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Newsletter > April  2020

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In this issue:
1. News & Upcoming Events
2. How Corporate In-House Lawyers Should be Responding to the Coronavirus Pandemic
3. Arbitration Rulings on Video Platforms for Hearings
4. “Independent Contractors” Beware
5. Responding to Breaches of Contract
6. Duty to Defend Update
7. Limitation of Liability & Exclusion Clauses

Two large architectural buildings at the waterfront for November 2019 newsletter.
1. News & Upcoming Events

  • Fernandes Hearn LLP is a proud new member of Globalaw™, a top tier international affiliation of over 100 law firms.   As a member of Globalaw™, Fernandes Hearn LLP will now have networking access to over 4500 attorneys in 85 countries which promises to enhance our transportation, trade law and business practice.
  • Five Fernandes Hearn LLP lawyers have been recognized in Doyle’s Guide 2020™ to Canada’s “Leading Transport Lawyers”: Rui Fernandes and Gordon Hearn (“Preeminent”), Kim Stoll (“Leading”) and Carole McAfee Wallace and Alan Cofman (“Recommended”).
  • The health and welfare of the Fernandes Hearn LLP team, our clients and of our community is our highest priority and foremost in our thoughts as we actively monitor and address the COVID-19 pandemic. The Firm has business continuity plans and protocols in place that allow us to operate and to continue to serve our clients. The lawyers and staff of Fernandes Hearn LLP wish you and your families good health.
  • Fernandes Hearn LLP Webinar April 22nd, 2020 – 1 PM
    RSVP info@fhllp.ca to receive Zoom invite
    Limited to 100 participants

                       Topics

  1. Supply chain status – Gordon Hearn
  2. Employment issues in the current climate – Carole McAfee Wallace and Janice Pereira
  3. Force majeure and frustration of contract – Rui Fernandes
  4. Litigation status and litigation strategies – Alan Cofman
  5. Insurance issues raised by COVID-19 – Kim Stoll
  6. COVID-19 Issues faced by companies –Oleg Roslak

 

2. How Corporate In-House Lawyers Should be Responding to the Coronavirus Pandemic (*1)

The COVID-19 pandemic has presented a unique set of challenges for Canadian “in-house” corporate lawyers.  Businesses are facing serious questions of viability as social distancing has slowed many facets of the Canadian economy.  In these circumstances, in-house lawyers have the opportunity to be problem solvers and help their businesses by providing practical, risk-based solutions in real time.  Some of the areas where in-house lawyers may presently focus include:

Monitoring and timely applying for government relief programs. The Canadian federal government along with each of the provinces has announced a myriad of government programs designed to assist businesses. Many of these programs are evolving daily and many of them, such as the announced Canadian Emergency Wage Subsidy which will cover up to 75% of employee wages for eligible employers, are significant. In-house counsel can help ensure that their businesses are aware of these programs and ensure they are eligible to participate.

Helping safeguard and enhance the remote office. Many businesses are working completely remotely. This brings with it new challenges, including ensuring all employees continue to feel secure and connected to their teams and reviewing security processes to ensure personal and client information is safeguarded. In-house lawyers can help ensure thoughtful protocols are in place that prevent significant business risk while balancing the practical need for work to continue to get done and for communications to flow. For businesses that are providing essential services and are continuing to operate at physical locations, workplace safety for employees, suppliers and customers should be top of mind of internal legal teams.

Navigating workforce issues. Many businesses, despite the promise of significant government assistance programs, have been forced to significantly reduce operations. Others have shut down altogether. This had led many to have to make difficult decisions on workforce numbers. Canadian labour and employment laws are employee-friendly and navigating workforce reductions can come with significant cost to businesses if not handled directly. In-house lawyers can help design programs that do not expose their businesses to more risk than is necessary while also recognizing the hardships that employees are facing and avoid being unnecessarily heavy-handed. Creative solutions such as work sharing arrangements and temporary furloughs (including general pay reduction) can potentially offer short term cash relief to businesses and also allow employees to take advantage of individual focused governmental programs such as the Canadian Emergency Response Benefit.

Assessing contract performance issues. In-house counsel will be called on to evaluate the risks of contractual non-performance, both from their own business’s perspective and for counterparties.  Important and other sensitive key contracts should be scrutinized for potential force majeure, Material Adverse Effect or Change provisions and other possible “outs” and associate consequences such as penalties or loss of deposits.  Many tenants will consider withholding rents for premises that they cannot effectively make use of during this period and many landlords will have to evaluate the benefit of insisting on full payment of rents in the short-term versus ensuring they have viable tenants in the long-term.  Previously reliable counterparties will suddenly present significant – though potentially temporary – risks. In many of these situations, a negotiated solution driven by lawyers taking an efficient and practical approach will lead to the best outcome.  Careful review of business interruption insurance policies and other available coverage and ensuring claims are preserved and timely submitted are also critical.

