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Co-Counsel
McCarthy Tétrault Co-Counsel:
Litigation Volume 1, Issue 2
July — October 2007
Co-Counsel: Litigation Volume 1, Issue 2
Welcome to Volume 1, Issue 2 of McCarthy Tétrault Co-Counsel: Litigation.
Much is happening in the courts, and we are pleased to be able to tell you about recent developments in a number of areas.
As always, nothing ever stays quiet in the area of class actions. Our authors discuss an important Ontario decision that may make it easier for plaintiffs to establish commonality in consumer class actions, increasing the chances of actions being certified.
The Honourable James M. Farley, in his regular column, discusses exercising options to renew and complying with conditions precedents. An avid golfer, he also shares with us an interesting postscript on the surprising treatment of that game in a recent B.C. case.
On the competition front, we look at whether suppliers can determine the resale price of their products in cross-border distributions, noting an increasing divergence between US and Canadian law arising from a recent decision of the US Supreme Court. The article also comments on the resulting implications for uniform distribution policies in North America.
For in-house counsel, three articles will be of particular interest. One discusses a ruling on privilege in situations where lawyers represent both parent and subsidiaries. Another provides guidance on managing insurance claims, outlining steps to take to enhance the chances of claims being covered and losses paid. A checklist of issues to consider before undertaking an internal investigation will also be a useful resource.
In contract law, we have an article explaining the doctrine of common mistake, describing circumstances where the doctrine will not be applied to void a contract.
In tort law, we have an article examining a recent Supreme Court of Canada ruling on causation in negligence cases.
Lastly, we include a primer on costs awards, explaining the different types and the varying degrees of recovery.
All of the authors listed in the publication, as well as the rest of their colleagues at McCarthy Tétrault, are happy to answer your questions and discuss the issues raised in these articles.
Co-Counsel: Litigation Volume 1 Issue 2
We welcome your questions and comments. If you are not a current subscriber and would like to receive it in future, simply contact us to have your name added to our list.
Yours truly,
Geoff R. Hall (Toronto, Editor-in-chief) Shaun Emery Finn (Montréal), Kara L. Smyth (Calgary), Miranda Lam (Vancouver)
Heather J. Ritchie and Martin B. Halpern Knowledge Management Lawyers, Litigation Group
October 2007
Co-Counsel: Litigation Volume 1 Issue 2
Table of Contents
Class Actions........................................................................................ 1 An Issue of Significant ‘Interest’: Ontario Decision Lowers the Threshold on Establishing Commonality in Consumer Class Actions ..........................................................1
Competition Law .................................................................................. 3 Cross-Border Distribution: Can a Supplier Dictate the Resale Price of Its Products? ......................3
Company Matters .................................................................................. 5 Internal Investigations: A Checklist ...............................................................................5
Privilege ............................................................................................. 7 Privilege over In-House Work Upheld in US Appellate Court: A Good Reason for In-House Counsel to Celebrate .............................................................7
Negligence Law .................................................................................... 9 Causation in Tort Law: The ‘Resurfice’ of the ‘But For’ Test ................................................9
Contract Law ......................................................................................11 My Mistake, Your Mistake or Common Mistake ................................................................ 11
Insurance Law ....................................................................................13 Responding to a Major Claim: Managing the Process of Claiming Reimbursement ...................... 13
Costs ................................................................................................15 Cost Awards: The Declining Role of Indemnity ................................................................ 15
Farley's Reflections ..............................................................................17 Caution When Exercising Option................................................................................. 17 Post Script........................................................................................................... 18
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Class Actions An Issue of Significant ‘Interest’: Ontario Decision Lowers the Threshold on Establishing Commonality in Consumer Class Actions
Since Ontario adopted its Class Proceedings Act (CPA) in 1992, consumer class actions involving small individual claims have been hard to certify because commonality is often difficult to establish. However, the recent Ontario Court of Appeal decision in Markson v. MBNA Canada Bank may facilitate the certification process.
Even in cases where there is no reasonable means of proving that each class member suffered a loss, courts can now hypothesize such a loss for the purposes of certification. The Court of Appeal has relegated the concept of universal liability to an administrative issue that can be addressed through assumptions and aggregate awards, rather than considering it a basic requirement for class proceedings.
