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Transferring liability for negligence in commercial contracts: the Canada Steamship test

This article was written by Michael Dew, a Vancouver lawyer who practices civil litigation. Click here for contact information and further details about Michael’s practice. This article provides only information, not legal advice. If you require legal advice you should consult a lawyer.

 

Summary
Parties to commercial contracts may agree that one of them will indemnify the other against certain losses. Losses caused by negligence may be covered by an indemnity, but to cover such liability the parties must use very clear words, and ideally use the word negligence, or a synonym for it. The test for determining whether liability for negligence is covered by a particular indemnity clause was set out by the Privy Council in the case of Canada Steamship Lines Ltd. v. The King, [1952] 2 D.L.R. 786 (P.C.). That test has been applied in Canada when interpreting indemnity clauses. This article considers the application of the Canada Steamship test in Canada and discusses the standard to be met by indemnity clauses seeking to protect indemnified parties from liability for their own negligence.
 
Introduction
Indemnity agreements covering negligence are not uncommon. Most insurance contracts provide such protection: a motor vehicle insurer agrees to indemnify the driver for claims against the driver arising out of the driver’s own negligence. Courts have little difficulty enforcing such indemnity clauses, and although they may reduce the incentive for insured persons (e.g. drivers) to act cautiously, such clauses are not considered to be contrary to public policy.
 
Insurance contracts typically expressly state that the insured will be indemnified for its own negligence. Those clauses are carefully drafted, perhaps because providing the indemnity is the primary purpose of the contract.
 
Parties in commercial relationships may also include indemnities in their contracts: one party (the indemnifier) may agree to indemnify the other (the indemnified) from losses arising from the indemnified’s negligence. However, unlike for insurance contracts, such indemnity clauses are seldom the primary purpose of the commercial contracts which contain them. Rather, such contracts aim to define the working relationship between the parties during the expected good times, rather than focus on who will pick up the pieces when things go wrong. Therefore, indemnity clauses in commercial contracts are often vaguely worded such that it is not clear whether the clause was intended to cover losses arising from the indemnified’s negligence, or only against other causes of loss.
 
This paper examines how courts interpret vaguely worded indemnity clauses in commercial contracts, and considers the type of wording necessary to cover indemnified parties against losses arising from their own negligence.
 
The test from Canada Steamship
The case of Canada Steamship Lines Ltd. v. The King, [1952] 2 D.L.R. 786 (P.C.) [“Canada Steamship”] considered whether a negligent party could rely on an indemnity clause drawn in its favour. In that case Canada Steamship Lines Ltd. leased land, including a shed, from the Crown. It was a term of the lease that the Crown would keep the shed in a state of good repair.
 
During the lease, the Crown undertook to repair part of the shed, but negligently caused a fire that destroyed the shed and the property of third parties inside the shed. The third parties sued Canada Steamship Lines Ltd. for the loss and when the company tried to recover from the Crown, the Crown attempted to rely on the indemnity clause the parties had included in the lease.
 
The Crown relied on following two clauses in the lease:
 
7.         That the Lessee [Canada Steamship Lines Ltd.] shall not have any claim or demand against the Lessor [the Crown] for detriment, damage or injury of any nature to the said land, the said shed, the said platform and the said canopy, or to any motor or other vehicles, materials, supplies, goods, articles, effects or things at any time brought, placed, made or being upon the said land, the said platform or in the said shed.  
17.       That the Lessee [Canada Steamship Lines Ltd.] shall at all times indemnify and save harmless the Lessor [the Crown] from and against all claims and demands, loss, costs, damages, actions, suits or other proceedings by whomsoever made, brought or prosecuted, in any manner based upon, occasioned by or attributable to the execution of these Presents, or any action taken or things done or maintained by virtue hereof, or the exercise in any manner of rights arising hereunder.      
 
(Canada Steamship at 789-790).
 
The Supreme Court of Canada (Canada Steamship Lines Ltd. v. The King, [1950] S.C.R. 532) held (Locke J. dissenting) that the intention of the parties, gathered from the whole of the document, was that Canada Steamship Lines Ltd. would indemnify the Crown from liability in negligence. In dissent, Locke J. said that negligence had not been expressly or impliedly excluded and that the Crown was therefore liable for its own negligence.
 
