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Case Name:
Kruger Products Ltd. v. First Choice Logistics Inc.
Between
Kruger Products Limited/Produits Kruger Limitee, Respondent
(Plaintiff), and
First Choice Logistics Inc. and Terrance Bodnar, Appellants
(Defendants)
[2013] B.C.J. No. 10
2013 BCCA 3
332 B.C.A.C. 1
[2013] 3 W.W.R. 45
[2013] I.L.R. I-5378
10 B.L.R. (5th) 1
39 B.C.L.R. (5th) 310
98 C.C.L.T. (3d) 24
223 A.C.W.S. (3d) 903
358 D.L.R. (4th) 255
2013 CarswellBC 31
Docket: CA038662
British Columbia Court of Appeal
Vancouver, British Columbia
M.V. Newbury, J.E. Hall and N.J. Garson JJ.A.
Heard: December 3, 2012.
Judgment: January 9, 2013.
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(64 paras.)
[Editor's note: Supplementary reasons for judgment were released August 13, 2013. See [2013] B.C.J. No. 1761.]
Commercial law -- Bailment -- Insurance -- Duties of bailee -- Storage and warehousing -- Appeal
by defendants from judgment awarded in favour of plaintiff allowed -- Plaintiff stored paper
products in warehouse operated by defendant FCL -- Warehouse destroyed by fire after paper
debris was ignited by forklift -- Trial judge did not err in determining cause of fire -- Trial judge
erred in finding subrogated claim against FCL was not barred by application of insurance
provisions in warehousing agreement -- FCL had insurable interest in property given exposure to
liability under agreement -- Express wording that insurance was primary coverage was intended for
FCL's benefit and strengthened its case for tort immunity.
Appeal by the defendants, FCL and Bodnar, from a judgment awarded in favour of the plaintiff,
Kruger Products (Scott). FCL operated a warehouse that perished in a fire. Paper products owned by
the plaintiff were destroyed in the fire. The products had been stored pursuant to a warehousing
agreement between the parties. The plaintiff sued and alleged a breach of contract, a breach of the
defendant's statutory duties under the Warehouse Receipt Act and the Occupiers Liability Act and
common law negligence by FCL and its employee, Bodnar. Bodnar operated a forklift that allegedly
caused the fire when paper debris was ignited by its exhaust system. The defendants denied the
breaches alleged by the plaintiff and pled that any duty of care had been satisfied. The defendants
alleged the plaintiff's own negligence in the manner in which its products were stored was the cause
of its loss. The defendants further relied on provisions in the warehousing agreement requiring the
plaintiff to obtain insurance and limiting liability to such insurance. The trial judge found in favour
of the plaintiff. On appeal, the defendants challenged the finding the plaintiff's losses were caused
by FCL's negligence and the conclusion the plaintiff's subrogated claim against FCL was not barred
by the application of the insurance provisions of the warehousing agreement.
HELD: Appeal allowed. The trial judge's conclusion regarding the cause of the fire was consistent
with the evidence. There was substantial evidence the fire began when paper came into contact with
the forklift's extremely hot exhaust system. Whether the contact was internal or external was
immaterial, as FCL was aware of the issue from previous near-fires and ought to have known the
paper debris throughout the warehouse created a dangerous situation. However, the trial judge erred
in failing to find the plaintiff's subrogated claim was barred by the parties' warehousing agreement.
FCL, as the warehouser, was subject to the possibility of liability under the agreement and thus it
was erroneous to conclude it did not have an insurable interest in the property destroyed by the fire.
In any event, the absence of an insurable interest given to a tenant under a landlord's insurance
policy was not determinative of the issue of tort immunity. Similar reasoning was applicable to the
bailment context. The parties' express acknowledgement that insurance obtained would respond as
primary coverage was clearly intended for FCL's benefit and strengthened its case for tort
immunity. There was no basis for finding the indemnification provision superseded the insurance
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provision. The trial judgment was set aside, the plaintiff's claim was declared barred and the action
was dismissed.
Statutes, Regulations and Rules Cited:
Occupiers Liability Act, RSBC 1996, CHAPTER 337,
Warehouse Receipt Act, RSBC 1996, CHAPTER 481, s. 2(4)
Appeal From:
On Appeal from the Supreme Court of British Columbia, November 26, 2010, (Kruger Products
Limited v. First Choice Logistics Inc., 2010 BCSC 1242, Docket Number L032139)
Counsel:
Counsel for the Appellant: W.G. Wharton, N.J. Tuytel.
Counsel for the Respondent: M. Skorah, Q.C., R. Bailey.
[Editor's note: Supplementary Reasons for Judgment were released May 16, 2014. See [2014] B.C.J. No. 957.]
Reasons for Judgment
The judgment of the Court was delivered by
1 M.V. NEWBURY J.A.:-- On July 31, 2001, a fire broke out in a New Westminster warehouse
in which the plaintiff Kruger Products Limited (formerly known as Scott Paper Ltd. and referred to
herein as "Scott") was storing large rolls of paper. The fire destroyed the entire building and its
contents, including 3713 tonnes of "parent rolls" of unprocessed paper, approximately 236,000
cases of finished paper products, and other materials and supplies. At the time of the fire, the
warehouse was being operated by the defendant First Choice Logistics Inc. ("FCL") pursuant to the
terms of a warehousing agreement with Scott.
The Litigation
2 Scott commenced this action against FCL in July 2003, alleging FCL had breached express or
implied terms of the warehousing agreement to maintain the warehouse in a condition "that met or
exceeded professional warehousing management practices", to operate all equipment safely and
efficiently, and to operate the warehouse "so as to minimize the risk of damage to the Plaintiff's
inventory, including the risk of damage by fire." Scott pleaded that FCL had breached its common
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law duty of care, its duty of care as a warehouser under the Warehouse Receipt Act, R.S.B.C. 1996,
c. 481, and its duty of care as an occupier of the warehouse under the Occupiers Liability Act,
R.S.B.C. 1996, c. 337. Paragraph 10 of the amended statement of claim stated in part:
The Fire, and the Plaintiff's ensuring loss and damage, were caused by the breach
of contract, breach of statutory and common law duties of care, and gross
negligence of the Defendant FCL, and by the breach of common law duties of
care and gross negligence of its employee the Defendant Bodnar, and of other
employees of FCL, for whose acts FCL is vicariously liable. Particulars of the
fault of FCL and its employees include:
(a)
(b)
(c)
(d)
(e)
(f)
(g)
Operation of the Warehouse and the storage of goods therein in such a
manner as to create excessive waste paper and paper debris;
Failure to maintain the Warehouse and thereby allowing for the
accumulation and presence of waste paper and paper debris within the
Warehouse;
Use of a type of lift truck in areas of the Warehouse where paper debris
would be generated and would accumulate which FCL knew or ought to
have known had a propensity to accumulate within its body paper and
paper debris and knew or ought to have known of the risk that such paper
would ignite;
Failure to keep the body of the Lift Truck clean and clear of paper and
paper debris;
Failure to install or, alternatively, failure to instruct the dealer of the Lift
Truck to install, safeguards against the ignition of paper and paper debris
by the Lift Truck when FCL knew that such safeguards were readily
available;
Use of the Lift Truck when FCL knew or ought to have known that the Lift
Truck incorporated no or insufficient safeguards to minimize the risk of
ignition of accumulated paper and paper debris;
Storage of goods within the Warehouse contrary to standard industry
practices, in such a manner and configuration as to impair both the
effective operation of fire suppression and firefighting equipment and
personnel;
...
(i)
Failure to exercise the care and diligence in regard to goods stored in the
Warehouse as a careful and vigilant owner of similar goods would exercise
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in the custody of them in similar circumstances;
...
(l)
Failure to warn the Plaintiff that the Lift Truck was operated in the
Warehouse with no or insufficient safeguards to minimize the risk of paper
debris ignition when FCL knew that such safeguards were readily
available.
3 For its part, FCL denied the specific breaches of duty alleged in Scott's pleading and stated that
it had satisfied any duty of care owed to Scott. FCL pleaded that Scott itself had been negligent in
certain respects, including:
(a)
(b)
failure to wrap the parent rolls in order to avoid paper sloughing off the
rolls creating a housekeeping issue and fire hazard and to avoid the risk of
ignition and/or fire transfer;
instructing storage of parent rolls in such quantity and configuration at the
Warehouse with the knowledge that such quantity and configuration
created an increased fire hazard;
...
