintiffs counter that the Court of Appeal for Ontario has determined that covenants to insure should not be considered and analyzed in the same way that exclusion clauses are, in the case of D.L.G. & Associates Ltd. v. Minto Properties Inc., 2015 ONCA 705, at paras. 20-21:
D.L.G. submits that the covenant to insure is an exclusion clause and is unenforceable under the principles set down in Tercon. In my view, the covenant to insure cannot be read as a clause excluding Minto from liability it would otherwise carry but for the clause. Instead, the covenant to insure assigns risk for certain losses by requiring that the tenant, D.L.G., obtain insurance coverage for those losses: Smith v. T. Eaton Co., 1977 39 (SCC), [1978] 2 S.C.R. 749 at 756, St. Lawrence Cement Inc. v. Wakeham & Sons Limited (1995), 1995 2482 (ON CA), 26 O.R. (3d) 321 at paras. 37-39 (C.A.).
As I am satisfied that the covenant to insure cannot be read as an exclusion clause, I need not address the enforceability of that clause. I would, however, observe that in the context of a negotiated lease between arms-length commercial entities I see little room for an argument that a covenant to insure, whether directed at the landlord or the tenant, could be viewed as unconscionable.
[60] While the City of Toronto and Toronto Hydro urge the court to consider the similarities between exclusion clauses and covenants to insure, which are both creatures of contract law, and argue that they should, accordingly, be subject to the same public policy arguments, I am bound to follow the Court of Appeal’s determination in D.L.G. and must conclude that the insurance covenants in this case cannot be read as exclusion clauses.
[61] The fact that the challenge to the covenant to insure in these proceedings is being made by a non-party to the contract was not considered to be a sufficiently distinguishing feature in the Laing case, nor do I consider it to be such in this case, so as to allow me to ignore this very clear statement by the Court of Appeal for Ontario in D.L.G. that covenants to insure cannot be treated as exclusion clauses. Thus, I see no basis upon which I can or should analyze the effects of the insurance covenants in these proceedings through the application of the three-part test in Tercon.
iv) Is there a Broader Public Policy Reason Not to Apply T. Eaton Co. and Giffels that Requires Further Consideration?
[62] The considerations that would be invoked if the court were to be engaged in an analysis of whether to decline to enforce an exclusion clause on public policy grounds under Tercon do not directly arise in this case, for the reasons indicated in the previous section of this endorsement.
[63] The defendants argue that the broader public policy should still be considered in the analysis of the implications and effect of the insurance covenants in the novel circumstances of these proceedings, to avoid the strict application of the jurisprudence under Giffels and T. Eaton Co. against public or quasi-public bodies such as a municipality and public utility.
[64] The City of Toronto submits that the insurance covenants relied upon by the parties “should be found void as being against public policy because such an effect is injurious to the state and to its justice system.”[^3] It is argued that the proposed third parties actions and inactions put Toronto Fire Service members and building occupants in danger and caused or contributed to the $200 million in damages. Toronto Hydro echoes that the same considerations should apply to the provider of hydroelectricity to the public.
[65] If Giffels and T. Eaton Co. are strictly applied to these circumstances, that could result in the City of Toronto and/or Toronto Hydro being held liable for all of the damages without the ability to seek contribution from other joint tortfeasors. The City of Toronto submits that the Supreme Court of Canada’s reasoning in Giffels “is not intended to protect the plaintiffs, third parties, and their insurers, to the detriment of municipalities…”[^4] Toronto Hydro argues, similarly, that it is not intended to protect these parties to the detriment of a public utility provider. In other words, this is not a case involving the allocation of risk as between private commercial parties. Its implications extend to public or quasi-public entities.
[66] This is acknowledged to be a novel argument. For purposes of the motions presently before the court, the defendants argue that this should lead the court to the conclusion that it is too early to find that their claims against the Proposed Third Parties are untenable. They want the opportunity to advance this novel argument, tied up with determinations of public policy, with the benefit of a proper and complete factual record.
[67] RBC observes that the defendants have not submitted any case law or precedent where a covenant to insure has not been enforced for broader reasons of public policy. Exclusion clauses provide the only context in which public policy has been invoked and the exclusion clause exceptions have been held not to apply to covenants to insure. RBC contends, therefore, that the “public policy arguments that the defendants advance, are not relevant to the enforceability of RBC’s covenant to insure and have no bearing on the legal effect of T. Eaton Co. and Giffels.”