On appeal from the Supreme Court of Canada, the Privy Council held that the indemnity clause was not clear enough to protect the Crown from its own negligence:
 
Such a liability for the negligence of others must surely be imposed by very clear words, if it is to be imposed at all.
(Canada Steamship at 797).
 
The Privy Council set out a three stage test for determining whether an indemnity clause is clear enough to cover negligence:
1.      If the clause contains language which expressly exempts the person in whose favour it is made [the indemnified] from the consequence of the negligence of his own servants, effect must be given to that provision…
2.      If there is no express reference to negligence, the Court must consider whether the words used are wide enough, in their ordinary meaning, to cover negligence on the part of the servants of the [indemnified]. If a doubt arises at this point, it must be resolved against the [indemnified]…
3.      If the words used are wide enough for the above purpose, the Court must then consider whether "the head of damage may be based on some ground other than that of negligence"… The "other ground" must not be so fanciful or remote that the [indemnified] cannot be supposed to have desired protection against it; but subject to this qualification … the existence of a possible head of damage other than that of negligence is fatal to the [indemnified] even if the words used are prima facie wide enough to cover negligence on the part of his servants.
(Canada Steamship at 793-794)
 
In formulating Stage 3 of the test, the Privy Council in Canada Steamship relied on the judgement of Lord Greene M.R. in Alderslade v. Hendon Laundry Ltd., [1945] K.B. 189. Considering limitation of liability clauses, Lord Greene M.R. said that if negligence was the only possible ground of liability, then liability for negligence must be excluded or else the clause would lack subject matter. However, if there were multiple heads of damage which the clause could cover, then negligence would only be included if sufficiently clear language was used. 
 
Since Clause 17 of the lease in Canada Steamship did not expressly refer to negligence of the Crown, the Crown was not protected under stage 1 of the test. At stage 2 the Privy Council tentatively found that the words “any action…done…by virtue thereof” in Clause 17 were not broad enough to include negligent acts of the Crown, but that it only referred to acts of the Company for which the Crown may be sued. On that basis, the Privy Council held the Crown was not indemnified against negligence.
 
The Privy Council then held that application of stage 3 of the test would lead to the same result. Stage 3 required the Privy Council to identify an alternative ground of liability (other than negligence) which the court would presume the parties were intending to cover given that they did not expressly refer to negligence. The court identified what is sometimes called “flying the flag” liability.
 
Consider the following example that illustrates what flying the flag liability is. Assume, for example, that someone had been harmed on the lands Canada Steamship Lines Ltd. had leased from the Crown. Then imagine that the injured party sued the Crown because they knew that the land was owned by the Crown – perhaps they did not know that a private company had leased it from the Crown. In those circumstances, the Crown, not having caused the injury, would want Canada Steamship Lines Ltd., as the party generally responsible for the land under lease, to indemnify them. The reason the Crown had been sued at all was because the Crown flag was “flying” on that land in that it was widely known that the land was Crown land. The Privy Council identified such situations as being what the parties were intending to cover when agreeing to Clause 17. Having identified an alternative ground of liability, the indemnity clause, having not expressly referred to Crown negligence, was presumed to not cover Crown negligence.
 
Discussing flying the flag liability as an alternative ground in Canada Steamship the Privy council said the following:
 
By cl. 17 the Crown is saying, in effect to the company "Nothing that you do under the lease is to involve the Crown in any liability. Third Parties may consider that they have a claim against the Crown by reason of the Crown's act in granting to you the right of occupying the shed, or by reason of acts done by you with the sanction of the Crown .... If any such claim is made against the Crown, and succeeds, you must indemnify the Crown".       
(Canada Steamship at 798).
 
The Privy Council justified their overall conclusion in that case by saying:
 
There would have been no difficulty in inserting an express reference to negligence of the Crown's servants, in clauses. 7 and 17, if these clauses had been intended to protect the Crown against the consequences of such negligence.
(Canada Steamship at 799).
 
Practical Application of the Canada Steamship test
The Canada Steamship test essentially gives the indemnified two opportunities to obtain protection. The first opportunity is in stage one: if the indemnity uses the words “indemnified’s negligence”, or some synonym for them, then the indemnified will be protected from its own negligence.
 
The second opportunity is for the indemnified to show that the wording of the clause is sufficiently broad to encompass the indemnified’s negligence (stage 2), but not too broad to encompass other grounds of liability (stage 3). The indemnified cannot secure protection at stage 2, but only gain passage to stage 3.  
 