(d)
(e)
4
demanding that the FCL Defendants utilize a Toyota Series 6 forklift at the
Warehouse when they knew or ought to have known the dangers of using a
Toyota Series 6 forklift;
failing to warn the FCL Defendants about the risks inherent with the use of
Toyota Series 6 forklift trucks including the Lift Truck ...
With respect to insurance, the warehouser also pleaded:
6.
The FCL Defendants state that the [warehousing agreement] includes
provisions requiring the Plaintiff to obtain insurance including, inter alia,
"insurance of its inventory and property within the Warehouse" and that
such insurance should name the FCL Defendants as additional assureds
and stand as primary coverage. As a consequence of these insurance
provisions, the Plaintiff is barred by the terms of the [warehousing
agreement] and is otherwise estopped from claiming against the FCL
Defendants to the extent of the indemnity which would have been provided
by such insurance if such insurance had been placed by the Plaintiff.
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7.
The FCL Defendants state that it was an express or implied term of the
[warehousing agreement] that the parties restrict recovery between them
for any loss or damage to the amount of available insurance. The Plaintiff
is therefore barred by the terms of the [warehousing agreement] and is
otherwise estopped from claiming against the FCL Defendants in total or,
in the alternative, to the extent of the indemnity that would have been
provided by such insurance as the Plaintiff was obliged to obtain and
maintain under the terms of the [warehousing agreement].
5 The action did not come on for trial until June 2008. By that time, the pleadings had been
amended several times and assorted third parties had been joined by FCL, including various
"Toyota" corporations alleged to have been involved in the design, manufacture, distribution or sale
of the propane-powered lift truck (or forklift) allegedly involved in the starting of the fire, and
Mason Forklift Ltd. ("Mason"), which had leased the forklift to FCL. These third parties in turn
joined certain fourth parties. By the time of trial, however, the fourth party proceedings had been
discontinued.
6 In an amendment to its statement of claim made pursuant to an order dated June 6, 2008, Scott
expressly waived any right to recover from the defendants or any other party, any portion of its loss
that might be attributable to the fault or breach of duty of any of the Toyota corporations or Mason
and any other persons not named as defendants, for which the defendants might have been entitled
to claim contribution, indemnity or apportionment.
7 Immediately before the trial commenced, the trial judge sitting in chambers ordered that the
parties endorse an order dismissing the proceedings against Mason and the Toyota third parties,
subject to the condition that the order would not be filed until the conclusion of the trial. On
September 17, 2008, the Toyota proceedings were dismissed and on November 5, 2008 those
against Mason were also dismissed, the latter without prejudice to certain possible defences.
8 The trial occupied 20 days beginning June 16, 2008. Even though no third or fourth party
proceedings remained to be tried, there were many issues of fact and law to be resolved between the
plaintiff and the defendants. Thus it is not surprising that the trial judge's reasons - indexed as 2010
BCSC 1242 - are lengthy and detailed. I do not intend to review them as a whole, given that most of
his factual findings are unchallenged on this appeal. I do note, however, that one of the difficult
issues before the Court was to determine the exact terms of the agreement between Scott and FCL.
Although the parties had discussed the terms of several drafts, they had never signed any written
warehousing agreement. The trial judge ultimately found that their agreement (referred to as the
"WMA") consisted of a draft agreement and two appendices, "A" and "C". Both parties had acted
on the basis of these documents since early 2000. (Paras. 84-5.) No appeal is taken from that
finding.
9
Another significant issue was the standard of care to which FCL was subject in operating the
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warehouse. Appendix A required FCL to maintain the facility in "food grade condition and
cleanliness at all times", and para. 7(a) of the agreement itself required FCL to perform its services
in an "efficient, effective and professional manner, and properly, safely, efficiently and
professionally ... all in accordance with the highest industry standards". In addition, s. 2(4) of the
Warehouse Receipt Act required that the warehouser exercise the care and diligence that a "careful
and vigilant" owner of goods similar to those being stored would exercise in similar circumstances.
(Para. 106.) The trial judge found that this standard of care was a higher one than that of reasonable
care (para. 108), and again, no appeal is taken from that conclusion.
10 This appeal challenges only two substantive conclusions reached by the trial judge - first, his
finding of fact that Scott's losses and damages were caused by negligence on the part of FCL; and
second, his conclusion of law that Scott's claim against FCL (which we are told is a subrogated
claim) was not barred by the application of certain insurance provisions in the WMA. It is to those
two issues that I now turn.
The Cause of the Fire
11 The factual background of the outbreak of the fire was described by the trial judge at paras.
7-27 of his reasons. He began by describing the services provided by FCL to Scott at the warehouse,
which included not only storage but space management and the co-ordination of shipping on Scott's
behalf. (Para. 8.) The "parent rolls" of paper being stored for Scott were very large rolls being stored
until they could be processed for packaging into final products such as paper towels and toilet
paper. Unlike the smaller processed rolls, these rolls were not wrapped in plastic or at all and were
moved around in the warehouse primarily by means of a Toyota propane-powered forklift, the only
forklift with a turning radius short enough to move the rolls. The defendant Mr. Bodnar, who
operated the forklift in the storage area, described the debris created just by moving the rolls
around:
The unwrapped rolls, when they'd come into a truck, it depends where they came
from at the other end. From Scott Paper they've - they've already come
unravelled. Depending on the size of the roll they were held by just like, it looked
like masking tape, practically. And the operator at the other end, by squeezing
them so hard, would force them to come unravelled. And some of the rolls were a
fair size, so if a roll unravelled once around that could be anywhere from six to
eight feet around a piece of paper that would come off. And just from the force of
the machine would tear it right off when -- when we went to unload it, and it
would fall on the floor.
12 Until about one week before the fire FCL employees had noticed that the propane forklift (the
"Original Forklift") was, in the trial judge's words, overheating "due to paper debris being sucked
up into the body of the vehicle by the operation of the radiator cooling fan." The drivers could smell
smouldering paper "within the machine as a result of contact with various hot elements associated
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with the engine and exhaust system." (Para. 11.) Mr. Bodnar stated in discovery that the first time
this happened, he "stopped, turned the machine off, opened the bonnet and the paper under there - it
wasn't really on fire; it was smouldering. It was turning brown, kind of." He was asked where the
smouldering paper was located:
A.
Q.
A.
Q.
A.
Q.
A.
13
That is the part I have difficulty with, is where the exhaust - I can see part
of the exhaust between the engine compartment and the radiator and there
was a piece of paper like touching, but I think it was part of the exhaust.
Around the muffler? That far back?
Yes. Yes.
That is on the opposite side of the radiator in the shaker screen, is it?
It wasn't the muffler, it was the exhaust pipe. If I remember - like you're
saying the muffler was on the opposite side of the - toward the back of the
machine. I can't recall what it looks like now.
But was it your experience that paper debris could get sucked up and get
sucked through the shaker screen and the radiator into that back area where
the tail pipe and the muffler were located?
It has to come up past the exhaust pipe first to get to the shaker screen and
the radiator. And being such a suction I guess since it's happened earlier,
no paper had ever gotten stuck by the exhaust pipe, it all went to the shaker
screen. The radiator blocked the flow of the air and the machine
overheated. It's only a matter of time before it starts - you know, before it
got near the exhaust. Sooner or later it was bound to happen, which it did.
That's when I opened the bottom and it's smouldering and there was a
brown piece of paper there.
At trial, Mr. Bodnar testified:
It would seem that the forklift would suck up paper like a vacuum cleaner, and
doing so it would -- the paper would have packed itself in the exhaust pipe. And
shortly after starting to operate the machine the -- I could smell -- I wasn't sure
the first couple of times, but it was like a smouldering distinct paper smell. And
the first time I had noticed this I lifted the bonnet and there was -- there was
paper wrapped around the exhaust. And I would try to reach my hand down there
and tear it out as best I could and clean it out.
Mr. Bodnar said he attempted to deal with the overheating problem by "blowing out" and cleaning
the radiator and then adding water to it (using an outdoor hose) until the temperature gauge went
down. (The Original Forklift had also been fitted with venting at the front and sides of the hood.)
