No Juries For Insurance Misrepresentation Cases

     Does trial by jury lead to chaos in the courtroom?

In a decision released Friday, the Alberta Court of Appeal denied the plaintiff's application for a jury trial in a life insurance claim: Coulter v. Co-operators Life Insurance Company.  The two Justices in the majority agreed that the insurer's misrepresentation defence was a claim for equitable relief which cannot be tried by a jury.  The dissenting Justice, who characterized the misrepresentation defence as statutory rather than equitable, would have permitted a jury trial.

The Misrepresentation Defence

 

The life insured was a long-time policyholder with Co-operators who applied for additional coverage less than two years before his death.  After investigating the claim, Co-operators paid the benefit on the original policy, but denied the additional benefit, taking the position that it was entitled to void this coverage as the life insured had misrepresented important facts on the recent application.  Co-operators relied on ss. 652 and 653 of the Alberta Insurance Act, R.S.A. 2000, c. I-3, which state that misrepresentation of a material fact in the life insurance application renders the coverage voidable by the insurer within the first two years after coverage takes effect.

 

The Alberta statutory provisions are derived from uniform life insurance legislation, and similar provisions are in effect in all the common law provinces and territories of Canada.

 

When the beneficiary sued, Co-operators raised the misrepresentation issue in its statement of defence, citing the Insurance Act provisions.  The defendant was content to defend on this issue, and did not counterclaim for rescission of the insurance contract.  The beneficiary applied for a jury trial, but this application was denied by the Chambers Judge, who directed that the trial should proceed by judge alone.

The Majority Decision
 

In the majority opinion, Mr. Justice Cote referred to the historical distinction between the common law courts and courts of equity.  In civil cases, the common law courts could award damages for breach of contract and other legal wrongs.  A broader range of remedies was available in the equity courts, including specific performance and declaratory relief.  Jury trials were available in the common law courts, but not in the courts of equity, where cases were decided only by judges.

 

Although the two courts are now joined into one, the distinction between common law and equity remains, and juries are not permitted in cases in which equitable relief is claimed.

 

There was no dispute that the plaintiff was claiming damages for breach of the insurance contract, and that this was a common law claim.  According to Mr. Justice Cote, however, the defence raised by Co-operators was essentially a claim for rescission of contract.  This was an equitable remedy, and since common law courts are restricted to damages, a jury could not decide the misrepresentation question.  The Chambers Judge was therefore correct in denying the application for a jury trial.

 

Justice Cote was careful to point out that although the reasons for denying the plaintiff a jury trial may seem to be based on a technical historical distinction, there are sound policy reasons for restricting equitable relief to judges.  Equitable remedies are discretionary.  In exercising their discretion judges are guided by previous cases, and by principles established in maxims such as "Delay defeats equities", and "He who seeks equity must do equity".  In the view of Mr. Justice Cote, the distinction between the principled exercise of a discretion and "mere sympathy or fairness" would be "almost impossible" to explain to a jury.  These cases are therefore unsuited to trial by jury.

 

In a claim for breach of contract or tort, on the other hand, the judge instructs the jurors that they must award damages if they conclude that the evidence supports certain findings of fact; there is no discretion involved.

The Dissent

 

In his dissenting judgment, Mr. Justice O'Ferrall seemed to accept that equitable claims involving the exercise of discretion are unsuited to trial by jury; in his view, however, the insurance company was not claiming equitable relief at all.

 

"Rescission" was not specifically pleaded.  In its statement of defence, Co-operators said that it was entitled to "void the policy" by virtue of the Insurance Act provisions.  This was a statutory defence rather than an equitable claim, and "What the jury would be asked to do in this case is determine whether or not the insured ... made a misrepresentation with respect to a fact or facts material to the insurance."  In his opinion, this was the kind of factual question that juries are especially well qualified to decide.  There is a presumption in favour of the right to trial by jury, which should be respected.

