Bank Wins Conspiracy Case

    The Court of Appeal of Alberta

In HSBC Bank Canada v. Fuss the Court of Appeal of Alberta upheld a conspiracy judgment against corporate directors.  The defendants had stripped a company of its assets and diverted its business to a new company they controlled in order to prevent the secured creditor from recovering on a loan.

Factual Background

Electronics Wholesale had an operating line of credit with HSBC Bank of Canada.  The line was secured by a General Security Agreement ("GSA") which provided that any money collected by the borrower was subject to a trust in favour of HSBC.

Cameron Kendrick was the sole director and shareholder of Electronics Wholesale.  David Fuss was a director of Ariza Technology Inc. and of Incredible Electronics Inc., two companies that were suppliers to Electronics Wholesale.  He was also director of a third corporation that became a 50% shareholder in Electronics Wholesale.  His wife, Rhonda Thuna, was then made a director of Electronics Wholesale.  She was also a director of Ariza and the company that owned half the shares in Electronics Wholesale.

Electronics Wholesale began to encounter business difficulties in 2003, but it still had sufficient assets and income to meet its obligations to HSBC.  Kendrick, Fuss, and Thuna created companies to take over the business of Electronics Wholesale.  One of their new companies was called Electronics Wholesale (Edmonton) Ltd. ("EWE").  They opened an account at the TD Bank in the EWE name, and all three were signing officers for that account.  All of the receivables coming to Electronics Wholesale, as well as the proceeds of the sale of that company's inventory, were deposited in the TD account.  They also incorporated a numbered company, which eventually took over the business operations of Electronics Wholesale, including its inventory, receivables, and staff.

In June of 2004 HSBC appointed a receiver and manager for Electronics Wholesale.  The company was petitioned into bankruptcy a month later, but the remaining assets were of little value and HSBC was unable to realize on its security.  In addition, Kendrick produced misleading financial information for Electronics Wholesale and destroyed the company's electronic records.

The Judgment at Trial

HSBC sued Kendrick, Fuss, Thuna, and the companies they controlled for conspiracy to prevent HSBC from recovering the debt owed by Electronics Wholesale.  The trial judge found that there was a conspiracy against the Bank and awarded damages of $1.7 million.  Fuss and Thuna appealed.  In a decision released June 25, 2013 the Court of Appeal of Alberta upheld the trial judgment.

The Decision on Appeal

The Memorandum of Judgment of the Court of Appeal contains a useful summary of the elements of the tort of "unlawful conduct" conspiracy, and a careful analysis of the factual and legal conclusions of the trial judge.

The only legal question in the case was the test for conspiracy by unlawful conduct.  Although the standard for appellate review on this issue is correctness, the parties agreed that the trial judge had stated the test correctly.

The appellants' critique of the trial judgment involved issues of mixed fact and law, as well as inferences that the trial judge had drawn from the facts.  On appeal, the findings of the trial judge on these kinds of issues are entitled to deference and will not be overturned unless the appellants can show "palpable and overriding error".

The elements of unlawful conduct conspiracy are:

(1)  An agreement to act in concert;

(2)  Unlawful conduct in furtherance of the agreement;

(3)  The unlawful conduct must be directed towards the plaintiff;

(4)  Knowledge that the conduct is likely to injure the plaintiff; and

(5)  The conspirators' conduct must actually cause injury to the plaintiff.

Agreement

The alleged conspirators must act in combination, or with a common design.  They must know the facts of the agreement and intend to participate in it.  Where direct evidence of the agreement is not available, the court can resort to circumstantial evidence.

Fuss and Thuna argued that in order to be participants in the conspiracy, they would have had to know about Kendrick's misstatements to HSBC and his destruction of corporate records.  The trial judge had found that they were not aware of these fraudulent activities.

The appellate court said that this argument misconceived the findings of the trial judge.  The agreement which supported the conspiracy finding was not based on fraud; it was based on a common design to divert the assets and business of Electronics Wholesale to the new companies.  Fuss and Kendrick had agreed to repay debt owed to Ariza in preference to payments due to the Bank.  Although Thuna was less active in the conspiracy, she knew that Electronics Wholesale was in trouble and that its business was transferred to EWE.  Her participation in the common design consisted in carrying out her husband's instructions while knowing that the effect would be to deprive HSBC of its security.

Unlawful Conduct

Unlawful conduct means actions that are legally wrong, but the conduct does not have to be actionable.  Highly competitive commercial activity that is not otherwise illegal does not qualify.

The trial judge found that Fuss and Thuna had breached their statutory fiduciary duties as directors.  As a director of Electronics Warehouse, Thuna had a duty to see to it that the company met its obligations to the bank.  The transfer of the company's assets with no legitimate business purpose and for inadequate consideration was against the interests of Electronics Warehouse, and also a breach of her duty to see to it that the company could meet its obligations.  The judge also said that Fuss breached his duty as a fiduciary of the numbered company by authorizing it to take over the assets of Electronics Warehouse, effectively appropriating trust property.

