APPEALS DECIDED

R. v. Resolute FP Canada Inc., 2019 SCC 60

Contracts — Interpretation — Indemnity

On appeal from a judgment of the Ontario Court of Appeal (2017 ONCA 1007), reversing a decision of Hainey J., 2016 ONSC 4652.

In 1985, Ontario granted an indemnity (the “Indemnity”) to Reed Ltd. and Great Lakes Forest Products Limited, both former owners of a pulp and paper mill located in Dryden, Ontario, as well as to their successors and assigns, “from and against any obligation, liability, damage, loss, costs or expenses incurred by any of them” after the date of the Indemnity, “as a result of any claim, action or proceeding, whether statutory or otherwise”, because of “any damage, loss, event or circumstances, caused or alleged to be caused by or with respect to, either in whole or in part, the discharge or escape or presence of any pollutant by Reed or its predecessors, including mercury or any other substance, from or in the plant or plants or lands or premises”, as set out in para. 1 of the Indemnity. The Indemnity was agreed to by the parties pursuant to the settlement of litigation brought by two First Nations in relation to the mercury waste contamination of two rivers caused by the operation of the Dryden mill.

Twenty‑six years later, the Ministry of the Environment and Climate Change issued a remediation order in relation to monitoring and maintaining a mercury waste disposal site at the Dryden mill. In the intervening period, ownership of the mill had changed hands in several transactions. The Director’s order was issued to both Resolute, Great Lakes’ corporate successor, and Weyerhaeuser, who also owned the Dryden property for a time. Weyerhaeuser commenced an action in Superior Court, seeking a declaration that the terms of the Indemnity required Ontario to compensate it for the cost of complying with the Director’s order. Resolute sought leave to intervene in order to claim the same protection. Weyerhaeuser, Resolute and Ontario each moved for summary judgment.

The motion judge held that the Indemnity applied to a statutory claim brought by an agent of the Province and that both Resolute and Weyerhaeuser were entitled to indemnification for their costs of complying with the Director’s order. He therefore granted summary judgment in their favour. Ontario appealed. The majority at the Court of Appeal agreed with the motion judge’s finding that the Indemnity applied to the Director’s order, but held that Resolute was not entitled to indemnification and remitted Weyerhaeuser’s entitlement to indemnification to the Superior Court. The dissenting judge would have allowed Ontario’s appeal. In his view, the motion judge made reversible errors in his interpretation of the Indemnity; properly construed, the Indemnity was intended to cover only pollution claims brought by third parties, not first party regulatory claims such as the Director’s order. Ontario, Weyerhaeuser and Resolute appeal to the Court.

Held (Côté, Brown and Rowe JJ. dissenting in part): Ontario’s appeal should be allowed and summary judgment granted in its favour. Resolute and Weyerhaeuser’s appeals should be dismissed.

Per Abella, Moldaver, Karakatsanis and Martin JJ.:

The Indemnity does not cover the Director’s order. As the dissenting judge in the Court of Appeal concluded, the motion judge made palpable and overriding errors of fact and failed to give sufficient regard to the factual matrix when interpreting the scope of the Indemnity, justifying appellate intervention.

The motion judge erred when he found that the waste disposal site continues to discharge mercury into the environment. His mistaken finding that discharges of mercury from the waste disposal site were an ongoing source of serious environmental liability undoubtedly drove his conclusion that these discharges could give rise to pollution claims, and that unless the Indemnity covered first party claims, Resolute and Weyerhaeuser would be exposed to significant liability. The motion judge misconstrued the purpose and effect of the waste disposal site — this site was not a source of ongoing mercury contamination or environmental liability, and therefore its creation would not give rise to a pollution claim. Rather, the waste disposal site was created and used as a solution to the mercury pollution problem, effectively as a burial site for mercury‑contaminated waste. There was no evidence of mercury‑contaminated waste being discharged from the waste disposal site. This erroneous factual finding was key to his conclusion that the Director’s order was a pollution claim within the meaning of the Indemnity.

Furthermore, the Indemnity was a schedule to a broader settlement agreement, so its scope was limited to the issues defined in that agreement, namely the discharge by Reed and its predecessors of mercury and any other pollutants into the river systems, and the continued presence of any such pollutants discharged by Reed and its predecessors in the related ecosystems. The motion judge failed to consider this context when interpreting the scope of the Indemnity. Properly interpreted, the Indemnity was intended to cover only proceedings arising from the discharge or continued presence of mercury in the related ecosystems, not those related to the mere presence of mercury contained in the waste disposal site.

The Indemnity must be read in the context of two prior indemnities given by Ontario in 1979 and 1982 in the context of the litigation brought by the First Nations. The Indemnity was given in partial consideration for Great Lakes and Reed releasing Ontario from its obligations under those prior indemnities. It is clear that the 1979 and 1982 indemnities were in response to the ongoing litigation, which involved claims brought by third parties, not by Ontario directly. There is no language in those indemnities that would imply Ontario intended to provide protection against the costs of regulatory compliance.

