



COURT OF APPEAL FOR ONTARIO

CITATION: Capital Sewer Servicing Inc. v.
    Crosslinx Transit Solutions Constructors, 2022 ONCA 10

DATE: 20220112

DOCKET: C69165

Doherty, Benotto and Huscroft
    JJ.A.

BETWEEN

Capital Sewer Servicing Inc.

Respondent/Counter-applicant (Appellant in
    Appeal)

and

Crosslinx Transit Solutions
    Constructors

Applicant (Respondent in Appeal)

Ian M. Mair and Ramon V. Andal, for the
    appellant

Daniel A. Schwartz, Adrian Visheau, and
    Alexander Soutter, for the respondent

Heard: November 30, 2021

On appeal from the order of Justice Markus
    Koehnen of the Superior Court of Justice, dated February 1, 2021, with reasons
    reported at 2021 ONSC 1091.

Doherty J.A.:

OVERVIEW

[1]

The appellant (Capital) and the respondent
    (Crosslinx) were involved in the construction of a light rail transit line in Toronto.
    They were both sued by property owners who alleged they had suffered property
    damage as a result of the negligence of the appellant and the respondent.

[2]

Crosslinx claimed that under the terms of the
    agreement with Capital, Capital had a duty to indemnify and save Crosslinx
    harmless from the damages, legal fees and other costs associated with the
    claims made by the property owners. Capital denied any such obligation and
    maintained that Crosslinx had assumed the risk of the harm claimed by the
    property owners when Crosslinx undertook to insure the appellant against such
    claims.

[3]

Capital and Crosslinx both brought applications
    seeking a judicial interpretation of the relevant provisions of their contract.
    Crosslinx prevailed. Capital appeals, alleging the application judge made
    errors of law in his interpretation of the contract.

[4]

I would dismiss the appeal. Capital has failed
    to show any error in law. The application judge applied the applicable rules of
    contractual interpretation to the language of the contract considered in the
    factual context presented by the evidence. His interpretation provides a
    coherent reading of the agreement as a whole, considered in the context of the broader
    relationship among the parties engaged in the project.

BACKGROUND

[5]

In July 2015, Crosslinx Transit Solutions General
    Partnership (Project Co.) entered into an agreement (the Project Agreement) with
    Metrolinx and other government agencies to complete work on the Eglinton
    Crosstown Light Rail Transit Project. The same day, Project Co. contracted with
    its subsidiary, Crosslinx, to carryout various projects relating to the
    construction of the Crosstown rail line (the Construction Contract). Almost
    two years later, Crosslinx entered into an agreement with Capital to do work
    relating to the sewer system near the Avenue Road Station (the Subcontract).

[6]

On February 21, 2018, the sewer system near the Avenue
    Road station backed up, causing damage to three properties. Two of the property
    owners sued Crosslinx and Capital. Their claims included specific allegations
    of negligence against Capital.

[7]

Crosslinx brought an application claiming that
    under the terms of the Subcontract, Capital was obliged to indemnify Crosslinx
    and hold Crosslinx harmless in respect of the claims brought by the property
    owners. Crosslinx contended that the indemnity extended to all costs associated
    with defending against the claims, any indemnification obligations of
    Crosslinx, and any insurance deductibles paid or payable by Crosslinx in
    respect of the claims.

[8]

Capital responded with a cross-application seeking
    a declaration that it had no obligation to indemnify or defend Crosslinx in the
    actions. Capital maintained Crosslinx had assumed the risk of the damage
    described in the property owners claims when it undertook in the Construction Contract
    to maintain insurance covering those risks. Capital contended that the
    obligation to insure contained in the Construction Contract had been incorporated
    into the Subcontract.

The Agreements

[9]

There are three agreements in play. The Project Agreement
    between Project Co. and Metrolinx included insurance covenants set out in Schedule
    25 to that agreement. Under those covenants Project Co. was required to obtain
    and maintain Primary Wrap-Up Commercial General Liability insurance (the Primary
    Wrap-Up insurance). The Primary Wrap-Up insurance had to name as insured all
    contractors and subcontractors and was required to be primary without right of
    contribution of any other insurance carried by any Named Insured.

