



COURT OF APPEAL FOR ONTARIO

CITATION: Whirlpool Canada Co. v. Chavila Holdings Limited,
    2017 ONCA 81

DATE: 20170131

DOCKET: C61703

Strathy C.J.O., LaForme and Benotto JJ.A.

BETWEEN

Whirlpool Canada Co.

Applicant (Appellant)

and

Chavila Holdings Limited, Outrigger Investments
    Limited, and 863880 Ontario Limited

Respondents

(Respondents in
    Appeal)

Jennifer Dahany and Gary D. Graham, for the appellant

Allan Sternberg and Joseph Figliomeni, and the
    respondents

Heard: October 11, 2016

On appeal from the order of Justice G. Dow of the Superior
    Court of Justice, dated January 12, 2016, with reasons reported at 2016 ONSC 58.

Benotto J.A.:

Overview

[1]

This appeal concerns an alleged conflict of interest between parties to
    an action arising out of the sale of contaminated land.

[2]

In the early 1990s, an area of land on the western edge of downtown
    Toronto was being assembled for development. It is now known as Liberty
    Village. The land consisted of four adjacent properties, which I refer to (by
    the names of their original owners) as the CP Lands, the Oxford Lands, the CN
    Lands and the Inglis Lands.
[1]


[3]

In 1990, 863800 Ontario Limited (863) purchased the CP and Oxford
    Lands. In 1991, 863 sought to purchase Whirlpools parcel (the Inglis Lands)
    through its related corporations Chavila and Outrigger.
[2]
It was discovered that the
    soil and groundwater on all four properties were contaminated. Negotiations
    ended but resumed years later when Whirlpool lowered its asking price in
    exchange for Chavila and Outrigger agreeing to indemnify it for all liability
    arising from the condition of the property, and to defend any actions brought
    against it. The terms of the sale and indemnity are central to the issues in
    this appeal.

[4]

In 2004, 863 commenced an action against CP and Oxford for contamination
    of the CP and Oxford Lands. In 2012, CP and Oxford brought claims seeking
    contribution and indemnity from Whirlpool. These claims triggered Chavila and
    Outriggers agreement to defend the action and to indemnify Whirlpool. Chavila
    and Outrigger said they would honour the agreement and appointed counsel to
    represent Whirlpool.

[5]

Whirlpool challenged Chavila and Outriggers choice of counsel, alleging
    a conflict of interest. It says that counsel cannot represent Whirlpools
    interests while taking instructions from Chavila and Outrigger. Whirlpool
    brought an application in the Superior Court for an interpretation of the
    indemnity agreement that would preclude this conflict.

[6]

The application judge concluded that there was no conflict and dismissed
    the application. Whirlpool appeals. For the following reasons, I would dismiss
    the appeal.

Background

[7]

Between 1990 and 1997, 863 purchased and assembled former industrial
    lands for redevelopment. In 1990, it purchased the CP and Oxford Lands. Inglis
    had historically leased the CN and Oxford Lands for commercial activities,
    including manufacturing appliances.

[8]

863 had affiliate corporations: 921424 Ontario Limited (921), which
    became Outrigger, and 941600 Ontario Limited (941), which became Chavila.

[9]

Outrigger had initially sought to purchase the Inglis Lands from
    Whirlpool in 1990. The purchase price was $25.6 million. David Moscovitz was
    counsel representing Outrigger/921. 921 carried out due diligence examinations
    of Whirlpools land and the lands that its predecessor Inglis had been leasing
    from CN, 863 and Oxford. All four parcels of land were found to be
    contaminated. The soil and groundwater contained elevated levels of the
    carcinogen trichloroethylene. On behalf of 921, Mr. Moscovitz terminated the
    purchase.

[10]

Years later, negotiations resumed and Mr. Moscovitz again acted as
    counsel for Outrigger. Gowlings acted as counsel for Whirlpool. A sale was
    negotiated in 1997. The purchase price was now $4 million and the property was
    being sold as is. In 1998 the parties signed an Agreement of Purchase and
    Sale and an Indemnity Agreement.

[11]

The Agreement of Purchase and Sale provided that Whirlpool would receive
    a full and final release from the purchasers for any liability relating to the
    condition of the CN Lands. The Indemnity Agreement provided that Chavila and
    Outrigger would indemnify Whirlpool for any claims against Whirlpool in
    relation to the lands it had owned or leased, and that Chavila and Outrigger
    would defend any actions brought against Whirlpool. Section 15 of the Agreement
    of Purchase and Sale provides:

The Vendor leases certain lands from [863] which lands were
    formerly owned by [CP]  The Purchaser acknowledges the possibility of a claim
    for the remediation of contamination of the CP Lands. The Purchaser and
    [Chavila] assume as of Closing any and all responsibility and liability
    whatsoever relating to the condition of the CP Lands  This Agreement is
    conditional  upon ... [an indemnity by the Purchaser and [Chavila] to save the
    Vendor harmless from and against any and all Claims whatsoever relating in any
    manner to the contamination to, in or under or the remediation of the CP
    Lands.

