THE EXACT WORDING IN AN INDEMNITY MATTERS

Posted: August 09, 2019 | Last Updated: August 09, 2019
Written by: Edward D. Brown

Edward D. (Ned) Brown
Pitblado LLP
July, 2019

A corporate - or an individual person - purchaser ("Purchaser") enters into an agreement with a seller ("Seller") for the sale and purchase of a parcel of realty (the "Realty").  The agreement (the "Purchase Agreement") provides that the Purchaser may terminate the deal if, upon conducting due diligence, it/he/she determines that it/he/she is not satisfied with the results of such due diligence.

The Purchaser conducts due diligence and concludes that the deal shouldn't be completed.  The Purchaser's concern is that there are one or more third parties ("Third Party Claimants") who either have - or may have - claims ("Claims") against the owner of the Realty.  Some - or all - of such Claims, by their nature and/or by applicable law, would or may be enforceable against the Purchaser personally (as well as against the Realty) should the Purchaser acquire ownership of the Realty.

The Purchaser and the Seller agree to complete the deal, and in consideration of the Purchaser agreeing to so complete notwithstanding the existence or potentiality of Claims, agree to amend the Purchase Agreement to provide that the Seller will grant the Purchaser an indemnity.  The indemnity ("Indemnity") is to indemnify the Purchaser for losses, liabilities and costs which the Purchaser may be subject to or sustain by reason of Claims.

What should the lawyers acting for the Purchaser and the Seller keep in mind in negotiating, drafting and finalizing the Indemnity?  Matters related to these questions were considered by the Ontario Court of Appeal in the case of Weyerhaeuser Company Limited v. Ontario (Attorney General, ONCA 2017 1007 (judgement issued December 20, 2017, hereinafter the "Weyerhaeuser Case").  The Weyerhaeuser Case was concerned with a paper manufacturing and processing plant in Dryden, Ontario (the "Plant Property") which, in conjunction with its production of paper products, had for many years released toxic mercury chemicals ("Pollutants") into the northwestern Ontario English and Wabagoon River systems.  The Pollutants caused substantial harm and losses to persons, businesses and properties affected by same.  Consequently, a number of claims were made or threatened against the various owners of the Plant Property.  Ownership, use and occupation of the Plant Property changed on a number of occasions over the years.

The Ontario government ("Ontario") was concerned, both with respect to the damages, losses and health problems engendered by the Pollutants, and with the fact that the Plant Property (and the business operations of same) were a significant component of the economy in Dryden and its surrounding area.  If it was shut down completely, the result would be substantial ongoing hardship for the community.  Consequently, various of the owners of the Plant Property and Ontario conducted numerous meetings and had numerous communications concerning what could be done to ameliorate the Pollutants problem but still maintain the Plant Property's continuing viability.  This led to a number of agreements between the Plant Property owners and Ontario, the gist of which were the following:

  1. the Plant Property owners were to establish and maintain protocols, including the installation of equipment and the carrying out of certain procedures intended to reduce and remediate the Pollutants and the affects thereof; and
  2. Ontario would provide indemnification to the Plant Property owners which, subject to certain limitations, would enable such owners to be reimbursed for the costs incurred by them with respect to Claims based on the ill effects of the Pollutants.

Over the years, several indemnities were provided by Ontario, but the one before the Court of Appeal in the Weyerhaeuser Case was that which was issued by Ontario in December of 1985 (the "1985 Indemnity").

On August 25, 2011, the Ontario Ministry of the Environment ("Ontario Environment") issued a "Director's Order" (the "2011 Order") requiring Weyerhaeuser Company Limited ("Weyerhaeuser") and Resolute FP Canada Inc. ("Resolute") to perform certain remedial work on the Plant Property and its facilities.  Weyerhaeuser and Resolute argued that they were entitled to the benefits provided under the 1985 Indemnity and that accordingly, Ontario was obliged to cover (or reimburse) each of them for any costs incurred by them in fulfilling the 2011 Order.

Two primary questions were raised and argued before the Court:

(a)        did the 1985 Indemnity actually/by its wording apply to (ie, cover) costs incurred (or to be incurred) by Weyerhaeuser and Resolute by virtue of the 2011 Order? and

(b)        were Weyerhaeuser and Resolute entitled to the benefit of the 1985 Indemnity in relation to the 2011 Order (ie, were they actually intended to be beneficiaries by the 1985 Indemnity's wording)?