 

For the majority, however, Mr. Justice Cote pointed out that the Insurance Act provisions did not purport to displace the role of equity or replace the equitable remedy of rescission of contract.  The statute did not provide a comprehensive code for misrepresentation cases, such that it could be concluded that the legislature intended to occupy "the whole field" and do away with the role formerly carried out by courts of equity.

A View From the Bleachers

 

Justice Cote is right to prefer a principled or policy-based approach over reliance on the historical accident of the division between equitable and common law courts.  Where legal issues are more important to the case than factual issues, judges have an extensive knowledge of the law that jurors lack.  Jurors, on the other hand, are just as qualified as judges to decide whether or not a witness is lying, or to assess evidence and make findings of fact.

The jury is an important institution in our society.  Justice is delivered by members of the community who can bring a diversity of background and experience to the courtroom, rather than by a judicial "expert" with extensive, but perhaps narrow, training in one area (the law).  The jury introduces a populist, democratic element into our system of justice.  Trial by jury is a long-standing right that should only be taken away for cogent reasons.

It is conventional wisdom that an insurance company never wants to face a jury.  The man in the street will always be blinded by sympathy and emotion, it is thought, and will side with the individual plaintiff over the big, impersonal corporation every time.

This is not necessarily the case.  Several years ago, defence-side insurance lawyers in Ontario began to serve jury notices routinely in personal injury cases, believing that their clients would be better served by the practical, common-sense approach of jurors.  Whether to seek a jury trial is a question that both plaintiff and defence counsel should ask themselves in every case; it is a strategic decision that depends on more than just the sympathy factor.  A precedent that denies the life insurance beneficiary her claim to a jury trial cuts both ways, as insurers will not be able to put their defences to juries in future cases.

What about the Coulter case? Although it is easy to see how the discretionary aspects of certain equitable remedies, such as injunctions and specific performance, might be difficult for jurors without any legal training, it is unclear how equitable principles or maxims could come up in a misrepresentation case.  The issue is whether or not the insured misrepresented important facts on the application.  This is something a jury can decide.  Since the conduct of the insurance company is not in issue, maxims like "He who seeks equity must do equity" or "He who comes to equity must come with clean hands" don't have any bearing.  Delay is not a factor, as the insurer can only raise non-fraudulent misrepresentation within the two year incontestability period established by the insurance legislation.

 

The availability of jury trials in misrepresentation cases should be based on a pragmatic assessment of the real issues in the case, and not on the somewhat arbitrary fact that "rescission" of contract is historically a remedy granted by courts of equity.

 

Coulter v. Co-operators Life Insurance Company, 2013 ABCA 295

 

Contact Richard Hayles at Billington Barristers:

(403) 930-4106

RHayles@BillingtonBarristers.com

Visit our website: http://billingtonbarristers.com

View my profile on LinkedIn: Richard Hayles on LinkedIn



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.

Zoning Error No Bar to Sale of Business

    The purchaser learned the business
    wasn't zoned for a dry cleaning facility

 

Chang Lee agreed to buy a Toronto dry cleaning business.  Although the business had been in operation for more than 15 years, neither the purchaser nor the vendor knew that the City had changed the zoning two years before the date of sale, and that the location was no longer zoned for the operation of an on-site dry cleaning facility.  Could Mr. Lee get out of the deal? The Ontario Court of Appeal said no.

 

The decision contains a concise summary of the law on mistake in contracts, covering mutual mistake, common mistake, and equitable mistake.  This area of law can be confusing.  It often seems that the rule is that a mistake doesn't get you out of a contract, except when it does.  This well-reasoned decision of the Court of Appeal shows how the policy basis for the law should determine the application of the doctrine in specific situations.

 

The Zoning Change

 

The parties negotiated an agreement of purchase and sale through a real estate broker using a standard form provided by the Ontario Real Estate Association.  Mr. Lee was to buy all the assets of the business, including the lease, goodwill, and trade name, for $340,000.  Neither Vendor nor Purchaser consulted a lawyer until after the agreement had been signed.