MBNA was accused of charging an illegal rate of interest to its credit card holders. Under the Criminal Code, it is illegal for a lender to receive more than 60 per cent interest on any loan. The term “interest” is defined to include both actual interest and fees charged on the loan. Markson alleged that MBNA’s cash advances, which required customers to pay both a flat fee and compound interest, violated this provision and sought to certify the proceedings as a class action.
The lower court refused certification. It found that it would be impracticable to determine whether MBNA was liable to each class member. Such a determination would involve a painstaking examination of transactional information when the amounts in question were negligible.
Moreover, MBNA did not have electronic records covering the period before January 2000. This made it impossible to develop a program that could scan available data and isolate potentially excessive interest charges.
The lower court also noted that the proposed class action was not a preferable procedure. Because changes in MBNA’s computing practices would limit the credit options enjoyed by many of its customers, the proceedings would undermine, rather than serve, the interests of the prospective class members.
The Court of Appeal, however, took a very different approach. According to the appellate court, it was unnecessary to determine MBNA’s liability toward each class member when all were ‘at risk’ of being charged a criminal rate of interest. Since some form of wrongdoing could be certified as a common issue, the fact that only a small number of individuals might have been affected by MBNA’s practices — and therefore be entitled to damages — was irrelevant.
Because the CPA allows judges to calculate and distribute compensation on an approximate
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basis, the difficulties associated with assessing individual claims could be resolved administratively. In the court’s view, it was better to certify a class when only some of its members have suffered an injury than to allow a defendant to get away with illicit practices. The court also held that it would be inappropriate to reward MBNA for the deficiencies of its record-keeping system.
As for the notion that customers would be disadvantaged by more limited credit options, the court noted pithily that, “[a]s a matter of public policy, a criminal should not be permitted to keep the proceeds of the crime.”
McCarthy Tétrault Notes:
The Markson case appears to lower the threshold on establishing commonality in consumer class action cases for Ontario plaintiffs. Even if proving liability on an individual basis is extremely problematic, the plaintiffs need only show that there has been some underlying infringement that creates a ‘risk’ of class-wide damages.
From a strategic standpoint, this may increase pressure on defendants to settle at an early stage of the proceedings, even when the merits of the action are quite weak. Unfortunately, this ‘blackmail’ effect goes against the Supreme Court’s threefold justification for class proceedings, namely access to justice, judicial economy and behaviour modification.
Contact: Shaun Emery Finn in Montréal at [email protected] or David I.W. Hamer in Toronto at [email protected] or Sean S. Smyth in Calgary at [email protected] or Elaine J. Adair in Vancouver at [email protected]
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Competition Law Cross-Border Distribution: Can a Supplier Dictate the Resale Price of Its Products?
An issue that frequently arises in the context of cross-border distribution agreements is whether manufacturers can determine the resale prices of their products, a practice called resale price maintenance (RPM). Canadian and US law treat RPM differently, and the US Supreme Court recently issued a decision accentuating these differences, making a uniform distribution policy for both countries even more difficult to adopt.
In Canada, RPM is a criminal ‘per se’ offence, which means that it is prohibited irrespective of its effect on competition in the market. The Competition Act prohibits any supplier from attempting, by agreement, threat, promise or any like means, to influence upward or to discourage the reduction of the price at which another person sells or advertises a product within Canada. Suppliers are therefore prohibited from making an agreement with their distributors to set the resale price of their products, to increase such price or to prevent its reduction. Suppliers are also prohibited from using promises, threats or other similar acts to achieve this result. Imposing a ceiling price is permissible.
The Competition Act also provides that suggested resale prices or price advertisements by a supplier of a product constitute RPM, unless it is made clear that the reseller has no
obligation to accept the suggested resale price. It is also a criminal offence to refuse to supply a product to a reseller because of the reseller’s low pricing policy.
US law, in contrast, has no specific provision about RPM. This practice is considered under the Sherman Act, which prohibits all agreements in restraint of trade. Based on a decision that dates back to 1911, agreements between suppliers and their customers about the prices at which goods would be resold were considered price-fixing agreements contrary to the Sherman Act. However, it is not illegal for a manufacturer to unilaterally announce the desired resale price and to cease dealing with a reseller who charges a lower price. US courts have held that this does not amount to an agreement within the meaning of the Sherman Act.
