Monday, 13 May 2019

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

By Christopher Green and Peter J. Major, Q.C.

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.

[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

Tuesday, 12 February 2019

In Summary: It’s Still a Balance of Probabilities

By: Allie Laurent

On February 6, 2019, the Alberta Court of Appeal released the Weir-Jones Technical Services Incorporated v. Purolator Courier Ltd. 2019 ABCA 49 (“Weir-Jones”) decision. This decision was the result of a panel of 5 judges convened to hear two summary judgment appeals, Weir-Jones and Brookfield Residential (Alberta) LP v. Imperial Oil Limited, 2019 ABCA 35. It was anticipated that this decision would provide clarification on the test for summary judgment in Alberta in light of numerous contradictory cases regarding the appropriate burden of proof.

The Court of Appeal upheld the Court of Queen’s Bench decision wherein the Chambers Judge granted summary dismissal to the Defendant Purolator Courier Ltd., on the basis that the Plaintiff, Weir-Jones Technical Services Incorporated’s claim was statute barred from bringing their claim as a result of the Limitations Act.

The Majority Decision

The four member majority of the panel acknowledged that since the Supreme Court of Canada decision in Hryniak v. Mauldin, 2014 SCC 7 (“Hryniak”), the test for summary judgment in Alberta has been unclear. The majority cited the Can v. Calgary Police Service, 2014 ABCA 322 (“Can”) and Stefanyk v. Sobeys Capital Incorporated, 2018 ABCA 125 (“Stefanyk”) decisions as illustrative of this riff discussed at paragraph 12:
In Can, at paragraph 20, the Court of Appeal described the test for summary judgment as when “A party’s position is without merit if the facts and law make the moving party’s position unassailable…A party’s position is unassailable if it is so compelling that the likelihood of success is very high.”
In Stefanyk, at paragraph 17, the Court of Appeal stated that, “the issue is not whether the appellant’s position is “unassailable”… The ultimate issue is whether the appellant has proven on a balance of probabilities that it is not liable for the Plaintiff’s injuries.”
Decisions following the analysis in Can held on to the pre-Hryniak analysis that required a higher standard of proof. The majority held that this approach is inconsistent with Hryniak because requiring a claim to be irrefutable defeats the whole purpose of the “culture shift” that was called for.

The majority clarified that the only standard of proof in civil proceedings is “on a balance of probabilities.” The majority noted that the real question is not whether on the facts alone the “standard of proof” has been met, but rather if the factual basis of the claim is proven on a balance of probabilities, whether the presiding judge is satisfied that there is no genuine issue requiring a trial. In reaching that decision the judge must be guided by the principle of fairness, and consider whether it is fair to conclusively adjudicate the matter summarily. With the principle of fairness being considered at all stages; fact-finding, making a determination on a the balance of probabilities, deciding if there is a genuine issue requiring a trial, and if overall summary judgment is a suitable means of achieving a just result.

Going forward when determining whether summary judgment is appropriate, it will be important to consider the following:

  1. Based on the record is it possible to fairly resolve the dispute summarily, or are there any uncertainties that reveal a genuine issue requiring a trial?
  2. Can the applicant show on a balance of probabilities that there is no genuine issue requiring a trial?
  3. Can the respondent demonstrate either that there is a genuine issue requiring a trial or that there is a positive defence, and therefore summary disposition should not be available?
  4. Whether based on the record, the presiding judge can confidently, properly and fairly resolve the dispute.
Applying this analysis to the appeal at hand the majority held that the evidence demonstrated Weir-Jones knew more than two years before commencing the proceeding that its injuries warranted a bringing an action. Thus, the chambers judge had not erred in concluding that Weir-Jones failed to prove any reason why their claim was not statute barred, and the decision to dismiss the claim was upheld.

The Minority Decision

The decision of the Honourable Justice Wakeling concurs in the result, but dissent in the analysis. His reasons contain a lengthy review of the history of summary judgment both in Canada and abroad, and hold that Hyrniak has not changed the interpretation of Rule 7.3 in Alberta. He maintains that summary judgment should only be available if the disparity between the parties “is so marked that the ultimate outcome of the dispute is obvious.” This analysis runs contrary to the majority’s holding that summary judgment is available if having proven the facts on a balance of probabilities the presiding judge can confidently decide the matter. As his reasons for upholding the Appeal were specifically rejected by the Majority, the analysis of Justice Wakeling is of limited precedential use.