These conclusions on the fiduciary responsibilities of directors seem to imply that a director is obliged to ensure that the company carries on business in a responsible and ethical manner, and not just in a manner that promotes the company's business goals.  The Court of Appeal did not feel it was necessary to consider this interesting idea.  The assets of Electronics Warehouse were transferred, with the approval of the appellants, at less than fair market value.  This constituted a conversion of the property of Electronics Warehouse, which was unlawful conduct sufficient to meet this branch of the test for conspiracy.

Other Elements of the Conspiracy

The appellate court had little difficulty supporting the conclusions of the trial judge with respect to the remaining branches of the test for conspiracy.  The diversion of the receivables and other assets of Electronics Warehouse was a deliberate scheme to separate the assets of the business from the liabilities.  The appellants knew that their actions would prevent the Bank from recovering on its security, and HSBC suffered a substantial loss as a result.

Damages

The principal amount of the debt was about $670,000.  The trial judge added in interest, collection costs, insurance premiums, the receiver's charges, and legal fees as all of these amounts were to be added to the debt under the terms of the GSA.  This brought the total to $1.7 million.  The Court of Appeal supported this calculation of damages.

Conspiracy requires illegality, either as the goal of the conspiracy itself or in the means for carrying it out.  Hard-headed business tactics that do not involve illegality are not actionable.  Business people who have been harmed by corporate machinations often struggle to find the requisite "unlawful conduct" they require in order to succeed in an action for conspiracy.  If the Court of Appeal had upheld the views of the trial judge regarding the statutory duties of directors, it would expand the scope of the tort of conspiracy considerably; a ruling in the other direction would limit the scope of the tort.  As the Court of Appeal did not find it necessary to deal with the question, it will have to be resolved in another case on a different set of facts.

HSBC Bank Canada v. Fuss, 2013 ABCA 235, http://www.albertacourts.ab.ca/jdb_new/public/ca/2003-NewTemplate/ca/Civil/2013/2013abca0235.pdf

Contact Richard Hayles at Billington Barristers:

(403) 930-4106

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Any legal information provided is general in nature and may not apply to particular situations. It does not constitute legal opinion or advice. Please consult your lawyer regarding your specific legal issue.

Live-In Girlfriend Can Pursue Wrongful Death Claim

    Court Case Has Implications for Couples Living Together

After an evening of drinking a group of young men are driving home in the early morning hours.  They get into an altercation with a group in another vehicle.  One fellow approaches the other vehicle, ready for a fight.  The driver of the other car runs him over, and the victim dies in hospital six days later.

Does the dead man's live-in girlfriend have a claim for the loss of his care, companionship, and future financial support? Considering how common "common law" relationships have become, it is surprising that the law on this question is unclear.

The issue came before a Master of the Court of Queen's Bench of Alberta in Dotto Estate v. Thickson.  Tracy Atkin and David Dotto planned to marry but were not formally engaged.  He was an apprentice electrician and she was a university student.  They had been living together for 16 months when Wesley Thickson killed Mr. Dotto in the circumstances described above.  Ms. Atkin brought an action against Mr. Thickson and the owner of the car he was driving, claiming in her own right as the "common-law spouse of the deceased".  She also made a derivative claim through Mr. Dotto's estate for loss of services and financial support.

The company that insured the car brought an application to dismiss Ms. Atkin's claim.  Master Schlosser reviewed the authorities on wrongful death actions, going back to the 1808 case of Baker v. Boulton, 1 Camp 493; 10 RR 734, in which Lord Ellenborough proclaimed that "In a civil court the death of a human being could not be complained of as an injury".  That principle is at odds with the modern law of negligence, which imposes a duty on us all to avoid causing foreseeable harm to others.  Nevertheless it has remained in force for two centuries, subject to specific statutory exceptions.

Master Schlosser agreed that the rule in Baker v. Boulton is inconsistent with the development of the tort of negligence, which would seem to favour the imposition of a duty of care in these circumstances, but since the rule remained law Ms. Atkin would have to find a way to fit her claim into one of the situations in which an individual who has suffered no physical injury can recover damages for pure economic loss arising out of physical injury to another.  Since none of the common law exceptions fit the facts, the Master went on to consider statutory exceptions to the Baker v. Boulton rule.

Section 5(2)(c) of the Survival of Actions Act bars any recovery by the estate for loss of future earnings, so Ms. Atkin's derivative claim through the estate could not succeed.

The plaintiff's direct claim was based on an argument that she qualified as an "adult interdependent partner" under the Fatal Accidents Act.  This legislation gives a statutory right of action to the children, parents, spouse, and adult interdependent partner of the deceased.  Ms. Atkin did not qualify as a "spouse", as this term is limited to partners who are legally married.

