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.