In the recent case of Leegin Creative Leather Products, Inc. v. PSKS, Inc., the US Supreme Court overruled its century-old decision. It held that agreements between suppliers and dealers about minimum resale prices should no longer constitute a ‘per se’ offence, but rather should be judged under the ‘rule of reason.’ Therefore, only RPM agreements proven to have anti-competitive effects that are harmful to consumers will be held to offend the Sherman Act.
Among the relevant factors for the ‘rule of reason’ analysis, the court mentioned the market power of the parties, the prevalence of
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RPM in the relevant market (at either the manufacturer or reseller level), whether the driving force behind the RPM was the manufacturer or its dealers and the potential pro-competitive effect of RPM in certain cases.
McCarthy Tétrault Notes:
The practical impact of the Leegin decision in the U.S. remains to be seen. This decision will, however, certainly make it easier for manufacturers in the U.S. to impose a resale price in many situations, a practice which remains illegal in Canada.
One of the pro-competitive justifications considered by the US Supreme Court for RPM was to prevent ‘free-riding’ by discounting resellers who benefit from the higher demand created by other resellers who invest in providing customer service or developing a reputation for quality. This argument will no doubt be relied upon to justify imposing RPM requirements in many cases, particularly on Internet sellers who offer low prices but no service.
As indicated above, the situation is markedly different in Canada, where all forms of RPM, either by agreement or by unilateral action, remain ‘per se’ illegal, and where refusing to deal with a reseller because of its low pricing policy is also illegal.
This US Supreme Court decision will therefore make it even more difficult to apply a single distribution policy for both
countries. It will also raise particularly thorny issues for manufacturers wanting to impose RPM requirements on Internet resellers located in Canada, where RPM is illegal.
The Canadian government has recently created the Competition Policy Review Panel to review key elements of Canada’s competition and investment policies. Part of this panel’s mandate is to examine other jurisdictions’ competition regimes “to assess reciprocity between their rules and Canada’s.”
While the panel’s precise agenda remains unknown, it is to be hoped that the panel will assess the relevance of Canada’s RPM rules to the Canadian economy in light of these developments in US law.
Contact: Madeleine Renaud in Montréal at [email protected] or Yves Comtois in Montréal at [email protected] or Oliver J. Borgers in Toronto at [email protected] or Randal T. Hughes in Toronto at [email protected] or Donald B. Houston in Toronto at [email protected]
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Company Matters Internal Investigations: A Checklist
Consider these scenarios:
• An industrial accident results in a workplace fatality.
• An anonymous whistleblower tip raises suspicion of a significant internal fraud.
• A serious allegation of wrongdoing is made against a long-time employee.
Each situation will require an investigation, but each will require a different response:
• Regulators and police will be involved in the investigation of a workplace fatality, and administrative or criminal proceedings may result. In addition, the investigation will, in part, gather information to be used in preparing for litigation, so preserving privilege will be important.
• Investigation of an ongoing fraud will require the ability to move quickly to preserve evidence and assets.
• Investigation of an allegation of misconduct will require a balance between the benefits of an open process and protection of the privacy rights of the individuals involved.
All investigations will need to be tailored to the circumstances giving rise to them and the investigative goals. Nonetheless, there
are basics to follow. Here is a checklist of fundamental issues that you should consider before undertaking an internal investigation:
Expect the unexpected — Something bad will happen; it is only a matter of time. Identify the most likely risks to your business. Implement a structure that designates who will be responsible for directing the investigation, conducting the investigation and acting as company spokesperson.
Move quickly — Decide right away whether to involve outside counsel. Assess the risks. Who is the subject of the investigation? What is the risk of prosecution? Is the company’s reputation at stake? Are assets at risk of dissipating? Preserve the evidence before it is gone.
Establish a chain of command — Recognize the potential for conflict between the company and those affected by the investigation. Always remember who the client is. Have outside counsel lead the investigation and establish a clear claim for privilege. Make sure the investigation is independent and not a management tool.
Set investigative goals — Is this a fact-finding exercise? Will there be recommendations made to change existing practices? Will the report be disclosed to the public or to regulators? Is this mostly preparation for anticipated litigation?
Choose a process — Who needs to be interviewed? Can internal investigators conduct the interviews? Are external
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investigators needed to preserve objectivity and independence? Will the report be fault-finding or fact-finding? What level of due process is required?
Be credible — Only credible investigations are effective. Independence, fairness and rigour are the keys to credibility. An open process is the best choice, where possible.
Control timing — Effective investigations move quickly. Set time constraints at the outset. Balance the need for process with the need to get an answer.