Stage 3 considers whether there is any ground of liability, other than negligence, which the clause may address. If so, the law assumes that the indemnity covers only the alternative ground(s) and not negligence. Therefore, if counsel for the indemnifier can creatively convince the court that there is some other ground of liability which the indemnity may apply to, then the clause, found broad enough at stage 2 to cover negligence, is read down to exclude negligence. If the indemnifier is unable to show that there are other grounds of liability which the clause applies to, then the indemnified will be protected.
 
Possible heads of liability other than negligence that may be covered by indemnity clauses include
o       Flying the flag liability. This liability, explained above, was the alternative ground of liability identified at stage 3 in Canada Steamship.
o       Occupiers’ liability under statute (e.g. Occupiers Liability Act, R.S.B.C. 1996 c.337). Under such statutes there can be more than one occupier of the same premises and therefore more than one party may be liable for harm caused on the premises. Therefore an indemnity may be used to place responsibility for occupiers’ liability on just one of the occupiers.  Occupiers’ liability is somewhat similar to negligence and flying the flag liability, but could be argued as a separate ground for liability, particularly for acts of omission. For example, if someone had injured themselves by tripping on a fallen tree on the lands leased by Canada Steamship Lines Ltd., the Crown could say “we may be an occupier according to the statute, but by the indemnity clause we agreed that the company would be responsible for keeping the premises safe.”
o       Strict liability, for example under Rylands v. Fletcher, non delegable duty, or statutory strict liability for defects in leased goods. The Quebec Civil Code in Canada Steamship covered this latter type of liability, and it was argued by the company as an alternative ground.
o       Liability for nuisance (see Kocherkewych v. Greyhound Canada Transportation Corp., 2006 BCSC 534 [Kocherkewych], infra).
o       Builders’ liens liability (see Kocherkewych, infra).
 
Merely identifying a conceivable alternative ground of liability is not enough. The alternative ground “must not be so fanciful or remote that the [indemnified] cannot be supposed to have desired protection against it”: Canada Steamship at 794.
 
Ordinary principles of contract interpretation apply
Although the Canada Steamship test is to be used as a guide, the rules of interpretation for indemnities created by the express agreement of the parties are the same as under the general law of contract:
 
In construing contracts of indemnity, the ordinary rules of construction employed in the interpretation of contracts generally are applicable. Indemnity contracts, like other contracts, are to be expounded as to effectuate the intention of the parties.
(McDougall v. Gariepy, [1922] 63 D.L.R. 214 per Hyndman J.A. dissenting (Alta. C.A.)).
 
The effect of indemnity provisions depend on the wording of the specific provision and each provision should be interpreted on its particular wording: Falls Creek Falling contractors Ltd. v. Pat Carson Bulldozing Ltd., 2001 BCCA 600 at para 38. Further, at para. 20, the court said:
 
[T]he scope of a contractual indemnity is a matter of interpretation not to be determined in a technical way but rather in the way in which the business people who drafted it probably would have approached it.
 
More recently, in Kocherkewych, referring to indemnity clauses, Ehrcke J. said at para. 40:
 
Every case, however, turns on its own unique facts, and meticulously comparing the facts of one case to the facts of another is of limited assistance. Ultimately, what matters is what the parties in the present case intended by the language they used in their contracts.
 
Thus, the Canada Steamship test is still a question of the intention of the parties and the correct approach at stage 3 is to ask whether the alternative ground was one within the contemplation of the parties (Canada Steamship at 795) and give a “natural construction to the words” of the indemnity (Canada Steamship at 799).
 
The court will also take into account that the parties may have chosen clearer language (Canada Steamship at 799). 
 
Application of the Canada Steamship test in England
The Canada Steamship test was adopted by the House of Lords in Smith v. South Wales Switchgear Ltd., [1978] 1 All E.R. 18 (H.L.) [South Wales Switchgear]. In South Wales Switchgear at 25, Lord Fraser of Tullybelton held that the Canada Steamship test was fully applicable to indemnity clauses, as opposed to only exemption clauses or limitation of liability clauses. This clarification was required because Alderslade v. Hendon Laundry Ltd., [1945] K.B. 189, which the Privy Council relied on in Canada Steamship, dealt with limitation of liability clauses. South Wales Switchgear clarified that the same test is applied when considering whether either exclusion clauses or indemnity clauses cover liability for negligence.
 
