Canada: Top 5 Civil Appeals from the Court of Appeal (March 2012)

Last Updated: April 30 2012
Article by C. Kirk Boggs

Written with the assistance of Rivka Birkan and Andrew Carvajal

  1. GasTOPS Ltd. v. Forsyth, 2012 ONCA 134 (Goudge, Juriansz and Rouleau, JJ.A.), March 1, 2012
  2. Pye Bros. Fuels Ltd. v. Imperial Oil, 2012 ONCA 153 (Winkler C.J.O., Armstrong and LaForme JJ.A.), March 12, 2012
  3. Hamilton (City) v. Metcalfe & Mansfield Corporation, 2012 ONCA 156 (Blair and LaForme JJ.A. and Benotto J. (ad hoc)), March 13, 2012
  4. Dundas v. Zurich Canada, 2012 ONCA 181 (Cronk and Blair, JJ.A. and Strathy J. (ad hoc)), March 22, 2012
  5. 1540039 Ontario Limited v. Farmers' Mutual Insurance Company, 2012 ONCA 210 (Feldman and Hoy JJ.A. and Spence, J. (ad hoc)), March 30, 2012

1. GasTOPS Ltd. v. Forsyth, 2012 ONCA 134 (Goudge, Juriansz and Rouleau, JJ.A.), March 1, 2012

This decision, addressing various issues with respect to claims for breach of fiduciary duty, breach of confidence and breach of an employee's contract of employment, is of interest because of its review of the principles underlying the proper assessment of damages with respect to these causes of action. It is also interesting because of its discussion regarding the obligation on employees, particularly key employees, to give adequate notice of their departure where premature departure would leave their employer vulnerable to harm in the marketplace.

GasTOPS is a company involved with the design, development and application of computer software products that assessed machinery conditions for maintenance purposes for operators of gas turbine engines. This is a highly specialized niche industry with limited high value contract customers. GasTOPS' major focus was the military aviation market, and to some extent the commercial industrial and aviation markets. Up until October 1996, the four individual defendants were all senior employees of GasTOPS. They were considered the designers of the core programs within the family of GasTOPS' technology products. All were aware of the business opportunities GasTOPS was pursuing, including its future business plan and its strategic plan to acquire the U.S. Navy as a long term customer. Between October 7 and 10, 1996, the individual defendants resigned from GasTOPS, giving two weeks' notice of their departure. On October 15, 1996, they incorporated the defendant, MxI Technologies, and immediately began competing with GasTOPS. By November 1996, a number of former GasTOPS employees had joined MxI.

After a trial lasting 295 days, Granger J. found that the notice the individual defendants gave to GasTOPS was totally inadequate, that they knew this and that this was done with the intent of destroying GasTOPS' technology business. They also knew that their departures would leave the company unable to meet its existing contracts or continue to pursue business opportunities it had been pursuing. The trial judge also found that, subsequent to their departure, the defendants pursued virtually every existing and potential GasTOPS customer using the confidential business information they obtained while working at GasTOPS to form their marketing strategy and develop their technology, which was virtually identical to their former employer's. The impact of engaging in this behaviour was devastating to GasTOPS' revenues and highly beneficial to MxI.

The individual defendants were found liable for breach of fiduciary duty, breach of confidence and breach of their contract of employment. The trial judge also found MxI liable for breach of confidence. He awarded damages against the individual defendants equivalent to the profits earned by MxI from military contracts in its first 10 years of operation and ordered MxI to disgorge those profits. All defendants were ordered to pay $12,306,495 jointly and severally. The Court also awarded pre-judgment interest of $3,039,944, together with costs on a full indemnity basis of $4,252,920.24. The appeal and cross-appeal of the trial decision was dismissed.

The trial judge found that ten years was the time over which MxI earned profits in breach of its duty of confidence and the duration of the losses suffered by GasTOPS due to the breach of fiduciary duty by the four individual defendants. This period reflected the highly specialized nature of GasTOPS' business, the time required to develop and evolve its products and the useful life of the confidential information taken from the company. The appellants attacked this finding as one that "was motivated in large part by a desire to punish" not "measured and proportional" and "well beyond the temporal limits for claims of breach of fiduciary duty".