Pitfalls — Investigations are hard on people. Ineffective investigations make the situation worse by failing to establish facts, causing dissent and prejudicing the company’s legal position. Regulators may see a weak investigation as an absence of due diligence.
McCarthy Tétrault Notes:
Investigations are required at critical times. They are strategic.
Done poorly, they will only make things worse. An inadequate investigation will, at best, lack credibility and, at worst, look like a cover up.
Done properly, they will anticipate risks, gather information quickly and ultimately allow for efficient, effective decision-making and the ability to influence regulatory action. An effective investigation will quickly identify the
organizational risks to the company and commit enough resources, both personnel and financial, to deliver the best result.
Contact: Robert W. Cooper in Vancouver at [email protected] or Michael Ford in Calgary at [email protected] or F. Paul Morrison in Toronto at [email protected] or William J. Atkinson in Montréal at [email protected]
Page 7 Co-Counsel: Litigation Volume 1 Issue 2
Privilege Privilege over In-House Work Upheld in US Appellate Court: A Good Reason for In-House Counsel to Celebrate
Solicitor-client privilege can take different forms that are often confused. The recent US Court of Appeals for the Third Circuit decision, Teleglobe USA Inc. v. BCE Inc. (In re Teleglobe Communications Corp.), sheds light on the distinctions and helps guide in-house counsel in structuring companies’ affairs in order to preserve privilege.
When BCE purchased Teleglobe in 2000, BCE pledged financial support to Teleglobe to create a global data network. When the technology bubble burst, BCE ceased funding Teleglobe. Teleglobe, along with several of its American subsidiaries, filed for bankruptcy protection. Teleglobe's creditors sued BCE.
During the ensuing litigation, Teleglobe’s creditors asked to see all documents that had been produced for or by BCE relating to the decision to discontinue funding Teleglobe, including opinions of outside counsel. BCE opposed that request.
The federal District Court in Delaware ordered BCE to produce all such communications, on the basis of community-of-interest privilege. The Court of Appeals, however, sent the case back to the District Court because the lower court had not made a factual finding allowing it to set aside BCE’s privilege.
The Court of Appeals found that the District Court had misconstrued the type of solicitor-client privilege at issue. It said that community-of-interest privilege applies only where several parties are represented by different lawyers on matters of common interest.
Co-client (or joint client) privilege applies, said the court, when the same lawyer represents both a parent and a subsidiary company on matters of common interest. Thus, communications among parties to the joint representation are protected from compelled disclosure to outside parties.
If BCE and Teleglobe had been jointly represented on matters of common interest, the communications made during the joint representation would have been discoverable as between them. The court rejected BCE’s position that the discoverability rule should not apply when the parties are related entities. It also decided that the communications remained discoverable even after their interests became adverse.
The court instructed the District Court to determine whether BCE and Teleglobe were jointly represented upon the discontinuation of Teleglobe’s funding. The extent of the joint representation would determine whether the District Court’s earlier ruling would stand.
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The court urged in-house counsel to avoid joint representations except when necessary and to limit the scale of joint representations. It also suggested separate counsel when the interests of the parent and the subsidiary company diverge. For spin-off transactions, the court advised against the use of joint representations.
Recognizing that spin-off transactions can take time to complete, the court suggested that parent companies retain outside counsel for the subsidiary company being spun-off, while using joint representations on matters of mutual interest.
McCarthy Tétrault Notes:
In light of this decision, in-house counsel might want to:
• devise a strategy to determine when the interests of the parent and subsidiary companies should be jointly represented and when the interests of the parent and subsidiary companies require separate representation;
• document the strictly limited nature of any such joint representation, thereby limiting any future unanticipated loss of privilege over key opinions;
• retain outside counsel to represent a subsidiary company’s interests if they diverge from those of the parent company; and
• retain outside counsel for the parent company on matters in which it would not want to subsequently have to turn over documents to a former subsidiary company.
A more detailed discussion of this case by Tara McPhail and Andrew Wilkinson is on our website.
Contact: Tara McPhail in Vancouver at [email protected] or Andrew Wilkinson in Vancouver at [email protected] or Mendy M. Chernos in Calgary at [email protected] or William D. Black in Toronto at [email protected] or Mason Poplaw in Montréal at [email protected]
Page 9 Co-Counsel: Litigation Volume 1 Issue 2
Negligence Law Causation in Tort Law: The ‘Resurfice’ of the ‘But For’ Test
For a defendant to be found negligent, the law requires a causal link between an act or omission and the harm suffered by the plaintiff. Many labels have been used to describe causal links, and certain difficulties may arise in applying those labels to the facts of a given case. In Resurfice Corp. v. Hanke, the Supreme Court of Canada has tried to clarify this complicated area.