[68] Nuyork and Paupst agree with RBC and further argue that the public interest actually favours the enforcement of contractual provisions and the need for contractual certainty. They cite portions of the Supreme Court of Canada’s recent judgement in Uber Technologies Inc. v. Heller, 2020 SCC 16 for the proposition that existing grounds of public policy used to set aside contracts are narrow and well established. Justice Côté in her dissent at para. 309 summarized the law in this area: “the doctrine of public policy ‘should be invoked only in clear cases, in which the harm to the public is substantially incontestable, and does not depend on the idiosyncratic inferences of a few judicial minds…”
[69] There is no doubt that there can be an inherent unfairness in the manner in which the Giffels and T. Eaton Co. cases have been held to operate, to the detriment of non-contracting parties. That unfairness, although acknowledged by the Supreme Court in the Giffels case itself, has not translated into any court having carved out exceptions to its application. (Master McLeod tried to do so in the Chinook Group case and was overturned). It is argued that public policy considerations were not discussed in those cases, or in the Laing case and are, thus, not foreclosed. However, in my view, that begs the threshold question of what triggers the public policy considerations in the first place.
[70] The court is urged to consider the fact that the non-contracting parties in these proceedings are public entities as a basis for engaging in a public policy analysis. It is suggested that these insurance covenants be subjected to public policy scrutiny because their effect in the particular circumstances of this case, renders them injurious to the state and to the justice system.
[71] It would be novel, indeed, to apply the court’s public policy jurisdiction to avoid the effect of covenants to insure, commonplace in the commercial context and entrenched in the jurisprudence of the Supreme Court of Canada. The court is not being asked to strike down all covenants to insure, or the entirety of the contracts in which they appear, but rather to exempt the insurance covenants from the effect of the application of the law because they have the effect, in this particular case, of negatively impacting public or quasi-public bodies.
[72] No authority has been presented, even by analogy, for this proposition. Nor, was I directed to any authority for excluding public bodies from the general effects of the Negligence Act, under which defendants who are joint tortfeasors (including public entities) are at risk of paying the entirety of a judgement for other reasons, for example if the joint tortfeasor is bankrupt or unable to pay its share of the liability for some other reason. There is insufficient foundation for the application of a public policy exception to what is otherwise a clear bar to the claims against the Proposed Third Parties who are privy to the insurance covenants (RBC as tenant in the Nuyork action and Nuyork as landlord in the Paupst and RBC actions).
[73] I do agree with the defendants that, if there were grounds for invoking public policy considerations, there is good authority, and there are sound reasons, for those considerations to be undertaken with the benefit of a more complete factual record than what is available to the court on this pleadings motion. However, the cases in which this consideration of the need to await the development of the factual record were concerned with the enforceability of exclusion clauses (the exceptions for which have already been held not to apply to covenants to insure). See Precision Drilling Canada Limited Partnership v. Yangarra Resources Ltd., 2017 ABCA 378, 60 Alta LR (6th) 57 at para. 6, and Imperial Metals Corporation v. Knight Piesold Ltd., 2018 BCSC 211, at para. 68.
[74] The need to await the development of the factual record (and defer public policy considerations) does not arise without a foundational justification for invoking the public policy considerations in the first place. I have not been presented with any authority to which I can tether a foundational justification for embarking upon a consideration of public policy grounds to challenge the shield provided by the insurance covenants in the circumstances of this case.
b) Have Claims Been Asserted Outside of the Negligence Act that do not fall within Giffels?
[75] Some courts have held out the prospect of there being a viable claim arising outside of the Negligence Act that might not be subject to the strict application of the principles in Giffels. See National Union Fire Insurance Company of Pittsburgh, PA. et al. v. National Semiconductor Corp. et al., 2006 BCSC 178, at para. 6.
[76] This was discussed in the following passage of Master MacLeod’s decision in Chinook Group Ltd. v. Foamex International Inc. 2004 33017 (ON SC), [2004] O.J. No. 4118 (S.C.J.) at para. 9:
It is of course obvious but worth observing that no such rule precludes a claim by a defendant against a third party if the duty to indemnify or contribute is independent of the Negligence Act. If the defendant has a claim against a third party that is not based on the allegation that the proposed third party caused the plaintiff's damages but had an independent duty to the defendant, either in contract or in tort, the rationale in Giffels or in Canada Colors would not apply.[^5]
[77] Toronto Hydro argues that certain of the Proposed Third Parties, even if protected against claims under the Negligence Act by the covenants to insure and the principles in Giffels, could still be liable to contribute to any amounts it is ordered to pay the plaintiffs through the implied contract under its Conditions of Service. Toronto Hydro contends that the interpretation and application of the terms and conditions of the implied contract and the Conditions of Service require a factual matrix and should be allowed to be asserted and determined at trial.