[12]

Section 7 of the recitals to the Indemnity Agreement has a similar
    provision. Section 5 of the Indemnity Agreement provides:

[Outrigger and Chavila], at their own expense, shall be
    obligated to assume the carriage of and the diligent prosecution or defence of
    any legal or administrative proceeding, mediation or arbitration in connection
    with any and all Claims against one or both of Inglis and Whirlpool, to pay all
    costs and expenses of Inglis and Whirlpool of any nature whatsoever in relation
    to each such proceeding

[13]

All the land purchased by Outrigger and Chavila was reconveyed to 863
    and developed into Liberty Village  a mixed residential, commercial and office
    development.

[14]

In 2004, 863 commenced an action (amended in 2010) against CP and Oxford
    seeking private law remedies for the costs of remediation of the contaminated
    Liberty Village lands. I will refer to this action as the Main Action. In
    2012, CP and Oxford each commenced an action against Whirlpool, seeking
    contribution and indemnity in respect of the environmental contamination claims
    made by 863.

[15]

The CP and Oxford actions against Whirlpool triggered the Indemnity
    Agreement. Outrigger and Chavila agreed to honour the indemnity and to appoint
    counsel to conduct Whirlpools defence against CP and Oxford. Outrigger and
    Chavila further committed not to seek payment of any judgment against CP or
    Oxford to the extent that Whirlpool is found liable.

[16]

Mr. Moscovitz, the real estate lawyer who represented 863, Outrigger and
    Chavila throughout the period from 1990 to 1997, is also the sole officer and
    director of 863, Outrigger and Chavila. On behalf of 863, he instructs Ricketts
    Harris, counsel of record to 863 in the Main Action against CP and Oxford. He
    has appointed Simon Schneiderman to act for Whirlpool in its defence of the CP
    and Oxford actions. Mr. Schneiderman has not acted for 863, Outrigger or
    Chavila before. He has no affiliation with Ricketts Harris.

[17]

Gowlings is counsel of record for Whirlpool in the CP and Oxford
    actions.  Gowlings has sought reimbursement from Outrigger and Chavila for
    costs of approximately $80,000 for defending the CP and Oxford actions,
    although no Statement of Defence has yet been delivered.

[18]

Whirlpool challenged Outrigger and Chavilas appointment of counsel to
    defend it in the CP and Oxford actions. Whirlpool took the position that Mr.
    Schneiderman was in a prohibited conflict of interest by representing Whirlpool
    while taking instructions from Outrigger and Chavila, which are associated with
    863, the plaintiff in the Main Action.

[19]

Whirlpool, still represented by Gowlings, launched an application in the
    Superior Court for an interpretation of the Indemnity Agreement that would
    preclude Mr. Schneiderman from acting. Before the application was heard, CP and
    Oxford brought a motion before the Master for intervenor status within the
    application. Master Short dismissed the motion and commented:

Why does [Whirlpools representation] matter to [CP]?  They
    will have to defend and assert their arguments regardless of who is instructing
    counsel.



It is also argued that the proposed arrangement by 863 for
    legal representation of Whirlpool gives rise to a conflict of interest and
    impacts the public perception of the administration of justice in that [863]
    will be instructing on the conduct of the third party defence.

The potential for this result turns on the meaning of the
    parties agreements. If this potential result was a real concern, it could have
    been addressed when the agreements were entered more than 15 years ago.

[20]

The Master compared the situation to that of an insurer added as a third
    party with potential conflicts in the main action.

The Application

[21]

The application requested an interpretation of the Indemnity Agreement
    that would prohibit Mr. Schneiderman from representing Whirlpool in the CP and
    Oxford actions. Whirlpool argued that allowing Mr. Schneiderman to represent it
    on the instructions of Outrigger and Chavila would put Mr. Schneiderman in a
    prohibited conflict of interest. Whirlpool wanted to be able to instruct
    counsel itself.

[22]

The application judge dismissed the application. He found that there was
    no conflict of interest because the immediate interests of Whirlpool were not
    adverse to those of Outrigger and Chavila.