This case involved an ice resurfacing machine at an arena in Edmonton. The machine had both a gasoline tank and a water tank. Unfortunately, Hanke mistakenly placed the water hose into the machine’s gasoline tank. Hot water pouring into the gasoline tank made it overflow, resulting in the release of vaporized gasoline into the air, leading to an explosion and fire that caused severe burns to Hanke.
Hanke sued the manufacturer and distributor of the ice resurfacing machine on the basis that it was too easy to confuse the gasoline tank and the water tank, given their appearance and proximity. Hanke’s action was dismissed at trial. On the issue of causation, the trial judge concluded that Hanke was not confused and that the design of the machine had not caused the accident.
The Alberta Court of Appeal, however, decided that the trial judge had erred by failing to consider the ‘comparative blameworthiness’ of
the plaintiff and the defendants and also by not applying a ‘material contribution’ test.
The Supreme Court of Canada reversed the Alberta Court of Appeal’s decision and summarized the principles that have emerged from the cases on causation:
First, the basic test for determining causation remains the “but for” test. This applies to multi-cause injuries. The plaintiff bears the burden of showing that “but for” the negligent act or omission of each defendant, the injury would not have occurred. Having done this, contributory negligence may be apportioned, as permitted by statute.
The court said that the ‘but for’ test is intended to ensure that a plaintiff will receive compensation for negligent conduct only where a ‘substantial connection’ exists between the injury and the defendant’s conduct. Where the plaintiff’s injuries may very well be due to other factors that are not connected to the defendant, no liability will be found.
The ‘material contribution’ test only applies in special circumstances and specifically where it is impossible for the plaintiff to prove that the defendant’s negligence caused the plaintiff’s injury using the ‘but for’ test. This impossibility must be due to factors that are outside the plaintiff’s control, such as the current limits of scientific knowledge. In addition, the plaintiff must show a breach of duty that exposes the
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plaintiff to an unreasonable risk of injury. Causation may be relaxed only where both requirements are met.
The existence of multiple causes is not enough to relax the test:
The Court of Appeal erred in suggesting that, where there is more than one potential cause of an injury, the “material contribution” test must be used. To accept this conclusion is to do away with the “but for” test altogether, given that there is more than one potential cause in virtually all litigated cases of negligence. If the Court of Appeal’s reasons in this regard are endorsed, the only conclusion that could be drawn is that the default test for cause-in-fact is now the “material contribution” test.
Thus, it is inappropriate to focus on whether an alleged act of negligence made a material contribution to the damages. Instead, if a defendant is going to be found liable in negligence, it will generally be on the basis that ‘but for’ the defendant’s negligence, the damages would not have occurred.
Contact: Darryl A. Cruz in Toronto at [email protected] or Douglas T. Yoshida in Calgary at [email protected] or Michelle S. Lawrence in Vancouver at [email protected] or Chantal C. Tremblay in Montréal at [email protected]
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Contract Law My Mistake, Your Mistake or Common Mistake
The doctrine of common mistake will void a contract based on a common and mistaken assumption of material fact. If, however, the contract provides that one party bears the risk of the particular mistake, that party cannot rely on the doctrine to have the contract set aside. One should bear in mind this point, recently emphasized by the Ontario Court of Appeal in Miller Paving Limited v. B. Gottardo Construction Ltd., when agreements are drafted and performed, as well as when mistakes are litigated.
Miller contracted to supply to Gottardo paving materials used to build a highway extension. In late 2001, the parties signed a mutual release in which Miller acknowledged receiving payment in full for all materials supplied. Unfortunately for Miller, this acknowledgment was a mistake. A month later, Miller discovered that it had failed to bill for approximately $500,000 in materials delivered to Gottardo between June and September 2001. Miller sued for that unpaid amount, but the trial court denied his claim.
The appeal court upheld the trial court’s decision, holding that Miller could not invoke the doctrine of common mistake because the mutual release allocated the risk of underpayment to Miller.
