In Addison & Leyan Ltd v Fraser Milner Casgrain LLP, 2014 ABCA 230, the Alberta Court of Appeal clarified the circumstances in which a plaintiff can claim contribution and indemnity. The ability to claim contribution and indemnity hinges on whether the party against whom indemnification was sought could independently be found liable for damages suffered by the third party.

Background

The individual plaintiffs in this matter each had an ownership interest in York Beverages Ltd. (“York”) either directly or through ownership of shares in Addison & Leyan Ltd (“Addison”). In September 1989, Addison agreed to sell shares in York to a third party. Mr. Wallace Shaw practised as a tax lawyer for Fenerty, Robertson, Fraser & Hatch (“Fenerty”) and provided a legal opinion regarding tax liability to York prior to their entering into a transaction.

In 1992, the Minister of National Revue (the “Minister”) reassessed York for tax year of 1989 and determined it owed around $3.5 million. York was unable to pay so in February 2001, the Minister determined Addison was statutorily liable for the income tax debt and issued notices of assessment for tax liability now worth $6.7 million. They entered into a settlement agreement with the Minister and ultimately incurred approximately $490,000 in tax liability and $1.25 million in legal fees, disbursements and other expenses.

Addison brought an action in September 2011 seeking contribution and indemnity from Fraser Milner Casgrain LLP (“FMC”) as the successor to Fenerty. FMC later acknowledged that the advice was negligently prepared and that Addison relied upon the opinion.

The question before the court was whether Addison had a claim against FMC in negligence or a claim of contribution and indemnity based on the common law implied right of indemnity. The distinction was important because of limitation issues: the limitation period had expired for an action in negligence, whereas a claim of implied indemnity had not.

The Court of Appeal agreed with the trial judge that the action could not be commenced as a claim for contribution and indemnity and went on to clarify when a claim for implied indemnity is appropriate.

Scope of Contribution and Indemnity

The Alberta Court of Appeal followed the leading common law authority on contribution and indemnity, Birmingham and District Land Co v London and Northwest Railway Co (1886), 34 CH D 261 (CA). In that early English Court of Appeal decision the right to indemnity under the common law, as a direct right to reimbursement, arises in three circumstances:

  1. By express contract, if provided in the terms of a contract between the parties;
  2. By implied contract, if the parties intended such indemnity; or
  3. By implication, if the circumstances demand a legal or equitable duty to indemnify, by which the law recognizes an assumed promise by a person to do what, under the circumstances, he ought to do.

The Supreme Court of Canada has also relied on this reasoning in R. v. Imperial Tobacco Canada Ltd., 2011 SCC 42, where it was confirmed that equitable indemnity is a narrow doctrine, confined to “situations of an express or implied understanding that a principal will indemnify its agent for acting on the directions given.”

Implied Indemnity

Implied indemnity can be found where indemnity is not expressly provided for by a clause in an agreement but is nevertheless determined to be reasonably intended by the parties, based on equitable consideration. The court focused on implied indemnity in this case and reiterated that it “may arise where the wrongdoer’s negligence causes damage to a third party for which the party seeking the indemnity is held liable. However, there must be a connection between the wrongdoer, the third party, and the damage.”

The lack of connection is what saved the FMC from being held liable to indemnify Addison in this case. The court stated “As the respondents could have never been found liable to the Minister for the tax liability or for the appellants’ subsequent expenses, the respondents could have no common law obligation to contribute to or indemnify the appellants.”

Bottom Line

This ruling maintains the limited scope of implied indemnity, providing some relief to lawyers and other professionals who provide advice. While this ruling may be good news to some, it highlights an inherent unfairness that can result that leaves individuals at risk of being given negligent advice and having no available remedy. Addison never would have entered into the transaction that resulted in their liability had FMC not been negligent in their legal opinion.

When the policy reasons for such a limitation are examined, however, it is clear that those reasons outweigh any potential risk to individuals. The court stated that if the scope of implied indemnity was expanded “anyone who gives advice could be considered to provide an implied indemnity to their clients, covering any loss incurred in relying on that advice.” This is increasingly troublesome when considering the implications under the Limitations Act that would subject those professionals to “indeterminate litigation under a never-ending limitations period.”

If a client does, however, require certainty in this regard, it is possible to negotiate for and include a specific promise of indemnity in a retainer agreement. In addition, there is still a possibility to receive damages in a common law claim for breach of contract or tort. If the limitation period had not expired, Addison in this case would have been able to claim against FMC for relying on their tax opinion. This is the appropriate remedy for those in similar situations, rather than implied indemnity.