14 At some point, FCL mentioned the overheating problem to Mason. It was decided that an air
compressor would be used to "blow out" the Original Forklift and, in the trial judge's words, that the
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exhaust pipe would be wrapped with fibreglass insulation "in order to shield paper and debris from
the hot surface of the exhaust pipe". These measures "greatly reduced", but did not eliminate, the
problems with smouldering paper. (Paras. 12-3.)
15 Unfortunately, the Original Forklift had to be taken out of operation due to an accident on July
20, 2001. Mason supplied a replacement of the same type and make which it delivered to the
warehouse on July 26, fitted with a roll clamp so that it could handle the parent rolls. The exhaust
pipes, however, were not wrapped, nor was the hood vented to reduce overheating. The replacement
forklift (the "Forklift") was put into service immediately.
16 On July 30, Mr. Bodnar returned from holiday. He noticed that the Forklift began overheating
right away and had the same smouldering problems the Original Forklift had had. In his words, it
"was right back to square one. Like smouldering, overheating, and just got [sic] to be really careful
again." (Para. 18.) The Forklift was blown out with compressed air about every ten or 15 minutes up
to the time of the fire.
17 The trial judge found that on the morning of July 31, Mr. Bodnar was driving the Forklift,
having picked up a roll. Mr. Bodnar testified that he did not notice any smell or detect any
overheating, but a co-worker who was driving an electric forklift in the opposite direction saw
something very concerning:
Mr. Nijjar noticed a piece of paper approximately 2 to 3 feet long in the vicinity
of the exhaust grill of the Forklift. The paper was on fire. Mr. Nijjar saw the
paper drifting away from the back of the Forklift. The burning paper landed at
the base of a stack of parent rolls. The burning paper immediately transferred
flame to the stack of parent rolls.
Mr. Nijjar made an attempt to stomp out the fire before running to get a nearby
fire extinguisher. When Mr. Nijjar returned with a fire extinguisher, he felt the
fire was already out of control so he left the area to report the Fire. [At paras.
23-4.]
Mr. Bodnar testified that he immediately jumped off his machine, ran to the front of the Warehouse
and yelled "9-1-1" to the office, ran back and tried to extinguish the fire with a fire hose. He had to
give up very soon thereafter. Fire and emergency trucks were called, but the entire inventory in the
warehouse was quickly destroyed.
18 The trial judge approached the issue of causation of the fire beginning at para. 107, noting the
"but for" test enunciated by the Supreme Court of Canada in Resurfice Corp. v. Hanke 2007 SCC 7,
[2007] 1 S.C.R. 333. After describing the high standard of care imposed by the Warehouse Receipt
Act and the reverse onus applicable to a bailee, he found that:
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... [FCL] owed a duty of care to Scott not to allow paper debris to build up and to
maintain the Warehouse as a "careful and vigilant owner". A careful and vigilant
owner would and should have foreseen that there was a risk of fire igniting due to
smouldering paper debris coming into contact with various parts of a propane lift
truck and if the Warehouse was not kept in a "food-grade condition" so that paper
debris was allowed to accumulate at the base of the stored parent rolls during
each shift. A careful and vigilant warehouseman in the position of [FCL] would
have taken steps to sweep up the paper debris not only in the aisles but also at the
base of the stacked parent rolls on a regular basis and not just after each shift. I
find that these failures amount to a breach of the duties owed by [FCL] to Scott. I
am satisfied that Scott has demonstrated on a balance of probabilities that the
damage which occurred would not have occurred but for the negligence of [FCL]
in this regard. [FCL] has not shown that the duty that it owed to Scott has been
discharged. As the standard of care if higher than merely not acting negligently,
[FCL] has not met the onus of showing that the duty imposed upon it has been
discharged. Scott has met the onus of showing that [FCL] did not discharge the
duty that it owed to Scott. [At para. 116; emphasis added.]
and further:
I find that [FCL] did not act throughout as a careful and vigilant owner despite
the fact that it had an obligation to do so pursuant to the obligations imposed at
common law and under the Warehouse Receipt Act. Scott has met the burden of
proving its losses and damages were caused through the negligence of [FCL].
[Para. 123.]
19
As to exactly how the fire had started, the trial judge found that:
... it was paper debris coming into contact with the unwrapped exhaust system of
the Forklift that caused the Fire. Burning tissue debris was seen by Mr. Nijjar to
be trailing behind the Forklift. The fact that the burning paper was outside the
Forklift, allows me to conclude that the paper had not been sucked up into the
Forklift. This incident occurred only days after the Forklift had gone into service
to replace the Original Forklift. This spatial and temporal proximity between the
use of the Forklift with the unwrapped exhaust system and the burning paper is
sufficient to allow me to come to the conclusion that the Fire was caused when
paper came into contact with the unwrapped exhaust of the Forklift.
An inspection of the Forklift following the Fire disclosed no evidence of fire
within the Forklift. I find this to be further evidence that the Fire was caused by
paper coming into contact with an external part of the Forklift. I find that the
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unprotected exhaust of the Forklift came into contact with paper debris, either in
the location where Mr. Bodnar had deposited a parent roll or in the aisle as he
moved the Forklift back to that part of the Warehouse where he was to pick up
another parent roll. I find that the heat of the unprotected exhaust of the Forklift
caused the paper which was in the aisle or which had been blown into the aisle
from debris at the foot of a stack of parent rolls to ignite, the ignited paper landed
at the base of a stack of parent rolls, the paper transferred the flame to the parent
rolls, and the fire spread from there [At paras. 51-2; emphasis added.].
The Court did not make any finding of gross negligence on the part of the defendants.
20 Beginning at para. 53, the Court also considered whether there were other possible causes of
the fire. Most notably, FCL had adduced into evidence a report prepared by a professional engineer,
Mr. West, of Baker Materials Engineering, who was instructed to assume inter alia that an
examination of the Forklift did not reveal any possible source of ignition other than one "associated
with the exhaust system." He carried out certain tests on the overflow tube from the radiator
reservoir of the Forklift. The tube was found charred and partly melted "where it passed adjacent to
the exhaust pipe on the left side of the [Forklift]." The tests indicated that the temperature of the
exhaust pipe in the Forklift during operation was "certainly sufficient to ignite paper" and that a
molten or charred piece of the overflow tube could also have achieved temperatures sufficient to
ignite paper. Mr. West concluded:
We also understand that the fire started at approximately 10:30 a.m. and that
forklift 1478 had operated as a replacement for FCL's own unit for a period of
four or five days before the fire occurred. The extended period of operation of the
forklift before the fire indicates that either the overflow tube fell into contact with
the exhaust pipe very shortly before the fire occurred, or the contact was
intermittent over the time that the forklift was used before the fire. Our tests
showed that the tube melted and charred within minutes of contact with a hot
exhaust pipe.
If the contact had been intermittent, this could then present an opportunity for
fragments of toilet paper product to attach to the melted portion of the tube after
it separated or moved away from the exhaust pipe. When the tube next moved
into contact with the exhaust pipe, these tissue fragments could be ignited as a
result of contact with the exhaust pipe.
Hence, contact between the overflow tube and the exhaust pipe also presents
itself as a potential cause of ignition of the streamer observed by witness Nijjar.
[Emphasis added.]]
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21
The trial judge rejected this theory, however, noting that:
There was no evidence as to when the overflow hose in the Forklift had been
installed. I cannot conclude that the plastic radiator coolant overflow hose melted
at the Warehouse where the Forklift had been used for less than a day and a half
or that the alleged faulty installation caused or contributed to causing the Fire.
No theory was presented how paper two to three feet long might have come in
contact with the plastic radiator coolant overflow hose, been ignited, and then
expelled from the Forklift in order that it would be streaming behind the Forklift.
[At para. 53.]
22 The defendants also adduced evidence from an engineer, Dr. Colwell, who had conducted
(and videotaped) certain tests in relation to the airflow characteristics of the Forklift. The purpose of
the tests was "to evaluate whether 'burning embers' of paper could pass through the radiator, past the
fan, past the exit grill and then ignite a strip of paper or streamer caught on the exit grill." He
described the test and the results thereof in his report as follows:
With the engine running at full rpm, the paper samples were placed at locations
that provided the best opportunity for them to flow around the radiator and come
into contact with the radiator grill at the rear of the lift truck. These locations
included above and below the exhaust pipe as it passed the right side of the
radiator (on the right side of the lift truck) and underneath the radiator near the
fan drive belt.
