Last Week’s Court Rulings from the Alberta Court of Queen’s Bench, Court of Appeal and SCC.
Edited by Steven Graham
Optrics Inc. v Lloyd’s Underwriters, 2022 ABCA 26
Duty to Defend | Coverage | Summary Application
Nixon v Gruschynski, 2022 ABQB 80
Negligence | Collateral Attack | Issue Estoppel
Optrics Inc. v Lloyd’s Underwriters, 2022 ABCA 26
In a summary application before a chambers judge, the appellant, Optrics, sought a declaration that the respondent, Lloyds, had a duty to defend certain breach of contract and intellectual rights claims asserted against it in a separate action. The chambers judge found that there was no duty to defend under the 2016-17 policy, and with respect to the 2012-13 policy, there were questions of fact that required a trial to determine. The appellant appealed, seeking a declaration that there was a duty to defend and that the respondents indemnify them for all costs incurred in defending the claims since their inception. The respondents cross-appealed for a finding that in the event coverage under the 2012-13 policy can be determined, they have no duty to defend.
Between 2006 and 2017, the appellant was insured under a commercial policy for tech companies underwritten by CFC Underwriting Limited, as managing agent for various Lloyd’s underwriters. The policy wording changed over time as the policies were renewed. The 2012-13 policy provided, inter alia, that Lloyds would pay the appellant’s legal costs and expenses in the defence or settlement of any ‘claim’ made by a ‘client’ arising out of an unintentional ‘breach of client contract’ and from the ‘infringement of any intellectual property right in the course of [the appellant’s] business activities. This required notice of the claim to be given during the 2012-13 policy period. The 2016-17 policy was similar, but excluded claims arising ‘directly or indirectly’ from the ‘infringement of any intellectual property rights’ or ‘breach of an intellectual property rights license acquired by [the appellant]’, referred to as the “IP Exclusion”.
When the appellant notified the 2016-17 underwriters of a January 2017 demand from a third party, coverage was denied on the grounds that the demand was not a ‘claim’, the agreement the appellant was alleged to have breached was not a ‘client’ contract, and the 2016-17 policy exclusion noted above applied.
The chambers judge made the following findings:
[29] The chambers judge found that:
In my view, a plain reading of the 2016/2017 policy does not support a finding that BNI is a client, nor do I find the definition of client to be ambiguous in this case thereby necessitating reference to extrinsic evidence to assist in resolving the issue. Based on the evidence before me I do not consider the term client to be reasonably susceptible to the interpretation suggested by Optrics. Further, I believe that to accept the interpretation suggested by Optrics would give rise to an unrealistic result that could not have been reasonably in the contemplation of the parties at the time the policy was concluded.
The 2018 counterclaim alleges that Optrics purchased products and services from BNI and resold them. There is nothing to suggest that Optrics supplied its business activities to BNI. As well, Optrics is the one purchasing the product and services from BNI, not receiving a fee from BNI. These allegations do not fit within the parameters of coverage provided for in the policy. I therefore conclude that the breach of contract allegations in the BNI 2018 counterclaim do not trigger the Underwriters’ duty to defend under the terms of the 2016/2017 policy and it is not necessary for me to address the Underwriters’ argument concerning the affect of the IP Exclusion Clause.
Two grounds of appeal were advanced. First, it was alleged the chambers judge failed to interpret the definition of ‘client’ under the 2016-17 policy and erred in finding BNI was not a client. Second, it was alleged the chambers judge failed to analyze evidence permitted on a duty to defend application and erred in declining to decide the issue under the 2012-13 policy.
The Court of Appeal rejected the appellant’s contention that the appeal involved interpreting a standard form contract best characterized as a question of law:
[36] […] The contractual interpretation exercise in this case is one in which “the principles of contractual interpretation are applied to the words of the written contract, considered in light of the factual matrix.” Absent an extricable question of law, a deferential standard of review applies: Sattva Capital Corp v Creston Moly Corp, 2014 SCC 53 at paras 50-52.
The chambers judge’s decision regarding whether summary resolution was appropriate was also entitled to deference:
[37] The chambers judge’s assessment of the facts, the application of the law to those facts, and the ultimate determination in relation to whether summary resolution is appropriate are all entitled to deference: Weir-Jones Technical Services Incorporated v Purolator Courier Ltd, 2019 ABCA 49 at para 10. A decision to refuse summary judgment on the facts and to direct a trial is a discretionary decision and an appellate court will only intervene with such a discretionary decision when it is unreasonable: Arndt v Banerji, 2018 ABCA 176 at para 45, leave to appeal to SCC ref’d [2018] SCCA No 277.