[78] Toronto Hydro asserts that it has broadly alleged that past building owners (including RBC) were responsible for the construction and installation of electrical equipment and had an independent duty to notify Toronto Hydro of any safety concerns or emergencies. These claims are said to arise independently of any of the claims for contribution and indemnity under the Negligence Act that might be precluded by the application of T. Eaton Co. and Giffels the covenants to insure. That may be so. In any event, I have already granted leave for the issuance of the third party actions as against RBC in its capacity as a former owner of the Building and claims under the Conditions of Service may also be included. These claims may be viable to the extent that RBC can be said to have owed a duty to the plaintiffs in that capacity (that is not covered by the covenants to insure), and/or to owe an independent duty to the defendants under the Conditions of Service.
[79] Nuyork and Paupst argue that, even if sufficiently pleaded, Toronto Hydro’s Conditions of Service are limited to requiring indemnification from customers in connection with construction and installation of electrical equipment. Since they are not alleged to have been involved in either the construction or installation of any electrical equipment they say they could not be covered by any such claims.
[80] In the case of Marsh v. Century, 2014 ONSC 1154, at paras. 21-24, the court concluded that claims did not exist outside of the Negligence Act because the pleadings had not asserted an independent duty in tort against the agent and there was no evidentiary foundation that would explain how or why a duty of care was owed. The Court continued with the following comments (at para. 24):
Moreover, regardless of its being dressed up as an “independent tort”, there is no logical explanation as to how Oxford Management, as a property manager, could have caused damage to Century, as plumbing contractor, other than by way of contribution with respect to injury suffered by the Plaintiffs as tenants. Such an allegation, even if there were evidence to support it, would not support an independent damages claim by Century since Century did not suffer independent damages; rather it could only support a claim for contribution and indemnity with respect to losses suffered by the Plaintiffs.
[81] This same reasoning would apply to any attempt to claim against Nuyork or Paupst for liability for construction and installation in the absence of any factual assertion that they were involved in such. I am not satisfied that such claims are tenable.
[82] RBC argues, in relation to the proposed third party claims against RBC in the Nuyork action with respect to RBC’s involvement as a tenant that Toronto Hydro seeks to characterize as falling outside of the Negligence Act, that these are just disguised claims for contribution and indemnity under the Negligence Act, and they should not be permitted to proceed. It is suggested that these claims are an afterthought consistent with the lack of any particularity for these claims in the pleading. RBC relies, in particular, on the lack of any claim for independent damages arising from these “other” claims as further support for the position that they remain, in essence, claims for contribution and indemnity under the Negligence Act.
[83] Based on the wording of the current draft third party claims against RBC in its capacity as a tenant, they are drafted as claims for contribution and indemnity and they must be analyzed as such for purposes of this motion. They do not disclose any viable claims for independent damages arising outside of the Negligence Act that I could permit to proceed on the basis that they might fall outside of the strict application of the principles in T. Eaton Co. and Giffels.
[84] Applying those principles, the terms of the lease agreements contain insurance covenants that reflect the agreement, as between landlord and tenant, that they will look to the insurer rather than to each other for such insured losses. For reasons outlined earlier in this endorsement, there cannot be liability between tenant and landlord where they both agree to insure against the risk of loss, and it does not matter whether it is the tenant or landlord, or both, who provided the covenant to insure.
c) Should the Plaintiffs’ Claims be Restricted if the Third Party Claims Cannot Proceed?
[85] Alternatively, if the Court declines to grant leave to the defendants to issue third party claims against some of the Proposed Third Parties, it has been suggested that the court should only do so on the basis that the plaintiffs be declared to be themselves responsible at law for any damages in each action caused by the fault, neglect or breach of duty of the Proposed Third Parties, and that the plaintiffs not be permitted to pursue the defendants for any portion of any liability that a court may or could determine to be attributable to the fault, neglect or breach of duty of the Proposed Third Parties in each action. In other words, limiting the plaintiffs’ claims in each action to the several liability of the named defendants.