Dispute Resolution Management  Most of our courts are functioning at a very base level. While certain courts are providing for the electronic processing of court documents, only urgent matters are being addressed by telephone or by “virtual” attendance.  There are indications that non-urgent matters may soon be heard by the courts. Certain mediations and arbitrations are being conducted “virtually”.   In-house counsel will be called on to monitor access to the courts and/or to alternative dispute resolution mechanisms that may be of interest and to adapt strategies accordingly.

Insurance coverage review and policy compliance. Along with company risk management in-house counsel will be called on to identify and assess the scope of available insurance coverage(s) for COVID-19 events.  The company may have Commercial General Liability, Commercial Property and Business Interruption, Contingent Business Interruption, Event Cancellation, Professional Liability, Cyber Liability and/ or Directors & Officers Liability coverage in place. Is there coverage for a particular claim or potential claim, or are there policy exclusion issues?  Is the company compliant with relevant notice provisions and policy conditions?

Insolvency issues. In-house counsel should be called on to evaluate if the business needs to restructure its financial affairs to avoid bankruptcy, through a formal plan of arrangement under the laws applicable in case of insolvency or otherwise.

What should in-house lawyers be doing to prepare for when the workforce comes out of lockdown?

When the COVID-19 lockdown ends, it is likely that we will be coming back to a workplace that is permanently changed from the pre-pandemic world.  There will be opportunities to capitalize on:

Continuing to monitor government programs.  It is likely that Canadian government assistance programs will continue to evolve and be available for business recovery purposes beyond the immediate crisis period.  In-house lawyers can monitor for these programs and also ensure that their businesses continue to be eligible for the current subsidies and deferrals.

Evaluating the physical workplace.  As we noted, many employees have been introduced to working remotely as a result of COVID-19, often with better than expected results.  Employers are likely to re-evaluate their workspace needs and related costs.  In-house lawyers can play a role in shaping the business’s approach to physical space and in helping design more robust – and less crisis-reactive – remote work protocols.

Workforce Issues.  Most businesses will have taken temporary measures to rationalize employment expenses during the crisis through layoffs, paycuts or other means.  A return to normalcy will mean a need to evaluate which of these measures can be rolled back and which should become permanent.  In addition, many of the rationalization measures will have been taken while in crisis mode with a view to short term survival and may have consequences in the medium-term.  Paycuts and layoffs, for example, may lead to a surge in constructive dismissal claims that legal teams will be called upon to advise on.

Contractual Remedies. Less than perfect performance under many contracts will have occurred as a result of the crisis.  For example, a party may have relied upon a force majeure clause to excuse performance.  A return to normal will mean legal teams will be able to consider whether any non-performance was proper and which of their contractual relationships need waivers, amendments or resolution through the court system.  In worst cases, counterparties may no longer be solvent and recovery through collections or the insolvency process may be necessary.

Risk Management Post-Mortem. The experience of the crisis will lead businesses to re-evaluate all aspects of their risk management strategy, including insurance coverage, counterparty risk and specifically allocating for pandemic risks in some contracts.  In-house lawyers with their knowledge of the business and understanding of underlying legal risks will be uniquely situated to provide solutions.

Gordon Hearn

Endnotes

(*1) This article was jointly drafted with Fraser Hartley of Edwards, Kenny & Bray LLC (Vancouver) and Antoine Tremblay of Morency, Société d’Avocats, S.E.N.C.R.L. (Montreal). Fernandes Hearn LLP, Edwards, Kenny & Bray and Montency, Société d’Avocats, S.E.N.C.R.L. are the Canadian law firm members of Globalaw™, an international association of over 100 law firms.

3. Arbitration Rulings on Video Platforms for Hearings

In Southampton Nursing Home v. Service Employees International Union, Local 1 Canada, 2020 CanLII 26933 an arbitrator had to consider whether an arbitration hearing would continue remotely utilizing some form of electronic attendance such as “Zoom”, “Skype”, “Facebook” or other videoconferencing platforms.

After three days of hearings the parties scheduled two additional days to be held on April 21 and 22nd, 2020 in Owen Sound, Ontario. These dates fell in the midst of the on-going Covid-19 health crisis and during mandatory prohibitions on gatherings making it impossible to proceed with the hearings in person.

The Union wished to proceed with the hearings on the scheduled dates through one of the alternative means. The Employer disagreed. The Union grievance alleged that the Employer had violated the collective agreement by excluding a coordinator from its bargaining unit. The subject employee had been assigned to non-unionized members of the Employer’s managerial or administrative staff.

The arbitrator had heard evidence on November 8, 2017 with subsequent hearings on July 11 and 12, 2018. The Employer had agreed to proceed first with its evidence and, in those three hearing days, the arbitrator heard extensive opening statements from both parties as well as testimony from the Employer’s “Administrator”, Ms. Brenda Ohm, and from Ms. Pam Campbell, who was the “Co-Director of Care” coordinator.