Issue 1 - What Did The 1985 Indemnity cover?

The Court quoted the indemnification language in the 1985 Indemnity, namely "Ontario…agrees to indemnify Great Lakes…harmless from and against any obligation…costs or expenses incurred…after the date hereof as a result of any claim, action or proceeding, whether statutory or otherwise…whether by…governments (including the Federal Government of Canada and any province…thereof or any agency, body or authority created by statutory or other authority)…because of…any damage…caused…by the discharge or…presence of any pollutant by Reed…from or in…lands or premises forming part of the Dryden assets sold by Reed Ltd. to Great Lakes…".

Based on the plain and ordinary meaning of the above-quoted wording, the Court held that the 1985 Indemnity did cover costs incurred as a result of the issuance of the 2011 Order.

Ontario argued that the 1985 Indemnity should be interpreted to apply only to "third party" claims and not the 2011 Order, because the 2011 Order had been issued by an arm of Ontario itself and was thus not really a "third party" claim.  Ontario supported this argument by urging the Court to consider all of the surrounding circumstances involved in the issuance of the 1985 Indemnity (the whole or entire "factual matrix" should be considered in interpreting the wording in the 1985 Indemnity).  The Court held that consideration of surrounding circumstances (ie, the entire"factual matrix") was not appropriate in a situation where the wording of the document being interpreted was clear and unambiguous as to its meaning.  It is where the wording's meaning is ambiguous or it is difficult to garner what the intent of the contracting parties was from the wording, that it is appropriate to consider surrounding circumstances.  Although not expressed, it is the writer's opinion that one element of Ontario's position would have been that as a matter of "public policy", the 2011 Order should supercede the Court's application of accepted contractual interpretation rules.

In particular, the Court observed that the 2011 Order:

  1. was a "proceeding" because it was a necessary step that had to be taken by the Ontario environmental authority in order to assert its statutory rights to require remediation;
  2. was a "claim" in the sense that it was a "legal demand by (the Ontario environmental authority) pursuant to its authority under the (Ontario Environmental protection Act) to require monitoring and remediation of the disposal site by Weyerhaeuser and Resolute"; and
  3. was "caught" by the 1985 Indemnity because the 1985 Indemnity specifically referred to "…any claim, action or proceeding, whether statutory or otherwise, …whether by individuals, firms, governments (including the Federal Government of Canada and any province or municipality thereof or any agency, body or authority created by any statutory or other authority)…" (the underlining here is made by the writer for emphasis purposes).  Clearly the government of any province, including any agency, body or authority thereof would encompass the Ontario environmental authority and the Director thereof.

Issue 2 - Were Weyerhaeuser and Resolute entitled to the Benefit of the 1985 Indemnity in Relation to the 2011 Order?

In order to understand why Weyerhaeuser and Resolute were involved, (and their relationships to the 1985 Indemnity) it is necessary to understand the "history" of the ownership of the Plant Property (and its components) the various corporate restructurings of the owners, and, the various changes in the ownership of the Plant Property.  In particular:

  1. starting in the 1960s, the Plant Property was originally owned by Dryden Paper Company Limited and its affiliated corporation Dryden Chemicals Limited produced and provided the various chemical substances required in order to enable Dryden Paper Company Limited to manufacture paper products (such chemicals or the waste materials derived therefrom after their use in the manufacturing process, being the source of the Pollutants which were disseminated from the Plant Property);
  2. in 1976, Dryden Paper Company Limited and Dryden Chemicals Limited amalgamated to form Reed Paper Ltd.;
  3. in 1979, Reed paper Ltd. sold the Plant Property to Great Lakes Forest Products Limited;
  4. as the Court observed, "…the post-1985 corporate history of Great Lakes is complex, but the purposes of this appeal, it suffices to note that":
    1. in 1998, Great Lakes became Bowwater;
    2. in 2010, Great Lakes/Bowwater became part of Abitibi Consolidated Inc.;
    3. in 2012, Great Lakes/Bowwater/Abitibi Consolidated Inc. became Resolute;
    4. in 1998, Weyerhaeuser entered into an agreement with Bowwater to purchase the Plant Property from Bowwater; and
    5. in 2007, Weyerhaeuser sold the Pollutants Processing Facility to Domtar.