Results of the testing, summarized in Table 1, demonstrated that none of the
tissue samples were able to get past the radiator intact. The only piece that made
it past the radiator was manipulated such that a portion of the paper was pushed
completely underneath the radiator and then released. It was drawn out of the
engine compartment and chopped up by the fan such that only confetti-sized
paper exited the lift truck. Samples released near the exhaust pipe which passes
around the right side of the radiator were drawn forward, not rearward, and did
not exit the engine compartment. [Emphasis added.]
23 In cross-examination, Dr. Colwell acknowledged that in one or two of his tests, the video
showed a piece of paper being released, moving forward in the engine compartment, becoming
entangled in a "structure" there and, after the camera had been shut off, being "sucked back onto the
radiator screen." He also confirmed that the cooling fan had been operating at maximum speed
during the test and that accordingly, he had not made any observations "as to how burning paper
debris and burning embers would move around in the engine compartment if the engine and the
cooling fan were being operated at less than maximum speed." Further, the engine had not been
under load when the tests were carried out, nor had the Forklift been driven around "in piles of
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paper debris to see what would happen". Significantly, the radiator had been cleaned out before
each test. Counsel for the defendants successfully objected to counsel's question to Dr. Colwell:
I suggest to you, Doctor, that given these variables, you would have been
surprised if you had seen fire propagate outside the lift truck?
This witness, not having been called to provide expert evidence, was not asked to comment on the
"exhaust pipe" theory ultimately adopted by the trial judge.
24
The trial judge said he accepted Dr. Colwell's evidence. In his analysis:
... I accept the evidence of Jeff Colwell, a professional engineer, that paper, once
inside the body of a forklift, is drawn upwards towards the radiator with
significant force so that the paper cannot get past the radiator and outside the
vehicle unless manually forced past the radiator. I also take into account that
there was no evidence of fire damage within the body of the Forklift after the
Fire. I find that it would not have been possible for paper to be drawn into the
Forklift, ignited and then expelled from the Forklift. [At para. 55; emphasis
added.]
For the same reason, he also rejected the defendants' submission that the Toyota third parties were
responsible for the fire - although it was not necessary for the Court to decide the point. The judge
rejected the notion that paper had been:
... drawn into the body of the Forklift as a result of the negative air pressure
created by the exhaust fan and that, after coming into contact with an exposed
portion of the exhaust pipe, caught fire and escaped from the body of the Forklift.
I am satisfied that this theory is disproven on the evidence due primarily to the
inability of paper to escape once it has entered the body of the Forklift and the
inability of ignited paper to move past the radiator fan to outside of the Forklift.
[At para. 55; emphasis added.]
On Appeal
25 On appeal, the defendants submit that the trial judge made a palpable and overriding error in
finding that the fire occurred when paper debris came into contact with the unwrapped exhaust
system of the Forklift, while at the same time finding that paper had not been "sucked up into the
Forklift." (Para. 51.) The defendants say these findings require that some part of the exhaust system
(the part that was wrapped on the Original Forklift) must have been "external" to the Forklift. Citing
the reports of Mr. West and Dr. Colwell, the defendants contend the entire exhaust system was
inside the machine and that there was no evidence of any external portion that could cause paper to
ignite. Further, they argue:
Page 14
... there was no evidence that anyone at [FCL], Scott, the manufacturer (Toyota)
or supplier (Mason Lift), had ever seen or heard of paper being ignited by an
external part of a forklift. On the evidence, therefore, ignition of paper by an
external component of the forklift would not just be unforeseeable, but physically
impossible.
As the only parts of the exhaust system wrapped on the original forklift were
internal to the machine, and there was no part of the exhaust system outside the
body of the replacement Forklift, such fire could not have been caused by contact
with the exhaust system. While the Forklift may conceivably have caused a fire,
such fire would have been caused in a manner completely unknown to [FCL].
It was also the uncontroverted evidence and finding of the Court that the Forklift
had a propensity to vacuum up paper debris from the floor around the base of the
machine while it was operating. Such paper would then be sucked up into the
engine compartment, and would not exit the machine. [Emphasis added.]
26 With respect, I believe this argument takes an overly literal approach to the trial judge's
reference to "an external part" of the Forklift in his analysis of Dr. Colwell's evidence. As Scott
points out in its factum, no witness was asked directly whether the exhaust system was "internal" or
"external"; and some of the photos of the Forklift in evidence show that the exhaust system is, in
Scott's words, "encased on the sides within an exterior housing", that there is an open exhaust grill
at the back, and that the underside of the machine was open. Arguably, the part of the exhaust
system that travels from underneath the internal engine compartment to a location beside the
radiator and then behind the radiator and up into the muffler is not "inside" or is external to the
engine compartment itself. It seems to me that para. 56 of Scott's factum aptly describes the
reasoning adopted by the trial judge:
Since the evidence at trial was clear that: (i) the actual strip of paper that caused
the Fire was somehow attached to the exhaust grill; (ii) all other possible sources
for the ignition of the Fire other than the [Forklift] were eliminated by the
Appellant; (iii) the unwrapped exhaust pipes were known to be hot enough to
start paper fires; and (iv) paper cannot escape from inside the engine
compartment, it must be that the Fire started by paper touching that part of the
exposed exhaust pipe near the muffler at the back of the [Forklift].
27 As Scott notes, this explanation is consistent with Mr. Bodnar's experience with the Original
Forklift described above. It is also consistent with the discovery evidence of Mr. Woykin, another
FCL employee who worked in the warehouse. He recalled that before the exhaust system of the
Original Forklift was "wrapped", he had seen paper "smouldering" with smoke coming from a
Page 15
location under the driver's seat of the machine, which was then being operated by a Mr. Bertie. By
the time he and Mr. Bertie located an operating fire extinguisher, Mr. Woykin could see flames.
28 Significant evidence in this regard was also given by a Mr. Reinders, an employee of Toyota
Canada Inc. He recalled "problems" experienced by Toyota early on in the production of its GM262
engines - the kind used in the Original Forklift and the Forklift. According to his testimony, these
machines had a "propensity to suck up paper into the engine compartment and through into the
radiator", and to overheat. These problems were experienced where the units were "working
extremely hard in the environment where there is significant debris on the floor that leads to
plugging of the rads, and there is a ... very heavy use of the attachments that are on the truck." The
witness was referred to an internal Toyota memorandum to Toyota Canada describing overheating
in pulp and paper applications of the machine. Toyota Canada recommended the following
measures in response:
1)
2)
3)
4)
Increase size of engine pipe diameter to allow for easier exhaust flow.
Improved air flow around exhaust pipe to remove excess heat.
Add fibreglass insulation wrap to engine pipe.
Reduce hydraulic pressure, thus lowering hydraulic load on engine.
29 A couple of years later, in 1998, another Toyota customer complained about overheating of
the exhaust pipe - to over 400 degrees F. "very rapidly". The writer of the memo stated:
If this customer for some reason rotates the clamp attachment on a regular basis
in this application (short travel distances) the hydraulic oil has no time to cool
and will keep the temperature rising until something fails. Further to this the
engine is being loaded during rotation causing the exhaust pipe to drastically
increase in temperature. When these units deliver damaged rolls to the recycling
area (loose paper on floor) the possibility of paper igniting can happen if the
exhaust temperature is extremely high. [Emphasis added.]
The solution suggested by Toyota Canada Inc. was to install a "flow regulator" in the rotating
circuit. In 2001, it also recommended inter alia that suppliers install vents in the hood, and "exhaust
wrap".
30 In late 2000, a paper recycling plant in Washington state reported continuing difficulties to
Toyota, having had two small fires start "from the exhaust manifold downpipes and trapped paper".
The fires were small and resolved quickly. Again, Toyota recommended using, inter alia, a "heat
wrap on the exhaust pipe", and hood vents. There were similar reports from other customers of
"excessive amounts of paper sucking up underneath the engine compartment and clogging the
radiator" and "paper sucked up into the engine bay", threatening to ignite on the exhaust manifold.
31 All of this in my view supports the trial judge's findings as to how the fire started, although he
was apparently under the impression that because the third party proceedings against the Toyota
Page 16
corporations had been discontinued, it was not open to him to consider Mr. Reinders' testimony.