 

The contract contained an "entire agreement" clause stating that there were no representations, warranties, or conditions other than those expressed in the agreement itself.  The only reference to zoning was a clause stating that the parties weren't relying on the broker for information on zoning, and that they had been told to seek professional advice.

 

The business had been operated as a dry cleaning plant continuously since 1995.  The Vendor acquired it in 2005, and had obtained a license every year from the City authorizing the operation of a dry cleaning business.  Apparently the business license was renewed at least once after the change in zoning.  Although the City had given notice of the change as required by statute, the Vendor was unaware of the change and the topic of zoning never came up during the negotiations.

 

Summary Judgment

 

The case was decided on a summary judgment motion.  The motion judge considered mutual mistake, where each party is mistaken about a different matter and there is no contractual consensus, as well as the doctrine of common mistake, where the parties share an erroneous assumption about a fundamental fact.  She concluded that there was a common mistake that "the property was properly zoned, such that the dry-cleaning business was a permitted use."

 

The motion judge also concluded that Mr. Lee was entitled to relief on equitable grounds.  Although equitable mistake seems to have been abandoned by courts in England after the 2003 decision of the Court of Appeal in Great Peace Shipping v. Tsavliris Salvage, [2003] Q.B. 679, this decision has not yet been adopted in Canada.  In equity, a contract can be set aside where the parties are under a common misapprehension as to a fundamental fact and the party seeking to avoid the contract is not at fault.  The motion judge found that the Vendor would be unjustly enriched if the deal went through, as the purchase price was based on a shared belief that the location was properly zoned.

 

The Court of Appeal Decision

 

The decision of the Court of Appeal was delivered by Strathy, J.A.  He concluded that the motion judge had made three errors:

 

(1)   She made a palpable and overriding error in the assessment of the evidence when she found that the parties both assumed that dry cleaning was a "permitted use";

 

(2)   She erred in law by putting the onus on the Vendor to show that the business could continue to operate as a dry cleaners, when the onus should have been on the Purchaser to show that it could not;

 

(3)   She erred in law by putting the risk of mistake on the Vendor, when under the principle of caveat emptor it should have been on the Purchaser.

 

The decision turns on a principle in zoning law called the doctrine of "legal non-conforming use".  A change in zoning law does not prevent a property from being used for a particular purpose where that use was legal at the time of the change, so long as the property continues to be used for that purpose.

 

Although dry cleaning was no longer a "permitted use" after the change in zoning, it was likely still a "lawful use" in that the Purchaser would be able to continue that use as a legal non-conforming use.  The parties shared a lay person's understanding that the Purchaser would be able to operate the business as it had been operated by the Vendor.  If the Purchaser had a more technical understanding of the difference between a permitted use and a use that could be lawfully continued, his mistake was unilateral.  If he shared the Vendor's belief that the use could be continued, this was not a mistake unless it could be shown that the business could no longer operate as a dry cleaner.  This is where the onus of proof becomes an issue.

 

In response to an inquiry from the Purchaser's lawyer just before closing, the City had advised that dry cleaning was not a permitted use, but took a neutral stand on whether it constituted a legal non-conforming use.  No-one had applied to the City for that determination.  The motion judge said there was no evidence that the City would allow the current use to continue.  In doing so, she put the onus on the Vendor to show that the use would be allowed by the authorities.  Since the Purchaser was a Plaintiff seeking to rescind the contract, the onus was actually on the Purchaser to demonstrate that the use could not be continued.  In the absence of any evidence, the Purchaser had failed to establish this part of his case.