At the conclusion of the third hearing day the Employer advised that it intended to call one more witness, and the Union indicated it would produce two witnesses who were members of the bargaining unit (both being Registered Practical Nurses), which evidence the parties anticipated would take an additional two hearing days that they requested to be held consecutively in the City of Owen Sound, and which were accordingly scheduled on consent for July 23 and 24, 2019.  The arbitrator had to cancel those two hearing dates due to personal illness and the hearing was rescheduled to April 21 and 22, 2020.

On March 17, 2020, the province of Ontario declared an emergency under the Emergency Management and Civil Protection Act, R.S.O. 1990, c. E.9 due to the outbreak of a novel coronavirus (“COVID-19”).  As the arbitrator noted in his April 14th decision, “these emergency measures, along with general prohibitions on gatherings of more than five people, mandating “social distancing” and encouraging all citizens outside of those performing essential functions to stay at home, are anticipated to continue through the scheduled hearing dates of April 21 and 22, and likely for many weeks if not months longer.”

The Employer urged the arbitrator to adjourn the proceedings. The Employer noted that it is a long-term care home in a small Ontario town with limited human resources. It stated that the Administrator, Ms. Ohm, was “the instructing client or advisor” whose presence at the continuation of the hearing was essential to the fair hearing of the dispute.   Clashing with that requirement, the Employer asserted “the Home is taking extreme measures to protect its vulnerable residents and staff”, which required the full attention of its Administrator on a daily basis “to provide leadership and where necessary a set of helping hands” over what is anticipated to be a particularly difficult period at the facility.  The Employer took the position that:  “[The Administrator] cannot imagine that she can be away for two days in a row to attend a video conference [as the] situation of the Virus in Long Term Care Homes can change daily.”

In addition, the arbitrator noted that:

The Employer also claims the Administrator’s attendance at the arbitration  hearing “is necessary if [counsel is] to be able to effectively cross-examine the two bargaining unit witnesses [the Union] advised some time ago that [it] plans to call.”  Given the expectation that the Union will “give evidence to tell a different story” than the Administrator’s and Ms. Campbell’s testimony, the Employer submits its cross-examination of the Union’s witnesses would be “handicapped” without the Administrator’s advice, who is urgently required to attend to the business of the nursing home at this critical time.

The Union argued that “arbitrations are important matters” and that the logistics of holding an arbitration through an appropriate remote technology in the present circumstances “are not so unreasonable to lead the arbitrator to adjourn the hearing”. The Union pointed out that almost two and one-half years passed since the first hearing day which the Union submitted was already an inordinate amount of time to resolve an ongoing and contentious dispute.

The Union also submitted that:

The unfortunate reality [is] that the COVID-19 pandemic is expected to persist for a considerable period of time (that some media reports suggest could be in the order of 18 to 24 months) while the Employer is continuing to operate a unionized facility where the Union submits the employees retain “their statutory and Charter-protected rights, as does the Union” to effectively pursue and safeguard their collective interests, that are not suspended by the current health crisis.

The arbitrator was referred to a prior decision, the case of Re Sunnybrook Health Sciences Centre and ONA  (SB16-06) (2017), 294 L.A.C. (4th) 183 (Ont. Arb.) (Surdykowski) in support of the Employer’s position.

In the Sunnybrook decision, which on its merits concerned a challenge to the employer’s refusal to allow a grievor to work her scheduled shifts during an influenza outbreak because she was not vaccinated against the disease, Arbitrator Surdykowski considered a request by the union to hear the testimony of a medical specialist by telephone or videoconference, in the face of the employer’s objection to proceeding in that manner.  One of the reasons for the employer’s objection was its challenge to the specialist’s credibility, said to make it unfair to permit her to testify by some electronic means.

The information before the arbitrator in the Sunnybrook decision also indicated that the specialist’s testimony was crucial or “key” to the case, but given her busy medical practice she could not attend during the day.  However, the specialist was available to give testimony in person after 4:30 p.m. at a location closer to her office that was acceptable to both the union and the employer.

In the Sunnybrook decision the arbitrator concluded that it had authority to order the hearing to proceed through some form of tele or videoconferencing, noting at paragraphs 14-14:

Although there is nothing in the Labour Relations Act, 1995 which specifically authorizes as. 48 grievance arbitrator to receive evidence by tele or videoconference, neither is there anything in the legislation which prohibits a grievance arbitrator from doing so.  The Act gives s.48 arbitrators very broad powers which in some ways are even broader than a court in civil cases. There is no expectation that the grievance arbitration process will remain rooted in the past and restricted from using available technology to advance the hearing process, so long as hearing integrity and fairness are maintained. [Emphasis added].