(Para. 125.) Even without the benefit of the reverse onus imposed by the Warehouse Receipt Act,
there was substantial evidence that the fire began, as fires or near-fires had on previous occasions
known to Toyota, when paper came into contact with the extremely hot exhaust system of the
Forklift. Whether one sees this as 'internal' or 'external' to the engine is not in my view material.
FCL was of course also aware of this problem which, in combination with the fact that paper debris
was all around the warehouse, created a 'perfect storm' of dangerous conditions.
32
I would dismiss FCL's appeal on the question of causation.
Was the Subrogated Claim Barred?
33 Paragraph 17 of the WMA contained covenants on the part of both parties with respect to
insurance. Paragraph 17 stated:
INSURANCE
A. Liability Insurance
The Contractor [FCL] will maintain, throughout the Term of this Agreement, and
any Extension Term, comprehensive general liability insurance and industry
standard warehouseman's legal liability insurance. Scott will maintain general
liability insurance, tenant's legal liability insurance, and insurance of its
inventory and property within the warehouse.
All insurance shall name Scott or the Contractor as applicable as an additional
insured against all liability for bodily and/or personal injury and property
damage, arising from the insured's fault or negligence, or the fault or negligence
of any of its or their shareholders, directors, officers, employees, servants and
agents, its and their affiliated, related, parent and subsidiary companies, and its
and their appointees, successors and assigns, in connection with the Management
Services hereunder.
If the comprehensive general liability policy contains a general aggregate, that
aggregate limit shall apply separately, per location, so that the Warehouse will
have its own aggregate limit. All insurance policies contemplated hereunder shall
constitute and respond as primary coverage to any insurance otherwise available
Scott and any of its shareholders, directors, officers, employees, servants and
agents, its affiliated, related, parent and subsidiary companies, or its and their
appointees, successors and assigns.
Page 17
...
B. Insurance on Building Contents
Scott shall, at its own costs and expense, insure and keep insured any of its own
property in, on or about the Warehouse, in which Scott itself has an insurable
interest, including, without limitation, Scott'[s] inventory, furniture, fixtures, and
equipment.
D. Warehouseman's Legal Liability Insurance
The Contractor shall obtain and maintain industry standard Warehouseman's
Legal Liability Insurance that covers against risk of loss of inventory and
property belonging to Scott or its divisions, subsidiaries, affiliated or related
corporations, and arising from or relating to the Contractor's gross negligence,
which insurance shall be in the amount of (Cdn.) five million dollars. Damaged
or lost inventory and products insured hereunder will be valued at Scott'[s]
selling price to the trade.
The Contractor will add both the Landlord and Scott as additional insureds. The
Contractor will obtain and pay the premiums for such insurance coverage as an
Allowable Operating Expense.
E. Notice of Loss or Damage to Goods
The Contractor agrees to notify Scott promptly in writing of any loss or damage
of any kind to any product or goods stored or handled under the terms of this
Agreement. [Emphasis added.]
(Paragraph 17 contained no section "C".)
34 As mentioned earlier, we were told this action is a subrogated action, i.e., one brought by
Scott's insurer, which (presumably) paid Scott out in respect of its losses due to the fire. As also
noted, FCL's statement of defence at least suggested that Scott failed to name FCL as an additional
insured under the "primary coverage" referred to in para. 17A. However, we were not referred to
any evidence on this point, and the trial judge did not refer to any. In any event, this question of fact
would seem irrelevant to the "covenant to insure" (also called "tort immunity") defence raised by
Page 18
FCL as a bar to Scott's subrogated claim. That defence depends entirely on the terms of the contract
between Scott and FCL, whether they were performed or not: see Greenwood Shopping Plaza Ltd.
v. Beattie [1980] 2 S.C.R. 228.
35 The starting point on the question of whether a subrogated claim may be pursued against FCL
in the circumstances of this case is the Supreme Court of Canada's "trilogy" of cases,
Agnew-Surpass Shoe Stores Ltd. v. Cummer-Yonge Investments Ltd. [1976] 2 S.C.R. 221, Ross
Southward Tire Ltd. v. Pyrotech Products Ltd. [1976] 2 S.C.R. 35, and T. Eaton Co. v. Smith [1978]
2 S.C.R. 749. Each involved landlord-tenant insurance arrangements and damage by fire, but each
involved slightly different contractual provisions. In Agnew-Surpass, the lease required the landlord
to insure its shopping centre "against all risk of loss or damage caused by or resulting from fire." In
Ross Southward, the lease required the tenant to pay all "insurance rates". The landlord regularly
charged the tenant for, inter alia, its share of the cost of fire insurance. In T. Eaton, two landlords
covenanted to insure the leased premises against fire; the tenant on the other hand promised to
repair on notice, damage by fire excepted. In each instance, a fire was caused by negligence
attributed to the tenant. Subrogation was barred partly in Agnew-Surpass, where the Court was split,
and was barred completely in the latter two cases.
36 The three cases are well-known to insurance practitioners and I do not intend to rehearse their
legal reasoning in detail. It is fair to say that Chief Justice Laskin's minority position in
Agnew-Surpass evolved into the majority position in the other two cases, such that by the time T.
Eaton was decided, the landlords' covenant to insure their tenant's premises was regarded as a
"supervening covenant" that prevailed even where the tenant's negligence had caused the loss. The
Chief Justice characterized the issue in T. Eaton thus:
... It is whether, in circumstances where, by the lease, the tenant is under an
obligation to repair, and where its obligation to repair does not extend to
repairing damage from accidental (as contrasted with negligent) fires, it is
entitled, as between it and the landlord, to claim the benefit of a fire insurance
policy (providing indemnity for loss arising from fires negligently caused), which
the landlord had covenanted with the tenant to provide.
... This is not a case where one has to consider whether there is some provision
exonerating one contracting party from liability to the other for the former's
negligence. Rather is it a case where a supervening covenant has been given and
taken to cover by an insurance policy the risk of loss from a fire caused by
negligence. An insurer could not refuse to pay a claim for loss by fire merely
because the fire arose from the insured's negligence. I can see no reason why its
position can be any better against a tenant, whose negligence caused loss by fire,
if the lease with the landlord makes it clear that a policy was to be taken out by
the landlord to cover such fires, and a policy is written which does so. In short,
Page 19
the insurer can claim only by subrogation under the lease. [At 755-6; emphasis
added.]
37 A helpful summary of the evolution of the trilogy was provided in Madison Developments
Ltd. v. Plan Electric Co. (1997) 36 O.R. (3d) 80 (Ont. C.A.), where Carthy J.A. stated:
... The law is now clear that in a landlord-tenant relationship, where the landlord
covenants to obtain insurance against the damage to the premises by fire, the
landlord cannot sue the tenant for a loss by fire caused by the tenant's negligence.
A contractual undertaking by the one party to secure property insurance operates
in effect as an assumption by that party of the risk of loss or damage caused by
the peril to be insured against. This is so notwithstanding a covenant by the
tenant to repair which, without the landlord's covenant to insure, would obligate
the tenant to indemnify for such a loss. This is a matter of contractual law, not
insurance law, but, of course, the insurer can be in no better position than the
landlord on a subrogated claim. The rationale for this conclusion is that the
covenant to insure is a contractual benefit accorded to the tenant, which, on its
face, covers fires with or without negligence by any person. There would be no
benefit to the tenant from the covenant if it did not apply to a fire caused by the
tenant's negligence. [At 84; emphasis added.]
(See also 1044589 Ontario Inc. (Nantucket Business Centre) v. AB Autorama Ltd. 2009 ONCA
654.)
38 The Court in Madison echoed the reasoning in Ross Southward that the tenant had paid for "an
expected benefit" as between itself and its landlord - insurance coverage via the landlord's policy.