 

Strathy, J.A. also pointed out that the law of mistake could not be used to transfer contractual risk from one party to another.  The Purchaser had not insisted on making the contract conditional on zoning, although there were other conditions in the contract and zoning conditions are often inserted in such agreements.  The contract contained an acknowledgement that the parties had been urged to obtain independent advice on zoning.  By signing the agreement without any zoning conditions, and by failing to obtain independent confirmation of the zoning, the Purchaser had assumed this risk.

 

Placing the risk of zoning problems on the Purchaser is also consistent with the principle of caveat emptor, under which the buyer is expected to inquire into risks associated with the transaction.

 

For the same reasons, equitable mistake could not assist the Purchaser.  Relief in equity is only available where the Plaintiff is not at fault.  Mr. Lee was at fault in that he had failed to take reasonable measures to protect himself, either by investigating the zoning or by negotiating a warranty with respect to the use.

 

Analysis

 

The law of mistake in contracts seeks to reconcile two competing values.  On the one hand, the economy will function better if business people can be sure that contracts will be enforced as written.  Thus the law favours certainty.  On the other hand, fairness seems to require that a contract should be set aside where the parties' agreement is based on a set of facts that turn out to be untrue.

 

The decision of Strathy, J.A. illustrates how the courts balance the values of certainty and fairness by putting limits on the scope of the doctrine of contractual mistake.  The mistake must be mutual.  It must involve facts that are fundamental to the contract.  The onus is on the Plaintiff to show that there was a mistake.  The doctrine of mistake cannot be used to reallocate a risk that one party assumed in the contract itself, or to reverse the rule of "let the buyer beware".  Mistake does not assist someone who failed to conduct an investigation before signing the contract, or to insert standard provisions into the contract that would have protected his interests.

 

It is unclear why the parties to this case did not seek a ruling that the continued operation of a dry cleaning facility was a legal non-conforming use; this could have saved a lot of time and legal costs.

 

Query: shouldn't a standard form agreement for the purchase of a business contain a provision dealing with zoning? A clause stating that the Vendor warrants that the current use can be continued could be deleted in transactions where it doesn't apply.

Lee v. 1435375 Ontario Ltd., 2013 ONCA 516

 

 

 Contact Richard Hayles at Billington Barristers:

(403) 930-4106

RHayles@BillingtonBarristers.com

Visit our website: http://billingtonbarristers.com

View my profile on LinkedIn: http://www.linkedin.com/profile/view?id=50396098&trk=nav_responsive_tab_profile



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.

Supreme Court: Disqualification Is Not the Only Remedy for Law Firm Conflict of Interest



    The Supreme Court of Canada

McKercher LLP is a substantial law firm in Saskatchewan.  The Canadian National Railway Company retained McKercher from time-to-time on a variety of matters, and as of late 2008, McKercher was representing CN on three files: a personal injury claim, a real estate acquisition, and a receivership.  In that same time frame McKercher accepted a retainer to act against CN in a class action claiming that CN had overcharged farmers in Western Canada for the transportation of grain.
 

McKercher did not inform CN that it planned to initiate the action on behalf of the class.  The law firm hastily terminated its existing CN retainers before serving CN with the statement of claim in the class action, claiming $1.75 billion.  This was the first notice that CN received that McKercher was acting in a class action against CN.  CN applied for an order removing McKercher as solicitor of record for the class action plaintiffs, claiming conflict of interest, and the motion judge granted the order.  This decision was reversed by the Saskatchewan Court of Appeal.
 

A further appeal to the Supreme Court of Canada raised two issues: (1) can a law firm act against a current client on a matter unrelated to the client's existing files? (2) if not, does the firm's conflict of interest result in automatic disqualification, or should alternative remedies be considered?

The "Bright Line Rule"
 

In a decision released July 5, the court found that McKercher was in a conflict position, invoking the "bright line rule" from its earlier decision in R. v. Neil, 2002 SCC 70, [2002] 3 SCR 631.  Under the bright line rule a law firm cannot represent clients adverse in interest without first obtaining the clients' consent, even if the two matters are unrelated.
 