In reaching this conclusion, the appeal court relied on:
• Miller’s acknowledgment and agreement in the mutual release that full payment had been received; and
• the parties’ billing practice, which made it Miller’s responsibility to determine what material was supplied and invoice the correct amount.
Reading the contract within the factual matrix of the billing practices, the court held that Miller bore the risk that payment in full had not been received. Therefore, the doctrine of common mistake did not apply.
The court went on to state that, even assuming the doctrine of common mistake could be invoked, this release could not be set aside because:
• applying the common law approach to the doctrine, Miller could not show that the subject matter of the contract became “essentially different from what it was believed to be” as a result of the common mistake; and
• under the equitable doctrine, the fact that the mistake was due to Miller’s own gross oversight was fatal.
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Although the court considered the equitable doctrine of common mistake as one of the alternative bases of its decision, the court noted that it was not deciding whether a 2003 English Court of Appeal decision abandoning the equitable version of the doctrine should be followed. Nevertheless, the court did comment that there was “good reason” not to abandon the equitable doctrine: its flexibility allows for the correction of unjust results in diverse circumstances.
McCarthy Tétrault Notes:
While the court recognized the importance of common mistake as a corrective tool, this case illustrates that mutual misapprehension of facts is not necessarily sufficient for the application of the doctrine. Rather, the first issue to determine is whether the contract assigns responsibility for the mistake to the aggrieved party. If so, no redress is available.
Therefore, when drafting agreements, consider whether common mistakes are likely to arise in performance and clearly allocate responsibility for such mistakes to the counter-party, if possible.
Furthermore, be aware of the parties’ practices, such as the manner in which they bill, because the court may consider these practices, in addition to the language of the contract, when assessing the allocation of responsibility for the mistake.
Contact: Andrew Matheson in Toronto at [email protected] or Kara L. Smyth in Calgary at [email protected] or Herman Van Ommen in Vancouver at [email protected]
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Insurance Law Responding to a Major Claim: Managing the Process of Claiming Reimbursement
Organizations buy insurance as protection against events that might happen in the future. If, regrettably, a claim arises, how can you increase the chances that it will be covered under your insurance? This article outlines some steps to take when managing the process of claiming reimbursement for your loss.
Assemble a team — You need to understand potential coverage issues before presenting your claim. Your team should identify your organization’s obligations under the policies to ensure compliance. Furthermore, good teamwork will ensure the coverage implications of all decisions are carefully made and considered.
The team should include the company’s risk manager, in-house counsel, outside counsel where necessary, insurance advisors (such as the broker) and senior management. Depending on the nature of the claim, it may also be advisable to retain experts to assist on potential coverage issues before a claim is presented. As your insurance company will appoint an adjuster, you should appoint a spokesperson to liaise with the adjuster and manage the flow of information.
Read the policy carefully to identify reporting requirements — In an ‘event/occurrence’ policy, coverage is triggered by the actual event or occurrence, which you should report immediately to the insurer with whom you had coverage at the time the occurrence took place. The claim must be reported to all insurers under all possible policies, including ‘umbrella’ and ‘excess insurance’ policies. Delay in reporting may prejudice the insurer and impact your coverage.
In responding to a claim under a ‘claims-made’ policy, you must serve your notice of the claim on the insurer during the term of the policy. Delay in reporting the claim can result in no coverage.
Consider obtaining ‘run-off’ insurance — Apart from demands, the policy may also require the insured to notify the insurer of occurrences which may give rise to claims. If your policy is about to expire and you have provided notice of an occurrence to your insurer but no third party claim has been made against you, run-off insurance would extend coverage long enough to satisfy any limitation period.
Cooperate with the insurer — Apart from the notification requirements under the policy, you are under a duty to cooperate with the insurer when a claim occurs, which includes the duty to:
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• obtain the attendance of witnesses;
• secure evidence;
• provide relevant evidence that is not publicly available; and
• protect the right of subrogation.
Moreover, you cannot do anything to prejudice the insurer’s rights, namely their right to investigate, admit liability and effect settlement.
Report all changes material to the insurer’s risk — Remember that an insurance contract is referred to as creating an ‘uberrima fides’ relationship (a relationship of utmost good faith), which imposes on you a continuous duty of full disclosure.