In rejecting the appellants' argument, the Court noted that this finding deserved appellate deference. First, the ten-year accounting period was an integral component of the remedies ordered by the trial judge for breach of confidence and breach of fiduciary duty. Both the order for disgorgement of profits by MxI and the award of equitable compensation against the individual appellants were equitable remedies. Equitable remedies are always subject to the discretion of the court and the exercise of judicial discretion at trial deserves deference on appeal.

Second, it was clear from the trial judge's reasons that the selection of the ten-year accounting period was a very fact-driven exercise. As a result, it was deserving of appellate deference in the absence of a palpable and overriding factual error. The Court rejected the appellants' arguments that the ten-year period was well in excess of the temporal limits set by the case law relating to the claims in issue, and was done to punish the defendants. Since the trial judge did not assess the accounting period for each cause of action separately, but decided on this period as part of the remedy for the combined effect of all the appellants' breaches, the Court could not compare this situation to cases where individual breaches had occurred. In this case, the trial judge's conclusion was "reasonable in the circumstances that were before him".

The trial judge held that the individual defendants' failure to provide GasTOPS with reasonable notice of their intention to resign "positioned the defendants as an alternative to GasTOPS' existing and prospective customers' software needs." In reaching this conclusion, he emphasized the "extremely vulnerable position" GasTOPS was in as a result of the failure to give adequate notice. While the remedy for this breach was part of the ten-year accounting period discussed above, Granger J. suggested that a notice period of 10-12 months would have been appropriate on the facts of the case.

The Court, while appearing to acknowledge the inadequacy of the two week notice period given, declined to endorse the trial judge's conclusions with respect to the length of notice that would have been appropriate or the factors that should be considered in determining what would have been appropriate. Because the trial judge did not separately quantify the damage award flowing from the failure to give proper notice, and it played no part in his calculation of the accounting period, "it was unnecessary to consider the length of notice that should have been given." By neither endorsing nor critiquing the trial judge's analysis of what is appropriate notice by an employee or the factors that should be considered when a claim for lack of adequate notice is pursued against an employee, the Court left this issue for consideration in another case.

The Court held that the trial judge's finding that Cass and Vandenberg owed GasTOPS a fiduciary duty, and breached that duty, must be given significant deference on appeal. Trial determinations in these areas should not be interfered with unless an appellate court is satisfied that the trial judge made a "material and identifiable error of law or a clear and identifiable error of fact in his appreciation of the evidence".

Granger J. undertook a detailed review of Cass' and Vandenberg's roles at GasTOPS. He concluded that they "were responsible for developing a significant commercial component of GasTOPS' business, and achieved that through the use of sensitive technological information that they helped develop and which was at the very core of GasTOPS' corporate identity". He further noted that they worked with little, if any, supervision, had a high degree of responsibility and had integral knowledge of GasTOPS' products, future direction and guidance. In summary, they were part of GasTOPS' senior management. Since the appellants had not established any palpable and overriding error with respect to these findings of fact, no appellate intervention was appropriate.

The appellants submitted that the trial judge had erred in finding the appellants jointly and severally liable for the damages ordered. In rejecting this argument, the Court noted that the defendants engaged in a joint enterprise that inflicted significant harm on GasTOPS in breach of their legal obligations. The quantum of damages was ordered to remedy the harm caused by them collectively. Given the circumstances, and the absence of evidence about the relative shareholding of the personal defendants in MxI, Granger J.'s imposition of joint and several liability was within his discretion.

The Court also disagreed with the appellants' submission that Granger J. erred in imposing costs on a full indemnity basis. A costs award is an act of judicial discretion to be set aside only if the trial judge has made an error in principle or if the award is plainly wrong. The trial judge had ample evidence on which to base his conclusion that the defendants intended to mislead the court, which resulted in full indemnity costs.

The Court of Appeal also dismissed the cross-appeal regarding the trial judge's refusal to award a permanent injunction. The Court held that the trial judge's exercise of discretion in declining the equitable remedy of injunctive relief deserved deference. GasTOPS' request for a permanent disgorgement of profits was also denied since it would essentially involve a monetized version of a permanent injunction. The Court noted that "in the rapidly changing world of technology, information such as that misappropriated here gradually loses its value and utility. At some point, it ceases to have the characteristics that require it to be cloaked in confidence." The trial judge determined that this point was reached at the ten year mark. An order for permanent disgorgement would be inconsistent with this factual conclusion.