[10]

Project Co. obtained the necessary Primary Wrap-Up
    coverage. That coverage had a limit of $100,000,000. Crosslinx and Capital are
    both Named Insured under the terms of the Primary Wrap-Up policy. The coverage provided
    by the Primary Wrap-Up insurance extended to property damage arising from the
    project and payable by any Named Insured. Under the Primary Wrap-Up policy, the
    insurer was obliged to defend Named Insured against claims and pay all expenses
    including legal fees.

The Construction Contract

[11]

The Construction Contract between Project Co.
    and Crosslinx provided for insurance coverage that paralleled the Primary Wrap-Up
    insurance required under the Project Agreement. Under the Construction Contract,
    Project Co. undertook to obtain and maintain the Wrap-Up insurance it had
    undertaken to obtain and maintain in the Project Agreement. All Subcontractors
    were to be included as Named Insured and the insurance was designated as
    primary.

[12]

After the property owners commenced their claims
    against Crosslinx and Capital, the Primary Wrap-up Insurer retained a law firm
    to defend Crosslinx in the two actions.

The Subcontract

[13]

The terms of the Subcontract between Crosslinx
    and Capital are central to the dispute between the parties. Several provisions
    are relevant. Clause 9.1 provides a declaration of the intention of Crosslinx
    and Capital:

The parties agree that it is their mutual
    intent that Construction Contractor [Crosslinx] not incur for its own account
    and without recourse to Subcontractor [Capital] any obligation or liability
    under or in relation to the Subcontract Work.

[14]

The Subcontract imposed certain insurance
    obligations on Capital. Capital was required to obtain and maintain the insurance
    coverage set out in Schedule D to the Subcontract. In essence that coverage paralleled
    the Wrap-Up coverage Project Co. and Crosslinx had to maintain under the other
    agreements. The schedule required Capital to obtain and maintain Commercial
    General Liability insurance with a limit of $5,000,000. That insurance was
    designated as primary except where the project specific insurance responds to
    the loss. Crosslinx and Project Co. were to be named as Additional Insured
    only with respect to the liability arising out of the operations of the Subcontractor
    [Capital] with respect to the Subcontract Work. Clause 5.3 provided that whichever
    party was responsible for the matter giving rise to a claim was responsible to
    that same extent for payment of any deductible under any policy of insurance.

[15]

Clause 2.1 and 2.2 of the Subcontract described
    the relationship between the obligations created under the Subcontract and
    those laid out in the Construction Contract. Those provisions are set out below:

2.1 Intent of Subcontract
: The Parties acknowledge their mutual intent, and hereby agree,
    that all obligations and liabilities of Construction Contractor arising under
    the Construction Contract [and the Interface Agreement] in relation to the
    performance of the Subcontract Work be assumed, performed and discharged by
    Subcontractor under this Subcontract and in strict accordance with the terms
    and conditions of the Construction Contract [the Interface Agreement] and the
    other Subcontract Documents.
Therefore, the Parties
    further acknowledge that the terms and conditions of the Construction Contract
    [and the Interface Agreement] are incorporated by reference into and form part
    of this Subcontract mutatis mutandis, and are applicable to and govern the
    performance of the Subcontract Work by Subcontractor, with the changes
    necessary to give full effect to the Intent of the Parties as set out in this
    Subcontract, and subject to the express terms and conditions hereof
. Any
    specific references to the Construction Contract [the Interface Agreement] or
    the Project Agreement in the Subcontract Documents are not intended to be
    exhaustive.

2.2 Equivalent Project Relief
: Subcontractor acknowledges and agrees that:

(a)
to the extent that
    any entitlement of Construction Contractor under the Construction Contract is
    related to the Subcontract Work, whether or not reflected in this Subcontract
    as an entitlement of Subcontractor, Subcontractor shall be entitled to receive
    the benefit of such entitlement to the extent that the Construction Contractor
    is or becomes entitled under the Construction Contract
, but in any event
    to no greater extent than Construction Contractors entitlement under the
    Construction Contract (
Equivalent Project Relief
); and

(b) Subcontractor shall not be entitled to
    receive any entitlement or benefit in respect of any Equivalent Project Relief
    until Construction Contractor has received such entitlement or benefit from
    Project Co. [Emphasis added.]