Viscount Dilhorne agreed with the approach taken by Lord Fraser of Tullybelton, and held that:
 
While an indemnity clause may be regarded as the obverse of an exempting clause, when considering the meaning of such a clause one must, I think, regard it as even more inherently improbable that one party should agree to discharge the liability of the other party for acts for which he is responsible. In my opinion it is the case that the imposition by the [indemnified] on the other party of liability to indemnify him against the consequences of his own negligence must be imposed by very clear words.
(South Wales Switchgear at 22).
 
In South Wales Switchgear a contractor agreed to sell certain machinery to the purchaser, as well as to perform renovation work in the purchaser’s factory. One of the contractor’s employees was injured by the negligence of the purchaser.  When sued by the injured worker, the purchaser tried to rely on an indemnity clause in the contract it had with the contractor. The court held that the following indemnity clause was not adequate to protect the purchaser (the indemnified party) for claims arising from its own negligence:
 
23. In the event of this order involving the carrying out of work by the [contractor] and its subcontractors on land and/or premises of the purchaser, the [contractor] will keep the purchaser indemnified against: - (a) all loses and costs incurred by reason of the [contractor’s] breach of any statute, bye-law or regulation. (b) Any liability, loss, claim or proceedings whatsoever under statute or common law (i) in respect of personal injury to, or death of, any person whomsoever, (ii) in respect of any injury or damage whatsoever to any property, real or personal, arising out of or in the course of or caused by the execution of this order. The [contractor] will ensure against and cause all subcontractors to insure against their liability hereunder, and will produce to the purchaser on demand, the policies of insurance with current renewal receipts therefor. 
 
Because the indemnity clause contained no explicit reference to negligence (and so the purchaser failed at stage 1), the House of Lords went on to consider whether the words used were broad enough to cover negligence. At stage 2, the court held that the words were not broad enough to cover negligence. In particular, the word “whatsoever” was held to not refer to negligence, but to merely be word of emphasis.
 
Application of the Canada Steamship test in Canada
The Canada Steamship test was applied in Hobbs v. Robertson, 2004 BCSC 1088, 243 D.L.R. (4th) 700 [Hobbs]. In that case a patient undergoing a hysterectomy died from excessive blood loss, caused in part by the surgeon’s negligence. However, the patient was a Jehovah's Witness who did not believe in blood transfusion because of her religious principles, and before the operation she had signed a document provided by the hospital refusing to accept blood, and releasing the hospital and its physicians for "any responsibility whatsoever" for untoward results including death "due to" this refusal.
 
After her death, the patient's husband and children brought an action for damages under the Family Compensation Act, R.S.B.C. 1996, c. 126. The physician argued that the release signed by the patient barred the action in negligence.
 
Referring to Canada Steamship, Pitfield J. summarised the effect of the test as follows:
 
When the wording of a release is capable of application in relation to negligence, it must also be capable of application in some other circumstances if omission of a specific reference to negligence is to be a limiting factor.
(Hobbs at para. 70).
 
Although the release did not include specific reference to “negligence” (and so failed stage 1), Pitfield J. found it to be broad enough to cover negligence (so it passed stage 2) and went on to consider alternative grounds of liability under stage 3:
 
With and without the assistance of counsel, I have been unable to identify circumstances not involving negligence in which the release would afford protection that is not otherwise afforded by the simple request that no blood or blood products be transfused. If the standard of medical practice in non-negligent circumstances required transfusion and one is excused from adherence to the standard because of the request, the only circumstances in which there might be a dispute and need for protection and waiver are those in which there is negligence. There is no other head of damage in respect of which protection for the hospital or attending physicians and staff is required. In my opinion, that accounts for the inclusion of the release and its specific wording.
(Hobbs at para. 71).
 
Thus, in Hobbs, even though the exclusion clause did not specifically refer to negligence, it was interpreted as covering liability for negligence and the action was dismissed.
 