In order to succeed, Ms. Atkin had to show that it was at least arguable that she fit within the definition of adult interdependent partner in the legislation.  Section 3(1)(a) of the Fatal Accidents Act says that such a relationship exists where two people have lived together in an interdependent relationship for three years, or if cohabitation is "of some permanence" and they have a child.  Ms. Atkin did not come within either branch of s. 3(1)(a).

Under section 3(1)(b) Ms. Atkin would be the adult interdependent partner of Mr. Dotto if they had entered into an adult interdependent partner agreement under s. 7, which provides that two people who are living together or who intend to do so may "enter into an adult interdependent partner agreement in the form provided for by the regulations."  The Master found that the couple were in a close and committed relationship, and that they had an agreement that amounted to an adult interdependent partner agreement although it was not in written form.

The legislation does not expressly require that the agreement should be in writing.  It could be argued, however, that the form provided by the regulations implies that it should be in writing.  The Master described the Act as remedial legislation that provides a statutory claim to close relatives of the deceased.  Since informality is a hallmark of many adult interdependent partnerships (in that the partners have decided to forego the formality of marriage), it seemed unlikely to the Master that the legislature intended that a lack of formality would defeat the statutory remedy.

The Master concluded that there was a triable issue, and dismissed the insurer's motion for summary judgment.

Master Schlosser was quite critical of the principle set down in Baker v. Boulton.  This principle is inconsistent with contemporary negligence law and at odds with the expectations of the public in society today, in which cohabitation is common and most people believe that there are legal consequences to such relationships.  A further easing of the common law rule makes sense.

It is hard to fault the Master for concluding that a lack of formality should not defeat a claim based on a relationship that by definition is informal.

Ms. Atkin was living with Mr. Dotto at the time of his death, and a claim based on cohabitation is verifiable.  Insurers will have a legitimate concern,  however, arising from the fact that s. 7 of the Act permits two persons who merely "intend to live together" to enter into an adult interdependent partner agreement. If verbal agreements are recognized, it will be difficult if not impossible for insurers to corroborate a claim by a surviving girlfriend or boyfriend based on a verbal agreement to cohabit in the future.

The case raises an issue that is important to the automobile insurance industry; it also has significant public policy implications regarding the legal consequences of relationships that involve cohabitation but not marriage.  We can expect that this issue will eventually reach the appellate court level.  When it does, it will be interesting to see whether the court chooses to overrule Baker v. Boulton and articulate a comprehensive threshold test for wrongful death claims, or continue to chip away at Lord Ellenborough's rule on a case-by-case basis.

Dotto Estate v. Thickson, 2013 ABQB 348; http://www.albertacourts.ab.ca/jdb_new/public/qb/2003-NewTemplate/qb/Civil/2013/2013abqb0348.pdf



Contact Richard Hayles at Billington Barristers:

(403) 930-4106

RHayles@BillingtonBarristers.com

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Any legal information provided is general in nature and may not apply to particular situations. It does not constitute legal opinion or advice. Please consult your lawyer regarding your specific legal issue.

Insurance for Flood Damage to Your Home

    Pumping flood water back into the river

Standard homeowner's policies issued by Canadian insurance companies contain an exclusion for damage caused by flood.  Here is a typical flood damage exclusion:

"This policy does not insure … loss or damage caused directly or indirectly by flood, and the word "flood" means waves, tides, tidal waves, and the rising of, the breaking out or the overflow of, any body of water, whether natural or man-made…"

The exclusion clause is carefully drafted so as to provide the insurance company with the widest possible protection against this type of claim.

The language employed is quite comprehensive.  Damage arising "directly or indirectly" from flood is excluded from coverage, and the word "flood" is defined broadly so as to include things that people would not normally think of as flooding, such as tides and waves.  Flooding from any body of water, including man-made sources such as reservoirs, is excluded.

Courts in a number of Canadian provinces have upheld this form of exclusion clause.  In Catalano v. Canadian Northern Shield Insurance Company, 2000 BCCA 133, municipal workers diverted water from overflowing culverts so that it inundated the plaintiff's business.  The B.C. Court of Appeal held that the diversion was not a separate intervening cause of the damage, and that since the original source of the water was overflow arising from heavy rainfall and melting snow pack, the loss came within the policy definition of "flood" and was excluded.

In the recent emergency in Alberta, work crews in certain locations have erected berms and other barriers to divert overflow from rivers.  Although these actions are intended to protect residential areas from flooding, some property owners have probably found that the diverted water increased the flow over their land.  Assuming that the Alberta courts adopt the B.C. interpretation, the ensuing flood damage would be excluded under the typical home insurance policy.

In an Alberta case, the Court of Queen's Bench also accepted the insurer's interpretation of this clause.  In MacNichol v. Insurance Unlimited (Calgary) Ltd., 1992 CanLII 6185 rising water in the Peace River breached a dam, causing blocks of ice to go over the dam and crash into a pump-house that was under construction.  Although the immediate cause of the damage to the pump-house was the action of the ice blocks pounding against it, the court concluded that the direct cause was the rise and overflow of the river, which triggered the exclusion clause.