2. Pye Bros. Fuels Ltd. v. Imperial Oil, 2012 ONCA 153 (Winkler C.J.O., Armstrong and LaForme JJ.A.), March 12, 2012

This short decision provides helpful guidance to practitioners with respect to when Rule 30.02(3) can be used to require a party to produce an insurance policy. There had been sharp disagreement between the motion judge and the Divisional Court regarding the proper scope of the rule.

The main action involved claims for damages against Pye Bros. and Imperial Oil relating to an alleged release of oil from a residential oil tank. The amount of the claim was $350,000 plus interest and costs. Pye Bros. had cross-claimed against Imperial Oil, but only for contribution and indemnity. Pye Bros. moved for production of an insurance policy in the possession of Imperial Oil, which it asserted was producible under Rule 30.02(3).

Rule 30.02(3) provides:

A party shall disclose and, if requested, produce for inspection any insurance policy under which an insurer may be liable,

  1. to satisfy all or part of a judgment in the action; or
  2. to indemnify or reimburse a party for money paid in satisfaction of all or part of the judgment,

but no information concerning the insurance policy is admissible in evidence unless it is relevant to an issue in the action.

In deciding that the policy need not be produced, the motion judge did not review the policy. Instead, she relied on the uncontradicted affidavit evidence of Imperial Oil's representative that the insurance policy did not meet the criteria of Rule 30.02(3), and that Pye Bros. was seeking disclosure of the policy for a collateral purpose. The Divisional Court reversed the motion judge's decision, ordering production of the policy. In doing so, the Divisional Court held that the motion judge erred in denying production based on Imperial Oil's affidavit. The Court of Appeal restored the motion judge's decision denying production.

The Court of Appeal's reasoning was two-fold. First, the Court determined that the motion judge did not err in relying on Imperial's evidence without reading the insurance policy itself. Although Imperial's interest was adverse to Pye Bros.' interest, Pye Bros. had not challenged, through cross-examination or otherwise, Imperial's evidence that the deductible limit of the policy exceeded the amount of the plaintiffs' claim, and that the policy was a "claims made" type of policy under which no claims had been made to trigger coverage. Since these were the relevant factual issues on this motion it was not necessary for the motion judge to see and interpret the policy.

Second, the Court of Appeal noted that Pye Bros. did not argue that the policy was relevant to the main action. The Court found that in the litigation before it, Pye Bros. had not claimed against Imperial regarding insurance coverage, contractual obligations or the duty to defend. Pye Bros. sought disclosure under Rule 30.02(3) as a means to explore the possibility that Imperial's insurer owed it a duty to defend. The Court held that the Divisional Court erred in ordering the production of a document that was not relevant to the main action, based on an implied contractual right not pleaded by Pye Bros.

The Court clarified that Rule 30.02(3) is a limited exception to the general rule that only relevant documents need to be produced. The underlying purpose of this exception is to assist parties involved in litigation to make informed and sensible decisions in circumstances where they may have recourse to insurance money. The rule is not intended to provide a means to obtain production of insurance policies in advance of starting a separate action relating to coverage or contractual obligations.

3. Hamilton (City) v. Metcalfe & Mansfield Corporation, 2012 ONCA 156 (Blair and LaForme JJ.A. and Benotto J. (ad hoc)), March 13, 2012

In dismissing the City's action to recover its $10 million dollar loss on commercial paper as statute-barred, the Court of Appeal clarified the distinction between the concepts of "damage" and "damages"- terms that are sometimes improperly used interchangeably. The Court further clarified that, with respect to a claim for negligent misrepresentation, since the general principle underlying damages is "that the plaintiff is entitled to be put in the position he or she would have been in if the misrepresentation had not been made", the damage aspect of the claim is complete when the plaintiff is worse off than if the defendant had not made the misrepresentation. This analysis is consistent with the wording of s. 5 of the Limitations Act, 2002, S.O. 2002, c. 24, Sch. B (the "Act"), which indicates that for purpose of determining when a cause of action is "discovered" the relevant point in time is when the plaintiff has suffered loss sufficient to give rise to a cause of action and not when the party is aware of the extent of loss it has suffered. Finally, the Court provided guidance with respect to the circumstances required to suspend or extend a limitation period pursuant to the Act.