[23]

Moreover, the Indemnity Agreement itself contemplated the actions by CP
    and Oxford; the possibility of such actions was known to the parties when they
    signed the Agreement. The application judge also noted that the intent and
    effect of the Indemnity Agreement was for 863 to forebear collection of any
    award it received against CP and Oxford to the extent that Whirlpool is required
    to indemnify CP and Oxford. If such an award were made and 863 collected it, it
    would have to be paid by Outrigger and Chavila, affiliates of 863, pursuant to
    the agreement.

[24]

The application judge analogized the relation between Chavila and
    Outrigger and Whirlpool to that between an insurer and an insured. He noted
    that Mr. Schneiderman, as an officer of the court, had acknowledged that he
    would act in the best interests of Whirlpool in fulfilling the Indemnity
    Agreement. There were no instructions that could be given to him that would
    harm Whirlpool to the benefit of 863. Whirlpool, Chavila and Outrigger had the
    same interest: to minimize Whirlpools liability.

[25]

The application judge held that it was not necessary to read into the
    Indemnity Agreement an implied term prohibiting Schneiderman from acting for
    Whirlpool. The Indemnity Agreement had the exact effect in the circumstances at
    hand that the parties intended it to have. In exchange for expunging its
    potential liability for contamination, Whirlpool had given up the right to
    direct its defence against CP and Oxford.

The Appeal

[26]

The issue on appeal is simply this: did the application judge err in
    finding that Mr. Schneidermans representation of Whirlpool does not place him
    in a prohibited conflict of interest?

Positions of the Parties

[27]

Whirlpool submits that Mr. Schneiderman is in a conflict of interest if
    he represents Whirlpool in the action with CP and Oxford because Mr.
    Schneiderman will be instructed by Outrigger and Chavila  companies affiliated
    to 863. 863 is the plaintiff in the Main Action against CP and Oxford.
    Whirlpool argues that it has a limitation defence to the claims of CP and
    Oxford, and that Outrigger and Chavila will refuse to instruct Mr. Schneiderman
    to raise this defence because, if successful, it would also bar 863s claim
    against CP and Oxford in the Main Action.

[28]

Outrigger and Chavila submit that there is no conflict of interest
    because Whirlpool has no legitimate interest in the outcome of the main action.
    Indeed, Whirlpool has no interest in the CP and Oxford actions because it is
    fully indemnified. The Indemnity Agreement constitutes express or implied consent
    to have Outrigger and Chavila choose and instruct Whirlpools counsel. With
    respect to the limitation defence, this submission is academic because the
    limitation defence has already been raised by CP and Oxford. Lastly, they
    submit that deference is owed to the application judges interpretation of the
    Indemnity Agreement.

Analysis

Standard of Review

[29]

Whirlpools application was framed in contractual interpretation.
    Whirlpool asked for a determination of rights arising out of the Agreement of
    Purchase and Sale and Indemnity Agreement. The contracts were anything but
    standard form: they arose in a unique set of circumstances after a series of
    negotiations. All parties were sophisticated entities represented throughout by
    experienced counsel. The application judges interpretation should be reviewed
    on the deferential standard described in
Sattva Capital Corp. v. Creston
    Moly Corp.
, 2014 SCC 53, [2014] 2 S.C.R. 633.

[30]

As I will explain, I have concluded that the application judge did not
    err in law.

A Lawyers Duty to a Client

[31]

A lawyer has a duty to avoid conflicts of interest when representing a
    client. This is established both by the Law Society of Upper Canada in its
    Rules of Professional Conduct and by the courts. As McLachlin C.J. wrote in
Canadian National Railway Co. v. McKercher LLP
,

2013 SCC 39,
    [2013] 2 S.C.R. 649, at para. 16:

Both the courts and law societies are involved in resolving
    issues relating to conflicts of interest  the courts from the perspective of
    the proper administration of justice, the law societies from the perspective of
    good governance of the profession. [Citation omitted.]

[32]

A lawyer may not represent a client in one matter while representing
    that clients adversary in another matter. This is a bright line rule, as
    articulated in
R. v. Neil
, 2002 SCC 70, [2002] 3 S.C.R. 631, at para.
    29:

The bright line is provided by the general rule that a lawyer
    may not represent one client whose interests are directly adverse to the
    immediate interests of another current client 
even if the two mandates
    are unrelated
 unless both clients consent after receiving full
    disclosure (and preferably independent legal advice), and the lawyer reasonably
    believes that he or she is able to represent each client without adversely
    affecting the other. [Emphasis in original.]