Looking Forward

This decision is important because the Court of Appeal has clarified the confusion which has existed for a number of years regarding the standard of proof. The Court of Appeal has made it clear that the balance of  probabilities is the standard of proof on summary judgment. However, it should be noted, this does not mean summary judgment will always be granted if an Applicant proves the facts on a balance of probabilities. Summary judgment applications also require the Court to determine whether on the record and in light of the applicable law, that it is fair to decide the matter summarily. 

Despite this additional clarity regarding the standard of proof, there remain other contentious issues with the summary judgment procedure which have been raised in recent cases, but were not specifically considered by the Court in Weir-Jones, including a jurisdictional concern on the fact finding powers of a Master hearing the application in its first instance.  Therefore, it remains to be seen whether the Court of Appeal will be faced with additional challenges on the summary judgment procedure going forward.

For more information about this decision or its implications please contact Allie Laurent, Kunal Nand, or Peter J. Major,Q.C.. Further, due to the broad application of this decision to all types of summary applications, any member of the McLennan Ross LLP Commercial Litigation, Insurance or Labour and Employment groups would be well positioned to provide advice and assistance.

Monday, 4 February 2019

Ontario Court of Appeal Confirms Court May Render an Arbitration Clause Invalid in Order to Protect the Weaker Contracting Party

By: Marlena McMurtry

Canadian Courts have consistently held that arbitration clauses are to be given a large and liberal interpretation. Underpinning this interpretive approach is the policy of encouraging arbitration and minimizing judicial interference in the arbitration process. This policy is embodied in Alberta’s Arbitration Act,[1] which directs the Court to not intervene in the arbitration process[2] and establishes a presumptive stay of Court proceedings in favour of arbitration.[3]   

Despite the strong policy in favour of arbitration, Courts may still set aside an arbitration clause in the interests of fairness and justice via the doctrine of unconscionability, as illustrated in the recent Ontario Court of Appeal decision of Heller v Uber Technologies Inc.[4] There, the Court held that a universal arbitration clause that imposed significant barriers on the weaker contracting party was unconscionable and therefore invalid.  

The Heller case arose in the context of a proposed class action brought by the appellant UberEATS driver (the “Appellant”) on behalf of individuals who had provided food delivery services and/or personal transportation services through the Uber Apps (the “Drivers”). In his proposed class action, the Appellant sought a declaration that the Drivers were employees of Uber and were therefore entitled to the minimum benefits and protections provided for under the Employment Standards Act (the “ESA”).[5] The Appellant further sought declarations that Uber violated provisions of the ESA and that the arbitration provisions in the service agreements entered into between Uber and the Drivers were void and unenforceable. Finally, the Appellant sought damages of $400 million. 

The Appellant entered into a Driver services agreement and an UberEATS services agreement with Uber (the “Agreements”). The Agreements contained an identical arbitration clause which provided that arbitration must be held in Amsterdam, under the law of the Netherlands and must be conducted in accordance with International Chamber of Commerce rules (the “Arbitration Clause”).

Uber brought an application to stay the Appellant’s action in favour of arbitration. In granting Uber’s stay application, the motion Judge held that Courts must enforce arbitration agreements freely entered into, even in standard form contracts. There were two issues on appeal: (1) whether the Arbitration Clause amounted to an illegal contracting out of the ESA, and (2) whether the Arbitration Clause was unconscionable and thus invalid on that separate basis.

The Court first reviewed section 7(1) of the Arbitration Act,[6] which provides that if a party to an arbitration agreement commences a proceeding in respect of a matter subject to arbitration under an agreement, the Court shall stay the proceeding, unless one of the exceptions in s. 7(2) applies, including where the arbitration agreement is invalid. On the first issue, the Appellant argued that the Arbitration Clause was invalid as it amounted to a contracting out of the ESA, which is prohibited under the ESA.

To determine whether one of the exceptions in s. 7(2) of the Arbitration Act applied, the Court found that, like other preliminary challenges to the Court’s jurisdiction, it had to start with the presumption that the Appellant could prove what he had pleaded, namely that he was an employee of Uber. The Court concluded that the Arbitration Clause was invalid because, based on the presumption that the Drivers are employees, the Arbitration Clause was a contracting out of the provisions of the ESA. One reason was that the Arbitration Clause eliminated the ability to make a complaint to the Ministry of Labour, thereby depriving the Drivers of the right to have an Employment Standards Officer investigate their complaints.

Turning to the second issue, the Court said that regardless of its first conclusion, it found the Arbitration Clause to be invalid on the basis of unconscionability, which also brought the Arbitration Clause within the invalidity exception in s. 7(2) of the Arbitration Act.