In another B.C. case, however, the Court of Appeal adopted an interpretation more favourable to the insured.  In B.C. Ferry Corp. v. Commonwealth Insurance Co. (1987), 40 D.L.R.(4th)  766, the insured owned a ferry terminal which was damaged by heavy waves during a severe storm.  Since the evidence showed no abnormal rise in the water levels, however, the appellate court concluded that the event did not come within the extended definition of "flood" in the policy, which encompasses waves, tides, and tidal waves.  Although it was wave action that damaged the terminal, there was no rising of, breaking out, or overflow of any  body of water - the flood exclusion did not apply.

Although the Insurance Bureau of Canada has said that there is no coverage for "overland flooding" in Canadian home insurance policies, there is an alternative point of view.  If the original source of the water is overflow from a river, the damage comes within the standard flood exclusion and is not covered.  The exclusion does not use the word "overland", however, so the wording does not extend to any water that enters a home from outside regardless of the source.

There has been heavy rainfall in many areas of the province over the last week, and water that seeps or leaks into a home due to excess precipitation, and that does not originate in an overflowing river, stream, or reservoir, would not trigger the flood exclusion.  Such water damage would come within the coverage provided in an "all risks" policy, and would likely be covered as "storm" damage in a specified perils policy.

Here are some other kinds of losses that might be covered, even if the home policy contains a standard flood exclusion:

• Sewer backup - many home insurers provide sewer backup coverage as an add on for an extra premium.  If your home policy has a sewer backup endorsement, you are covered where waste water from storm or sanitary sewers has entered the basement through floor drains, tubs, shower stalls, or toilets.  You may also have coverage where some of the water entering your home is backup from sewers and some is overland flow from river flooding.
• Electrical disruption - electrical failure or interruption that is not caused by flood damage could be covered.  It seems that municipal authorities decided to cut power to certain areas once an evacuation order had been issued.  The spoiled contents of a fridge or freezer could be covered in this situation.  If the power loss was due to flood damage to a transformer, however, it would likely come within the flood exclusion.  The contrary argument is that the authorities cut power as a precautionary measure in areas that might be flooded, so the power disruption is analogous to the water diversion in the Catalano case.
• Evacuation costs - if you were evacuated, but your property was not in fact flooded, it is arguable that your accommodation costs such as hotel, restaurants, and parking could be covered.  Such losses would likely not be covered under a specified perils policy, but they should fall within the coverage of an all risks policy in the absence of an exclusion for government orders or actions.  Losses due to electrical disruption could be covered under the same argument.
• Theft, vandalism, arson - whether your property was flooded or not, damage caused by third parties while you were ordered to evacuate and unable to protect your home should be covered.
• Vehicle damage - cars are insured separately, and flood damage to a vehicle should be paid if the insured purchased comprehensive coverage.

All of the above applies to insurance for residential premises.  Business insurance is in an entirely different category.

Although standard business policies contain a flood exclusion similar to the one in home policies, business owners can purchase flood coverage for an extra premium.  This option is not available to home owners.

Even if a business policy does not have a flood endorsement, the flood exclusion often contains language stating that the exclusion does not apply to "resulting damage".  Under this exclusion to the exclusion, direct flood damage is not covered, but if building systems such as fire alarm and suppression, refrigeration, or security are damaged by flood waters, and then there is additional damage caused by the failure of one of those systems, this is "resulting damage" and it is covered.  An example might be the loss of the contents of an industrial freezer to spoilage where water shorts out electrical systems, causing the freezer to shut down.

If you are a business owner you should look at the specific terms of your policy and consult your broker, public adjuster, or legal counsel for assistance in determining what is and is not covered.

Contact Richard Hayles at Billington Barristers:

(403) 930-4106

RHayles@BillingtonBarristers.com

Visit our website: http://billingtonbarristers.com/index.php?id=59

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Any legal information provided is general in nature and may not apply to particular situations. It does not constitute legal opinion or advice. Please consult your lawyer regarding your specific legal issue.

How To Make a Home or Business Insurance Claim

    Bow River Near Prince's Island, June 21, 2013

Early yesterday morning my wife and I were evacuated from our home along with thousands of other Calgary residents. My office is closed after the City issued an order for the controlled evacuation of the downtown area.

Although people living near the Elbow River are starting to return home this morning, it looks like the evacuation order for areas along the Bow River will remain in place for the time being. Power may not be restored in downtown for a few days, so many offices and businesses will remain closed.

Watching Global TV yesterday we saw incredible scenes of devastation, with many residential streets  covered in water. There was muddy water flowing around numerous warehouses and commercial buildings, as well as trucks and other vehicles half submerged.

Thousands of Alberta homeowners and tenants will be looking to their insurers to cover the damage to their houses, gardens, and possessions. Many business owners will have claims for property damage and business interruption. Insurance company claims departments will be inundated with new claims, and it will be difficult for people to get answers to their questions about what is covered, how to document a claim, and how much (if anything) the insurance company will pay.

