By Shawn Faguy

We represented Commercial Union Insurance Company (“Commercial Union”), the subrogated insurer of Kaid Industries Inc.(the “Tenant”), a local Montreal clothing importer, in an action for damages resulting from a fire at 9500 Meilleur Street inMontreal, a commercial building owned andoperated by the defendants, C.I.O. Holdings Ltd., Fantastex Fabrics Inc., 107685 Canada Inc. and Le 9500 Meilleur Enr. (collectively the “Landlord”).

On November 26, 1996, a fire started in an electrical room on the ground floor at 9500 Meilleur Street. It was quickly extinguished but the smoke billowed into the Tenant’s premises on the 7th floor of the building (“Premises”) damaging a large number of garments that the Tenant had stored therein. The quantum of $182,237.00 was agreed to by the parties and represented damages for lost garments (including profit), the costs of rewashing some of the garments for salvage and other incidental costs. The issues which needed to be determined by the Court were as follows:

1. What was the contract between the parties?

2. Could the Landlord exclude or limit its liability?

Pursuant to the law of Quebec, a Landlord is strictly liable to its Tenant for the damages caused to the Tenant’s property when the damages result from a hidden defect (electrical fire in this case). The Landlord attempted to invoke two defenses to exclude its liability for the damages to the Tenant’s clothing: (1) an exclusion of liability clause in the standard form lease; and (2) an agreement between the Tenant and the Landlord that the Tenant shall insure its goods.

Before discussing the outcome of the case, it will be useful to provide you with a brief description of the concept of an agreement to insure, a well-established principle in common law which is now recognized in Quebec civil law. When two parties agree that one party will obtain insurance for a specific risk, this constitutes an acceptance by the parties to allocate the risk for the peril insured against with the insurance obtained. The effect of such an agreement is to bar one party from recovering against the other in the event that the insured peril occurs. In the case at hand, had the Landlord and the Tenant agreed that the Tenant would obtain insurance for the Tenant’s property located in the Premises for fire and smoke damage, the Tenant (and its subrogated insurer) would likely have been barred from recovering against the Landlord.

The timing of the execution of the contractual documents was of critical importance indetermining whether the Landlord could rely on the defenses cited above. The Landlordand the Tenant signed an offer to lease on December 8, 1995. The offer to lease provided that the Tenant would sign and execute the Landlord’s standard form lease within 15 days of being called to do so. The offer to lease did not contain an exclusion of liability clause; nor did it contain the Tenant’s undertaking to insure its goods. The firsttime the Landlord provided the Tenant with acopy of its standard form lease was in March 1998, nearly 18 months after the fire. Therefore, the first time the Tenant saw the exclusion of liability and agreement to insure clauses was well after the fire. However, to complicate matters, the Tenant ultimately, but ex post the fire, signed the standard form lease which included the exclusion of liability clause and the agreement to insure.

The Landlord and their underwriters advanced the argument that since the Tenant subsequently agreed to the exclusion of liability and agreement to insure clauses then the Tenant would have agreed to them at the time of the fire had they been provided and thus, the Landlord should be able to invoke and rely on them as defenses.

Article 1475 of the Civil Code of Quebec provides that a party wishing to rely on an exclusion or a limitation of liability must prove that the other party had knowledge of the said exclusion or limitation at the time of the signing of the contract (this reflects the common law rule to the same effect). The Court also ruled that the undertaking to insure should be treated in the same way given it had a similar effect. Therefore, the Court concluded that because the undertaking to insure and the exclusion of liability were not brought to the attention of the Tenant at the time of the signing of the initial contract or prior to the fire, the Landlord could not rely on these clauses to exclude its liability for the loss in question.

This principle is not limited to leases, but applies to all contracts where limitations or exclusions of liability potentially apply.

Judgment was therefore rendered in Commercial Union’s favor in the amount of $182,237.00 plus interest and costs. It is also worth mentioning that given the additional indemnity provided for in Quebec (an amount payable beyond the legal rate of interest) and given that the institution of proceedings dated back to 1997, the amountof interest and additional indemnity awarded amounted to approximately $130,000.00, yielding a total recovery in excess of$317,000.00 Cdn.

Commercial operators should therefore be aware that exclusions of liability and undertakings to insure can significantly affect the success of a recovery action. Moreover, the execution of a contract without proper notification to one’s insurer could result in a denial of cover in the event that underwriters are not consulted regarding the execution of such clauses at a lease’s inception or in the event that changes to a lease are effected during its term or upon renewal.

Underwriters should be mindful of such clauses as they may seriously affect subrogated recoveries and it may be advisable to request warranties from insureds that their leases do not contain such clauses at the commencement of coverage and that such clauses shall not be agreed to without consulting underwriters. This article is provided for information purposes only and does not constitute a legal opinion. Sproule Faguy is a Limited Liability Partnership specializing in insurance, transportation, civil andcommercial litigation.