[33]

However, as the court writes in
McKercher
, at para. 41, the
    rule in
Neil
is limited in scope:

It applies only where the
immediate
interests of
    clients are
directly adverse
in the matters on which the lawyer is
    acting. It applies only to legal  as opposed to commercial or strategic 
    interests. It cannot be raised tactically. And it does not apply in
    circumstances where it is unreasonable for a client to expect that a law firm
    will not act against it in unrelated matters. If a situation falls outside the
    scope of the rule, the applicable test is whether there is a substantial

risk
    that the lawyers representation of the client would be materially and
    adversely affected. [Emphasis in original.]

[34]

The application judge found, and I agree, that the immediate interests
    of Whirlpool are not directly adverse to those of Outrigger and Chavila.
    Whirlpool states that Mr. Schneiderman is not pursuing a limitation defence in
    the Main Action. First, Whirlpool is not yet a party to the Main Action. Second,
    Oxford and CP have already raised a limitation defence. Third, there is no
    evidence that Mr. Schneiderman, as an officer of the court, would not pursue a
    diligent defence for Whirlpool. Indeed, the application judge accepted the
    evidence that Mr. Schneiderman would act in Whirlpools best interests. Any
    suggestion to the contrary is speculative at best and does not meet the test in
McKercher
. This case therefore falls outside the scope of the bright
    line rule.

[35]

I turn to consider whether there is a substantial risk that Mr.
    Schneidermans representation of Whirlpool would be materially and adversely
    affected by the fact that he would be taking instructions from Chavila and
    Outrigger, which share their sole officer and director with 863.

[36]

In my view the situation does not generate such a risk. I say this for
    three reasons: (i) 863 and Whirlpool are not adverse in interest; (ii) the
    terms of the Indemnity Agreement anticipated this very scenario; and (iii) by
    analogy to insurance law principles, there is no conflict.

Not adverse in interest

[37]

Whirlpool has no direct interest in the outcome of either the 863 action
    or the CP and Oxford actions because its interests are fully protected pursuant
    to the terms of the Indemnity Agreement and the confirmation by 863 that it
    will not seek any damages from Whirlpool. If 863 recovers damages from CP or
    Oxford, and CP or Oxford are awarded indemnity from Whirlpool, 863 will forbear
    collection of the amount otherwise payable by Whirlpool. The interests of 863
    and Whirlpool are fully aligned. This alignment makes it unlikely that Mr.
    Schneidermans representation of Whirlpool will be adversely affected by his
    taking instructions from companies associated with 863.

The Indemnity Agreement

[38]

The Indemnity Agreement was negotiated in a specific context. Whirlpool
    agreed to sell its property at a significant discount in return for an
    indemnity with respect to all claims arising out of contamination. The parties
    to the agreement anticipated the very situation that has arisen. They knew
    there was contamination on all four lots. They anticipated the Main Action and
    the potential parties to that action. Whirlpool knew that 863, Outrigger and
    Chavila were affiliated; nonetheless, with the benefit of counsel, it agreed to
    the indemnity which by its very nature gave Outrigger and Chavila the right to
    instruct counsel in Whirlpools defence. In sum, Whirlpool anticipated that 863
    would be involved in litigation with CP and Oxford and that Outrigger and
    Chavila would be conducting Whirlpools defence of any claims for contribution
    and indemnity.  The agreement by Outrigger and Chavila to provide a diligent
    defence is read in this context.

[39]

Paragraphs 6 and 7 of the Recitals provide:

[Outrigger] acknowledges the possibility of a claim against
    Inglis by one or all of [CN]  and [Chavila] relating to contamination or
    remediation of the CN Lands. [Outrigger] and [Chavila] have agreed to assume as
    of Closing all responsibility and liability whatsoever relating to the
    condition of the CN Lands.

[Outrigger] acknowledges the possibility of a claim against
    Inglis by one or all of [CP], [Oxford], [863] and [Chavila] relating to
    contamination or remediation of the CP Lands. [Outrigger] and [Chavila] have
    agreed to assume as of Closing any and all responsibility and liability
    whatsoever relating to the condition of the CP Lands.

[40]

The agreement provided that Outrigger and Chavila would assume the
    carriage of and the diligent defence of all legal proceedings. It further
    provided that Whirlpool would not negotiate, settle, compromise or pay any
    claims except with the consent of Outrigger and Chavila. Inherent in these
    provisions is the right of Outrigger and Chavila to retain and instruct
    counsel.