In the Sunnybrook decision the arbitrator decided, however, to order the hearing to proceed through some form of tele or videoconferencing. The arbitrator noted the factors to be considered include  (a) the importance of the testimony; (b) the significance of the credibility of the witness; (c) the circumstances of the witness; (d) the cost to be incurred by the witness to attend in person; (e) the practicality of the arrangements; and (f) the quality of the videoconference technology available.

The Sunnybrook arbitrator noted that:

Not only is demeanour rarely more than a minor consideration, it is dangerous to place too much weight on a factor which is not a dependable indicator of witness credibility or reliability.  Testimony by teleconference is in any event a poor and in my view an unacceptable substitute for in-person oral testimony of a key witness.  And notwithstanding the advances in videoconferencing technology, that option, through far better than the telephone, is also a poor substitute. Many if not most counsel have had the unfortunate experience of having a witness tell one story when interviewed not under oath in the relative comfort of their own home or the lawyer’s office, and then tell quite another when testifying under oath under the pressures that inevitably come to bear in the hearing room.  None of the cases seem to consider the salutary impact that testifying under oath in front of the parties and the adjudicator has on truth-telling.  The further away a witness is from the hearing room, the less likely it is that the truth will come out.

The Sunnybrook arbitrator denied the union’s request to hear the specialist’s testimony by videoconference.

In the Southampton Home decision, the arbitrator was more open to testimony by videoconferencing, noting the following:

But there is a new reality now.  Even agreeing with the foregoing analysis and result for arbitrations held in the usual course, Sunnybrook Health Sciences Centre, supra, occurred in very different factual circumstances than those suddenly confronting the parties before me, where it is simply not possible to conduct the hearing in-person, which is otherwise the norm in such cases.  Rather, in order to address a legitimate Union grievance at this particular moment and at least the foreseeable future, there must be some form of remote arbitral attendance in a manner that will maintain the hearing’s essential integrity and fairness if the resolution of workplace disputes is to continue at all while the current health crisis is ongoing.  The alternative is to defer the hearing of labour relations disputes entirely during what may be a lengthy period of time, which in my opinion is an untenable prospect.

In Southampton Home, the arbitrator noted that there existed a number of recent decisions involving video platforms. In a ruling dated March 24, 2020 by the Ontario Labour Relations Board in Point Farms Provincial Park, MNR (OLRB Case No: 2213-19-HS), concerning the underlying appeal of an Occupational Health and Safety Inspector’s Order, Vice-Chair Patrick Kelly directed the parties to hold a hearing on the merits already scheduled for April 20, 2020 by Skype videoconference.  In denying the employer’s objection to proceeding in that manner, the Board stated at para. 4 that, compared with its early experiences when Skype was in its infancy, “Times have changed.  The Board has gained more experience with Skype hearings, and has conducted full-scale hearings by video conference, including the calling of evidence.”  The Board also rejected the employer’s claim that it would be prejudiced if the Board heard testimony via Skype, where the employer had provided “no information in support of that claim.”

In another recent ruling dated March 31, 2020, Arbitrator McLean of the Ontario Grievance Settlement Board ordered the parties in AMAPCEO and PCEO (Grievor) and Ontario (Ministry of the Attorney General), GSB #2018-1346, to continue with their hearing scheduled for mid-April 2020 via Zoom technology to receive testimony from an expert witness, over the objections of the employer.  Noting at para. 8 that, “[t]here was significant contradiction in the cases about an adjudicator’s ability to assess credibility over video” and that, “[i]t may well be that this controversy stems in part from the adjudicator’s individual comfort level in doing so.” The arbitrator made the order to proceed with the hearing by videoconferencing.

On the other hand, a decision of the OLRB in in Berkim Construction Inc. (OLRB Case No: 0029-19-R), dated March 30, 2020 the Board refused to continue the hearing by tele-conference. continuing the hearing by tele-conference “would be wholly impractical and complicated given the number of volumes of materials as well as casebooks”.  And although the Board stated the “suggestion that the hearing via Skype has a certain attraction given the circumstances the community faces” (at para. 12), it was the Board’s opinion that, “the disadvantages outweigh the advantages in this particular case”, reasoning at para. 13 that where the Labourers had already presented their submissions in-person, given the complexity of the arguments and its need to refer to 24 volumes of materials, Berkim would be placed at a disadvantage “in terms of being provided a fair hearing”.