The motion judge’s view of the importance of the phrase “statutory or otherwise” in the Indemnity and of why the parties entered into the Indemnity was materially affected by a palpable and overriding factual error. The motion judge found that the Indemnity was provided in consideration for commitments from Great Lakes to make significant financial investments in the Dryden plant. Given what he found to be the rationale for entering into the Indemnity, the motion judge concluded that it would be commercially absurd if Ontario could still impose remediation costs. However, Great Lakes’ financial commitments were actually provided as part of the prior 1979 indemnity. Later, Great Lakes gave no new commitments to modernize in consideration for the Indemnity. The motion judge thus premised his interpretation of the Indemnity on an incorrect factual basis — one that led him to place too much emphasis on a change in language and misconstrue the bargain actually struck in the Indemnity.

The motion judge also erred by failing to consider the Indemnity as a whole when determining whether or not the Director’s order fell within its scope. Paragraphs 2 and 3 of the Indemnity are critical to its interpretation. Paragraph 2 provides that in any pollution claim, Ontario has the right to elect to take carriage of the defence or to participate in the defence and/or settlement of the claim and any proceeding relating thereto as it deems appropriate. Paragraph 3 requires the parties to cooperate with Ontario in the defence of a claim. These clauses would be utterly meaningless for first party claims. Their inclusion is completely inconsistent with the notion that para. 1 of the Indemnity contemplates first party claims. Nothing in the Indemnity suggests that pollution claims included both first and third party claims, but that the requirements of paras. 2 and 3 would apply only to the subset of pollution claims brought by third parties. To the contrary, para. 2 applies in “any Pollution Claim”. The fact that the requirements of paras. 2 and 3 would be utterly meaningless in first party claims implies that pollution claims encompass only those brought by third parties. Properly interpreted, the Indemnity only applies to third party claims, and therefore does not cover the Director’s order.

Per CôtéBrown and Rowe JJ. (dissenting in part):

The appeals brought by Ontario and Weyerhaeuser should be dismissed and the appeal brought by Resolute should be allowed. The Indemnity enures to the benefit of the successors and assigns of the Province, Reed and Great Lakes. Resolute is entitled to rely on the Indemnity to cover past and future costs incurred in complying with the Director’s order as a corporate successor of Great Lakes, but Weyerhaeuser is neither an assignee of the benefit of the Indemnity nor a corporate successor of either Great Lakes or Reed, and it has no entitlement to benefit under the Indemnity.

The Indemnity is a contract which must be interpreted with a view to ascertaining the objective intentions and reasonable expectations of the contracting parties with respect to the meaning of the contractual provision. The approach is rooted in practicalities and common sense. It considers the language that the parties employed to express their agreement, objective evidence of the background facts that was or reasonably ought to have been within the knowledge of both parties at or before the date of contracting, and the principle of commercial reasonableness and efficacy. The factual matrix cannot overwhelm the words of the contract and cannot change the words of the contract in a manner that would modify the rights and obligations that the parties assumed.

The Indemnity covers the costs of complying with the Director’s order. The motion judge did not make any of the four errors alleged by the Province in interpreting the Indemnity.

First, he did not err in failing to consider the text of the Indemnity with reference to the factual matrix, including the two earlier indemnities, the asset purchase agreement in which Reed sold the entire property to Great Lakes, the settlement agreement to which the Indemnity was a schedule, and certain provisions added to the Environmental Protection Act in 1985. Like the Indemnity, the two earlier indemnities addressed the mercury contamination, but they represent distinct agreements given for distinct purposes in distinct sets of negotiations. The Indemnity captures a broad scope relative to the other indemnities. In addition, the earlier indemnities were replaced by the Indemnity, which suggests that the parties themselves did not view those earlier indemnities as being co‑extensive in scope with the Indemnity. The Indemnity is a separate agreement and must be interpreted by considering the words the parties used in it, not a previous agreement. The asset purchase agreement is of substantially the same scope as the Indemnity, but it exempted the costs of complying with an earlier regulatory order. The Province was aware of its terms, and nothing prevented the parties to the Indemnity from expressly providing that such orders would not fall within the scope of the Indemnity, as the parties to the asset purchase agreement had done. As to the settlement agreement, the issues which that agreement was intended to address included government actions taken in consequence of the mercury contamination. Further, the Indemnity expressly applies in respect of the presence of mercury in the affected lands, and the settlement agreement cannot overwhelm the text in the Indemnity. As for the statutory amendments, even accepting that they are objective and admissible evidence of what the parties had or ought to have had in contemplation when entering into the Indemnity, it is a far leap to the conclusion that they would have understood the reference to statutory claims in the Indemnity to refer solely to claims brought under the amendments or other third party statutory claims which could have been brought at that time. Moreover, reading the Indemnity as excluding first party claims cannot be reconciled with the amendments’ creation of a right of action for the Province, or the Indemnity’s references to “any province” and statutory actors.