[41]

Knowing all this, Whirlpool agreed to accept the terms of the Indemnity
    Agreement in return for the sale of its land. It now submits that the party
    that it agreed would take over its defence may not act in its best interests.
    It raises the spectre of reputational damage, damage to its credit rating, and
    the risk of enforcement proceedings. These were all known to Whirlpool as potential
    outcomes of litigation. They are not new. If it believed these risks were
    substantial, Whirlpool would not have entered into the agreements. In my view,
    these matters cannot now be relied upon to ground a claim of conflict of
    interest such that the terms of the indemnity do not apply.

Insurance law principles

[42]

The parties and the application judge looked to insurance law principles
    for guidance in the present case. My conclusion that there is no conflict does
    not depend upon, but is strengthened by, the analogy to principles of insurance
    law.

[43]

In respect of Whirlpools liability to CP and Oxford, the relation
    between Whirlpool and Chavila and Outrigger is analogous to that between an insured
    and an insurer. As this court recently stated, "[t]here is no doubt that a
    liability insurer owes a duty of good faith to its insured in the defence of a
    claim:
Ernst & Young Inc. v. Chartis Insurance Co. of Canada
,
    2014 ONCA 78, 118 O.R. (3d) 740, at para. 70. The insurers contractual
    obligation to defend an action carries with it an obligation to exercise
    reasonable care and skill in so doing:
Kingscourt Auto Enterprises Inc. v.
    General Accident Assurance Co. of Canada
(1992), 8 C.C.L.I. (2d) 21 (Ont.
    C.J.), at p. 34, citing
Fredrikson v. Insurance Corp. of British Columbia
(1990), 44 B.C.L.R. (3d) 303 (S.C.), at p. 329. In
Shea v. Manitoba Public
    Insurance Corp.
(1991),55 B.C.L.R. (2d) 15 (S.C.), at para. 154, the court
    stated that [t]he duty to defend includes a duty to attempt to minimize the
    amount of any damages to be assessed against the insured.

[44]

These insurance law principles demonstrate that Outrigger and Chavila 
    and the counsel they appoint for Whirlpool  must exercise reasonable care and
    skill in defending the CP and Oxford actions and must pursue Whirlpools best
    interests by minimizing its liability.

[45]

In any event, it is unlikely that Outrigger and Chavila, in their
    capacity as third party liability insurer, will infringe the duty of utmost
    good faith in defending Whirlpool from the CP and Oxford claims. Their duty to
    minimize Whirlpools liability overlaps precisely with 863s interest in
    maximizing the liability of CP and Oxford. Moreover, Whirlpool will experience
    no setback to its economic interests because it is insulated from having to pay
    damages both by the Indemnity Agreement, which Outrigger and Chavila have
    pledged to honour, and by 863s undertaking not to collect any portion of any
    damages against CP and Oxford for which Whirlpool is found liable.

[46]

In recognizing the undertaking by 863 to forbear on collection of
    damages, the application judge did not  as Whirlpool suggests  import a new
    term into the agreement, relating to actions by a stranger to the contract. On
    the contrary, the undertaking was simply an acknowledgment by 863 that it would
    respect the Indemnity Agreement of its affiliated companies, Outrigger and
    Chavila.

Subsidiary issues

[47]

Whirlpool submits that the application judge erred in determining that
    Mr. Moscovitz was not the controlling mind of 863, Outrigger and Chavila. I
    disagree.  The application judge accepted the evidence that Mr. Moscovitz is
    the sole officer and director of the three corporations. There is no evidence
    that he is their beneficial owner.

[48]

Whirlpool seeks to recover the costs outlined in the account rendered by
    Gowlings. The application judge considered and rejected the amount claimed. He
    found, at para. 23, that the account  includes vast amounts of time and
    expense not related to the simple effort required to locate the source
    documents including the Indemnity Agreement and forward the statement of claim
    to Chavila and Outrigger requesting confirmation they respond in accordance
    with the Indemnity Agreement.  The application judge reduced the amount sought
    to $2,395.74. I see no reason to interfere with this discretionary finding.

DISPOSITION

[49]

I would dismiss the appeal with costs payable to the respondents fixed
    at $25,000, inclusive of disbursements and HST.

M.L. Benotto
    J.A.

I agree H.S.
    LaForme J.A.


Strathy C.J.O. (Dissenting)

[50]

I would allow the appeal for two reasons.

[51]

First, the application judge erred in law by failing to identify a patent
    conflict between the appellants interests and the interests of the respondent,
    863.
[3]
That conflict was not resolved either by the Indemnity Agreement given by 863s
    affiliates, the respondents Chavila and Outrigger, or by the hold harmless
    agreement offered by 863.