After reviewing these decisions, the Southampton Home arbitrator concluded that the Employer’s objection to continuing with the hearing by way of a videoconference utilizing Zoom or some similar technology based on credibility concerns alone must be dismissed. However, apart from that narrow determination, the arbitrator found there were other circumstances independently justifying the adjournment of the arbitration proceedings which existed outside of any consideration of the use of videoconferencing technology to fairly receive the parties’ evidence, noting:

I have also observed the attendance of the Employer’s Administrator, Ms. Ohm, whose extensive testimony over the first two hearing days and regular conferences with the Employer’s counsel exemplified her importance as the Employer’s directing mind from the beginning of these proceedings. Thus her continuing attendance at the arbitration. is reasonably necessary for the fair hearing of the Employer’s case, although realistically impossible where I find the circumstances of the current COVID-19 health crisis requires her full attention to the needs of the elderly residents at the Home as its on-site leader, at least through the next several weeks covering the expected peak period of risk.

However, the arbitrator held that “this does not mean the hearing must be deferred while the health crisis is ongoing to any degree or for an inordinate period of time.  Rather, it requires a reasonable assessment by the parties of their ability to continue the hearing at some future date after the anticipated peak in the danger to the Home’s residents has passed, utilizing videoconferencing technology as necessary where the prohibition on gatherings and social distancing continues, under my supervision as arbitrator to provide direction if the parties cannot agree.”

Rui Fernandes

4. “Independent Contractors” Beware: 9267-2245 Quebec Inc. v. M.N.R., 2020 TCC 10

In 9267-2245 Quebec Inc. v. M.N.R., 2020 TCC 10 9267-2245 Quebec Inc., 9267-2245 Quebec Inc. (“9267”) appealed a decision of the Minister of National Revenue (the “Minister”), in which the Minister determined that the 9267’s drivers were employees and that their employment was insurable under paragraph 5(1)(a) of the Employment Insurance Act, S.C. 1996, c. 23 (the “EIA”).

The facts

9267’s owner and sole shareholder, Mr. Steven Wood, was offered work by a separate company, Transport Xtra B, to deliver merchandise to the Metro grocery store chain along dedicated routes. Mr. Wood, at the time, was a sole operator and was unable to handle all of the routes. Mr. Wood placed an ad on Kijiji looking for Class I drivers, and subsequently entered into verbal agreements with three drivers who understood that they would work as independent contractors.

The drivers used 9267’s trucks and had to maintain daily logs recording their hours, mileage, the route taken, the goods pick-up and delivered, the times of the pick-ups and deliveries etc. The drivers were assigned dedicated routes and trucks. The trucks had to be picked-up from and returned to a specific parking lot designated by 9267. Although the drivers were able to work for other companies, they were unable to use 9267’s trucks to do so. The drivers did not have to pay for fuel, oil, maintenance, truck insurance, cargo insurance, or licensing. The drivers were required to take a three-day mandatory training program before they could begin working.

Metro would pay Transport Xtra B for the transportation service. Transport Xtra B would in turn pay the 9267, and 9267 would then pay the drivers. The drivers were paid the sum of $1,100 per week based upon a five-day weekly cycle plus $20 per hour for any waiting time. The drivers did not have much negotiating power. They could refuse work, but, in reality, this was rarely done.

The Law

Subsection 5(1)(a) of the EIA reads as follows: Subject to subsection (2), “insurable employment” is employment in Canada by one or more employers, under any express or implied contract of service or apprenticeship, written or oral, whether the earnings of the employed person are received from the employer or some other person and whether the earnings are calculated by time or by the piece, or partly by time and partly by piece, or otherwise.

If the drivers had been bound by a contract of service with 9267, they would be employees who held insurable employment. If the drivers were independent contractors who worked under a contract of enterprise or for services, then they would not hold insurable employment within the meaning of this subsection of the EIA.

Under the Civil Code of Quebec, CQLR c CCQ-1991, there are three elements required for a contract of employment to exist: (1) the performance of work, (2) remuneration and (3) a relationship of subordination. The intention of the parties is also an important factor to be considered; however, the behaviour of the parties in performing the contract must concretely reflect this mutual intention.

The Anglo-Canadian common law has developed tests or criteria for analyzing the relationship between parties. These common law tests or criteria can shed light on the character of a contract, and can be helpful in determining whether the legal subornation requirement under Quebec civil law for a contract of employment has been met. The following have been included in a non-exhaustive list of common-law criteria: (1) control, (2) ownership of tools, (3) chance of profit and risk of loss, and (4) integration of the worker into the business.

The Decision and Reasons

Deputy Justice Masse of the Tax Court of Canada dismissed the appeal and held that the drivers were bound to 9267 by a contract of employment and therefore they held insurable employment within the meaning of subsection 5(1) of the EIA.

The Court determined that the intention of the parties did not reflect the reality of the relationship. The drivers were subordinate to and under control of 9267. The drivers did not have discretion in the exercise of their duties. They had specific routes, paperwork, mandatory training, set duties, priorities, and instructions in performing their work. The drivers did not have to provide any tools or equipment. 9267 owned and controlled the use of the trucks. The drivers assumed no risk for any losses of 9267 and had no opportunity to share in any profits. 9267 could not conduct its business without the drivers and therefore they were fully integrated into the business.

