The recent decision of Addison & Leyen Ltd. v Fraser Milner Casgrain LLP, 2013 ABQB 473, highlights important considerations for plaintiffs up against the 10-year limitation period and those seeking contribution and indemnity from defendants. Although the result in this instance seems unfair, it is hard to find flaws in the well-reasoned judgment of the Honourable Mr. Justice J.T. McCarthy.
York Beverages (1968) Ltd. ("York") was a Saskatchewan soft drink bottling company. The Individual Plaintiffs in this matter (John Dietrich, Jeanette Dietrich, Wilfred Roach and Helen Roach) each had an ownership interest in York either as a shareholder or indirectly through their ownership of Addison & Leyen Ltd. ("Addison"). They were also directors of York.
On October 1, 1988, York sold its assets for approximately $10 million cash and $3 million in assumed indebtedness. York intended to stop carrying on business and distribute the proceeds of the sale to its shareholders before the end of its taxation year (September 30, 1989). After the distributions and other payments were made York had $2.8 million in cash which it retained to pay its income tax liability for the 1989 tax year.
In September 1989 the Plaintiffs decided to sell their shares in York to a prospective purchaser (388777 Alberta Ltd. - the "Purchaser") for $1,115,000 (the "Share Purchase Transaction"). The Purchaser intended on using York's available cash to purchase seismic data which was valued at $6,295,000 according to three independent appraisals. It is worth noting that the Purchaser had representatives on the York Board of Directors who were the ones that entered into the transaction for the purchase of the seismic data.
One of the conditions of closing the Share Purchase Transaction was that the Purchaser was to provide a legal opinion regarding the York's potential tax liability. Mr. Wallace Shaw practiced as a tax lawyer in Calgary for Fenerty, Robertson, Fraser & Hatch ("Fenerty" - FMC is a successor to Fenerty) and provided the tax opinion. The opinion stated that York would be able to pay its income tax liabilities and that the Plaintiffs would not be liable for any income tax liabilities in respect of York.
On December 29,1992, the Minister for National Revenue (the "Minister") determined that the seismic data was worth $1,696,500 and, as a result, reassessed York for the 1989 tax year stating that it owed $3,247,074. York could not pay. In around February 2001 the Minister issued notices of assessment (the "Assessment") to the Plaintiffs and took the position that they were statutorily liable for York's income tax debt (now at $6.7 million). The Plaintiffs objected the Assessment. In October 2010 the Plaintiffs entered into a settlement with the Minister which left York with a tax liability of $492,676 for the 1989 tax year. Addison paid the tax liability, but Plaintiffs incurred approximately $1.25 million in legal fees, disbursements and other expenses.
The Plaintiffs brought this action in September 2011 seeking contribution and indemnity from the Defendants based on the common law implied right of indemnity. There was a standstill agreement in place to suspend the running of any unexpired limitation period between February 2003 and September 2011.
The question of law that was to be determined in this matter was whether the Plaintiffs' claim was barred by the 10-year limitation period in the Limitations Act, s 3(1)(b).
The Plaintiffs argued that their cause of action only arose once they incurred liability through the settlement of the Minister's tax claim in October 2010. Alternatively they argued it could be dated back to February 2001 when they first learned of the Assessment. Either way, because of the standstill agreement the claim was not barred.
The Defendants argued that the Plaintiffs' claim is improperly characterised as a common law implied right of indemnity and that it is in fact simply a negligence claim; As such the cause of action arose in 1989 when they received the tax opinion, and therefore the claim is statute-barred.
Decision & Reasoning
The Court began by highlighting the policy considerations of the 10-year limitation period. Simply put, it is to "eliminate the harm to defendants of very belated litigation" (at para. 27). Quoting the decision in Bowes v Edmonton (City), 2007 ABCA 347, the Court states that these "harms" can be divided into two categories: social cost and burden on businesses of indefinite limitation periods, and having to find and test evidence about events that are decades old (at para. 27). The Court did acknowledge the inherent unfairness that can result from the 10-year limitation period where, as was the case with the Plaintiffs, one may lose the right to sue before they even become aware of their cause of action.
Next the Court considered the implied contract indemnity. The Court supported the position that a claim for contribution and indemnity can be advanced on its own or as an additional or alternative cause of action (including in addition to a negligence claim). It was conceded by the Defendants that the Plaintiffs had a claim against the Defendants in negligence - they did after all rely on their flawed tax opinion. However the Court had to decide whether the Plaintiffs' cause of action was properly characterized as a breach of an implied contract indemnity.
The Court recognized that a claim for contribution may be established by statute (such as under 3(1) of the Tort-Feasors Act, RSA 2000, c T-5) or at common law (such as in a contract situation where one of the defendants owes a duty to contribute to the other potential defendants). Neither situation existed with respect to the Plaintiffs in this matter. The Plaintiffs asserted that an implied contract arose because the Defendants owed them a duty of care in preparing the Tax Opinion, the Defendants were negligent in their preparation of the opinion, and the harm was foreseeable.
Both parties cited McFee v Joss,  2 DLR 1059 (Ont SC (AD)) in their arguments - a case that dealt with when an implied contract indemnity arises. The Plaintiffs argued that it was not necessary for the Minister to have a claim against the Defendants in order for there to be a common law right of indemnification, instead what matters is that the Plaintiffs were not personally at fault and were exposed to the liability as a result of the Defendants' negligence (at para. 38). The Defendants argued that the Plaintiffs' interpretation of McFee was wrong, and that indemnity at common law occurs only where the Plaintiffs, without fault, "are compelled to pay damages which ought to have been paid by the Defendants" (at para. 39).
The Court agreed with the Defendants. The Court stated that "there must be a connection between the actions of the party from whom the indemnity is sought and the cause of liability in the first place" (at para. 44), and indemnity would be permitted where "the party against whom indemnification was sought could independently be found liable for the damages suffered by the plaintiff" (at para. 45). In this case, the Defendants could not have been found liable to the Minister for the Tax Liability.
The Court concluded that the Plaintiffs' claim was properly a negligence claim, and as a result was barred by the 10-year limitation period.
There is an inherent unfairness in this result. The Plaintiffs would not have entered into the transaction that resulted in their liability had the Defendants not been negligent in their Tax Opinion. The Plaintiffs were not aware of the tax consequences impacting them until after the expiration of the 10-year limitation period. That said, I would have to agree with the Court that there are sound policy reasons for such a limitation, and those reasons outweigh any potential unfair results. The takeaway from this case is that if one wants to assert a right to indemnity it should be expressly stated in the contract
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