Second, the motion judge did not err in failing to interpret the indemnification clause in para. 1 of the Indemnity in light of the agreement as a whole. His reading of that clause was consistent with the notice/control and cooperation provisions at paras. 2 and 3 of the Indemnity, which are typical of third party indemnities and are meaningful only for third party claims against the indemnified parties.

Third, the motion judge did not make any palpable and overriding errors in characterizing the reason Great Lakes expended certain money or in concluding that the waste disposal site was the source of the mercury contamination. To the extent that these were errors, they could not possibly have had an overriding effect on the conclusion reached by the motion judge. Such minor and collateral factual findings could not determine the outcome of the case, particularly where the motion judge’s ultimate conclusion on the scope of the Indemnity rested on different factual and contextual considerations.

Fourth, the motion judge did not err in interpreting the Indemnity so as to impermissibly fetter the Legislature’s law‑making powers, thereby rendering the Indemnity unenforceable. As a matter of constitutional law, the executive of the Canadian state cannot bind or restrict the legislature’s sovereign law‑making power, whether by contract or otherwise. It follows that a contract entered into by the executive that purports to require that a certain law be enacted, amended or repealed cannot be enforced by way of injunction or specific performance. However, there is an important difference between a contract that impermissibly fetters the legislature’s power to enact, amend and repeal legislation, and a contract whose breach by the Crown exposes it to liability. Where the legislature exercises its law‑making power in a manner inconsistent with the terms of a contract, the Crown may still face consequences in the form of liability in damages. While the possibility of such liability may deter the legislature from acting in a manner that runs contrary to the Crown’s contractual promises — sometimes referred to as an “indirect fetter” — the legislature is not thereby truly fettered.

In this case, the enactment of new statutory claims might expose the Province to greater liability under the Indemnity, but the Indemnity in no way prevents the Legislature from exercising its sovereign authority to make or unmake any law whatever, and deterring or otherwise discouraging the Legislature from exercising its law‑making power in a certain way would not render it unenforceable at law. The Legislature’s freedom of action is not impacted.

As to whether Resolute and Weyerhaeuser could benefit from the Indemnity as successors and assigns of Great Lakes, the motion judge made no error in interpreting the Indemnity as covering the costs imposed on the successors and assigns of Great Lakes by the Director’s order. Although his analysis on this point was rooted primarily in the wording of the Indemnity, he also considered its meaning in light of the agreement as a whole and the circumstances surrounding its formation in 1985. However, he found that neither supported an interpretation of the Indemnity that would exclude coverage for first party claims.

However, the motion judge did err in principle in holding that a predecessor of Resolute had assigned the benefit of the Indemnity to Weyerhaeuser. He failed to read the impugned contractual term in light of the factual matrix and in a commercially sensible way, focussing his analysis solely on the text of the relevant provisions of the asset purchase agreement between the predecessor and Weyerhaeuser. Although an indemnified party cannot continue to enjoy the benefit of the Indemnity after it assigns its rights thereunder to a third party, the parties structured the agreement in a way that imposed all risk in relation to environmental liabilities on the predecessor while the predecessor relinquished its own protection. This risk‑allocation structure makes commercial sense only if the predecessor’s interests remained protected by the Indemnity.

The motion judge also committed a palpable and overriding error when he concluded that the Indemnity’s enurement clause extended the benefit of the Indemnity to successorsin‑title of the Dryden Property. The Indemnity’s enurement clause is a standard contractual term and certainty in commercial transactions is best protected where courts give effect to the common understanding and inclusion of such terms in contracts, absent any indication that the parties intended them to have a different effect. When used in relation to corporations, a “successor” generally denotes another corporation which, through some type of legal succession, assumes the burdens and becomes vested with the rights of the first corporation. Nothing in the language of the Indemnity or in the circumstances surrounding the formation of the contract suggests that “successor” in the Indemnity should extend to both corporate successors of Great Lakes and successors‑in‑title to the Dryden Property. However, it may be possible, in other circumstances, for the term “successors” to refer to a successor‑in‑title.

Citation: R. v. Resolute FP Canada Inc., 2019 SCC 60

SCC File No.: 37985

Reasons for Judgment: Abella, Moldaver, Karakatsanis and Martin JJ.

Joint Reasons Dissenting in Part: Côté and Brown JJ. (Rowe J. concurring)

https://scc-csc.lexum.com/scc-csc/scc-csc/en/item/18060/index.do