Canada: Austeville Properties Ltd. v. Josan Et Al.: Exploding Taco Del Mar Makes For Interesting Application Of The Corporate Identification Doctrine And New Law On Insurance Covenants

Many in Vancouver will remember when the Taco Del Mar restaurant on West Broadway exploded in the early morning hours of February 13, 2008. That explosion resulted in damage to the office building which contained the Taco Del Mar and to buildings across the street. Austeville Properties Ltd. v. Josan et al., 2016 BCSC 1963 is an action that arose out of the efforts of the landlord's insurer to recover over $3 million paid out to the landlord for property damage repairs and business interruption losses arising from that explosion. The landlord's insurer brought a subrogated action in the name of the plaintiff landlord against its corporate tenant and several other individuals including the only two directors of the corporate tenant, Mr. and Mrs. Nandha.

The facts of this case are extraordinary. Mrs. Nandha and her husband owned a company, Nandha Enterprises Ltd. ("NEL"), which owned and operated two Taco Del Mar restaurants. The evidence was that Mrs. Nandha was unhappy with her life and believed that if she did not have to run both of NEL's restaurants, then she would have more time to spend with her children. As a result, the evidence was that she asked a friend (Mr. Josan) to set fire to the restaurant premises in order to get out of the lease with the landlord.

When the director of a small company, which leases premises from a landlord, conspires to set fire to the premises, should the corporate tenant be attributed with that director's act of conspiring to commit arson and, if so, should the corporate tenant be immune from tort liability by operation of an insurance covenant found in the lease?

This decision makes two key findings on these issues:

  1. The attribution of the actions of a director to the company, even in a small and closely held company, is not automatic. Rather, the test for the corporate identification theory must be satisfied. Where the actions of the directing mind of a company were done outside the scope of his or her authority, and not for the benefit of the company, the actions of the director will not be attributed to the company; and
  2. Insurance covenants, and the corresponding tort immunity in favor of the beneficiary (here the tenant), can extend to intentional torts.

There was uncontroverted evidence at trial that Mrs. Nandha conspired with Mr. Josan to set the fire. The trial judge accordingly found that Mrs. Nandha and the arsonist, Mr. Josan, conspired to set the fire.

The Plaintiff's claim against NEL was that NEL had breached its lease with the landlord by virtue of the conduct of Mrs. Nandha. The Plaintiff's argument was that Mrs. Nandha was NEL because NEL was a small company with only two directors and two shareholders, and Mrs. Nandha primarily ran NEL.

The first issue with respect to NEL's liability for the fire was whether the actions of Mrs. Nandha ought to be attributed to NEL in these circumstances. In order to attribute the conduct of Mrs. Nandha to NEL, both of which are separate persons at law, the Plaintiff relied on the corporate identification doctrine – a legal doctrine where the act of an individual who is found to be a "directing mind" of the corporation may be attributed to the corporation as if the company had committed, and intended to commit, the actual act itself. Relying on the Supreme Court of Canada decision in R. v. Canadian Dredge & Dock Co., [1985] 1 S.C.R. 662 [Canadian Dredge], the Honourable Mr. Justice Bowden stated that the corporate identification doctrine only operates where it is demonstrated that the action taken by the directing mind of the corporation was: (a) within the field of operation assigned to him; (b) not totally in fraud of the corporation; and (c) was by design or result partly for the benefit of the company.

Mr. Justice Bowden determined that both directors of NEL (Mr. and Mrs. Nandha) were its directing minds. However, the actions of Mrs. Nandha were found to be outside the scope of her authority as a director of NEL because she was acting for her own personal purposes (to spend more time with her children) in conspiring to set the fire, rather than acting in relation to the business of NEL (to run restaurants). Most of the cases in which the court found a director to be acting within his authority involved directors committing misconduct within the very nature of their role in the company. For example, see: Moore v. I. Bresler Ltd., [1944] 2 All ER 515; Canadian Dredge; Dixon v. Deacon Morgan McEwen Easson (1993), 102 D.L.R.(4th) 1 (BCCA).