The most important thing right now is to give your insurer written notice of your claim right away. Delay in giving notice won't just delay the resolution of your claim; it can provide grounds to deny the claim altogether. The insurance company has the right to inspect the damage as soon as possible (even if it doesn't have enough adjusters available to handle all the claims right now).

Send your notice by fax or email, as these methods provide a record of the date and time notice was received.

The initial notice should be short and sweet. You don't need to provide any details about what happened or what was damaged - that can come later. All you need to do is provide the name of the insured, the policy number, and the address of the insured premises. For date of loss, you should say "June 21, 2013 and continuing", as the damage may be ongoing.

Avoid using terms like "flood" or "water damage", as flooding from water sources outside the building is excluded from many policies. At this point, all you need to do is provide notice of a "loss" or "property damage" at the insured address.

If you know that your property is in an affected area but you can't inspect the damage because an evacuation order is still in place, you should send notice of claim anyway. It is very important to provide notice as soon as possible, and you don't need to state any details or estimate the amount of your claim yet.

The Insurance Bureau of Canada has stated publicly that there is no insurance coverage for "overland flooding" in Canada. This may or may not apply to your claim - coverage always depends on the wording of the policy, and insurance policies are subject to interpretation. Legal principles of interpretation generally favour the insured. You should not give up on a potentially substantial claim based on a general statement from an insurance industry organisation that may not apply to your policy and your situation.

Many policies do include coverage for back up from storm or sanitary sewers. If water entered your home from floor drains, showers, tubs, or toilets, at least part of the damage could be covered.

There may be other provisions in your policy that bring parts of the damage into coverage, even if your insurer is telling you it is excluded. You should still send the insurer notice of claim, photograph the damage thoroughly, and keep all your receipts.

Contact Richard Hayles at Billington Barristers:

(403) 930-4106

RHayles@BillingtonBarristers.com

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Any legal information provided is general in nature and may not apply to particular situations. It does not constitute legal opinion or advice. Please consult your lawyer regarding your specific legal issue.

Insurance Company Must Defend Condo Developer

    Condominium Construction

Builders and developers involved in the construction or conversion of condominiums often face lawsuits over alleged deficiencies, sometimes long after the project is completed.  The builders are typically covered under Comprehensive General Liability ("CGL") policies that limit coverage to damage that occurs during the policy period, and which contain exclusions for liability arising out of contract.

The coverage provided by a CGL policy includes an obligation to indemnify the builder for legal liability to others resulting from the builder's negligence, and an additional, separate obligation to defend any actions claiming damages for such negligence.  The duty to defend includes an obligation to retain counsel and pay the legal costs involved in dealing with litigation.  Since defence costs in major construction litigation can easily run into the hundreds of thousands of dollars, and since most actions will settle before trial, the duty to defend is often as important as the obligation to indemnify.

Does the insurance company have an obligation to provide a defence where the condominium corporation sues the developer/builder for damage that didn't appear until long after the project is completed? What about damage that happens after the CGL policy has expired? In Alberta, the Court of Queen's Bench dealt with both these issues in a recent case involving Canalta Construction Co.

The Condominium Project

Canalta was the developer and general contractor for a condo conversion in Edmonton.  During the construction, Canalta obtained a CGL policy from Dominion of Canada.  Canalta registered the condominium plan in 2003, the work was completed in 2005, and all of the condo units had been sold by September of 2006.

The Dominion policy was renewed through to January 1, 2008.  A water main failed some seven months later, and the Condominium Corporation sued Canalta in July of 2010, claiming damages for the design and construction of the water main and the failure of the roof system to repel water vapour and insulate the premises.  The water main and the roof system were both common elements, and all of the damages were located in common areas rather than in individual condo units.

The Dominion Policy

The Dominion CGL policy covered liability for "'property damage' which occurs during the policy period."  There was an exclusion for compensation that Canalta had to pay "by reason of the assumption of liability in a contract or agreement", but this exclusion was subject to an exception for liability that Canalta "would have in the absence of the contract or agreement".

There were also exclusions for property that Canalta owned, rented, or occupied, and for damage to premises that Canalta has sold.  The latter exclusion contained an exception where the premises are "your work", and were "never occupied, rented or held for rental by you."

The coverage provisions and exclusions in the Dominion policy are common in CGL policy forms used in the construction industry in Canada.  Interpretative difficulties arise when damage outside the policy period is caused by deficiencies in design or construction that took place while the policy was in force: on those facts, did the property damage "occur" during the policy period?

The exclusion for liability assumed under a contract can also be problematic.  Since all the builder's work on a project is done pursuant to a contract, does this mean there is no coverage for defects in any of the work? Faulty construction is usually the result of negligence, however, and the builder would be liable for negligent construction in the absence of a contract.  Does the exception to the exclusion mean that all the defects are covered, and if so, what is the purpose of the exclusion for contractual liability?