[86] This alternative declaratory relief has been proposed as a way to avoid the unfair effects of the application of the T. Eaton Co. and Giffels cases, so that plaintiffs do not benefit from their private contractual insurance covenants and agreement not to seek contribution and indemnity from each other if the effect of those private arrangements is to leave the municipality and the public utility on the hook for damages that the plaintiffs themselves caused in their different capacities.
[87] The logic of this position is that, as between the plaintiffs and the defendants, it is the plaintiffs who should bear the responsibility for their choice to relieve others of responsibility, and that such a restriction on the plaintiffs’ claims would be in the interests of justice. There may be some merit to this, but it is not something that needs to be decided now. The defendants can assert this position in their statements of defence (I grant them leave to do so). This position can be developed more fully as the case progresses. Since this is a defence or position that would limit the amount of damages that the plaintiffs can claim or recover from the defendants (said to be akin to bar orders often granted in class action settlements and/or to Perringer settlement agreements), rather than an affirmative claim against another party, it need not be addressed in the context of this motion for leave to issue the third party actions.
Final Disposition and Costs
[88] I indicated that I might convene an oral hearing after receiving and considering the written motion materials. I have not done so, believing that I have understood and addressed the various arguments that were made. If my reasons cause any party to be concerned that a position was misunderstood or has not been addressed at all, a case management conference can be requested so that these can be brought to my attention and I will determine whether any further submissions or consideration of such issues is necessary to ensure that they have been fairly adjudicated. This is not an invitation to re-argue points that have already been made.
[89] With this in mind, I am provisionally:
a. granting leave for the following third party claims by the defendants to be issued (with amendments to the current drafts as necessary):
i. In the Nuyork action, to claim as against RBC in its capacity as the former owner of the Building;
ii. In the Paupst action, to claim as against RBC in any capacity; and
iii. In the RBC action, to claim as against the other former owners of the Building and as against the property managers.
b. Not granting leave for the following third party claims by the defendants to be issued:
i. In the Nuyork action, to claim against RBC as tenant;
ii. In the Paupst action, to claim as against Nuyork as landlord; and
iii. In the RBC action, to claim as against Nuyork as landlord.
[90] Given the nature of the issues, and the outcome which has permitted some but not all of the claims against the Proposed Third Parties, I am not inclined to award any costs of these motions. Even Nuyork, who might consider itself to have been successful in that it has benefitted the most from the operation of the application of the principles in T. Eaton Co. and Giffels, has only “succeeded” in a capacity as a potential third party and not in a capacity in which it had standing to make submissions on these motions.
[91] I consider that it is fair and reasonable in all of the circumstances that each party bear its own costs of these motions. If any party considers that it has an entitlement to costs that I should consider further, that party should notify the others and come prepared to the next case conference to outline that position and make a proposal for the court to consider regarding the receipt and consideration of further submissions about the costs of these motions.
Kimmel J.
Date: April 30, 2021
[^1]: A question was raised as to the standing of Nuyork to object to itself being named as a third party to the other actions. In its capacity as a Proposed Third Party, it does not have standing to make those arguments on these motions, which are being opposed by the plaintiffs. It can oppose the addition of RBC as a third party to its action and it should leave it to RBC and Dr. Paupst to oppose the addition of Nuyork as a third party in their actions. This is an artificial distinction to some extent, since the motions are being heard together and the arguments raised on each motion will be considered, if applicable, on the other motions. The parties in similar interests have largely adopted and relied upon each other’s arguments. All arguments raised are being considered on that basis. I do not consider any arguments to have been raised by Nuyork that are unique to its position as a Proposed Third Party that would render those arguments irrelevant or inapplicable to the positions advanced by the plaintiffs in opposition to these motions. However, for the clarity of the record, the defendants are right that Nuyork does not have standing to oppose itself being added as a third party based on the manner in which these motions have been constituted and brought forward.
[^2]: I do not, by this generalization, intend to in any way get into the weeds on any coverage issues that may exist under the policies of insurance. The analysis is directed to the type of loss to be insured, not the specific coverage actually obtained.
[^3]: City of Toronto Factum at para. 45.
[^4]: Ibid at para. 54.
[^5]: Although Master MacLeod’s decision was overturned on other grounds (discussed above), this observation by His Honour went undisturbed. This paragraph was cited with approval by the British Columbia Supreme Court in National Union Fire Insurance.