As a starting point, the Court of Appeal reiterated well-established principles regarding duty to defend applications – particularly that if the pleadings, given a broad reading, raise a mere possibility of a claim falling within a policy, the duty to defend is made out:
[41] The duty to defend under a policy of indemnity is broader than the duty to indemnify. In Progressive Homes Ltd v Lombard General Insurance Co of Canada, 2010 SCC 33 at paras 19-20, the Supreme Court of Canada explained:
An insurer is required to defend a claim where the facts alleged in the pleadings, if proven to be true, would require the insurer to indemnify the insured for the claim (Nichols v. American Home Assurance Co., 1990 CanLII 144 (SCC), [1990] 1 S.C.R. 801, at pp. 810-11; Monenco Ltd. v. Commonwealth Insurance Co., 2001 SCC 49, [2001] 2 S.C.R. 699, at para. 28; Jesuit Fathers of Upper Canada v. Guardian Insurance Co. of Canada, 2006 SCC 21, [2006] 1 S.C.R. 744, at paras. 54-55). It is irrelevant whether the allegations in the pleadings can be proven in evidence. That is to say, the duty to defend is not dependent on the insured actually being liable and the insurer actually being required to indemnify. What is required is the mere possibility that a claim falls within the insurance policy. Where it is clear that the claim falls outside the policy, either because it does not come within the initial grant of coverage or is excluded by an exclusion clause, there will be no duty to defend (see Nichols, at p. 810; Monenco, at para. 29).
In examining the pleadings to determine whether the claims fall within the scope of coverage, the parties to the insurance contract are not bound by the labels selected by the plaintiff (Non-Marine Underwriters, Lloyd’s of London v. Scalera, 2000 SCC 24, [2000] 1 S.C.R. 551, at paras. 79 and 81). The use or absence of a particular term will not determine whether the duty to defend arises. What is determinative is the true nature or the substance of the claim (Scalera, at para. 79; Monenco, at para. 35; Nichols, at p. 810). [emphasis added]
[42] To determine the true nature and substance of the claim, courts may review documents referred to in the pleadings. This limited extrinsic evidence is not considered for the purpose of examining the contentious points in issue in the underlying litigation, but rather to illuminate the substance of the claims made: Monenco Ltd v Commonwealth Insurance Co, 2001 SCC 49 at paras 37-39.
[43] The widest latitude is given to the allegations in the pleadings in determining whether they raise a claim that falls within coverage: Nichols v American Home Assurance Co, [1990] 1 SCR 801 at 812, 68 DLR (4th) 321.
The Court of Appeal did find that the chambers judge made two errors: first, that BNI was not a ‘client’; and second, determining the breach of contract allegations did not fall within the parameters of coverage:
[47] First, in interpreting the meaning of the word “client” in the 2016-2017 Policy, the chambers judge determined that “a plain reading of the 2016/2017 policy does not support a finding that BNI is a client.” In making this finding, the chambers judge went further than she needed to go and fell into error. Whether or not BNI is actually a “client” as that term is defined in the 2016-2017 Policy is an issue that will be informed by the outcome of the US Action, and finally determined when the question of indemnity is addressed under the 2016-2017 Policy. The chambers judge’s finding that BNI is not a “client” must be set aside.
[48] Second, in deciding that the breach of contract allegations in the Counterclaim did not fit within the parameters of coverage, the chambers judge overlooked ambiguity in the description of the appellant’s business activities in the 2016-2017 Policy and failed to consider the terms of the 2013 Reseller Agreement referred to in the pleading.
Accordingly, the Court of Appeal found a palpable and overriding error in the determination there was no possibility the breach of contract allegations fell within the grant of coverage under the 2016-17 policy. The Court of Appeal then determined whether there was a possibility the allegations fell within the grant of coverage, in light of the above oversights:
[52] Whether the allegations, if proven to be true, expose the appellant to liability for the breach of a client contract depends upon whether there is any possibility the alleged breach of the 2013 Reseller Agreement may be a breach of a “contract relating to the performance of [the appellant’s] business activities” supplied to BNI “for a fee, or where a fee would normally be expected to be paid.”