Legal Test for Insurer's Duty to Defend

If the duty to defend is to be of any use, the insurer has to take on its defence obligations during the litigation process; otherwise the insured could incur substantial legal costs defending an action when those costs are covered under the policy.  From the insurer's point of view, early involvement in the litigation is also beneficial, as the insurer is then in a position to monitor litigation costs and make decisions regarding tactics and settlement.  Deferring the duty to defend decision until after the trial would not be in the interests of either insurer or insured, and would defeat the purpose of this type of coverage.

Since any issues regarding the duty to defend have to be resolved before all the evidence in the action against the builder is available, this question is decided on the basis of the allegations against the builder set out in the statement of claim in that action.  According to the Supreme Court of Canada, the duty to defend is triggered if there is a "mere possibility" that the claim is covered: Progressive Homes Ltd. v. Lombard General Insurance Co. of Canada, [2010] 2 S.C.R. 245.  This is the test that was applied by the Alberta Court of Queen's Bench in the Canalta case.

Damage Outside the Policy Period

Since the water main didn't fail until some seven months after the expiration of the policy, Dominion argued that any ensuing liability was outside the policy period.

In duty to defend cases, the courts have entertained four different theories as to when damage occurs: (1) damage does not occur "until it manifests itself"; (2) damage that is undetected during the policy term is covered if it commences while the policy is in force; (3) exposure to a harmful condition constitutes damage; and (4) developing damage constitutes a continuous series of covered occurrences, starting when the property is first exposed to damage and ongoing until it is discovered.

Canalta argued that since all the work was completed by January, 2005, it was open to the trial court to decide that there was ongoing damage so that the second and fourth theories would apply.  Since the statement of claim issued against Canalta by the Condominium Corporation alleged negligence in design, installation, and construction, it was arguable that damage occurred before the end of 2005.

Liability Assumed Under Contract

Although the statement of claim contained allegations of negligence, Dominion argued that these were essentially allegations that the contract was breached by negligent design and construction.

The court mentioned the exception to the exclusion.  The allegations of negligent design and construction could be viewed as instances of breach of contract, or as negligence which would give rise to liability outside the contract.  It was not clear that the allegations of negligence were just repetitions of the allegations of breach of contract, so the exclusion for contractual liability did not assist Dominion.

Property Owned or Occupied by the Insured

Since both the defects and the damage were limited to the common elements in the building, the question here was whether or not the developer "occupied" the common property during the period in question.  Although duty to defend cases are normally limited to a review of the pleadings in the action against the insured, in this case an officer of Canalta testified that Canalta controlled access to the common property and hired a property manager until the condo board was in place.  Since it was unclear whether or not these acts amounted to occupation of the common property, there was a possibility that the exclusion did not apply.

Property Sold by the Insured

Canalta argued that even if the "alienated property exclusion" was applicable, there was a possibility that the exception for property that constitutes the work of the insured and that the insured never occupied would come into play.  The court seemed to agree: it was unclear whether or not the acts of Canalta prior to the takeover of the building amounted to occupation, so the exception to the exclusion could apply.

Conclusion

It was arguable that the damage occurred when the design and construction work was done, which was during the policy term and prior to the sale of the condo units or the transfer of the common elements to the Condominium Corporation.  The judge held that the claim of negligent design and construction was a "stand alone claim", and not merely derivative of the breach of contract claim.  Since there was a possibility that the claim was covered under the CGL policy and that none of the exclusions applied, Dominion had a duty to defend Canalta in the litigation.

The case illustrates how difficult it can be for an insurer to avoid its obligation to defend under a CGL policy.  A duty to defend application is only interim, and the insured could still be ordered to reimburse the insurer after trial if it appears that the claim is not covered or that one of the exclusions is applicable.  As a practical matter, however, a favourable decision on the duty to defend issue means that the insurer will defend and settle the action, and that the insured is unlikely to be called upon to contribute substantially to defence and settlement costs.

Canalta Construction Co. Ltd. v. Dominion of Canada General Insurance Company, 2013 ABQB 325, http://www.albertacourts.ab.ca/jdb_new/public/qb/2003-NewTemplate/qb/Civil/2013/2013abqb0325.pdf

Contact Richard Hayles at Billington Barristers:

(403) 930-4106

RHayles@BillingtonBarristers.com

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Court Finds Fiduciary Relationship in Oil Sands Equipment Marketing Agreement

    Oil Sands Operations

Indutech Canada Limited manufactures pipe and other speciality steel products for Alberta's heavy oil industry.  Guy and Barry Gibbs marketed Indutech products for many years under two "Agency Agreements" which appointed the Gibbs and their companies as Indutech's exclusive sales force.  From 2000 to 2004 the Gibbs operated a competing manufacturing business, Cladtech Canada Limited, without Indutech's knowledge.