The trial judge also found that Mrs. Nandha's actions, while not fraud in the classic sense, were found to be directed at the destruction of one of NEL's two restaurants. In so doing, Mrs. Nandha ceased to be a directing mind of the company: Canadian Dredge at page 712 – 713.

Lastly, the trial evidence failed to establish that Mrs. Nandha intended to benefit NEL, or that there was an actual benefit to NEL, arising from the destruction of the Taco Del Mar Restaurant. The court did not accept the Plaintiff's evidence that the Broadway Taco Del Mar was in dire financial straits given the lack of evidence on this point. The Plaintiff's reliance on NEL's financial statements alone, without an accounting expert's opinion, could not suffice to show a benefit was realized by NEL as a result of the fire. Further, Mrs. Nandha's primary motivation in destroying one of the restaurants was to find more time to spend with her children, something she believed she was unable to do while running NEL's two restaurants. Mr. Josan's evidence was the Mrs. Nandha never mentioned an intention to benefit NEL through setting the fire. In fact, Mrs. Nandha did not ever tell Mr. Josan about the existence of NEL. His Lordship held that Mrs. Nandha's conducted was motived for purely personal reasons.

Having found that Mrs. Nandha's act of conspiracy could not be attributed to NEL in this instance, the Plaintiff's breach of contract claim against NEL failed, as did the claim against Mr. Nandha.

Mr. Justice Bowden went on to consider whether an insurance covenant contained in the lease between the Plaintiff and NEL could provide immunity to NEL in the context of an intentional tort if Mrs. Nandha's actions had been attributed to NEL. While he did not need to make this obiter finding in order to dispose of the case before him, his comments are the first of their kind in Canada concerning insurance covenants in leases and intentional torts.

An insurance covenant is a provision which is commonly included in leases where one party undertakes to insure the building against loss or damage and the other undertakes to pay for the insurance. What arises from this type of provision is often referred to as "tort immunity" for the party paying for the insurance. Essentially, the insured party cannot sue the party paying for the insurance for losses which are covered by the insurance the parties agreed to obtain under the insurance covenant.

In Canada, insurance covenants have been interpreted to extend tort immunity to cases where the cause of action alleged has been negligence, vicarious liability, breaches of contract and gross negligence. However, no Canadian decision had determined whether an insurance covenant ought to apply to prevent parties from suing one another for loss or damage caused by an intentional tort. The insurance covenant in the lease read as follows:

7. LANDLORD'S COVENANTS

7.05. To insure the building to its full insurable replacement value against loss or damage by fire. The expense of such insurance shall be borne as provided in paragraphs 12.01 and 12.02 hereof. To the extent that any loss or damage to the building is covered by insurance maintained by the Landlord hereunder, the Landlord releases the Tenant from any and all liability for such loss or damage whether or not the same is caused by or contributed to by or through the negligence of the Tenant or its servants and agents.

Mr. Justice Bowden determined that insurance covenants transfer the risk of loss between parties, regardless of whether the cause of the loss is an intentional tort. This was so, at least in this case, because "[t]he insurance obligation under the covenant is concerned with the occurrence of the peril and not the cause of the peril." Had Mrs. Nandha's conduct been attributed to NEL, NEL would still have been protected from the subrogated action brought by the Plaintiff because the losses had been caused by fire and were covered by the insurance the Plaintiff agreed to obtain under s. 7.05 of the lease.

It remains to be determined whether other courts will adopt Mr. Justice Bowden's reasoning concerning insurance covenants in a context outside of these extraordinary facts. It is important to note that the insurance covenant found at s. 7.05 of the lease referred to "loss or damage by fire" and did not contain an express limitation concerning intentional torts. The impact of this decision will likely be to further restrict subrogated claims in the context of insurance covenants.

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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