The evidence before the Court was that the cost for a Driver to participate in the mediation-arbitration process in the Netherlands pursuant to the Arbitration Clause was $14,5000 US, which did not include the costs of travel, accommodation and counsel to participate in the arbitration. The Court juxtaposed those costs with the Appellant’s approximate earnings of $400-$600 per week based on 40 to 50 hours of work delivering food for UberEATS and his claim for minimum wage, overtime and vacation pay.

The Court took issue with the motion Judge’s finding that disputes between the Drivers and Uber could be dealt with by dispute resolution mechanisms available in Ontario and that only a substantial dispute would require arbitration in the Netherlands. The Court found that there was no dispute resolution mechanism in Ontario. The only other avenues available to the Drivers were in the Philippines or in Chicago, were completely controlled by Uber and could not be characterized as independent grievance procedures. The reason only a substantial dispute would go to arbitration was a direct consequence of the financial barriers that discouraged the Drivers from engaging in arbitration. 

The Court observed that what made the Arbitration Clause clearly unreasonable was that a Driver with a claim of no more than a few hundred dollars would have to undertake arbitration in Amsterdam, a place unconnected to where the Drivers lived and performed their duties. 

The Court addressed the proper test to be applied in determining whether a contractual provision is unconscionable, and said that the Ontario approach is to apply the following four-part test:
  1. a grossly unfair and improvident transaction;
  2. a victim’s lack of independent legal advice or other suitable advice;[7]
  3. an overwhelming imbalance in bargaining power caused by the victim’s ignorance of business, illiteracy, ignorance of the language of the bargain, blindness, deafness, illness, senility, or similar disability; and
  4. the other party’s knowingly taking advantage of this vulnerability. 

The Court then contrasted the Ontario approach with the test for unconscionability recently applied by Justice Abella in her concurring reasons in Douez v Facebook, Inc[8] that requires only 2 elements: inequality of bargaining power and unfairness. In that case, the Supreme Court of Canada found that Facebook’s forum selection clause in a standard form contract was unenforceable due to the gross inequality of bargaining power between Facebook and its users. The majority did not address the proper elements of the test for unconscionability, however.

In Heller, the Court found that it was not necessary to decide the proper elements to be applied in determining unconscionability in Ontario because, under either statement of the test, the Arbitration Clause was unconscionable. In arriving at this conclusion, the Court weighed the following factors:
·         The Arbitration Clause represented a substantially improvident or unfair bargain. It required an individual with a small claim to incur significant up-front costs. Uber was better positioned to incur the costs associated with the arbitration procedure that it unilaterally chose and imposed on the Drivers.
·         There was no evidence that the Drivers had any legal or other advice prior to entering into the Agreements or had the ability to negotiate any terms. In that sense, the Drivers were like consumers such as the users of Facebook in Douez, since they were at the mercy of terms, conditions and rates set by Uber.
·         The Arbitration Clause required that the rights of the Drivers be determined in accordance with the laws of the Netherlands, but the Drivers were not provided with any information as to what those laws were.
·         There was a significant inequality of bargaining power between the Appellant and Uber.
·         Uber chose the Arbitration Clause to favour itself and thus take advantage of its drivers, who were clearly vulnerable to the market strength of Uber.
·         The Arbitration Clause operated to defeat the very claims it purported to resolve.

Application to Alberta

In line with the Ontario approach, the Alberta Courts favour the four-part test for unconscionability.[9] The Heller case provides useful guidance on the factors that a Court might consider in deciding whether an arbitration clause should be rendered unconscionable.

[1] Geoff R Hall, Canadian Contractual Interpretation Law, 3rd ed (Toronto: LexisNexis Canada Inc, 2016) at 269-70.
[2] Arbitration Act, RSA 2000, c A-43, s 6.
[3] Arbitration Act, RSA 2000, c A-43, s 7.
[4] Heller v Uber Technologies Inc, 2019 ONCA 1 [Heller].
[5] Employment Standards Act, 2000, SO 2000 C 41.
[6] Arbitration Act, 1991, SO 1991, c 17 [Arbitration Act].
[7]  What constitutes “other suitable advice” is not clear from the case law. It does not include advice from an assistant at a law firm informing an individual that the firm does not practice in a certain area of law (Swampillai v Royal & Sun Alliance Assurance Company of Canada, 2018 ONSC 4023) but it does include advice from a lawyer friend in the absence of a retainer (Grixti v Kingston (City), 2010 ONSC 5161).
[8] Douez v Facebook, Inc, 2017 SCC 33.
[9] See Cicalese v Saipem Canada Inc, 2018 ABQB 835 at para 171, citing Cain v Clarica Life Insurance Co, 2005 ABCA 437 at para 32.

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

By Christopher Green and Peter J. Major, Q.C. Indemnification in law is a means by which one party agrees to shoulder the monetary cos...