Indutech eventually learned about the operations of Cladtech and sued for breach of contract and breach of fiduciary duty.  The trial judge found in favour of Indutech, holding that the defendants were fiduciaries of Indutech and granting judgment for $2 million.  This award consisted of some $1 million in damages, including $150,000 in punitive damages, plus $1 million representing the profits that the defendants had made from competing with the plaintiff.

The defendants appealed from the finding that they were fiduciaries of Indutech, and from the damages awarded, particularly the order under which they were required to disgorge the profits earned from their enterprise in addition to compensatory and punitive damages.  In a recent decision, the Alberta Court of Appeal upheld the conclusions of the trial judge on both fiduciary duty and the amount of the award.

The reasons of the Court of Appeal provide a useful explication of the law respecting fiduciary relationships, both under the three part test established by the Supreme Court of Canada in Frame v. Smith, [1987] 2 S.C.R. 99 and International Corona Resources Ltd. v. LAC Minerals, [1989] 2 S.C.R. 574,  and under the more recently developed "ad hoc" analysis from Elder Advocates of Alberta Society v. Alberta, [2011] 2 S.C.R. 261 (S.C.C.).

The case is also interesting for the use of the remedy of "disgorgement".  The trial judge held that the plaintiff was entitled to be paid any profits that the defendants earned as a result of their breach of fiduciary duty, in addition to the traditional compensatory damages available for breach of contract.  The Court of Appeal agreed.

Fiduciary Relationships - The Principled Approach

A fiduciary relationship is one involving trust, obligations of confidentiality, and a duty to act in the interests of or for the benefit of another.  A finding of fiduciary duty allows the court to protect the vulnerable when they have been taken advantage of by those in positions of trust.  Courts enforce fiduciary duties because honesty, fairness, and protecting the weak from the strong are important values in our legal system.

The concept of fiduciary duty can be at odds with values of individual autonomy and self-reliance that are also important in our system of law.  This conflict between competing values manifests itself in a reluctance on the part of our courts to impose fiduciary obligations in a commercial context.  The role of the fiduciary can seem out of place in the business world; it often appears to be inconsistent with the notion of freedom of contract and the emphasis that the common law places on free markets and the enforcement of bargains.

Historically, fiduciary obligations arose in certain established categories of relationships, such as agent and principal, solicitor and client, or trustee and beneficiary.  Since it is well understood that an agent has to protect confidential information, avoid conflicts of interest, and act for the benefit of the principal, anyone who agrees to act as an agent also agrees, either expressly or by implication, to take on the responsibilities of a fiduciary.

More recently, courts have recognized that the categories of fiduciary relationships are not closed.  It now appears that the categories that historically gave rise to fiduciary responsibilities are only instances in which a set of principles have been applied to identify fiduciary relationships.  This principled approach to fiduciary relationships, which originates in the dissenting opinion of Wilson, J. in Frame v. Smith, was endorsed by the Supreme Court of Canada in Corona Resources.  Under the Frame v. Smith analysis, relationships in which fiduciary obligations are imposed possess three characteristics: 

1. The fiduciary is in a position to exercise discretion or power over the affairs of the beneficiary;
2. The fiduciary can exercise that power unilaterally, so as to effect the beneficiary's interests;
3. The beneficiary has a particular vulnerability to the fiduciary.

The defendants in Indutech argued that they were not agents as the agreements gave them no authority to bind Indutech.  Since the substance of the relationship prevails over the words used by the parties to describe it, the fact that the two contracts between Indutech and the defendants were labelled "Agency" agreements was not determinative.  This meant that the courts had to struggle with the issue of whether or not to find a fiduciary relationship between two business organizations dealing with each other at arm's length.

The Court of Appeal concluded that the terms of the agreements did give the defendants power and discretion, which resulted in a corresponding vulnerability on the part of Indutech.  The agreements made the defendants the exclusive sales force for Indutech.  The defendants were required to keep Indutech informed about the market and about sales opportunities.  The defendants were subject to a duty of loyalty and were restricted from dealing with Indutech's competitors.  They had unlimited access to Indutech's customers and sales data, including confidential information on pricing, timing, and market strategy.

Indutech gave the defendants confidential business information, treating the defendants' personnel as if they were Indutech employees.  This close relationship made Indutech vulnerable as it provided the defendants with the opportunity to divert sales, manipulate prices, and influence purchasing decisions by providing Indutech customers with false scheduling information.  Vulnerability by itself does not give rise to fiduciary duties, but where it arises out of the contractual relationship between the parties rather than from pre-existing causes outside the contract, a fiduciary relationship can be formed.

There is a line of authority supporting the proposition that the courts should hesitate to find a fiduciary relationship when two corporations motivated by profit enter into an arm's length transaction.  The court was at pains to distinguish these cases, stating that the principle is limited to a situation in which a business entity fails to take available steps to protect its interests, then turns around and complains that it was taken advantage of.  In the instant case, Indutech built protections into the terms of the agreements, but the defendants gained advantage through a series of calculated breaches of those contractual protections.