[16]

Among other things, clauses 2.1 and 2.2 incorporate,
    by reference into the Subcontract, the terms and conditions of the Construction
    Contract. That incorporation included the Primary Wrap-Up insurance covenant in
    the Construction Contract. The incorporation was, however, subject to the changes
    necessary to give full effect to the intent of the Parties as set out in this
    Subcontract, and subject to the express terms and conditions hereof.

[17]

The Subcontract also contained a detailed indemnity
    provision requiring Capital to indemnify and hold Crosslinx harmless from all
    claims and related costs. Claims were broadly defined as:

Claims, actions, causes of actions, judgments,
    fines, costs, losses, penalties, expenses, fees, damages (whether liquidated or
    otherwise), legal costs (on a solicitor and client full indemnity basis), costs
    of compliance with regulatory orders and any other liabilities, whether brought
    or incurred by Construction Contractor [Crosslinx] or third parties.

[18]

The indemnity extended to claims:

Caused by or arising out of the performance,
    non-performance or breach of this Subcontract including any failure of the
    Subcontractor to perform and observe its obligations under this Subcontract; or
    any act of omission, whether or not negligent, of Subcontractor.

The indemnity did not extend however
    to claims caused solely by the wrongful act or neglect of Construction
    Contractor [Crosslinx].

[19]

The relevant parts of the indemnity clause are set
    out in full below:

9.2.1
Subcontractor
    shall be liable for, and shall indemnify and hold harmless Construction
    Contractor and its affiliates and their respective directors officers and
    employees ("Indemnified Persons") from and against, all Claims,
    including all claims made by Project Co against Construction Contractor under
    or relating to the Construction Contract, [and by Service Provider against
    Construction Contractor under the Interface Agreement] and all arbitration
    awards and judgements against the Indemnified Persons in respect thereof, to
    the extent caused by or arising out of the performance, non-performance or
    breach of this Subcontract including any failure of Subcontractor to perform
    and observe its obligations under this Subcontract; or any act or omission,
    whether or not negligent, of Subcontractor, its subcontractors of any tier, or
    their respective directors, officers, agents or employees, in relation to the
    Project, except only to the extent caused solely by the wrongful act or neglect
    of Construction Contractor.

9.2.2
Subcontractor
    shall also Indemnify Construction Contractor to the same extent as Construction
    Contractor has indemnified Project Co in the Construction Contract in respect
    of the Subcontract Work.

9.2.3
The
    Subcontractor further agrees to indemnify the Construction Contractor for any deductible
    value payable by the Construction Contractor with respect to any project-specific
    insurance policy placed by the Construction Contractor, Project Co and/or the
    Owner, where the claim triggering the deductible value under the applicable
    policy is caused by or arises out of the performance or non-performance of this
    Subcontract by the Subcontractor. This indemnity survives termination of this Subcontract,
    howsoever arising. Construction Contractor shall give Subcontractor prompt
    Notice of any claim by Owner, Project Co or any other third party in relation
    hereto, with reasonable particulars.

[20]

Clause 12.17 of the Subcontract laid out the priorities
    governing documents if there was an ambiguity, conflict or contradiction among
    those documents. Under those priorities the terms of the Subcontract rank
    several levels above the terms of the Construction Contract that are
    incorporated
mutatis mutandis
into the Subcontract.

The Application Judges Reasons

[21]

The application judge had to work his way
    through the various provisions in the agreements outlined above. Broadly
    speaking, the insurance covenants incorporated into the Subcontract favoured
    Capitals interpretation of the Subcontract, while the indemnity provisions in
    the Subcontract favoured the interpretation advanced by Crosslinx.

[22]

The application judge appreciated that he had to
    consider the Subcontract as a whole and within the broader context of the
    arrangement created by the three agreements considered in tandem. He understood
    that he was required to determine the objective intention of the parties to the
    Subcontract based primarily on the language used by them. He said, at para. 30:

It is well established, black letter law that
    courts must interpret contracts in a way that gives meaning to all of its terms
    and avoids interpretations that render one or more terms ineffective. To adopt Capitals
    interpretation would render ineffective the obligation on Capital to obtain its
    own $5,000,000 liability policy, and would denude Capitals contractual
    indemnity in favour of Crosslinx of almost all utility.