On July 24, 2007, the City of Hamilton (the "City") bought from the respondents $10 million in non-bank sponsored asset backed commercial paper ("ABCP"). On August 13, 2007, the Canadian non-bank sponsored ABCP market collapsed. On August 23, 2007, the City signed an agreement that various banks and investors had entered into to address the ABCP market collapse (the "Montreal Accord"). The Montreal Accord included a standstill agreement whereby all signatories agreed to refrain for a period of time from taking any action that would precipitate a default by the issuers. The City's notes matured on September 26, 2007, but were not paid. The standstill period contained in the Montreal Accord ended on January 10, 2008, and, as far as the City and respondents were concerned, the Montreal Accord collapsed.

On September 25, 2009, the City commenced an action against the respondents for negligent misrepresentation and unjust enrichment. The motion judge dismissed the City's claims on the basis that they were statute-barred. Section 4 of the Act provides that a claim shall not be commenced after 2 years from the date the claim was discovered. Section 5 of the Act provides that a claim is discovered when the plaintiff knew or ought to have known that the elements of its cause of action had accrued. The City unsuccessfully argued that it discovered the damage on September 26, 2007, when its ABCP matured and the respondents defaulted on payment. The motion judge found that the City's cause of action accrued and the limitation period commenced to run at some time prior to August 23, 2007, when the City agreed to be bound by the terms of the Montreal Accord. At that time, the City knew: 1) that it would be unable to redeem the notes on the maturity date; 2) there were no buyers for the note on a full recovery basis; and 3) if the Montreal Accord was successful, its ABCP would be converted into longer term floating rate notes, which would result in a present value loss.

The City's appeal focused on its claim for negligent misrepresentation. In dismissing the appeal, the Court set out four main reasons for upholding the motion judge's decision that the spring action was statute barred. First, the character of damage required for a cause of action to accrue is based upon the nature of the claim. For negligent misrepresentation claims, "damage" is the condition of being worse off than if the defendant had not made the misrepresentation that induced the plaintiff to enter into the transaction. Damage is distinct from damages, which is the monetary measure of the extent of that loss. Damage occurs as soon as the plaintiff's actual position is worse than what it would have been had it not entered into the transaction, provided that at least some of the loss is attributable to the defendant's misrepresentations. Here, the Court found that the City's damage flowed from the respondents' misrepresentations and not from the respondents' failure to repay the notes. At the time of purchase, induced by alleged misrepresentation, the City purchased something that was worth less than the safe, liquid investments it thought that it was purchasing. While the City may not have known the extent of its loss until the notes matured, it would not have entered into the transaction but for the misrepresentation and, accordingly, damage occurred when it purchased the notes.

Second, the Court found that the City was aware that it had incurred some loss before it signed the Montreal Accord and therefore had discovered the damage element of its cause of action by August 23, 2007. A plaintiff need not know the extent of damage – knowledge of some damage is sufficient – for the cause of action to accrue and the limitation clock to start ticking. At the time it signed the Montreal Accord, the City knew that the best case scenario, in which the short-term notes were replaced with long-term notes, would result in a present value loss. The evidence also supported the conclusion that the City knew that this adverse outcome resulted from the respondents' alleged misconduct. Although the City did not know the full extent of its investment loss before signing the Montreal Accord, at the time it signed the agreement it knew that it was in a worse position than it had been in before it was induced to purchase the notes.

Third, the Montreal Accord did not constitute an agreement to suspend the limitation period under the common law or under the Act. The City's scenario was distinguishable from jurisprudence where courts have found that the limitation period was suspended because a creditor and debtor had agreed to forbear the enforcement of a debt. In those cases, the creditor promised not to enforce a debt in exchange for consideration from the debtor. When such reciprocity has occurred, the limitation period does not run because the parties have renegotiated the terms of their agreement and the debtor is not effectively in default. Here there was no consideration provided by the debtors and, accordingly, no agreement on which the City could rely to suspend the limitation period.

With respect to s. 22 of the Act, the court found that the Montreal Accord did not prevent the City from suing the respondents, and was therefore not a bilateral agreement which suspended the limitation period. Section 22(1) provides that the limitation period applies despite any agreement to vary or exclude it, subject to enumerated exceptions. These exceptions include that a limitation period can be suspended or extended by agreement (s. 22(3)). Section 22 requires a bilateral agreement between the parties to toll a limitation period. Here, there was no evidence that the agreement was for the purpose of tolling the limitation period. Additionally, like the common law, a promise to forbear does not suspend the limitation period under the Act absent consideration from the debtor.