Andrea Fernandes

5. Responding to Breaches of Contract

Unfortunately, a myriad of contractual disputes is now arising as a result of COVID-19’s disruption to the economy.

Sometimes, the party in breach may be able to escape the ordinary repercussions. For example, in some cases, the contract will be found to be “frustrated” and unable to be performed for unforeseen reasons. For example, if a clown was hired in early March to perform at a birthday party in Ottawa this week, then the party would have to be cancelled because of “physical distancing” measures and a prohibition on public gatherings, which are now applicable in April. In that case, the clown would have no obligation to perform and the host would have no obligation to pay her. It would be as though the contract was never made.

Subject to any legislation that may be passed as a result of the emergency, the innocent party will be entitled to sue the party in breach, either to complete the contract (called “specific performance”) or to pay money damages. Of course, the usual course is to sue for the damages. In contract, that means seeking an order for the payment of money sufficient to put the plaintiff in the same position as if the contract had been performed. (In tort, the measure of damages is an amount of money sufficient to put the plaintiff back in same position as if the unlawful interference not occurred.)

However, would-be plaintiffs should be mindful that they cannot simply sit on their hands, allowing damages to accrue, in the expectation that courts will assist them when the COVID-19 crisis is over. Public policy suggests that this would not be economically sensible. Thus, the law had developed to address it.

Although there is no positive duty on a plaintiff to work to reduce her losses per se, all common law courts will limit damages awards where the defendant can show that mitigation was possible, but the plaintiff failed to take reasonable efforts. Recovery can be reduced as far as zero in appropriate cases.

The Honourable Lord Chancellor, Viscount Haldane, of the House of Lords (UK), famously explained the quantification of damages over one hundred years ago, in British Westinghouse Electric v. Underground Electric Railways: “The first [principle] is that, as far as possible, he who has proved a breach of a bargain to supply what he contracted to get is to be placed, as far as money can do it, in as good a situation as if the contract had been performed. The fundamental basis is thus compensation for pecuniary loss naturally flowing from the breach; but this first principle is qualified by a second, which imposes on a plaintiff the duty of taking all reasonable steps to mitigate the loss consequent on the breach, and debars him from claiming in respect of any part of the damage which is due to his neglect to take such steps”(*1).

The Honourable Mr. Justice Décary of the Federal Court of Appeal put it more succinctly in Redpath Industries Ltd. v. The Cisco: “Valuation of damages is a balancing process. The Court must make sure that the victim is compensated for his loss, but it must at the same time make sure that the wrongdoer is not abused”(*2).

Reasonableness will be considered with regard to the aggrieved party’s circumstances. For example, if she does not have the financial wherewithal to select the best mitigation route, a court may relieve her of the negative consequences of failing to follow it. Similarly, reasonableness will allow the plaintiff to recover its reasonable expenses incurred in mitigating the damages.

Thus, if you are faced with a breach of contract as a result of the present circumstances, you should address it proactively. Conversely, if you are likely have to breach a contract, you may be best served by notifying the opposite party and requesting that they take all reasonable steps to mitigate the loss. After all, they may be best placed to limit the loss. In either event, legal advice may be necessary.

Alan S. Cofman

Endnotes
*1) [1912] AC 673 (UK HL), online: .
(*2) 1993 CanLII 3025 (FCA), online: < https://www.canlii.org/en/ca/fca/doc/1993/1993canlii3025/1993canlii3025.html >. His Honour also cited, inter alia, S.M. Waddams, The Law of Contracts, 3d ed. (Toronto: Canada Law Book, 1993), at p. 514, for the principle that “a plaintiff can only recover loss which he could not have reasonably avoided”.

6. Duty to Defend Update

When a Statement of Claim is served, a party named and receiving it should provide the document to their broker for immediate handling and provision to their insurer. The insurer will consider the allegations along with the policy wordings and will review a variety of aspects to help determine whether there is coverage and a duty to defend the insured. Much of the time, the task is relatively straightforward; however, if the plaintiff’s lawyer’s drafting is imprecise or lax, it may not be clear whether coverage or a duty to defend is triggered. From the plaintiff’s side, the Statement of Claim is drafted to ensure that the target defendant’s insurance coverage will respond, if available, and lawyers paid to represent them. The insured defendant benefits from such drafting clarity to engage their own policy. For the insurer, it must determine in the face of lax draftsmanship whether it has obligation to provide coverage and has a duty to defend.

The insurer will often make such decisions with help of “coverage counsel”, who are their appointed lawyers who provide coverage advice and opinions.

The general rule is that the content of the Statement of Claim (or similar pleading such as an Application) will determine whether there is a duty to defend.  The leading case is a decision of the Supreme Court of Canada in Nichols v. American Home Assurance Co., [1990] 1 S.C. 801 (“Nichols”).