The Canada Steamship test was recently applied by Ehrcke J. in Kocherkewych, supra. In that case, the plaintiff tripped over a suitcase as she waited at a Greyhound bus depot. The plaintiff claimed that the bus driver, Greyhound's employee, was negligent by placing suitcase behind her. The depot was owned by Northland and operated by R&Z as Greyhound’s agent. A clause in the agency agreement between R&Z and Greyhound said that Greyhound was to be indemnified for claims of property damage or personal injury occurring on agent's premises or arising from any use or occupancy of agent's premises.
 
Ehrcke J. went through a rigorous application of the Canada Steamship test. At stage 1, Greyhound conceded that the indemnity clause did not expressly refer to negligence. At stage 2 Greyhound argued that the phrase "any use or occupancy of the Agent's Premises" was clearly a reference to the Occupiers' Liability Act, and therefore, to negligence.  Greyhound argued that the duty to indemnify for negligence was supported by the fact that the Agreement required R&Z to defend claims made against Greyhound.
 
Ehrcke J. found that the wording of the indemnity was not broad enough to cover liability for negligence:
 
In my view, the language used in the Agreement, in its ordinary meaning, is not wide enough to protect Greyhound against the negligence of its own employees. If that had been the intention of the parties, it would have been a very simple matter to say so clearly.
(Kocherkewych at para. 47).
 
Ehrcke J. then said that even if the words were broad enough to pass stage 2 of the test, Greyhound would fail again on the third part of the test. As alternative possible grounds of liability the indemnity could reasonably have been intended to cover, Ehrcke J. identified flying the flag liability, nuisance, and builders' liens.
 
Other factors which influenced the courts finding in Kocherkewych were that Greyhound retained a very significant degree of direction and control over most aspects of operation of depot, and that R&Z had no right, obligation, or authority to control, supervise, or direct Greyhound and its employees.
 
Non-application of the Canada Steamship test
The Canada Steamship case has been widely acknowledged as the leading authority in interpreting indemnity clauses in Canada. However, when “applying” the test, courts don’t always methodically consider each stage of the test originally set out by the Privy Council. Rather, courts sometimes simply refer to the test as being applicable, and then simply consider whether the indemnity clause in the particular case was sufficiently clear to cover negligence.
 
Such was the case in Blackwater v. Plint, 2001 BCSC 997 [Blackwater], var’d on other grounds 2003 BCCA 671. In Blackwater a school dormitory supervisor abused children at a residential school. The school was run by a church and the government had contractually agreed to indemnify the church from certain losses. The Church argued that it was an implied term of its relationship with the government that the government would assume responsibility for any claims arising out of the operation of the school and would indemnify the Church against such claims. However, the trial judge held that:
 
In the case at bar, there is no evidence of an express or implied agreement whereby Canada agreed to grant a broad general indemnity to the Church, including indemnity from the consequence of the Church’s own negligence or that of its employees.
(Blackwater at para. 316).
 
Although in Blackwater Brenner C.J.B.C. acknowledged the applicability of the Canada Steamship test, a meticulous application of the three stage test was not set out in the judgment.  
 
In Consumers’ Gas Co. v. Peterborough (City), [1981] 2 S.C.R. 613 [Consumers’ Gas], a gas line ruptured and exploded following negligent work in the vicinity of the main by Consumers’ Gas Co. The Supreme Court of Canada considered whether Consumers’ Gas Co. could rely on an indemnity to protect it from its own negligence.
 
The Supreme Court approved of the Ontario Court of Appeal’s reference to the Canada Steamship test, and with the following words of the Court of Appeal:
 
If one is to be protected against and indemnified for one’s own negligence there would have to be an indemnity clause spelling out this obligation on the other party in the clearest terms.
(Consumers’ Gas at 616).
 
The Supreme Court of Canada did not methodically apply the three-stage test, but simply said that the indemnity in that case was not sufficiently explicit to protect the negligent party from the loss it had caused.
 
Conclusion
The Canada Steamship test has been acknowledged by the Supreme Court of Canada as the applicable test for determining whether an indemnity clause in a commercial contract covers losses arising from the negligence of the indemnified party. The same test is also applied in determining whether an exclusion or limitation or liability clause excludes liability for negligence.
 
Not all courts referring to the Canada Steamship case methodically apply the test; some simply consider whether the clause is explicit enough to cover negligence. However, regardless of whether the test is strictly followed or not, it is clear that the courts seek to determine the intention of the parties, and indemnities covering negligence will not be lightly inferred; clear language is required.
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