The Court of Appeal determined that the 2013 Reseller Agreement did, in fact, suggest the resale of BNI products could involve the ‘performance of [the appellant’s] business activities for a client’, which would bring it within the ambit of coverage:
[55] […] The 2013 Reseller Agreement imposes obligations on the appellant as a reseller for BNI’s benefit, including the obligation to “use all commercially reasonable efforts to promote, market, and distribute” products and services to end-users. BNI retains the right to approve or reject purchase orders. The invoicing procedure set out in the 2013 Reseller Agreement allows the appellant to take a share of the purchase price depending upon the reseller discount for which it is eligible, once BNI approves the purchase order.
[56] Because the 2013 Reseller Agreement requires the appellant to undertake activity for BNI and contemplates the appellant receiving some payment for that activity, there is, in our view, a possibility the appellant will be found in “breach of [a] client contract” as defined in the 2016-2017 Policy if the allegations made in the Counterclaim are proven to be true. This conclusion gives proper effect to the principle that the widest latitude must be given to the allegations in a pleading in determining whether they raise a claim that falls within coverage.
The Court of Appeal then considered whether the “IP Exclusion” precluded coverage, given their finding that the allegations did fall within the initial grant of coverage. Their conclusion was that it clearly and unambiguously applied, such that despite the reviewable error in the chambers judge’s analysis, there was no reason to interfere with the outcome of the application.
The allegations were summarized as follows:
[59] BNI’s breach of contract claim is based upon the allegations that the appellant licensed or sold (or attempted to license or sell) the CudaMail trademark and/or CudaMail product and services to a third party. BNI alleges this “resulted in [the appellant] losing any rights it had to use” the CudaMail trademark and CudaMail URLs and obligated the appellant “to take all actions necessary to transfer” rights in the CudaMail trademark and the CudaMail URLs to BNI. It is alleged that the appellant’s continued assertion of ownership rights in the CudaMail trademark and its failure to take the actions necessary to transfer those rights and the CudaMail URLs to BNI constitute a breach of the 2013 Reseller Agreement.
[60] The same conduct is alleged to have created an actual and justiciable controversy between the parties with respect to the ownership of the CudaMail trademark and CudaMail URLs, entitling BNI to its claimed declarations of ownership and the order it seeks requiring the appellant to transfer control of the CudaMail URLs to BNI.
The IP exclusion precluded coverage for claims arising directly or indirectly out of any infringement of IP rights or any breach of an intellectual property rights license acquired. The nature and substance of the claims is the appellant’s alleged interference with BNI’s intellectual property rights. While the appellant conceded BNI’s claim to ownership of the domain names fell under the IP exclusion, it sought coverage under the 2012-13 policy which did not contain such an exclusion.
The Court of Appeal determined that all of BNI’s claims arose from the alleged infringement of their intellectual property rights, such that there was no possibility the 2016-17 underwriters would have to indemnify the appellant. Accordingly, there was no duty to defend.
With respect to whether the 2012-13 underwriters had any obligation to pay the appellant’s defence costs under the 2012-13 policy, the Court of Appeal held that the chambers judge’s decision that a trial was required was entitled to deference and should not be disturbed:
[67] Although not made clear for the chambers judge, the questions engaged the principles that guide the determination of summary judgment applications under Rule 7.3(1). In Weir-Jones at para 47, this Court explained that on an application for summary disposition, the chambers judge must consider, with regard to the state of the record and the issues, if it is possible to fairly resolve the dispute on a summary basis, or whether uncertainties in the facts, the record or the law reveal a genuine issue requiring a trial. The applicant must establish on a balance of probabilities that there is “no merit” or “no defence” to the claim and the respondent must put its best foot forward and demonstrate that there is a genuine issue requiring a trial. The chambers judge must have sufficient confidence that the state of the record allows them to exercise judicial discretion and summarily resolve the dispute. Summary adjudication is inappropriate or potentially unfair when the record is unsuitable, the issues are not amenable to summary disposition, a summary disposition may not lead to a “just result”, or there is a genuine issue requiring a trial.
[68] On the record before the chambers judge, the evidence about what was communicated and understood about the risk of a potential claim was conflicting. No questioning on affidavits was, to our knowledge, conducted. The parties acknowledged that the evidentiary record was incomplete. Even if the chambers judge found that the Counterclaim arose from the circumstances reported to the 2012-2013 Underwriters in 2013, there remained an issue about whether the appellant failed to provide full and accurate information in relation to the ongoing risk, which had other possible consequences not fully addressed in the parties’ arguments.
The Court of Appeal therefore set aside the finding that BNI was not a ‘client’ under the 2016-17 policy; otherwise the appeal and cross-appeal were dismissed.