[23]

The application judge went on to hold that the
    indemnification requirements in the Subcontract imposed a duty on Capital to indemnify
    Crosslinx in respect of any amounts Crosslinx was found liable to the property
    owners and in respect of any amount Crosslinx owed pursuant to its indemnity
    obligations, except insofar as the liability was based on Crosslinxs own
    negligence. The application judge also concluded Capital had a duty to defend
    Crosslinx and indemnify Crosslinx for all legal and other costs payable by
    Crosslinx, including amounts payable under Crosslinxs indemnity obligations.
    Finally, the application judge held Capital had an obligation to indemnify
    Crosslinx for any deductibles paid or payable by Crosslinx or any person to
    whom Crosslinx had indemnity obligations.

Capitals Arguments

(i)

Does an assumption of the risk follow, as a
    matter of law, from a covenant to insure against that risk?

[24]

Capitals first and primary submission targets
    the effect of the insurance covenants incorporated into the Subcontract by para.
    2.1 of that agreement. Capital submits that under the terms of the insurance
    covenant in the Construction Contract, Project Co. and Crosslinx were obliged
    to provide Wrap-Up liability insurance to all Subcontractors, including Capital.
    That insurance was intended to protect Subcontractors against the risk of property
    damage claims like those made by the property owners. That insurance was
    primary to any other coverage. Capital contends that those clear provisions were
    incorporated by reference into the Subcontract.

[25]

Relying on a line of authority from the Supreme
    Court of Canada and this court, Capital argues that a covenant to insure
    against a certain peril constitutes an assumption of the risk of harm or damage
    caused by that peril. As Crosslinx undertook to provide the requisite
    insurance, it assumed responsibility for any damages caused when the harm
    insured against occurred: see
Agnew-Surpass v. Cummer-Yonge,
[1976] 2
    S.C.R. 221, at pp. 251-2;
T. Eaton Co. v. Smith et al.,
[1978] 2
    S.C.R. 749, at p. 755;
Ross Southward Tire v. Pyrotech Products,
[1976]
    2 S.C.R. 35, at p. 39;
Madison Developments Ltd. v. Plan Electric Co.
(1997)
,
36 O.R. (3d) 80 (C.A.),
    at para. 9, leave to appeal refused, [1997] S.C.C.A. No. 659.

[26]

In many, if not most circumstances, a promise to
    insure against a certain risk will lead to the logical conclusion that the party
    undertaking to insure against the risk had agreed to be responsible for any
    damages should the risk ensue. That conclusion does not however reflect a free-standing
    legal principal of contractual interpretation but is an example of how the
    contractual intention of the parties is determined through an objective
    consideration of all of the circumstances. An undertaking to insure leads to
    the reasonable inference that the parties intended that the party promising to
    insure would undertake the risk to be insured against. However, that inference can
    only properly be drawn after a reading of the contract as a whole in the
    factual context of the particular circumstances. The language of the contract
    and the context control the interpretation of the contract, including any
    insurance covenant in the contract. There is no legal rule that a partys covenant
    to insure against a risk must mean it was intended that the party undertaking
    to insure assumed the risk of the harm insured against:
Royal Host G.P. Inc.
    v. 1842259 Ontario Ltd.
,
2018
    ONCA 467, 422 D.L.R. (4th) 661, at para. 16, leave to appeal refused, [2018]
    S.C.C.A. No. 316.

[27]

The correct approach to the interpretation of
    insurance covenants is captured by G.R. Hall in
Canadian Contractual Interpretation
    Law
,
4th ed. (Markham,
    Ont.: LexisNexis, 2020), at pp. 340-41:

The interpretation of a covenant to insure as
    an allocation of risk is not a rule of law, meaning that if the contractual
    language indicates that the covenant is to insure, not to act as an allocation
    of risk precluding liability for the event subject to the covenant, the text
    will prevail and the covenant will not have that effect. Each contract
    containing a covenant to insure must be interpreted based upon its own wording.
    Decided cases can be helpful, when the wording considered is similar to that in
    the agreement in issue. However, differences in the wording between each case
    can be determinative.