Lastly, the Court held that s. 11 of the Act, which provides that parties can agree to have an independent third party resolve a disputed claim and, in the interim, suspend the limitation period, did not apply. The Court rejected the City's argument that an investors committee formed to develop a rescue plan for the ABCP market was an independent third party within the meaning of s.11, because there was no agreement to involve an independent third party in resolving the City's claims against the respondents. The Court agreed with the motion judge that the Montreal Accord was not capable of being viewed as a s.11 resolution mechanism, and there was no evidence that the City thought it was participating in such a process.

4. Dundas v. Zurich Canada, 2012 ONCA 181 (Cronk and Blair, JJ.A. and Strathy J. (ad hoc)), March 22, 2012.

In this case, the Court of Appeal clarified the proper interpretation and operation of the limitation period contained in the statutory conditions of the standard automobile policy issued in Ontario. While this case concerned the policy wording applicable to claims arising out of a 1988 accident, the present wording is sufficiently similar to the earlier wording that the same conclusions would likely be reached with respect to an action based on the present policy wording. The analysis will also be of interest to those practicing in other provinces where the wording considered continues to be used. The Court also provided a useful analysis on the true nature of a claim by an insured against their insurer with respect to an alleged breach of the duty of the utmost good faith involving third party coverage. Finally, the Court provided further guidance with respect to the analysis that is required to determine whether a claim by or against an estate is subject to the limitation period contained in s.38(3) of the Trustee Act.

In 1988, four people died in a motor vehicle accident, including the driver of the vehicle, Robert Reid. Reid was insured by Zurich under a policy providing $1 million in coverage. Reid's estate was sued by the families of the three deceased passengers. In May, 1992, the passengers' families offered to settle their claims for an amount that was in excess of the policy limits (approximately $1.66 million), with prejudgment interest and costs to be determined later. The independent counsel for Reid's estate agreed to the proposed damages in April, 1993.

On October 12, 1993, counsel for the plaintiffs and for Zurich reached an agreement before Kennedy J., with damages in the amount set out above. On December 3, 1993, Kennedy J. heard submissions on prejudgment interest and costs. On December 23, 1993, Zurich paid the insurance limits into an interest-bearing account and on March 29, 1994, the insurance limits were paid out to the passengers' families in agreed proportions.

On November 25, 1994, Kennedy J. issued an endorsement dealing with interest and costs. The endorsement contained critical comments about Zurich's failure to adjust Reid's loss and to pay the policy limits into an interest-bearing account at an earlier date. Under the terms of the insurance policy, prejudgment interest in excess of the policy limits would fall on the insured. Kennedy J.'s endorsement was sent to counsel for Reid's estate by Zurich's counsel on December 21, 1994. Consent judgments dated August 21, 1995, were issued against Reid's estate for the total amount of $2,067,399.35, inclusive of damages and prejudgment interest. Costs were awarded in favour of the plaintiffs of approximately $600,000.

This action was commenced by Reid's estate against Zurich on August 19, 1996, less than one year after the date of the consent judgments. The Statement of Claim alleged that Zurich breached its duty of good faith, exposed the estate to claims in excess of the policy limits, failed to pay the policy limits on a timely basis and failed to pay the limits into an interest-bearing account. The action was subsequently assigned to the families of two of the three passengers in exchange for their agreement not to pursue the Reid's estate for the balance owing under their judgments.

Zurich brought a motion for summary judgment asserting that the one-year limitation period contained in statutory condition 6(3) of the applicable policy applied to the insured's claim and that the action was barred. Zurich contended that the limitation period began to run on the date that counsel for Reid's estate was sent Kennedy J.'s endorsement containing critical comments about Zurich. In response, the plaintiffs contended that the limitation period only began to run once the consent judgments were issued and the amount of the estate's exposure was ascertained.

The motion judge found that Reid's estate had known for some time of its exposure beyond the policy limits, and having received Kennedy J.'s endorsement, it was informed of a possible claim against the insurer. Since the exact amount of the claim was not required for the limitation period to begin to run, the motions judge dismissed the action against Zurich. The Court of Appeal granted the appeal and allowed the action to proceed.

The one-year limitation period applicable to a claim against an automobile insurer at the material time (now 2 years in Ontario in relation to loss or damage to persons or other property) was contained in the former Ontario Standard Automobile Policy (SPF No. 1). These conditions were included in every insurance policy issued in Ontario, as required by section 207 of the Insurance Act, R.S.O. 1980, c. 218:

When Action May be Brought

6(2) The insured shall not bring an action to recover the amount of a claim under this contract unless the requirements of statutory conditions 3 and 4 are complied with or until the amount of the loss has been ascertained as therein provided or by a judgment against the insured after trial of the issue or by agreement between the parties with the written consent of the insurer.