The Court of Appeal emphasized the fact that in the commercial context a fiduciary relationship has to be based on the terms of the contract and not on circumstances external to the contract.  As in the traditional categories of fiduciary relationships, the principled analysis requires an "undertaking" on the part of the fiduciary to take on duties of trust and confidence.  The court concluded that "Such a circumstance arises where, as here, the contract imposed express obligations of loyalty and non-competition."

The "ad hoc" Analysis of Fiduciary Obligation

The Court of Appeal also considered the applicability of the approach established in the Elder Advocates decision, in which a fiduciary relationship is founded on an "ad hoc" basis outside traditional categories.  The requirements for an ad hoc finding of fiduciary relationship were summarized by McLachlin, J. in Elder Advocates:

1. Vulnerability arising from the relationship, as in Frame v. Smith;
2. An undertaking by the fiduciary to act in the best interests of the beneficiary;
3. A defined person or class that is subject to the fiduciary's control; and
4. The fiduciary can adversely exercise discretion or control so as to affect the beneficiary's legal or practical interests.

The Court of Appeal decided to uphold the trial judge's decision as the facts that supported the existence of a fiduciary relationship under a Frame v. Smith analysis also supported an ad hoc finding of fiduciary obligation.  On the facts of the Indutech v. Gibbs case, the two approaches to the issue are very similar, and the Court of Appeal suggested that they may just be "different ways of stating the same thing".

The common thread that runs through the cases on fiduciary relationships is the vulnerability of the beneficiary and the "undertaking" or agreement of the putative fiduciary to do something that is associated with a fiduciary role.  Whether the approach is one of traditional categories of fiduciary relationship, the principled analysis from Frame v. Smith, or the ad hoc approach from Elder Advocates, the fiduciary has to agree to keep information in confidence, refrain from competition, safeguard another's property, give precedence to the beneficiary's interests, or otherwise undertake an obligation of loyalty and trust.  If the beneficiary is vulnerable to a breach of the undertaking, a fiduciary relationship is established.

Compensatory Damages and the Disgorgement Remedy

The normal measure of damages for breach of contract is an amount that would restore the income that the plaintiff lost as a result of the breach.  These are sometimes referred to as "compensatory" damages.  Where the defendant is in breach of a fiduciary obligation, the court can go further; in addition to awarding compensatory damages, it can order the defendant to disgorge any profits arising from the breach of duty.

The defendants had diverted sales and opportunities rightly belonging to Indutech in a number of different instances.  The fact that the defendants were in breach of their fiduciary obligations did not justify an across the board application of the disgorgement remedy.  Indutech had to establish, in each instance, that the defendants' profits result from breach of fiduciary duty and not merely from breach of contract.

As the trial judge had been careful to distinguish between activities that constituted breach of contract and those that amounted to breach of fiduciary duty, and limited the award to compensatory damages where no breach of fiduciary duty was involved, the Court of Appeal upheld her use of the disgorgement remedy.  The remedies for breach of fiduciary duty are discretionary, so the standard on appellate review is reasonableness.  Since the trial judge had not committed any error of law in applying the disgorgement remedy, the Court of Appeal was not prepared to interfere with the exercise of her discretion.

Punitive Damages

In cases involving breach of fiduciary duty, the court can award punitive damages in addition to compensatory damages; the purpose of the punitive damages is to deter the defendant and others from engaging in similar conduct, and to uphold the integrity of fiduciary relationships.  In the Indutech case, the Court of Appeal stated that if a market is to operate smoothly and effectively, manufacturers have to be able to rely on their sales representatives to protect confidential information and trade secrets.

Punitive damages have to be proportionate.  In determining whether or not to award punitive damages, the court is to consider such factors as the harm caused, the degree of misconduct, the relative vulnerability of the plaintiff, and the advantage and profit accruing to the defendants.  The defendants argued that the addition of the disgorgement remedy amounted to sufficient deterrence, and that an award of exemplary damages was therefore disproportionate.

The Court of Appeal concluded that the trial judge had exercised her discretion reasonably.  The $150,000 punitive damages award was proportionate to the balance of the award ($1.85 million), and amounted to appropriate deterrence in light of the long period of deliberate and flagrant breaches of contract and the dishonesty and deceit involved.

Indutech Canada Limited v Gibbs Pipe Distributors Ltd., 2013 ABCA 111

http://www.albertacourts.ab.ca/jdb_new/public/ca/2003-NewTemplate/ca/Civil/2013/2013abca0111cor1.pdf

Contact Richard Hayles at Billington Barristers:

(403) 930-4106

RHayles@BillingtonBarristers.com

Visit our website: http://billingtonbarristers.com/index.php?id=59

Any legal information provided is general in nature and may not apply to particular situations. It does not constitute legal opinion or advice. Please consult your lawyer regarding your specific legal issue.