Carthy J.A. extended this reasoning beyond landlord-tenant relationships to complex construction
cases, emphasizing the "anticipation" that subcontractors would "contribute their efforts to the
overall project and ... that if a fire occurred it would most likely be caused by the negligence of one
of those subcontractors." In the Court's analysis, it would make no business sense for each
subcontractor to pay premiums to duplicate the comprehensive fire coverage to be obtained by the
contractor and there would be no purpose for a covenant on the latter's part to obtain such insurance
if it were not to protect the subcontractors from claims caused by their own negligence. (At 85.) The
subcontractor's employees were also held to be entitled to be protected from liability: see 92. (See
also Tony & Jim's Holdings Ltd. v. Silva (1999) 43 O.R. (3d) 633 (C.A.); Orange Julius Canada
Ltd. v. Surrey 2000 BCCA 467; London Drugs Ltd. v. Kuehne & Nagel International Ltd. [1992] 3
S.C.R. 299; and Madison, supra, at 88-92.)
39 The trilogy was also applied by this court in North Newton Warehouses Ltd. v. Alliance
Woodcraft Manufacturing Inc. 2005 BCCA 309, lve to app. refused [2005] S.C.C.A. No. 375. Mr.
Justice Hall for the majority held that a subrogated claim brought by the insurer of a landlord
against a tenant whose employees had negligently caused a fire was barred. The landlord had
Page 20
covenanted in the lease to take out and maintain insurance against "all risks" of loss or damage to
the building and to repair the premises in the event of damage by "fire or other casualty not caused
by the negligence of the Tenant"; the tenant had agreed to reimburse the landlord for its insurance
premiums as a component of "additional rent". Adopting the "benefit" reasoning of Ross
Southward, Hall J.A. stated:
Here the tenant Alliance has paid the landlord an amount for the insurance
obtained by North Newton covering fire damage to the building. It seems to me
that, as Laskin C.J.C. observed in the Ross Southward case at 39, a tenant who
has paid for an expected advantage as between itself and its landlord should
benefit from those payments, and loss issues thereafter are between the landlord
and its insurer. In such circumstances, to allow the insurer of North Newton to
pursue its subrogated action against Alliance would render nugatory benefits
accruing to the tenant under the covenant of the landlord to insure. [At para. 42;
emphasis added.]
and further:
Ultimately, the policy rule underpinning the proposition that the insurer cannot
pursue a tenant for damages in circumstances such as those present in the instant
case is based on the proposition that it makes little business sense for a landlord
to covenant to insure and for a tenant to pay the premiums if the tenant is not to
derive some benefit from the insurance. One might properly say that there is
something approaching a presumption in favour of a tenant benefiting from a
landlord's covenant to insure. That is the legal principle that I take to be
established from the trilogy of cases decided by the Supreme Court of Canada.
[At para. 45; emphasis added.]
(See also Orange Julius, supra, at para. 22.)
40 Finally, reference may be made to Commonwealth Construction Co. Ltd. v. Imperial Oil Ltd.
[1978] 1 S.C.R. 317. Like Madison, it involved a contract entered into by a general contractor with
an owner, Imperial Oil, for the construction of a fertilizer plant. A subcontractor, Commonwealth,
had been engaged to install piping and had caused a fire to break out, causing damage not only to its
own property but to other parts of the project. Imperial Oil had taken out property insurance that
named not only its own subsidiaries, but their contractors and subcontractors as insureds. The entire
amount of damage was claimed by and paid to Imperial Oil by its insurer, which then purported to
bring a subrogated action against Commonwealth. The Alberta Appellate Division, [1974] A.J. No.
261, ruled that the policy insured Commonwealth only to the extent of its portion of the work
performed under the subcontract, and therefore permitted the subrogated action to proceed.
41 Commonwealth appealed successfully on the basis that it had had an insurable interest in the
entire "works". De Grandpré J., speaking for the Supreme Court, began his analysis by referring to
Page 21
the "basic principle" that subrogation cannot be obtained against the insured himself. This was also
true, he said, in cases of "true joint insurance" and in cases of several insurance "if the different
interests are pervasive and if each relates to the entire property, albeit from different angles". (At
321.) As to whether Commonwealth had a "pervasive" interest in the entire project, he drew an
analogy to longstanding law in the field of bailment.
The question is: in the context of the construction contracts, did the various
trades have, prior to the loss, such a relationship with the entire works that their
potential liability therefor constituted an insurable interest in the whole?
In certain fields of mercantile law, e.g. bailment in the widest sense, full
insurable interest has for a long time been held to exist in others than the owner
because of their special relationship with the property entailing possibility of
liability.
It is sufficient to refer to the now classic decisions of Waters v. Monarch Fire
and Life Assurance Co. [[1843-60] All E.R. Rep. 654] and London and North
Western Railway Co. v. Glyn [(1859), 1 El. & El. 652], applied by the House of
Lords as recently as 1966 in Hepburn v. A. Tomlinson (Hauliers), Ltd. [[1966]
All E.R. 418.] These two classic decisions were also referred to with approval by
the Supreme Court of the United States in Phoenix Insurance Co. v. Erie and
Western Transportation Co. [(1886), 117 U.S. 312], which was followed in
Wager v. Providence Insurance Co. [(1893), 150 U.S. 99]. The decisions of the
Canadian Courts applying this doctrine are numerous and I will only refer to
Smith v. Stevenson [ [1942] 1 D.L.R. 681, [1942] O.R. 79], a judgment of the
Ontario Court of Appeal. Although these judgments were pronounced on policies
issued to the bailee and not to the owner and all other interested parties, as in the
case at bar, I do not see that circumstance making any difference when it comes
to determining the existence or non-existence of an insurable interest in a person
who is not the owner of the property.
In all these cases, there existed an underlying contract whereby the owner of the
goods had given possession thereof to the party claiming full insurable interest in
them based on a special relationship therewith. [At 322-23; emphasis added.]
42 The Court went on to observe that by recognizing an insurable interest in all tradesmen based
on the 'possibility' of damage, the courts would "apply to the construction field the principle
expressed so long ago in the area of bailment." Doing so would allow all parties engaged on one
construction project to be "spared the necessity of fighting between themselves should an accident
Page 22
occur involving the possible responsibility of one of them." (At 324.) In the result, Commonwealth
was held to be "an insured whose insurable interest extended to the entire works". The subrogated
claim brought by Imperial Oil was disallowed.
The Trial Judge's Reasons
43 Most if not all of the Canadian authorities described above were cited to the trial judge in the
case at bar. As he noted at para. 202, Scott took the position that the "covenant to insure" defence
did not apply in this instance because FCL had not paid (nor been required by the WMA to pay) any
of Scott's insurance costs and because:
(a)
there is no language in the Warehouse Management Agreement which suggests
an intent that the property insurance policy of Scott should benefit [FCL]; (b)
there is a valid commercial reason for the parties to a warehousing agreement to
stipulate that it is incumbent upon the bailor to insure its property against loss;
(c) there is a critical distinction between leases and construction contracts on the
one hand and contracts of bailment on the other hand regarding the insurable
interest of the parties in the bailed property; and (d) barring a claim against a
bailee in respect of losses arising from a breach of its duty of care because of an
insurance provision would effectively extinguish the rights of a bailor in entirety
and such an interpretation of an insurance clause would contravene the common
law obligations of a warehouseman and would make meaningless the
requirement that [FCL] act as a careful and vigilant owner
44 In considering these arguments, the trial judge turned his attention not to para. 17A of the
WMA, but to a provision in Appendix C, the form of warehouse receipt attached to the WMA. It
provided that all goods were stored at the owner's risk. (The WMA provided that in the event of a
conflict between the receipt and the agreement itself, the latter would prevail.) The trial judge
reasoned that contractual language of this kind simply means that the bailee does not accept risk of
loss to goods which may arise other than as a result of its own fault, citing Rose v. Borisko Brothers
Ltd. (1981) 33 O.R. (2d) 685, aff'd (1983) 41 O.R. (2d) 606 (Ont. C.A.)
45 The facts of Rose v. Borisko were very different from those in the case at bar: there was no
indication in the agreement between owner and warehouser or in their correspondence that the
owners would obtain insurance for the warehouser's benefit. Indeed, before entering into the
bailment agreement, the warehouser had assured the owners that it would provide "maximum"
insurance coverage and would take other precautions for the safety and protection of the owners'
goods. It failed to do so and the goods were destroyed by a fire caused by unknown third parties.
