Canada: You Have An Indemnity Clause, But Are You Still Exposed?

Indemnification in law is a means by which one party agrees to shoulder the monetary costs, either directly or by reimbursement, for losses of another party. In commercial agreements, indemnity clauses are tools parties will frequently utilize to overcome potential obstacles or risks that prevent two or more of them from agreeing to proceed with another more substantive contract or undertaking.

Given the consequences that can flow from an indemnity clause, it is of paramount importance that parties clearly understand, at the front end, what the indemnity clause covers, what each party’s intentions are and the scope of the harm, loss or potential liability to be addressed. It is equally important to take appropriate steps in the language used in drafting the clause to capture those specific intentions.

Weyerhaeuser, a recent Ontario Court of Appeal decision that will be appealed by the Supreme Court, illustrates the difficult and serious implications that an indemnification clause can create not only for contracting parties but for successors and assigns. 1

The Facts

In 1960, a pulp and paper company released mercury into two Ontario rivers and damaged First Nation’s land downstream. Subsequently, the First Nations brought a claim against that company. After the action was initiated, purchasers became interested in acquiring the pulp and paper company, however, they were reluctant to proceed with the acquisition while the claim against the company was outstanding. Since the purchase was vital to the local economy, the Province negotiated a deal to encourage the purchase. In that deal, the Province promised to limit environmental damages that arose from the breach if the purchaser followed through with the purchase. The deal was accepted and the purchasers acquired the pulp and paper company.

In 1985, the First Nations’ claim was settled. As part of the settlement, the Province agreed to grant the purchasers an indemnity for liability arising from the discharge of the mercury and other pollutants that flowed downstream. The indemnity clause in the settlement contract promised to protect the purchasers from “any claim” arising from the original damage. With an understanding that they would be indemnified by the Province for any potential claims, the purchasers agreed to settle ongoing litigation with the First Nations Band.

After the First Nation’s claim was settled, the purchasers subsequently amalgamated into several different successor companies until they eventually became Resolute FP Canada Inc. (“Resolute”).

The Summary Judgment Application

In 2011, the Ontario Ministry of the Environment issued a Director’s Order requiring Resolute to perform remedial work out of concern mercury from the mill would continue to leak into the rivers. Resolute brought a summary judgement application to dismiss the regulatory order, arguing that the Province was automatically liable based on the indemnification provided in the settlement arrangement. Conversely, the Province held that the indemnity only covered third party claims (those advanced against the successor company by strangers to the indemnity) and was not meant to cover first party claims (a claim or demand of payment advanced by the Province against the successor company). In other words, the indemnity clause was not meant to cover regulatory costs to prevent further environmental damage imposed on the successor by the Province itself.

The motion judge ruled that Resolute should be fully protected by the indemnity. He was satisfied from the plain and ordinary meaning of the words used in the indemnity that the intention of the parties was that the Province would indemnify future owners of the disposal site for any environmental liability, including complying with a remediation order, that might arise.

The Split Decision in the Court of Appeal

On appeal, the majority on the Ontario Court of Appeal found the motion judge did not commit a palpable and overriding error in his interpretation of the scope of the indemnity clause. Accordingly, the appeal was dismissed.

Justice Laskin dissented from the majority. He argued that the motion judge’s interpretation was incorrect and the Province’s appeal should be granted. Justice Laskin relied on the principle in Sattva that the Court needs to not only assess the words that the parties used but the context in which they were used. 2 Taking the commercial circumstances into account, he held that the phrase “all claims” really only covered third party claims. The indemnity referred to “damages”, “court” and “settlement” which were not synonymous with costs of regulatory compliance and therefore outside of the indemnity’s scope. Additionally, when the parties negotiated the indemnity, they had negotiated the contract with the 1985 “Spills Bill” in mind. The Spills Bill provided a statutory right of action for those harmed by spills of pollutants. This bill was proclaimed two weeks before the indemnity was entered into and it represented an objective fact that the parties would have known, or reasonably ought to have been known, when the indemnity was entered into. Further, the settlement arrangement contained other indemnity clauses that were boilerplate in contracts meant to exclusively provide third party indemnities. Essentially, Justice Laskin held that although a plain meaning interpretation of the contract suggests that third party and first party claims were indemnified, the commercial context suggest the parties only intended to indemnify third party claims.

The Implications

The case presents a common conundrum; how much weight should a court give to context when interpreting contract clauses? In this case, the Court of Appeal was satisfied that a clear indemnity clause is meant to cover both third party and first party claims. Conversely, Justice Laskin states that indemnity clauses typically cover only third party claims and the commercial context in this case bears that out. Justice Laskin also stated that indemnity clauses were traditionally used to allocate risk of third party claims as opposed to first party claims and if a party wants to allocate risk for first party claims, they will typically use other means such as a exculpatory clause.

The split in the Court of Appeal means that there are likely a variety of pre-Weyerhaeuser contracts that could be interpreted differently from their original intentions. Many parties that intended on limiting their indemnification to third party claims could arguably be liable for first party and third party claims under the Weyerhaeuser ruling. Parties bringing forward a first party claim ought to review any indemnity clause they may have with the party they are bringing the claim against. This is especially true if the first Party is government.

Onward to the SCC

All parties have appealed this decision and leave has been granted by the Supreme Court. The appeal, is now currently waiting to be heard as Resolute FP Canada Inc. v Ontario (Attorney General) 2018.3

The result of the appeal will no doubt be of great interest. Three of four lower court justices found that the indemnity clause referencing “any claims” was sufficiently clear and unambiguous to cover both first party and third party claims. Nonetheless, the Supreme Court must adhere to its direction that contractual clauses must be considered in their commercial context. If the court adopts Justice Laskin’s compelling analysis, the decision will be consistent with the High Court in Australia, who held that indemnity clauses should not be interpreted to cover first party claims unless explicitly stated so. 4

McLennan Ross is actively engaged in commercial transactions and disputes where indemnity and exclusionary clauses are routinely a part of any case analysis and strategic decision making. If you require assistance or wish to know more about the utilization of these clauses please contact Christopher Green or Peter J. Major, Q.C. or any other member of the firm’s commercial litigation group.

Footnote

1 Weyerhaeuser Company Limited v. Ontario (Attorney General), 2017 ONCA 1007 (“Weyerhauser”)

2 Creston Moly Corp. v. Sattva Capital Corp., 2014 SCC 53 (“Sattva”)

3 Resolute FP Canada Inc. v. Ontario (Attorney General) 2018 CarswellOnt 17522, 2018 CarswellOnt 17523

4 Andar Transport Pty Ltd v. Brambles Ltd. [2004] HCA 28 (H.C.A.) at para 67-68

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

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

Mondaq.com (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 www.mondaq.com

To Use Mondaq.com 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.

Disclaimer

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.

General

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