[28]

The application judge considered the same authorities
    the appellant put before this court. He correctly rejected the submission that
    the risk of loss associated with any peril must as a matter of law be on the
    party under an obligation to insure against that risk. The application judge,
    again correctly, held that the effect of the insurance covenant, like the
    effect of any term in a contract, depended on the objective intention of the
    parties determined by an examination of the contract as a whole and the
    consideration of individual terms within that broader context. The application
    judge correctly applied the applicable law.

(ii)

Did the application judge fail to consider the
    terms of the Primary Wrap-Up insurance incorporated into the Subcontract?

[29]

Capital submits that even in the absence of a
    legal principle that the assumption of risk follows a covenant to insure, the
    application judge was required to give effect to the terms of the Primary
    Wrap-Up insurance provision and the caselaw interpreting similar provisions.
    Capital contends the application judges interpretation of the Subcontract effectively
    ignored binding caselaw and gave no meaning to the Primary Wrap-Up insurance
    provision incorporated into the Subcontract. Capital argues, correctly, that
    the failure to consider a material term in a contract amounts to an error of
    law in the interpretation of that contract:
Deslaurier Custom Cabinets Inc.
    v. 1728106 Ontario Inc.
, 2017 ONCA 293, 135 O.R. (3d) 241, at para. 59,
    leave to appeal refused, [2016] S.C.C.A. No. 249.

[30]

A reading of the application judges reasons
    does not support Capitals submission. The application judge referred to all of
    the relevant provisions in the various contracts. He reproduced the key
    provisions. He appreciated the terms of the Primary Wrap-Up insurance covenant,
    its qualified incorporation into the terms of the Subcontract, and Capitals
    arguments made in reliance on the terms of the Primary Wrap-Up insurance
    covenant.

[31]

The application judge also examined the
    authorities pertaining to insurance covenants and the assumption of risk. As
    observed above, he correctly concluded they did not support the existence of a
    principle requiring that a contract be interpreted so that the assumption of
    risk followed the obligation to insure against that risk.

[32]

Significantly, the application judge pointed out
    that even if the risk had to follow the obligation to insure, that proposition
    hardly determined the proper interpretation of the Subcontract. In the
    insurance provisions within the Subcontract (Clause 5 and Schedule D) Capital had
    undertaken to provide Wrap-Up insurance protecting Crosslinx and Project Co.
    from liability arising out of Capitals work or operations. As the trial judge
    observed, at para. 25:

Given that Capital agreed to secure insurance
    against its own negligence, Capital has, on its own argument, assumed liability
    for the risk of its own negligence.

[33]

It cannot be said the application judge ignored
    the Primary Wrap-Up insurance provisions incorporated into the Subcontract. He clearly
    understood those terms. He also appreciated that the incorporation of the
    Wrap-Up insurance provisions into the Subcontract was subject to the changes
    necessary to give full effect to the intent of the Parties as set out in this Subcontract,
    and subject to the express terms and condition hereof. Similarly, the
    incorporation of the Wrap-Up provision was subject to the priority provision in
    Clause 12.17 of the Subcontract. That provision gave the Subcontract priority
    over the Construction Contract and the Project Agreement if there was a conflict,
    ambiguity, or contradiction.

[34]

While the application judge had to take into
    account the terms of the Primary Wrap-Up insurance provision as incorporated
    into the Subcontract, he also had to give meaning to the plain language of the
    Subcontract which directly addressed the intention and obligations of the
    parties to the Subcontract. Those provisions included the parties express and unambiguous
    declaration of their mutual intention that Crosslinx should not incur any
    obligation or liability without recourse to Subcontractor [Capital].

[35]

The strongly worded indemnity provision
    reflected the shared intention of the parties. Under that provision Capital
    undertook to indemnify Crosslinx in respect of any award or judgment:

To the extent caused by or arising out of the
    performance, non-performance or breach of this Subcontract including any
    failure of Subcontractor to perform and observe its obligations under this
    Subcontract.