[52]

Second, the application judge made an extricable error of law in his
    interpretation of the Indemnity Agreement by failing to give any effect to the
    appellants contractual right to be provided with a diligent defence by
    Chavila and Outrigger. The appellant was entitled to be represented by a lawyer
    who was free of conflicts and who would raise every viable defence. The lawyer
    appointed to defend the appellant was not entitled to put the interests of 863,
    the party who appointed him, ahead of the appellants interests.

Background

[53]

My colleague has set out the factual background. I will summarize what I
    see as the essential facts.

[54]

In 1998, the appellant sold the Inglis Lands to Chavila and Outrigger. As
    part of the Agreement of Purchase and Sale, Chavila and Outrigger executed an
    Indemnity Agreement in favour of the appellant.

[55]

That agreement contained two separate, but interrelated obligations. The
    first was an agreement to
indemnify
the appellant against all claims
    associated with the environmental condition of the Inglis Lands.

[56]

The second was an agreement to
defend
the appellant against any
    such claims. That agreement is quoted in my colleagues reasons, but for the
    sake of reference it provides:

[Chavila] and [Outrigger], at their own expense,
shall be obligated to assume the carriage of and the diligent
    prosecution or defence
of any legal or administrative proceeding,
    mediation or arbitration in connection with any and all Claims against one or
    both of Inglis and Whirlpool, to pay all costs and expenses of Inglis and
    Whirlpool of any nature whatsoever in relation to each such proceeding. [Emphasis
    added.]

[57]

In 2004, 863 sued CP and Oxford, owners of adjacent lands, claiming that
    they caused pollution of the Inglis Lands. Instead of commencing third-party
    proceedings, CP and Oxford commenced a separate action against the appellant,
    claiming contribution and indemnity for 863s claims. It is not disputed that the
    separate action will likely be consolidated with 863s Main Action, making the
    appellant a third party in the Main Action. It is in the appellants interest for
    the consolidation to occur because it would have an opportunity to defend 863s
    claim in the Main Action.

[58]

A significant issue in the Main Action will be whether 863s claim is
    time-barred. The appellant wishes to plead, and claims that it can adduce
    evidence, that 863 discovered pollution on the CP and Oxford lands in 1991 and
    that the limitation period expired long before the action was commenced in
    2004. CP and Oxford have also raised the limitation period as a defence.

[59]

863 retained a lawyer, Simon Schneiderman, to defend the appellant,
    purportedly pursuant to the Indemnity Agreement given by Outrigger and Chavila.
    When the appellant raised the issue of conflict of interest, Mr. Schneiderman
    stated that the indemnitors had the right to control the defence and that this
    would [militate] against Whirlpool assisting the defendants in the main action
    beyond its obligation to comply with the rules or with the principles of
    evidence. This statement was a reference to the appellants desire, as a third
    party, to defend 863s claim against CP and Oxford based on the expiry of the
    limitation period. Mr. Schneiderman went on to say that if the appellant did
    not accept his clients position, the indemnitors will thereafter consider
    their obligation to [the appellant] to be terminated.

[60]

Mr. Schneiderman confirmed that 863 would not seek payment from the
    appellant of any amounts for which the appellant was found to be liable as a
    result of the claims of CP and Oxford. The terms of the proposed hold harmless
    agreement to be given by 863 were as follows:

In the event 863 is awarded a judgment in the main action
    against CPR or Oxford, to the extent that Whirlpool is found to be liable, 863
    will not seek payment from either CPR or Oxford of that amount in respect of
    which Whirlpool is found to be liable. 863 is prepared, if necessary, to
    document this in further detailed language to be reviewed and agreed upon by
    Whirlpools counsel.

[61]

When the matter was not resolved, Whirlpool brought an application for a
    determination of its rights under the Indemnity Agreement.

Discussion

[62]

As stated at the outset, I would allow the appeal for two reasons. I
    discuss each in turn.

Mr. Schneiderman has a conflict of interest

[63]

In my view, 863s appointment of Mr. Schneiderman to defend the
    appellant, and the instructions it has given to him, have put the interests of
    the appellant in direct and immediate conflict with the interests of 863,
    contrary to the bright line rule against conflicts enunciated in
Canadian
    National Railway Co. v. McKercher LLP
, 2013 SCC 39, [2013] 2 S.C.R. 649,
    at para. 33. The application judge erred in failing to identify this conflict and
    in failing to exercise the courts inherent supervisory power to protect the appellant
    from prejudice and to preserve the repute of the administration of justice:
McKercher
,
    at para. 13.