Limitation of Actions

6(3) Every action or proceeding against the insurer under this contract in respect of loss or damage to the automobile shall be commenced within one year next after the happening of loss and not afterwards, and in respect of the loss or damage to person or property shall be commenced within one year next after the cause of the action arose and not afterwards.

Statutory conditions 3 and 4 pertained to the insured's obligations to give notice to the insurer and to verify the claim by statutory declaration in the case of damage to the insured's automobile.

The Court of Appeal found that the motion judge's interpretation of the statutory conditions was incorrect. In reaching this conclusion, the Court distinguished between the different limitation periods provided in condition 6(3). In the case of "loss or damage to the automobile", an action shall be commenced within one year after the "happening of loss". In respect of the "loss or damage to person or property", an action shall be commenced within one year "after the cause of the action arose".

The cause of action in this case did not arise until Zurich had a liability to indemnify Reid's estate under the insurance policy. This only occurred when the liability of the estate had been ascertained "by a judgment against the insured after trial of the issue or by agreement between the parties with the written consent of the insurer", using the language of condition 6(2). Given the facts of this case, the Court of Appeal held that this did not occur until the interest and cost amounts owing with respect to the actions against the estate had been resolved by the consent judgments of August 21, 1995.

The Court held that this interpretation resulted in consistency between conditions 6(2) and 6(3) and promoted certainty, by fixing a readily ascertainable date instead of one that was subject to discoverability. He also noted that this interpretation was consistent with the principle that a limitation period should be strictly interpreted and ambiguities "should be resolved in favour of the person whose rights are being truncated".

Interestingly, after completing the analysis of the limitation period contained in the statutory conditions and detailing how it would apply to the fact situation presented, the Court went on to find that both parties were mistaken in their assumption that the limitation period had any application to the estate's cause of action against Zurich. Referring to the jurisprudence that has developed with respect to an insurer's independent duty of the utmost good faith to its insured, breach of which gives rise to a cause of action independent of and in addition to any breach of the contractual duty to pay the loss, the Court concluded that the plaintiffs' claim was not a claim "under the contract" within the meaning of statutory condition 6(2), or a proceeding under the contract "in respect of the loss or damage to person or property" within the meaning of statutory condition 6(3).

The alleged breach of duty asserted in the Statement of Claim was not a claim for indemnity under the policy. Instead, it was an action asserting that the insurer had breached its independent duty of good faith and fair dealing by reason of its failure to take timely and appropriate steps to settle the claims against its insured or to limit the extent of the uninsured exposure resulting from the claims. As the contractual limitation period did not apply, the general six-year limitation period contained in the Limitations Act of the time applied.

Finally, the Court rejected Zurich's alternative argument that this claim was out of time due to section 38(3) of the Trustee Act, since it was not commenced within two years of Reid's death.

The Court noted that the proper question to be asked when attempting to determine whether the limitation period in s.38(3) of the Trustee Act applies to any claim by or against an estate is: "whether the claim is for injury of a personal nature". The Act is concerned with the survival of claims for wrongs done to the deceased in his or her lifetime. When the cause of action does not arise during the deceased's lifetime, the limitation period in s.38(3) has no application.

In the present case, the insurance policy Zurich issued to Reid passed to his estate on his death. Since the alleged injury involved in this action was not an injury to Reid himself but an injury to his estate, it was not subject to the limitation period in section 38(3) of the Trustee Act.

5. 1540039 Ontario Limited v. Farmers' Mutual Insurance Company, 2012 ONCA 210 (Feldman and Hoy JJ.A. and Spence, J. (ad hoc)), March 30, 2012

In this case, the Court of Appeal once again considered, but did not completely resolve, the debate regarding when extrinsic evidence may be considered in dealing with duty to defend applications.