46 The owners' insurance covered part of their loss and the insurer relied on Commonwealth to
argue that because part of the owners' loss had been covered, the action should be barred. The trial
judge held, however, that:
Page 23
... before an insurance policy will bar subrogation there must exist some special
relationship between the insurer and the person against whom subrogation is
sought. In general terms, the cases stand for the proposition that an insurer cannot
assert against a third party any rights which the insured has, by contract, put
beyond his own reach. In this case, I find neither any special relationship that
should preclude subrogation nor any contractual terms that would prevent
subrogation in this case. [At 691; emphasis added.]
The Court went on to rule (arguably as the ratio of the case) that the storage contract had been
fundamentally breached by the defendant and that the plaintiffs had been "grossly misled" as to the
type of facility to be used. Judgment was entered for the plaintiffs.
47 The Ontario Court of Appeal agreed with the trial judge's comments regarding the absence of
any special relationship that would preclude the insurer's right of subrogation. Presumably, a
"special relationship" (a phrase used in Commonwealth) would have existed if the owners had
covenanted to obtain insurance for the warehouser's benefit as well as their own. (See also Lafarge
Canada Inc. v. JJM Construction Ltd. 2011 BCCA 453.)
48 The trial judge in the case at bar did not comment further on Rose v. Borisko, but noted that
FCL had (at para. 8 of the WMA) expressly disclaimed any "right, title or interest" in the goods
stored for Scott, other than a possible lien under the Warehouse Receipt Act. He went on to
distinguish bailment cases from landlord-tenant and complex construction cases in terms of
insurable interest. In his analysis:
I am satisfied that the landlord-tenant and construction project cases that have
found a bar to subrogation can be distinguished from cases involving bailor and
bailee. A warehouser does not have a generalized property interest in the goods
which it stores. On the other hand, tenants have an insurable interest in the
continuing existence and availability for use of demised premises. Similarly, the
insurable interest of all trades and subtrades in a construction project is obvious
and was recognized in Commonwealth Construction Co. v. Imperial Oil Ltd.,
[1978] 1 S.C.R. 317. [At para. 205; emphasis added.]
49 On a policy level, the trial judge was also of the view that barring the subrogated action would
impair the duty of care owned by FCL to Scott, contrary to s. 2(4)(b) of the Warehouse Receipt Act.
He noted that there were no Canadian cases on point, but that in two American decisions, Brown v.
Sloan's Moving & Storage Co., 296 SW2d 20 (S.C. Mo., 1956) and Kimberley-Clark Corporation v.
Lake Erie Warehouse, Division of Lake Erie Rolling Mill Inc. 375 NYS2d 918, 49 A 2d 492 (S.C.,
App. Div.), the courts had declined to give effect to clauses requiring a bailor to obtain its own
insurance, on the basis that the bailee should not be exempted from its contractual or statutory
duties of care. As well, the trial judge said, disallowing the subrogated claim in this instance would
"make meaningless" the indemnification provisions at para. 12 of the WMA, under which each of
Page 24
Scott and FCL had covenanted to hold the other harmless from all losses and claims arising, inter
alia, from property damage 'related to' the negligence of the other. Given the policy implications of
barring a party from enforcing its rights to indemnity, he suggested that very clear and specific
language would be required for that purpose.
50 In the result, he held that there was no bar to the subrogated claim against FCL. The claim was
allowed as against both defendants, with damages to be assessed at a later date.
On Appeal
51 In this court, the defendants submit that the trial judge erred in declining to apply the
"covenant to insure" principle established by the trilogy and in particular, in distinguishing bailment
situations from the landlord-tenant and complex construction situations discussed in the authorities.
In the defendants' submission, the trial judge's concern regarding the "impairment" of the
warehouser's standard of care is based on a misapprehension of both the immunity defence and the
intent of the Warehouse Receipt Act. It is said that Scott's covenant to insure and to name FCL as an
insured in respect of the primary coverage for liability and property damage must be construed "in
effect as an assumption by that party [here, Scott] of the risk of loss or damage caused by the peril
to be insured against". (Madison, at 85.) The defendants say that para. 17A of the WMA was, like
the subject clause in Ross Southward, intended to benefit FCL, and that FCL did have an insurable
interest in the contents of the warehouse, contrary to the trial judge's holding. I will attempt to deal
with each of these arguments below.
Does a Warehouser have an Insurable Interest in the Stored Goods?
52 It seems to me that this question was answered by the Supreme Court of Canada in
Commonwealth. As seen above, de Grandpré J. for the Court observed that in the field of bailment
"in the widest sense", persons other than the owner have been held to have insurable interests in the
subject property "because of their special relationship with the property entailing [the] possibility of
liability." (At 322-23.) His Lordship cited various English and Canadian cases but found it
necessary to refer only to Smith v. Stevenson [1942] 1 D.L.R. 681 (Ont. C.A.). I repeat here for
convenience the observations of de Grandpré J.:
... Although these judgments were pronounced on policies issued to the bailee
and not to the owner and all other interested parties, as in the case at bar, I do not
see that circumstance making any difference when it comes to determining the
existence or non-existence of an insurable interest in a person who is not the
owner of a property.
In all these cases, there existed an underlying contract whereby the owner of the
goods had given possession thereof to the party claiming full insurable interest in
them based on a special relationship therewith. ... By recognizing in all
Page 25
tradesmen an insurable interest based on that very real possibility [of damage by
one tradesman to the property of another], which itself has its source in the
contractual arrangements opening the doors of the job site to the tradesmen, the
courts would apply to the construction field the principle expressed so long ago
in the area of bailment. [At 323-24; emphasis added.]
53 These comments are consistent with many venerable English and American cases. The locus
classicus is Waters et al. v. Monarch Fire and Life Assurance Co. [1843-60] All E.R. Rep 654
(Q.B.), where it was held that two insurance policies taken out by the plaintiff warehousers were not
limited to the amount of their charges (for which they had a lien on the goods) but extended to the
"whole amount of the loss." The majority relied on an analogy to trust, given that the goods had
been 'entrusted' to the bailee. Waters was adopted by the U.S. Supreme Court in Phoenix Insurance
Co. v. Eerie and Western Transportation Co. 117 U.S. 873 (1886). More recently, the principle was
affirmed in England in Hepburn v. A. Tomlinson (Hauliers) Ltd. [1966] 1 All E.R. 418 (H.L.), at
421 and in Petrofina (U.K.) Ltd. v. Magnaload Ltd. [1983] 3 All E.R. 35 (Q.B.), at 40-3, where the
Court cited and agreed with Commonwealth. See also Nicholas Legh-Jones, John Birds, David C.
Owen, eds., MacGillivray On Insurance Law, (10th ed., 2003) at s. 1-137; Norman Palmer, Palmer
on Bailment (3d ed., 2009) at s. 1-060 and ch. 39 generally; and ch. 4 of N. Palmer and E.
McKendrick, Interests in Goods (2nd ed., 1998), by John Birds.
54 Obviously in this case, the warehouser was subject to the "possibility of liability" under the
WMA. I conclude that the trial judge erred in ruling that FCL did not or could not be said to have an
insurable interest in the property that was destroyed by the fire.
55 Even if it were otherwise, this court has already held that the absence of an insurable interest
given to a tenant under the landlord's insurance policy is not determinative of the question of tort
immunity. In North Newton, the lease in question provided expressly that no insurable interest
would be conferred on the tenant under the policies of insurance to be carried by the landlord, and
further that the landlord's insurance would not cover any of the tenant's property. Hall J.A. for the
Court stated:
In my opinion, the fact that no insurable interest is given to the tenant under the
landlord's policy is not determinative. That issue was considered in the case of
Amexon Realty Inc. v. Comcheq Services Ltd. (1998), 37 O.R. (3d) 573, 155
D.L.R. (4th) 661 (C.A.). That was a case in which, as in the case at bar, the
landlord was required to insure and the tenant was obliged to contribute to the
premiums. The Ontario Court of Appeal held that the insurer could not pursue a
subrogated claim against the tenant. Reference was made to the Supreme Court
of Canada trilogy. On the question of insurable interest, Goudge J.A. said this at
576:
Page 26
It is true that the lease provides that the tenant has no insurable interest
under the landlord's policy. While this provision would presumably
preclude the tenant from asserting a claim for his own loss under that
policy, it does not speak to the claim asserted by the appellant in this case.
It is the bargain I have referred to rather than the tenant having an
insurable interest under the landlord's policy that is the basis upon which
this action is precluded.
I agree with this reasoning.