In its ruling in the McKercher case, the Supreme Court emphasized certain important aspects of the bright line rule.  The rule is based on a fiduciary's duty of loyalty.  It assumes that conflict of interest is inherent and inescapable in certain situations.  For that reason the rule cannot be rebutted or attenuated.
 

The scope of the rule is limited, however.  It only applies where the immediate interests of the client are directly adverse in the two matters.  It applies only to the client's legal interests, as opposed to business or strategic interests, so the rule is not triggered where the firm accepts a retainer on an unrelated matter from a company that is a business competitor of another client.  It should not be raised as a tactic in an effort to disqualify the law firm when the client has no real concern that its interests will be adversely affected (the Court suggested that an institutional client would not be permitted to abuse the rule by retaining a single lawyer in one office of a national firm, expecting that this would disqualify all other lawyers with that firm from acting against the client).  It does not apply in circumstances where it is unreasonable for the client to expect that the firm will not act against it in unrelated matters.  For instance, it is accepted practice that lawyers who handle work for "professional litigants" such as governments, banks, and other large institutions may act against these clients in unrelated matters.

 

The decision of the Court was delivered by Chief Justice McLachlin, who said that McKercher's concurrent representation of CN and the class action plaintiff "fell squarely within the scope of the bright line rule."  The legal interests of CN and the Western farmers who made up the class were adverse.  CN was not trying to abuse the rule, and it was reasonable for CN to expect that its lawyers would not act for plaintiffs that were suing CN for $1.75 billion.
 

McLachlin, C.J. went on to find that McKercher was in breach of other duties.  A law firm has a duty of commitment to its client's cause, and should not summarily drop a client in order to avoid a conflict of interest.  The firm also owes its client a duty of candour and is required to advise the client of any developing matters that could effect the retainer.  The failure to advise CN of its intention to act for the class action plaintiff constituted a breach of this duty of candour.

The Disqualification Remedy
 

Disqualification from acting in the pending litigation is the normal remedy when a law firm is in breach of the bright line rule, and this is the remedy that the motion judge had granted to CN.  The Court recognised that disqualification is not always appropriate, however, and sent the case back to the motion judge for a determination of the proper remedy.
 

The Courts exercise a supervisory jurisdiction over the administration of justice.  This includes an inherent jurisdiction to remove law firms as solicitors of record in pending litigation.  The factors that militate in favour of disqualification are: (1) the potential for the misuse of confidential information; (2) the risk of compromised or impaired representation; and (3) the need to uphold the integrity and reputation of the administration of justice.
 

McLachlin, C.J. was of the view that there was no potential for the disclosure or misuse of confidential client information in the instant case.  There was no prior or current retainer giving McKercher access to confidential information that would be directly relevant to the claim brought by the Western grain farmers.  The motion judge concluded that McKercher, by virtue of its involvement in previous CN litigation, had acquired a unique understanding of the strengths, weaknesses, and attitudes of CN with respect to litigation, and that this general knowledge was confidential information.  The Court of Appeal, on the other hand, said that a general understanding of CN's litigation strengths and weaknesses did not constitute confidential information.  The Supreme Court seems to have accepted this view, as the Chief Justice concluded that there was no confidential information at risk.
 

Since McKercher's other CN retainers had been terminated, there was also no concern that McKercher would fail to provide CN with strong representation in the concurrent matters out of a desire to favour its new clients.  The only remaining concern, then, was whether or not allowing McKercher to continue to act for the class would damage the integrity and reputation of the administration of justice.
 

Where there is a need to protect confidential information, or a risk of impaired representation, Madame Justice McLachlin said that disqualification is generally the only suitable remedy.  In cases where the concern is the protection of the reputation of the justice system, disqualification may be required in order to send a message that the law firm's disloyal conduct is condemned by the courts; this is not, however, necessary in every case.
 