When Weyerhaeuser agreed to buy the Plant Property from Bowwater in 1998, Weyerhaeuser was concerned about the possibility of environmental claims arising out of the Pollutants.  What Weyerhaeuser really wanted was to get title to the Plan Property excluding the portion thereof which comprised the equipment and facilities which had been installed to collect and process the Pollutants ("Pollutants Processing Facility").  Unfortunately, subdivision approval was required for this, so pending the obtaining of such approval, the parties agreed that title to the entire Plant Property (including the Pollutants Processing Facility) would be held by Weyerhaeuser.  Once subdivision approval was obtained, Weyerhaeuser would transfer title to the Pollutants Processing Facility back to Bowwater.  Also pending receipt of subdivision approval, Bowwater leased the Pollutants Processing Facility from Weyerhaeuser.

In 2000, subdivision approval was obtained and title to the Pollutants Processing Facility was conveyed by Weyerhaeuser to Bowwater.

The 2011 Order ordered remediation: (i) by Weyerhaeuser because it had held title to the Pollutants Processing Facility for approximately two years; and (ii) by Resolute because Resolute had at one time owned the Plant Property (including the Pollutants Processing Facility).  Clearly, the applicable Ontario environmental remediation legislation provided for holding not just current, but also past owners responsible for remediating the Pollutants problem.

In addition to the extract from the 1985 Indemnity quoted by the Court with respect to above-described "Issue 1", the Court referred to a further extract therefrom which provided as follows: "…(the) indemnity shall be binding upon and enure to the benefit of the respective successors and assigns of Ontario, Reed, International and Great Lakes, provided however that Ontario shall not be entitled to assign this indemnity without the prior written consent of the other parties hereto."

With respect to Weyerhaeuser, the Court held that "as a result of the 1998 assignment of the full benefit of (the 1985 Indemnity) from Resolute's corporate predecessor (ie, the assignment from Bowwater to Weyerhaeuser), Resolute had no legal interest in (the 1985 Indemnity) upon which it can assert a claim against Ontario".  It would appear that unless clearly specified in an indemnity, an indemnity that purports to indemnify an "original" party and its successors and assigns, when the indemnity is subsequently assigned (typically as part of the sale of specified assets) to a third party purchaser, the indemnity will cease to cover the original indemnified party and thus only, from that point on, benefit the assignee/purchaser.

With respect to Weyerhaeuser, the Court held that "it was not a corporate "successor" to any of the contracting parties to the 1985 Indemnity, Great Lakes and Reed.  The Court then went on to state that the word "successor, …when used in reference to a corporation, generally denotes another corporation which, through merger, amalgamation or some other type of legal succession, assumes the burdens and becomes vested with the rights of the first corporation".  Thus, "successor" does not - or does not necessarily mean - "successor in title".  However, the Court further concluded that because Bowwater assigned the full benefit of the 1985 Indemnity to Weyerhaeuser as part of the 1998 sale by Bowwater to Weyerhaeuser, Weyerhaeuser did - by that means - obtain the benefit of the 1985 Indemnity.  Nevertheless, the Court referred the question of exactly what were the rights that Weyerhaeuser obtained by reason of such 1998 assignment to the lower court for determination.

It would appear that in drafting an indemnity where it is intended that parties other than the originally named indemnitees are to be benefitted, counsel must clearly distinguish between:

  1. "successor" in the sense of corporate successors, for example, a successor by way of amalgamation;
  2. "successor in title" where such successor acquires ownership of an asset with respect to which the indemnity is given, which may well include further or subsequent owners; and
  3. an "assignee" of the original indemnity.

When drafting an indemnity, one should therefore consider - and word the indemnity accordingly - the following:

  1. just who is to be benefitted by the indemnity (ie, the above-described question of who is or may be a "successor", "assignee" and/or "successor in title"); and
  2. just which claimants (or potential claimants) is the indemnity intended to protect against?  In the Weyerhaeuser Case, the 1985 Indemnity clearly held that claims by the indemnifying party Ontario itself (or by an "arm" of it) were covered.