Nixon v Gruschynski, 2022 ABQB 80
The Plaintiff, Nixon, commenced an action against Timms as a result of a failed real estate transaction. Nixon’s counsel hired Covert Investigations Inc (“Covert”). to serve the Statement of Claim. The Defendant, Gruchynski, was a principal of Covert and a professional process server. Gruchynski swore an affidavit of service stating that he had personally served Timms with the claim, and Nixon then obtained a default judgment. Timms discovered the default judgment and brought an application to set it aside, during which it was found by Justice Acton in a reported decision that Gruchysnki had in fact not served Timms and the affidavit of service was false. Nixon subsequently commenced this action against Covert and Gruchynski for breach of contract and negligence. The Defendants filed a third party claim against Nixon’s former counsel, alleging that counsel encouraged Gruchynski to swear the false affidavit.
Nixon’s former counsel brought an application to dismiss the third party claim, arguing that the findings made by Justice Acton were binding, and that issue estoppel and collateral attack precluded the third party claim. Master Schulz heard the application and dismissed the third party claim, concluding that the swearing of a false affidavit is negligence and outside Gruchysnki’s authority, and additionally that no indemnification by the former solicitor was required given Gruchynski’s acting outside the scope of his authority.
Nixon brought this application against the Defendants for partial summary judgment, on the basis that the issue in dispute had already been determined and that the issue of damages can be determined in a summary trial. Nixon argued that issue estoppel and collateral attack apply to preclude the Defendants from disputing liability in this action.
On the question of issue estoppel, the Court found that the reasons behind the swearing of the Affidavit of Service were not before Justice Acton, and did not form any part of her findings of fact – the only issue before her was whether in the initial action Timms had been served. These issues were also not put before Master Schulz when she made her decision regarding the third party claim. Given that the question before Justice Acton was different than the question in this application, issue estoppel did not apply:
[43] The hearing before Justice Acton centered on whether Timms had been served, not the circumstances that informed Gruschynski’s swearing of the false Affidavit of Service. While it is correct that Master Schulz concluded that “The swearing of a false affidavit is negligent and certainly outside the scope of Gruschynski’s authority” (para 35) she did not make a finding that Gruschynski was in fact negligent. The fact of the Affidavit of Service being false was an admission by the Defendants in support of their Third Party Claim to add Nixon’s counsel to this litigation. There was no judicial determination of negligence in that application.
[44] The question in Timms is not the same question in the within Action. Issue estoppel therefore does not apply as a bar to preclude the Defendants from defending this Action.
The Court further found the Defendants were not parties or privy to the initial action:
[49] Gruschynski and Covert Investigations Inc. shared no interest with the Defendant Timms in the action before Justice Acton. In fact, Gruschynski’s testimony contradicted the evidence of Timms, since Gruschynski testified that he had served Timms and Timms testified (and proved) that he had not been served.
[50] Being a witness in the previous proceeding is insufficient on its own, to warrant privity of interest: Planon Systems Inc. v Norman Wade Co., 2005 O.J. No. 3877 p. 1; Klassen v British Columbia (Minister of Public Safety and Solicitor General), 2021 BCCA 294, para 30.
The Plaintiff argued that the Defendants attempting to re-litigate the truthfulness of the affidavit of service constitutes an abuse of process in light of Justice Acton’s findings. The Court found no abuse of process considering the different questions put before Justice Acton:
[60] While I agree that it would be an abuse of process to require the Plaintiff to call evidence to demonstrate that Timms was not served with the Statement of Claim in 2007, Gruschynski does not dispute that Timms was not served, and that his Affidavit of Service was false. These are not issues in the within Action. Counsel for the Defendants submits “Justice Acton held that the statement of claim was not served in the Timms Action. The Respondents do not dispute this.” Instead, the Defendants plead that they held an honest but mistaken belief that the affidavit was true, they did not deceive or breach any standard of care or contractual terms with the Plaintiff, and they did not make any intentional or negligent misrepresentations to the Plaintiff. None of these issues were addressed in the Timms action.
[61] While I agree that it would be an abuse of process to re-litigate the issue of whether Timms had been served with the Statement of Claim, it is not an abuse of process to litigate the extent of Gruschynski’s liability to Nixon for swearing in the Affidavit of Service that he had served Timms.
The Court made a similar finding with respect to the Plaintiff’s argument that the Defendants were making a collateral attack on Justice Acton’s findings, and dismissed that argument. As a result, the summary application was denied.