[36]

The indemnity was triggered by:

Any act or omission whether or not negligent,
    of Subcontractor

[37]

The obligation by Capital to indemnify Crosslinx
    excluded only claims to the extent that those claims were caused solely by the wrongful
    act or neglect of Crosslinx.

[38]

After considering clause 9.1 and clause 9.2, the
    application judge said at para. 29:

Section 9.1 of the Subcontract makes clear
    that it was the intention of the parties that Crosslinx not incur any liability
    for the conduct of Capital. Section 9.2.1 makes clear that Capital would be
    liable for its own negligence and would indemnify Crosslinx and hold it
    harmless against claims arising out of Capitals conduct under the Subcontract.

[39]

The application judges analysis belies any
    suggestion he failed to take into account and give meaning to the terms of the Primary
    Wrap-Up insurance provision incorporated into the Subcontract. It is important
    to bear in mind that the nature and scope of Capitals entitlement to recover
    from the Primary Wrap-Up Insurer any amount paid or payable to Crosslinx under
    the indemnification provision was not before the application judge. It may be,
    as counsel for Crosslinx submitted in oral argument, that for practical
    purposes this application is about responsibility as between Crosslinx and
    Capital for amounts, such as deductibles, that are not recoverable under the
    insurance coverage.

[40]

The application judges assessment of the interplay
    between the Primary Wrap-Up insurance provision and the indemnification provision
    in the Subcontract engaged questions of mixed fact and law. His assessment of
    that interplay was reasonable. This court must defer to that assessment.

(iii)

Did the application judge err in concluding that
    Capitals obligation to hold harmless Crosslinx included a duty to defend
    Crosslinx against the claims made by the property owners?

[41]

Capitals third argument challenges the
    application judges conclusion that the hold harmless language in the
    indemnity clause in the Subcontract should be read as imposing a duty on
    Capital to defend Crosslinx against the claims brought by the property owners.
    Capital submits that the Wrap-Up insurance provision incorporated into the
    Subcontract required that both Crosslinx and Capital be defended under the Primary
    Wrap-Up insurance policy. Capital further submits that the indemnity provision
    in the Subcontract extends not just to claims made against Crosslinx but also
    claims made by Crosslinx. Capital argues that it makes no sense to speak of a
    duty to defend in respect of claims brought by Crosslinx.

[42]

In response, Crosslinx submits that the
    application judge properly looked to the language of the indemnity provision.
    The words hold harmless follow immediately after the word indemnify and
    must be given some meaning beyond the meaning of the word indemnify. Crosslinx
    relies on the application judges observation, at para. 38:

The indemnity before me is clear. It provides
    that Capital shall hold Crosslinx harmless from any claim made against it to
    the extent such claim arises out of Capitals performance of the Subcontract. I
    can find no basis for excusing Capital from its duty to defend.

[43]

Capitals first argument in respect of the hold
    harmless provision in the indemnity clause essentially recycles the submission
    that the terms of the Primary Wrap-Up insurance provision incorporated into the
    Subcontract should circumscribe the scope of the indemnity clause. The
    application judge rejected that submission. As set out above, his reading of the
    relevant clauses of the Subcontract cannot be described as unreasonable.

[44]

Capitals second argument, that because the
    indemnity extends to claims made by Crosslinx, as well as claims against
    Crosslinx, it cannot include a duty to defend, ignores the central fact of this
    case. The claims in issue were made by property owners against Crosslinx. The
    meaning of the hold harmless provision, in the context of a claim brought by
    Crosslinx, is not before the court.

[45]

Capital has not identified an extricable
    question of law arising out of the application judges interpretation of the hold
    harmless provision in the indemnity clause. The application judges
    interpretation is not unreasonable. This court should defer to that
    interpretation.

Conclusion

[46]

I would dismiss the appeal.

[47]

Crosslinx is entitled to its costs on a full
    indemnity basis under the terms of the indemnity provision in the Subcontract.
    I would fix those costs at $25,000, inclusive of disbursements and relevant
    taxes.

Released:  January 12, 2022 DD

Doherty
    J.A.

I
    agree M.L. Benotto J.A.

I
    agree Grant Huscroft J.A.


