Canada: Can A Lease Between A Landlord And Tenant Protect A Third Party Hired By The Landlord From Liability?

In Williams-Sonoma Inc. v. Oxford Properties Group Inc., 2013 ONCA 441, WilliamsSonoma was a tenant at Yorkdale Shopping Centre when the mall was undergoing certain construction work. The landlord, Oxford Properties Group Inc., hired EllisDon Corporation as an independent contractor to perform the construction work. During the course of their work a vandal broke into Williams-Sonoma's third floor office space and opened a fire hose, leading to extensive damage of their premises and property. The resulting water damage was alleged to be approximately $7 million. Williams-Sonoma sued EllisDon for breach of commonlaw and statutory duty owed to the Tenant by failing to properly secure the area where the fire hose was located.

However, the Lease between the Landlord and all of the mall's tenants included a provision requiring tenants to obtain independent insurance for water damage. In addition, the Lease contained an exclusionary clause, s.8.3.1, which provided that "subject to 8.3.2 and 8.3.3, each of the Landlord and Tenant hereby releases the other and waives all claims against the other and those for whom the other is in law responsible with respect to occurrences insured against or required to be insured against by the releasing party, whether any such claims arise as a result of the negligence or otherwise of the other or those for whom it is in law responsible." [Emphasis addedJ. Based on this provision, EllisDon argued that the Landlord was responsible for their actions and the clause extended to them as a non-party.

The main analysis undertaken by the Courts (both Superior Court of Justice and the Court of Appeal) pertained to the doctrine of privity and interpretation of the phrase "in law responsible." Two cases, London Drugs Ltd. v. Kuehne 6- Nagel International Ltd., [1992J 3 SCR 299 (SCC) and Fraser River Pile 6- Dredge Ltd. v. Can-Dive Services Ltd., [1999J 3 SCR 108 (SCC) analyzed the doctrine of privity of contract and determined that the doctrine should be relaxed in certain circumstances. Fraser River adopted and modified a test established in London Drugs and considered two factors in extending the doctrine of privity to a third party:

  1. 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
  2. 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?

In considering the test established in Fraser, the motions judge concluded that the intention of the parties (Landlord and Tenant) was to extend s. 8.3.1 of the Lease to those parties involved in the renovation of the mall. EllisDon was contracted to do work in the mall, therefore the Landlord was responsible in law for them within the meaning of 2- MINDEN GROSS LLP - FALL 2013 the Lease. Furthermore, EllisDon was performing the very activities contemplated in the impugned clause in the Lease. Therefore both parts of the test in Fraser were satisfied. The Court of Appeal agreed with the motions judge, and further analyzed the term "in law responsible." Under s. 8.4, the Landlord indemnified the tenants from loss occasioned by the Landlord's "officers, agents, servants, employees, contractors, customer or licensees," therefore taking responsibility for EllisDon, the contractor. Had water damage not been excluded by s. 8.3, the Landlord would have indemnified the Tenant and been responsible for the damage caused by the contractor. As a result, the Court determined that EllisDon was the responsibility of the Landlord and thus protected by the Lease.

This case demonstrates that the doctrine of privity may extend beyond the scope of the parties to a Lease and that a third party, who is not a party to the Lease, may be exculpated from liability by an exclusionary clause. Although the Landlord and Tenant contemplated water damage, evidenced by the provisions in the Lease requiring Tenants to purchase water damage insurance, the Tenant could not seek additional damages from a non-party. By way of including an exclusionary clause in a Lease, a nonparty such as EllisDon, can be safeguarded by the Landlord from any liability arising from damage that stemmed from the non-party. Furthermore, language such as "in law responsible" can cast a wide scope and does not need to be accompanied by language specifically identifying parties that should fall within the parameters of the language.

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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