[64]

In the defence of the appellant in the Main Action, Mr. Schneiderman takes
    his instructions from 863, the plaintiff in the Main Action. It is in the
    appellants interest to raise a limitation defence to 863s claim. If that
    defence is successful and 863s claim against Oxford and CP is dismissed, the
    appellant will have no liability to those parties, and it will not have to call
    on Outrigger and Chavila for indemnification. Nor will it have to run the risk
    that Outrigger and Chavila will be unwilling or unable to honour the Indemnity
    Agreement. It is equally obviously
not
in 863s interest for the
    appellant to raise a limitations defence. If successful, that would defeat
    863s claim.

[65]

I therefore respectfully disagree with my colleagues conclusion that Mr.
    Schneidermans duty to minimize [the appellants] liability overlaps precisely
    with 863s interest in maximizing the liability of CP and Oxford. The
    appellants interest goes further than minimizing its own liability by
    maximizing that of CP and Oxford. Its interest is in having CP and Oxford exposed
    to
no liability
(by virtue of the limitations defence). In that case,
    there will be
no
claim for contribution against the appellant, and it will
    never have to call on either the indemnity of Chavila and Outrigger or the hold
    harmless agreement proposed by 863.

[66]

The facts belie the assumption made by the application judge that Mr.
    Schneiderman would act in the appellants best interests and that the conflict
    of interest is speculative. Mr. Schneiderman took the position that the
    appellant was not permitted to assist the defendants in the main action by
    raising the limitations defence. This position was immediately and directly
    adverse to the appellants interest.

[67]

It is not speculative to conclude that Mr. Schneiderman will fail to
    advance the limitation defence. The only reason 863 offered to not to seek
    payment from CN and Oxford of that amount in respect of which Whirlpool is
    found to be liable was because it took the position, through Mr. Schneiderman,
    that it was entitled to decide what defences would be raised on behalf of the
    appellant. Because Mr. Schneiderman was being instructed to abandon the
    limitations defence, which was not in 863s interests, 863 offered to cure the
    problem by giving the appellant an agreement to hold it harmless.

[68]

863s offer was an attempt to avoid the consequences of the conflict
    between its own interests and the interests of the appellant. It confirms that
    a conflict exists, because it was an offer by 863 to attempt to mitigate the
    consequences of the conflict.

[69]

The appellant was not obliged to accept 863s offer. Why would it surrender
    a viable defence in return for a promise from a party with whom it had not
    contracted (863) and run the risk of a judgment going against it and having to
    enforce an indemnity? The appellant could have waived the conflict, but it was
    not obliged to do so.

[70]

I disagree with the application judges conclusion that the failure to
    raise the limitation defence is of no consequence because of the Indemnity
    Agreement. As I have explained, there is an immediate and direct conflict of
    interest. The abandonment of the limitations defence exposes the appellant to
    the possibility of a judgment going against it. The appellant has no obligation
    to accept a promise from a party with which it did
not
contract (863) in
    place of a promise of a diligent defence from parties with which it
did
contract (Chavila and Outrigger).

[71]

The application judge also dismissed the appellants concerns about
    reputational damage, damage to its credit rating and the risk of enforcement
    proceedings. Respectfully, the appellants point was that these concerns may
    arise if the limitation defence is not advanced on its behalf. A judgment in
    the third party proceedings may go against it (causing reputational damage and
    damage to its credit rating) and it will have to enforce the hold harmless
    agreement against 863 and the Indemnity Agreement against Chavila and
    Outrigger, possibly resulting in further litigation. As I have noted, it should
    be entitled to raise every viable defence to the Main Action to avoid ever
    having to call on the indemnity.

Chavila and Outrigger have breached their duty to defend

[72]

In my view, the application judge failed to recognize and to give any
    effect to the express contractual promise of Chavila and Outrigger to assume
    the carriage and the
diligent

defence
of any legal 
    proceeding (emphasis added). In so doing, he failed to construe the contract
    as a whole and fell into extricable legal error: see
1298417 Ontario Ltd.
    v. Lakeshore (Town)
, 2014 ONCA 802, 102 O.R. (3d) 401, at paras. 8-9,
    leave to appeal to S.C.C. refused, [2015] S.C.C.A. No. 43; and
Richcraft
    Homes Ltd. v. Urbandale Corp.
, 2016 ONCA 622, at para. 59.