In Nichols, the main claim involved allegations of fraud against the defendant insured. The liability insurer denied both an obligation to defend and indemnity coverage, which coverage excluded fraudulent acts. The Supreme Court of Canada held, at page 812, “the duty to defend should, unless the contract of insurance indicates otherwise, be confined to the defence of claims which may be argued to fall under the policy. That said, the widest latitude should be given to the allegations in the pleadings in determining whether they raise a claim within the policy.”

Since then the Supreme Court of Canada considered these principles in. Progressive Homes Ltd. v Lombard General Insurance Co. of Canada, 2010 SCC 33. In this case, the Court found, at para. 19, “An insurer is required to defend a claim where the facts alleged in the pleadings, if proven to be true, would require the insurer to indemnify the insured for the claim” and then, at para. 51, “Because the threshold for the duty to defend is only the possibility of coverage, (the insurer) must show that an exclusion clearly and unambiguously excludes coverage.”

The most recent high-level treatment of this issue in Ontario (*1) was by the Ontario Court of Appeal in Parkhill Excavating Ltd. v. Royal & SunAlliance Insurance Co. of Canada, 2016 ONCA 832 (“Parkhill”), which involved a construction claim. At para. 22, Nichols is cited for the principle that “the pleadings shall be given the widest latitude to determine whether the mere possibility of a claim within the policy exists.” In Parkhill, the Court of Appeal overturned the Trial Judge’s decision, at para. 29-30, holding that the Trial Judge, once Her Honour had determined that there was a “mere possibility” that consequential damages were being claimed despite allegedly unclear drafting in the Statement of Claim and could not be excluded under the associated policy, she should have found that a defence was owed and ordered the insurer to provide such defence.

Recently, in Ashcroft Homes Inc. v. Aviva Insurance Company of Canada et al., 2019 ONSC 4634, the Ontario Superior Court provided a handy summary at para. 11 of the general principles from Nichols:

(a) An insurer is required to defend a claim where the facts alleged in the pleadings, if proven to be true, would require the insurer to indemnify the insured for the claim;

(b) The onus is on the insured to establish that the pleadings fall within the initial grant of coverage;

(c) The pleadings govern the duty to defend. However, in examining the pleadings, the parties are not bound by the labels selected by the plaintiff. It is the true nature or substance of the claim that is determinative

(d) It is irrelevant whether the allegations in the pleadings can be proven in evidence. That is to say, the duty to defend is not dependent on the insured actually being liable and the insurer actually being required to indemnify. What is required is the mere possibility that a claim falls within the insurance policy;

(e) Where it is clear that the claim falls outside the policy, either because it does not come within the initial grant of coverage or because it is excluded by an exclusion clause, there will be no duty to defend.

Finally

Typically, plaintiffs’ lawyers will sometimes fail to include allegations in the Statement of Claim that may potentially deny a defence where one would otherwise properly be provided. Conversely, sometimes wording is added, though not appropriate, to attempt to fit the allegations into any possible defending policy. As a result, the allegations must be carefully reviewed by the insurer, coverage counsel and also the insured, if there are any issues raised in this regard. The insured may receive a Reservation of Rights letter or be asked to sign a Non-Waiver as part of the initial “without prejudice” investigation to determine whether coverage is available under the policy. The insured is not expected to wait forever, however, and the insurer must address this issue in a timely manner. In the interim, the policy insured should consider obtaining an opinion from a lawyer well versed in coverage matters to determine their legal position in this regard.

Of course, a poorly drafted Statement of Claim can be amended to better identify allegations and meet the “mere possibility” of coverage test, subject to any limitation period argument. Where this happens, the review by insurers and response to the insured must be revisited.

It is also important to be aware that the courts may begin leaning toward permitting some review of evidence outside of imprecise pleadings and associated policy and which may support the “mere possibility” test. Certainly, in the US, there are cases that provide for more consideration of extrinsic evidence than in Canada thus far. US case law, while not binding, may still be considered and possibly be persuasive, although the Supreme Court of Canada may not revisit this area any time soon. It may be that an insurer should still be careful to consider all information provided in support of its insured’s claim for a defence and indemnity under a policy as part of determining the “true nature or substance of the claim” as identified in the Statement of Claim.

Kim E. Stoll
Follow Kim on LinkedIn and at url: linkedin.com/in/kim-stoll-transportationlaw

Endnotes
(*1) Also see recent confirmation of the Nichols principles by the Nova Scotia Court of Appeal in Trisura Guarantee Insurance Co. of Canada v Duncan 2019 NSCA 54.