In cases involving the protection of the integrity of the judicial system, factors that may point in another direction include: (1) delay in bringing the motion for disqualification; (2) prejudice to the new client's ability to retain counsel of choice; (3) difficulty on the part of the new client in finding alternative counsel; and (4) the fact that the law firm acted in good faith, reasonably believing that acceptance of the new retainer did not breach the bright line rule or law society conflict regulations.  Since these issues were not before the motion judge, and there was no evidence on these points, and it was necessary to remit the remedy question to the lower court.

Up to now, lawyers might have thought that a finding of conflict of interest would automatically result in disqualification.  It is understandable that the Supreme Court would want to allow flexibility in the area of remedies; disqualification is a blunt instrument that cannot suit every case.  If a firm is disqualified, even early in litigation, new counsel will have to be retained and briefed.  This causes delay.  Some of the work that the former firm has done will have to be repeated by the new firm, and thousands of dollars in fees may be wasted and unrecoverable.  Although the Supreme Court ruling does not permit a litigant to use disqualification for purely tactical purposes, even when this is not the case disqualification constitutes a serious tactical disadvantage to the party that has to retain new counsel.  This party, the new client, has not done anything wrong, so there is always an element of unfairness when a litigant's counsel of choice is disqualified.

Although in principle remedial flexibility is a good idea, it is difficult to understand how it could be applicable in this case.  The fact that the bright line rule applies even when the two retainers are unrelated was established by the Court's decision in R. v. Neil in 2002, so it seems unlikely that the McKercher firm had a good faith belief that the new retainer fell outside the rule.  Certainly McKercher could not have been surprised when CN moved for disqualification.

In addition to the finding that McKercher was in conflict, there are also the findings that McKercher breached its duty of commitment by terminating the earlier retainers in order to get around conflict rules, and that the firm breached its duty of candour by failing to advise CN that it was putting together a massive class action against CN.  If the Court wants to send a firm message condemning this kind of conduct on the part of lawyers, this case would seem to support that message.  CN did not delay in bringing its motion, the class action litigation was then in an early stage, and the Western grain farmers ought to be able to find another Western firm that has the capacity to handle a large and complex class action lawsuit.

It seems improbable that any remedy but disqualification could be appropriate, but we will have to await the decision of the motion judge on the issue of remedy.
 

Canadian National Railway Co. v. McKercher LLP, 2013 SCC 39
 

Contact Richard Hayles at Billington Barristers:

(403) 930-4106

RHayles@BillingtonBarristers.com

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

View my profile on LinkedIn: http://www.linkedin.com/profile/view?id=50396098&trk=nav_responsive_tab_profile



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.

Court Upholds "Wind-Driven Rain Exclusion"

    A Little Rain Must Fall

You asked your broker to make sure you had good coverage for your business, so you figure you can focus on your customers now and shouldn't have to worry about high winds, rains, or ice storms.  Maybe you should think again.

Many commercial property policies exclude water damage to the interior of the building or building contents unless wind or hail creates an opening in an exterior wall, allowing rain or other precipitation to enter the building.  This type of exclusion, known as a "Wind-Driven Rain Exclusion", can be an unwelcome surprise to the business owner when rain seeps into the building during a storm.

That's what happened to Vernon and Judy Smith, Alberta farmers who returned from a summer vacation to find that the insulation and contents of their barn had suffered water damage.  There had been a heavy snowfall the previous winter, and according to an expert who examined the roof after the loss, the weight of a 4' accumulation of snow in March had loosened seams and fasteners in the metal roofing.  Damage to the building and contents from the rain in July amounted to some $70,000.

The barn was covered under a Farm Property Policy issued by Wawanesa.  That policy contained an exclusion for damage to the interior of the building caused by rain, "unless an opening in the roof or wall is made by wind or hail and the rain...enters concurrently through this opening".