It does not appear to me that the clause stating the insurance of the landlord is not
to cover property of the tenant has much relevance in the circumstances of this
case. This case is concerned with damage to the building. [At paras. 36-7;
emphasis added.]
I know of no reason in principle why similar reasoning would not extend to the bailment context or
to the case at bar.
Impairment of Standard of Care?
56 With respect to the trial judge's policy concerns regarding the warehouser's obligation to
indemnify Scott for negligent acts, I must also, with the greatest of respect, disagree. First, I do not
see any conflict between a general covenant to indemnify given by a warehouser (in this case, by
FCL at para. 12 of the WMA), and insurance provisions such as para. 17A. Indeed one may see
insurance covenants as a means of strengthening indemnification obligations, which alone are only
as strong as the indemnifier's particular financial circumstances. Furthermore, the obligation of a
negligent warehouser to indemnify its bailor for breaches of its duty of care arises even without a
provision such as para. 12. It would make no commercial sense to permit an indemnity provision to
overwhelm or supersede an insurance provision such as para. 17A - the "supervening covenant"
discussed in T. Eaton. As was stated in Economical Mutual Insurance Co. v. 1072871 Ontario Ltd.
(1998), 20 R.P.R. (3d) 154 (Ont. Ct. J. (Gen. Div.)), aff'd (1999) 9 C.C.L.I. (3d) 224:
Counsel for the plaintiff further seeks to distinguish the T. Eaton case on the
basis that para. 8(1) of the lease before me contains a provision requiring the
tenant to keep the Landlord indemnified with respect to any damage to the
premises occasioned by the negligence of the tenant ... whereas there is no such
provision in the leases in the T. Eaton case.
I do not accept this submission. In my view para. 8(2) does not impose upon the
tenant any greater liability for fire caused by its negligence than exists in the
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absence of such a provision ...
...
This [omitted quotation from T. Eaton at 428] clearly indicates that even in the
absence of a specific provision requiring the tenant to indemnify for damage
caused by its negligence, there is no doubt as to the liability of the tenant for a
fire caused by its negligence. I therefore cannot see how the presence of a
provision such as para. 8(2) changes the effect of the landlord's obligation to
insure. I note that para. 8(2) does not ... purport to override the operation of the
para. 8(1) [i.e., the covenant to insure]. In my view the practical effect of the T.
Eaton case is that the presence in a lease of a covenant on the part of the landlord
to insure for fire, unless a clear intention to the contrary is expressed, will result
in the tenant being protected from liability for negligently caused fires. I do not
regard para. 8(2) as expressing such a contrary intention. [At paras. 11-3;
emphasis added.]
57 Nor can I agree on a more general level that the application of the "covenant to insure"
defence in the case at bar would "make meaningless" the warehouser's obligation to maintain the
warehouse premises to the standard specified in the Warehouse Receipt Act, or "impair" the duty of
care owed to Scott as the owner of the goods. A similar argument was raised and rejected in Evans
Products v. Crest Warehousing [1980] 1 S.C.R. 83. It did not involve insurance but concerned the
validity of a clause in a bail agreement that limited the warehouser's liability for loss or damage of
the stored goods to $50 per package unless a higher value was declared by the owner. The
warehouser's negligence caused a fire that damaged the goods and the warehouser sought to rely on
the limitation on its liability as a defence to the owner's claim for damages. The owner argued that
giving effect to this limitation of liability would "engender carelessness" on the warehouser's part,
thus contravening what was then s. 3(4)(b) of the Warehouse Receipt Act. (See now s. 2(4)(b).)
Various American authorities were referred to in this regard, but the majority, per Mr. Justice
MacIntyre, did not find them persuasive. In his words:
It is clear, in my opinion, that a contractual limitation of liability does not impair
the obligations to take care declared in s. 14 of the Act. That obligation is
statutory and not subject to modification by private contract. Even if a limitation
of liability did have the effect of inducing carelessness on the part of the
warehousemen it would not impair the obligation. It might very well impair
performance but the obligation remains untouched and in the event of loss
whatever the consequential damage the responsibility of the warehouseman must
depend upon whether or not he met the obligation fixed upon him in s. 14. [At
93; emphasis added.]
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58 In my view, the argument that an insurance clause such as para. 17A of the WMA would
"impair" the warehouser's standard of care contrary to s. 2(4) of the Warehouse Receipt Act is even
weaker than the argument with respect to the limitation of liability clause discussed in Evans, given
the specificity and importance of the insurance provisions. As well, as FCL argues in its factum, if
the trial judge were correct, similar reasoning could apply in any case where a party was obliged to
insure for its own negligence. I know of no authority that would suggest such a requirement should
be regarded as contrary to public policy because it might encourage carelessness on the insured's
part.
Construction of Insurance Provisions and "Benefit"
59 Finally, I turn to the wording of para. 17A and the issue of "benefit". I note that at para. 201 of
his reasons, the trial judge acknowledged that the trilogy is generally recognized as standing for the
proposition that in the context of a commercial lease, "a covenant to insure by a landlord should
flow to the benefit of a tenant unless that result would be inconsistent with something in the lease
itself." (North Newton and Madison were cited for this principle.) The trial judge appeared to adopt,
however, Scott's contention that there was no language in the WMA suggesting an intention that the
property insurance taken out by Scott should benefit FCL. (Para. 202.) In doing so, he focussed on
the stipulation in the form of warehouse receipt that the warehouser was not an insurer of the goods
and that it was the owner's obligation to obtain insurance. Such clauses, he reasoned, are "simply a
means of stipulating that the warehouser does not accept the risk of loss to goods which may arise
other than as a result of its own fault." As seen above, he cited Rose v. Borisko for the proposition
that a "special relationship" must exist between the parties before the tort immunity principle will
apply.
60 With respect, it appears the trial judge erred in failing to apply the trilogy and North Newton,
among other authorities, to the WMA. Paragraph 17A, like the insurance clauses in those cases,
went much farther than the terms of the receipt, which contained no relevant covenants regarding
insurance. Paragraph 17A required Scott to maintain "insurance of its property and inventory within
the warehouse" and to name FCL as an additional insured under this "primary coverage". The terms
of the agreement itself were to prevail over those in Appendix C in the event of a conflict.
61 Assuming that the question remains one of interpretation, I acknowledge that some of the
decided cases are difficult to reconcile on the question of what wording is necessary for the
"covenant to insure" principle to result in the barring of a subrogated claim. (See the online article
by Mr. Nigel Kent, Tort Immunity: Covenants to Insure and Waivers of Subrogation,
www.cwilson.com/publication/insurance/tort-immunity.pdf.) Mr. Kent notes in particular a short
oral judgment of this court delivered in April 1980 in Leung v. Takatsu and reported at [1992] 3
W.W.R. 129. The better view seems to be, however, that the insertion of a covenant to insure
(which was not present in Rose v. Borisko) on the part of a bailor or landlord is generally regarded
as intended for the benefit of the bailee or tenant. The wording of para. 17A in this case is not
identical to that of any of the cases to which we were referred, but is clearly analogous to the
Page 29
wording in cases in which subrogated claims were disallowed. As the Court stated in North Newton,
"where there is in a lease a covenant by a landlord [in this case bailor] to insure, the tenant [in this
case warehouser] should benefit from it unless there is something inconsistent with such a result
contained in the lease document [here the WMA]." (At para. 33.)
62 I see no inconsistent wording in the WMA, and indeed the parties' express acknowledgement
that insurance obtained under para. 17A would "respond as primary coverage" strengthens the case
for tort immunity on FCL's part. I conclude that Scott's obligations under para. 17A were clearly
intended for the benefit of FCL. Paraphrasing Madison, there would be no benefit to FCL from the
provision if it did not apply to a fire caused by FCL's beach of the applicable standard of care.
63 In the result, I find that the trial judge did err in proceeding on the basis that the various
Canadian authorities discussed above were not applicable to this case. I would allow the appeal,
grant a declaration that Scott's subrogated claim against the defendants is barred, and dismiss the
action.
64 Counsel may make written submissions regarding costs, if they wish, within a reasonable
time.
M.V. NEWBURY J.A.
J.E. HALL J.A.:-- I agree.
N.J. GARSON J.A.:-- I agree.
---- End of Request ---Email Request: Current Document: 1
Time Of Request: Monday, September 08, 2014
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