7. Limitation of Liability: Exclusion clauses work … but will give you only what you ask for

Contracts serve many purposes in the context of a business relationship. One important function is to protect one or both parties in case some unforeseen conduct or event causes outsize damages that is beyond the means of a party to make right. A common example among many is to expressly exclude liability from harm arising from unintended use of a product. In recent years, the courts have made it very clear that even very broad limitation of liability clauses will be enforced, even where the result might seem very unfair.

These clauses are quite common, and therefore should never be overlooked where you believe that you might attract serious liability from a product that malfunctions unexpectedly, or is used incorrectly, or as a result of an honest mistake being made in the performance of some service. A very recent decision from Ontario’s Court of Appeal, Montrose Hammond & Co. v. CIBC World Markets Inc. (*1), usefully helps to show us both that, on the one hand, the courts will enforce broadly worded exclusion clauses entered into between sophisticated parties, and, on the other, that these clauses still must be worded very carefully if you want effective protection from unexpected and outsize harms.

The facts

The facts in Montrose are fairly straightforward. Montrose Hammond was a start-up hedge fund. CIBC agreed to provide Montrose Hammond with access to its electronic trading system, as well as occasionally assisting Montrose Hammond in executing trades through its system. CIBC used various forms of software in this system. Part of the electronic trading system ran on software that was proprietary to CIBC. Some components of the system, however, were sourced by CIBC from third party suppliers.

One such third party component was supplied by a company called Belzberg. CIBC had exclusively worked with Montrose Hammond when the latter used software provided by Belzburg up until September 2008, after which time CIBC told Montrose Hammond to deal with Belzburg directly. In March 2009 Montrose Hammond told both CIBC and Belzberg about an issue with its software on one of its computers. In an effort to repair the issue, a Belzberg employee, acting without Montrose Hammond’s permission or knowledge, shut down a component of its software while Montrose Hammond was performing a trade using CIBC’s own software. Disabling that component caused Montrose Hammond to perform several erroneous trades on which it lost over a million dollars. CIBC sought to rely on a limitation of liability clause in its contract with Montrose Hammond. Montrose Hammond sued CIBC for the loss, and was successful at trial.

The clause on which CIBC wanted to rely was worded as follows:

Liability – The Client understands and acknowledges that electronic securities trading is inherently subject to risks and uncertainties beyond CIBC WM’s control that may lead to trading losses on the part of the Client and/or its customers. These risks include, without limitation, temporary or permanent breakdown or loss of telecommunication connections; delayed, inaccurate or incomplete market data; sabotage; hacker attacks; and malfunction of hardware and equipment not located on CIBC WM’s premises, operating system and application software not owned by CIBC WM. Accordingly, neither CIBC WM nor any of its affiliates … shall be liable to the Client or any other person asserting any claim on behalf of or in right of the Client for or in respect of any matter, directly or indirectly, arising out of or based upon this Agreement including in relation to the Systems Interconnect and the Trading System (*2). [Emphasis Added]
What was found at trial, and recently upheld on appeal, was that this clause did not exclude CIBC’s liability for the error committed by the Belzberg employee.

CIBC argued that language near the end of the clause gave it blanket protection from any liability in any way arising out of the agreement. In ruling against CIBC, the trial judge reasoned that he had to give meaning to all parts of the clause, and not just the sweeping exclusionary language at the end. Specifically, His Honour found that the problem that caused the loss – the work of the Belzberg employee – was not “beyond CIBC WM’s control,” and therefore was something for which CIBC could be held responsible.

The Court of Appeal in Montrose agreed. It strongly affirmed the principle that a properly worded limitation of liability clause was enforceable to exclude liability like the event in question. However, it nevertheless affirmed the trial judge’s conclusion that the event in question was not covered by it, saying that His Honour had properly “focused on the wording of article 6.1 and the objective intentions of these parties, as he was required to do” (*3). An “apparent or ostensible agent” of CIBC deliberately turning off a critical software component was, according to both the trial judge and the Court of Appeal, clearly something “within CIBC’s control,” and therefore not excluded by the clause.

Conclusion

Limitation of liability clauses are a powerful contractual tool because of their ability to protect a party from potentially catastrophic losses. However, just because they are so powerful, the general approach of the courts has been to review them extremely carefully and to apply the wording strictly. In this case, the lesson learned was that, if you want a general exclusion of liability, then say that, and only that. Here the Court applied a general rule of contract interpretation; namely, to give every word meaning and effect. The Court concluded that the only way that the clause could be read as granting CIBC the form of blanket immunity for which it argued was by ignoring the first half of the clause. The takeaway here is that exclusion clauses do work, but they must be very carefully worded to have the desired effect. In contracts, as in many things, sometimes it is a mistake to say too much.

Oleg M. Roslak

Endnotes
(*1) 2020 ONCA 219 [Montrose].
(*2) Montrose Hammond & Co. v. CIBC World Markets Inc. 2019 ONSC 2870 at para. 77
(*3) Montrose at para. 12.

 

 

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