The case was tried by Madam Justice Veit in Grande Prairie on the basis of an agreed statement of facts.  The judge relied on the established principles of interpretation applicable to insurance policies:

• the insurance company bears the onus of establishing that an exclusion clause applies;
• the insurer's burden of proof is on a balance of probabilities;
• the words in the policy are to be given their natural and ordinary meaning;
• exclusion clauses in insurance contracts should receive a narrow interpretation in favour of the insured;
• coverage provisions, on the other hand, are construed broadly;
• the court may consider the reasonable expectations of the parties, but only if that will help to resolve an ambiguity in the language of the exclusion clause.
  
  

The Smiths argued that the policy must be ambiguous, because they thought they would be covered for the kind of damage that occurred.  The judge pointed out, however, that the standard for ambiguity is not the subjective expectations of the insured, but the objective intention of the parties as determined by reading the policy as a whole.  Like any contractual language, the words in an insurance policy mean what an impartial bystander would think they mean.

Based on this objective or "reasonable man" test, the judge was unable to find any ambiguity.  There was therefore no basis to bring in evidence outside the contract, or to consider the expectations of the parties.

There was also no reason to invoke the contra proferentem doctrine and construe the policy against the insurance company.  This principle applies where there are two reasonable interpretations of the policy language; the court is to prefer the interpretation that advances the position of the insured over an interpretation that is in the interests of the insurance company.  Although the plaintiffs argued that the exclusion clause could have been written in a way that would make the meaning more clear, the possibility that different  wording might better convey the insurance company's intent didn't mean that there was ambiguity or that there were two possible interpretations.  Justice Veit concluded that she had to give effect to the plain language of the policy and reject the claim for interior damage.

The judge did not analyze the wording of the exclusion closely, but it is easy to see why she thought that the exclusion applied.  Although the loosening of the roof seams and fasteners might be construed as an "opening" in the roof, this damage was clearly caused by the weight of the snowfall in March and not by wind or hail.  Furthermore, the rainwater didn't  enter the building "concurrently" with the damage to the metal roof - the roof seams had been damaged in March, but the water penetrated the building in July.

The decision is in keeping with established insurance law.  Nevertheless, this kind of exclusion, as well as other common exclusions such as the exclusion of damage caused by overland flooding, do not meet the expectations of business and home owners who rely on insurance to protect them against weather-related disasters.

People don't have the time to read their policies and carefully and consider every clause that might limit coverage in the context of every contingency that could arise.  Insurance buyers are not insurance professionals; they lack the background and specialized knowledge to fully understand common policy provisions.  It is anomalous that documents created by insurance specialists are to be interpreted under a "natural and ordinary meaning" standard.   The words used in insurance policies and the way the policies are structured do not really have any equivalent in natural and ordinary communication.

Most business people place their insurance through brokers.  The broker has an obligation to inquire about the business, figure out what assets need to be protected, obtain appropriate coverage, and explain any exclusions or limitations in coverage.  If the insured could have purchased a policy without the exclusion, and the broker failed to recommend this or caution the insured about the effect of the exclusion, the insured may have recourse against his broker.

Smith v. Wawanesa Mutual Insurance Company, 2013 ABQB 369, http://www.albertacourts.ab.ca/jdb_new/public/qb/2003-NewTemplate/qb/Civil/2013/2013abqb0369.pdf

Contact Richard Hayles at Billington Barristers:

(403) 930-4106

RHayles@BillingtonBarristers.com

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

View my profile on LinkedIn: http://www.linkedin.com/profile/view?id=50396098&trk=nav_responsive_tab_profile


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.



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

RHayles@BillingtonBarristers.com

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

View my profile on LinkedIn: http://www.linkedin.com/profile/view?id=50396098&trk=nav_responsive_tab_profile


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

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

View my profile on LinkedIn: http://www.linkedin.com/profile/view?id=50396098&trk=nav_responsive_tab_profile


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

View my profile on LinkedIn: http://www.linkedin.com/profile/view?id=50396098&trk=nav_responsive_tab_profile


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.