Dealing with a denial of coverage — Insurers may initially deny coverage under a policy while they investigate the claim further. In order to avoid any claims for waiver or estoppel while they continue to conduct their investigation, your insurer may suggest signing a non-waiver agreement with you to preserve its rights to deny coverage. Non-waiver agreements frequently provide insurers with further rights that they do not otherwise have under the policy. You are not obligated to enter into a non-waiver agreement, but if you choose not to, you will have to consider other ways to deal with their denial of coverage.
If your insurer does indeed deny coverage, write them a letter inviting them to set out in writing the basis for their concern on coverage.
In this letter, express your willingness to cooperate fully with the insurer. If the insurer persists in its denial of coverage, be prepared to challenge their position while impressing on the insurer that you expect them to honour their commitments under the policy.
Document any agreement reached — If you do ultimately reach an agreement with your insurer about your claim, ensure that it is documented under a ‘reservation of rights’ agreement.
A more detailed discussion of this topic by Thomas H. Ferguson, Q.C. is on our website.
Contact: Thomas H. Ferguson, Q.C. in Calgary at [email protected] or Emmanuelle Poupart in Montréal at [email protected] or Ariel DeJong in Vancouver at [email protected] or William G. Scott in Toronto at [email protected]
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Costs Cost Awards: The Declining Role of Indemnity
Cost awards were traditionally awarded to compensate victorious litigants for the expenses they incurred prosecuting or defending a legal dispute. In Canada, courts typically order the losing party to pay costs to the winning party, though these awards rarely cover the successful litigant’s total costs.
While Canadian courts ultimately have complete discretion regarding cost awards, they tend to award costs on a ‘party-and- party’ — a partial indemnity — basis, in accordance with set tariffs or court practice. Party-and-party costs, referred to by different names in various jurisdictions, only partially reimburse a recipient for expenses incurred during litigation, as the courts attempt to strike a balance between the victor’s right to compensation and the losing party’s right to access the court system.
‘Solicitor-client costs’ (or ‘substantial indemnity costs,’ as they are aptly called in Ontario) are cost awards that come closer to providing complete indemnification. They are awarded primarily “where there has been reprehensible, scandalous or outrageous conduct on the part of one of the parties.” Although theoretically aimed at close to full indemnity, these rare awards of a punitive nature still only cover those costs that are reasonably necessary for the prosecution of the litigant’s case — what a lawyer could
charge a resisting client for representation — and therefore fall short of complete compensation.
In the case of both partial and substantial indemnity costs, the underlying principle of indemnification must be balanced against general principles of reasonableness and fairness. Ontario, for example, has recently abandoned its costs grid system for an approach that is, in the words of Justice Howden in Moss v. Hutchinson, “a more flexible, principled one targeted at fair value for the work reasonably required and the legitimate expectations of the losing party.”
The Ontario Rules of Civil Procedure set out several factors that courts should consider when fixing costs. These include the reasonable expectations of the paying party, the amounts claimed and recovered in the proceeding, the apportionment of liability, the complexity of the proceeding, the importance of the issues raised and the conduct of the parties.
As the Ontario Court of Appeal has stressed, adhering to an overriding principle of reasonableness in determining costs ensures access to justice. Therefore, even substantial indemnity cost awards are a reflection of what the court views as fair and reasonable, rather than a measure of actual expenses.
Similarly, the traditional definition of costs as ‘an indemnity to the person entitled to them’ has become outdated as courts use cost awards
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as policy instruments. Many provinces award costs on a higher scale where a party does not recover a judgment greater than a settlement offer it rejected, penalizing the loser for refusing a reasonable offer and increasing the duration of the litigation. Cost awards may also overcompensate in important cases of public interest. Furthermore, they may not match actual disbursements in cases of self-representation. In unusual circumstances, costs may even be awarded against a successful litigant.
By contrast, Québec courts do not increase cost awards to sanction reprehensible behaviour, nor do they look to overarching principles in making cost determinations. Under Québec civil law, costs are determined almost exclusively by reference to codified tariffs of judicial fees, which generally represent only a small fraction of actual expenditures. Only in highly exceptional cases of great importance and complexity will cost awards exceed the amounts outlined in the legislation.
McCarthy Tétrault Notes:
In determining the extent of cost awards, the law often strikes a balance between competing factors. Unlike the starting assumption in the U.S. that parties will pay their own costs, the ordinary rule across Canada is that the successful litigant is entitled to his or her costs. The implication is that unsuccessful litigation is itself the source of a duty to compensate.
Cost awards can encourage those in the right to pursue litigation and ensure that their victory will not come at an excessive cost, but they must not discourage legitimate litigation. Principles such as fairness, access to justice and reasonableness must be taken into account when assessing costs, as well as considerations regarding judicial efficiency and resource management.
Contact: Ayse Dalli in Montréal at [email protected] or Shaun Emery Finn in Montréal at [email protected] or Helen Gray in Ottawa at [email protected] or Eric Block in Toronto at [email protected]
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Farley's Reflections Caution When Exercising Option
In the Clark Auto Body Ltd. v. Integra Custom Collision Ltd. case decided earlier this year, the British Columbia Court of Appeal highlighted the dangers involved in exercising an option.
Clark had an option to renew its lease if it was not in default. The operative term was this:
The Tenant may exercise this Option only by giving written notice to the Landlord of its intention to renew not earlier than 9 months nor alter [sic] than 6 months prior to the date of expiration of the Initial Term, provided that there is no outstanding notice of default under Article 8.
A dispute had arisen concerning GST on the gross rent. Clark paid Integra all but $1,285 of the disputed amount, with no explanation as to the difference. Two months after making this payment, Clark sent Integra a notice to renew. Ten days later, Integra sent a notice of default regarding the unpaid disputed amount. Two months after this, Integra sent a notice of termination of the lease. Clark paid the disputed arrears the following day. By that time, the three-month notice window had expired.
The appellate court posed the problem this way: “… is a tenant who is in breach of covenants in a lease, the performance of which
are conditions precedent to the exercise of an option to renew the lease, entitled to relief from forfeiture?”
The court ultimately decided in favour of the landlord against the tenant. The court stated that it had to balance its ability to grant relief from forfeiture for the non-observance of the tenant’s covenants in an existing lease against the tenant’s non-compliance with conditions as to its renewal option. It concluded that, in the former case,
a tenant may be permitted to cure its default and be relieved from forfeiture to allow it to retain the balance of the term of the lease. In the latter, there is no compulsion on the tenant to exercise the renewal option, but if it does so, the tenant must comply with the conditions precedent. If the tenant fails to comply, it does not suffer a penalty or forfeiture of an existing tenancy. [The court on an equitable basis] will not intervene.
McCarthy Tétrault Notes:
This decision raises a number of points to consider when exercising an option (aside from the puzzling aspect that no attention appears to have been paid to the fact that no notice of default had been given when the notice of renewal was sent).
First, one should make certain that all of the conditions precedent to the exercise of the option have been satisfied. In this
Page 18 Co-Counsel: Litigation Volume 1 Issue 2
case, it would have been prudent to have paid the $1,285 in question, even if the payment were accompanied by a demand that that amount be sorted out for stated detailed reasons. Then, were the disputed amount in fact owing, it would have already been paid.
Second, the court did not discuss the situation of a bad faith notice of default being given by the landlord. This is probably because it noted that Clark gave no explanation for not paying the $1,285 difference.
Third, options can be extremely valuable assets, and failure to properly exercise an option may bring disastrous consequences. It’s worth considering whether Clark could have validly served another notice to renew within the three-month window if it had paid the disputed difference before the second service of such notice. In this case, payment may have cured and thereby eliminated the notice of default.
Last, it would seem prudent to ensure that option arrangements incorporate provisions whereby either one could verify that all conditions precedent to the exercise had been met or one could cure a default after notice had been given, even if that cure were outside the exercise period.
Post Script
Those of you who are golfers will find the June 2007 decision of the British Columbia Court of Appeal in Matharu v. Nam of interest. The court found that the defendant, who had a 12 handicap, did not have to yell “fore” when his ball went toward some trees adjacent to the tenth tee box. While he planned to shoot over the trees, his ball instead deflected and hit the plaintiff.
The court seemed impressed by the fact that the ball was on its intended line until the defendant lost sight of it, citing the trial judge who found: “This was not a shot that veered off on an unintended course. There was no reason for [the defendant] to call a warning immediately after taking the shot.”
However, golf is a three-dimensional game. If the ball does not go high or far enough to clear the trees before sight of it is lost, one would think that the best course of conduct would be to employ one’s maximum lung power.
The Honourable James M. Farley, Q.C. in Toronto at [email protected]
Please note that all decisions hyperlinked in McCarthy Tétrault Co-Counsel: Litigation are from Canlii (Canada Legal Information Institute: http://www.canlii.org/).
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