[73]

Properly interpreted, the promise made by Chavila and Outrigger to
    provide the appellant with a diligent defence meant that they had to conduct
    the defence in good faith and exercise reasonable care and skill in doing so:
    see
Ernst & Young Inc. v. Chartis Insurance Co. of Canada
, 2014
    ONCA 78, 118 O.R. (3d) 740, at para. 70; and
Kingscourt Auto Enterprises
    Inc. v. General Accident Assurance Co. of Canada
(1992), 8 C.C.L.I. (2d)
    21 (Ont. C.J.), at p. 34. As was said in
Shea v. Manitoba Public Insurance
    Corp.
(1991), 55 B.C.L.R. (2d) 15, at para. 154, the duty to defend
    includes a duty to attempt to minimize the amount of any damages to be assessed
    against the insured.

[74]

Chavila and Outrigger have not conducted the appellants defence in good
    faith, because they have refused to instruct Mr. Schneiderman to raise the
    limitation defence against 863s claim.

[75]

The fact that the limitations defence is being advanced by Oxford and CP
    is irrelevant. The appellant was entitled to adduce evidence that 863 knew or
    ought to have known of facts that triggered the commencement of the limitation
    period more than six years before the action was commenced. To give up that defence
    just because another party is raising it is not to provide a diligent defence
    in good faith.

[76]

The duty of Chavila and Outrigger to defend also carries with it a duty
    to be free from conflicts  a duty not to steer the defence in favour of the
    indemnifying party or to soft-peddle defences that are available to the
    indemnified party: see
Appin Realty Corp. v. Economical Mutual Insurance Co
.,
    2008 ONCA 95, 89, O.R. (3d) 654, at para. 14, leave to appeal to S.C.C.
    refused, [2008] S.C.C.A. No. 145; and
Amato v. Welsh
, 2013 ONCA 258,
    205 O.A.C. 155, at para. 60. As discussed, the appellants viable limitation defence
    could not be abandoned for the benefit of 863. And the failure to provide a diligent
    defence could not be remedied by the Indemnity Agreement or by the hold
    harmless agreement offered by 863.

[77]

Finally, there is nothing in the Indemnity Agreement or its underlying
    factual matrix to suggest that the parties contemplated that the appellant would
    lose the right to a diligent defence against time-barred claims. In my view,
    there is no reasonable interpretation of that agreement that would support the
    conclusion that Chavila and Outrigger were not required to advance a viable a
    limitation period defence if one were available to the appellant. There is
    nothing in the factual matrix that would warrant overriding the express
    contractual duty to provide the appellant with a diligent defence.

[78]

While this is not an insurance case, the provisions of the Indemnity
    Agreement are akin to the promise given by a liability insurer to defend the
    insured against claims falling within the policy and to indemnify it against
    proven claims. In such circumstances, the right of the insurer (the
    indemnifying party) to control the defence and the right of the insured (the
    indemnified party) to a full and fair defence may come in conflict
: Hoang
    (Litigation Guardian of) v. Vicentini
, 2016 ONCA 723, at paras. 73-76. The
    courts responsibility is to balance these rights. As this court said in
Brockton
    (Municipality) v. Frank Cowan Co.
(2002),

57 O.R. (3d) 447 (C.A.),
    at para. 43:

The issue is the degree of divergence of interest that must
    exist before the insurer can be required to surrender control of the defence
    and pay for counsel retained by the insured. The balance is between the insureds
    right to a full and fair defence of the civil action against it and the insurers
    right to control that defence because of its potential ultimate obligation to
    indemnify. In my view, that balance is appropriately struck by requiring that
    there be, in the circumstances of the particular case, a reasonable
    apprehension of conflict of interest on the part of counsel appointed by the
    insurer before the insured is entitled to independent counsel at the insurers
    expense. The question is whether counsels mandate from the insurer can
    reasonably be said to conflict with his mandate to defend the insured in the
    civil action. Until that point is reached, the insureds right to a defence and
    the insurers right to control that defence can satisfactorily co-exist.

[79]

In my view, for the reasons given, this case has reached the point at
    which the appellants and the indemnitors rights can no longer co-exist.

[80]

I would therefore allow the appeal and order that the appellant is
    entitled to retain separate counsel at the respondents expense. I would award
    costs to the appellant fixed at $25,000, inclusive of disbursements and all
    applicable taxes.

Released: January 31, 2017

G.R. Strathy C.J.O.





[1]
The appellant Whirlpool is the corporate successor to Inglis. For ease of
    reference they will be referred to when the context permits, as Whirlpool.



[2]
Negotiations began with 921424 Ontario Limited (921) and 941600 Ontario
    Limited (941), whose corporate successors are Outrigger and Chavila
    respectively. For ease of reference they are referred to by the latter names
    where possible.



[3]
For simplicitys sake,
I adopt the abbreviations of the
    parties names and other relevant terms established by my colleague.