The matter came before the court in the context of an action brought by the family of an unfortunate individual ("Nearing") who was fatally electrocuted while working on a pylon sign in front of a plaza owned by the appellant, 1540039 Ontario Limited. The family of the deceased brought an action in negligence against the appellant. The plaintiffs also claimed against Hydro One Inc. in relation to ownership of the hydro lines above the pylon sign and against Robert Monroe, carrying on business as TRJ Signman, claiming that he subcontracted the work to Nearing that resulted in his death. As against the appellant, the family alleged, among other things, that: it failed to regularly inspect the premises to ensure that it was kept in a safe condition; employed incompetent servants, agents and employees to perform work on the premises; improperly placed its signage; failed to post warning signs; created a situation of danger; and failed to take such care as in all the circumstances as was reasonable to see that persons entering the premises, including the deceased, were safe.

The appellant pleaded in its statement of defence and crossclaim that it did not hire Nearing or any other contractor to do the work that resulted in Nearing's death, asserting that Nearing was employed by TRJ Signman on behalf of Design Depot. Design Depot, one of the appellant's tenants, was not a defendant in the action and was not added as a third party by any of the defendants. In Monroe's statement of defence, counterclaim and crossclaim, he pleaded that Nearing was a self-employed independent contractor. Monroe did not deny that Nearing's work was done on behalf of Design Depot.

The appellant had primary insurance coverage under a comprehensive general liability policy ("CGL policy ") issued in its name. The appellant was also an additional named insured under a CGL policy issued to Design Depot by the respondent Farmers' Mutual Insurance Company ("Farmers' Mutual"). The appellant brought an application for a declaration that Farmers' Mutual was required to share in the defence of the claim.

The coverage provided pursuant to the Farmers' Mutual policy was issued to comply with a term in the appellant's lease agreement with Design Depot, which required the tenant to maintain a CGL policy naming the appellant as an additional insured with respect to "business carried on in the leased premises". The lease agreement further included an obligation that Design Depot indemnify the appellant for personal injury, death or property losses occurring "in or about the leased premises".

The appellant's application for a declaration that Farmers' Mutual was bound under its policy with Design Depot to share in the defence of the claim against the appellant was dismissed. On the application, the appellant sought to introduce evidence that Nearing was retained to perform work on behalf of Design Depot, and specifically that Nearing was placing a sign advertising Design Depot's business. The application judge found that the extrinsic evidence was not admissible because it would require findings to be made before the trial that would affect the underlying litigation. He further determined that, even if admitted, the extrinsic evidence would not establish a duty to defend. He concluded that the lease between the appellant and Design Depot limited the CGL coverage to liability arising out of occurrences within the leased premises. Nearing's death, which occurred outside the leased premises, was not such an occurrence.

On appeal, the appellant conceded that the facts alleged in the pleadings, if proven true, would not require the respondent insurer to indemnify it. The pleadings did not allege that Design Depot's hiring of TRJ Signman and Nearing led to the appellant's liability. However, the appellant submitted that the application judge erred in failing to consider extrinsic evidence that it was Design Depot that hired TRJ Signman in determining whether the respondent had a duty to defend the appellant. The appellant submitted that: 1) the extrinsic evidence was undisputed; and 2) it established that the appellant's liability arose out of Design Depot's operation of its interior decorating/home decor business, and therefore that the plaintiffs' claim fell within the policy.

After referring to authorities which have largely limited the extrinsic evidence admissible to evidence that has been explicitly referred to in the pleadings, the Court of Appeal noted that there may be merit to the position articulated by several commentators that an insured should be entitled to rely on extrinsic evidence on a duty to defend application where the evidence supports facts that are undisputed and where the determination does not require findings that would affect the underlying litigation. However, the Court concluded that this appeal was not the case to further extend the scope of extrinsic evidence that a court can consider in determining whether an insurer's duty to defend has been triggered. It noted at the end of its reasons that the extrinsic evidence exception when available "cannot be used to demonstrate that pleadings that say one thing really mean something else".

With respect to the case before it, the allegedly undisputed facts that the appellant sought to introduce through extrinsic evidence were, in fact, disputed. Contrary to the appellant's position, Hydro One pleaded that the appellant, not Design Depot, hired TRJ Signman. Further, and more importantly, the Court reasoned that, even if admitted, the extrinsic evidence would not support a duty to defend. The Court found that the substance and true nature of the plaintiffs' claim against the appellant, and Hydro One's crossclaim against it, was a claim in negligence that the appellant failed to ensure that the pylon sign was kept in a safe condition and its alleged improper placement of the pylon sign. These were claims based on the appellant's conduct as owner and occupier of the plaza rather than as landlord of premises leased to Design Depot, something that was not covered under the Farmers' Mutual policy.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions