Thursday, October 01, 2015

Storage of Vaccines Contract Interpretation

A commentary on UPS Supply Chain Solutions, Inc. v. Airon HVAC Service Ltd., 2015 ONSC 1734

The action arose from the alleged malfunction of a UPS warehouse cooling system where Sanofi Pasteur vaccines were being stored in 2009.  As required by the storage contract with , Sanofi Pasteur insured its vaccines under an all-risks policy.  After a weekend of storage allegedly below the required temperature, the vaccines were unsaleable.  Sanofi Pasteur was fully indemnified by its insurer, which subrogated itself and commenced the underlying action.  The claim was for about $8 million.

UPS brought an application against three of the service providers, Honeywell, Airon and ITS and their insurers for a declaration that they had a duty to defend UPS and indemnify them for all reasonable legal costs arising from the defence of the claims.

UPS relied on the contractual provisions in the service contracts and the policies of insurance with the commercial general liability insurers. These contracts required the service provider to add UPS to their own CGL policies as an insured and also included a clause requiring the service provider to indemnify and hold UPS harmless from certain losses including legal costs.

The general principles that apply to determine whether or not there is a duty to defend arising from an insurance policy are summarized by the Supreme Court of Canada in Progressive Homes Ltd. v. Lombard General Insurance Co. of Canada, 2010 SCC 33 (CanLII), [2010] 2 S.C.R. 245, at paras. 19 and 20, citing Nichols v. American Home Assurance Co., 1990 CanLII 144 (SCC), [1990], 1 S.C.R. 801, as follows:

(a) 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.
(b) The onus is on the insured to establish that the pleadings fall within the initial grant of coverage.
(c) The pleadings govern the duty to defend.  However, in examining the pleadings, the parties are not bound by the labels selected by the plaintiff.  It is the true nature or substance of the claim that is determinative.
(d) 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. 
(e) Where it is clear that the claim falls outside the policy, either because it does not come within the initial grant of coverage or because it is excluded by an exclusion clause, there will be no duty to defend.

Further, where the pleadings are not framed with sufficient precision to determine whether the claims are covered by a policy, the insurer’s obligation to defend will be triggered where, on a reasonable reading of the pleadings, a claim within coverage can be inferred:  Monencod. v. Commonwealth Insurance Co., 2001 SCC 49 (CanLII), [2001] 2 S.C.R. 699, at para. 31.

The judge proceeded to review the pleadings in the various actions, finding:

…that the true nature of the claim is a claim for compensation arising from damage to Sanofi Pasteur vaccines stored in a temperature-controlled UPS warehouse in Burlington in 2009.  The defendants are alleged to be jointly and severally liable for property damage in the amount of about $8 million.   There are two essential categories of claims:
(i) Claims against UPS SCS, Inc. regarding representations made to Sanofi Pasteur and encompassed in the Master Services Agreement entered into between them, and claims regarding the general operation of the business, employee training, proper maintenance and supervision of the warehouse.  The causes of action alleged are negligence, gross negligence, recklessness and/or fundamental breach of contract.
(ii) Claims against the other defendants, including ITS, as vendors, manufacturers, designers, installers and maintenance service providers of the components, equipment and systems that UPS SCS had in place at the warehouse, including with respect to the sensor that allegedly failed.  The causes of action alleged are again negligence, gross negligence, recklessness and/or fundamental breach of contract.  However, the essential nature of these claims is in negligence.

The court also analyzed the service contracts in place. The court found that the service contracts did not impose a duty to defend upon the service providers. However, the court found that the three commercial general liability insurers had a duty to defend UPS in respect of the second category of claims advanced by Sanofi Pasteur. The court held that the three insurers should share the defence costs equally and, given that the duty to defend arose in respect to only one category of claims, independent counsel ought to be appointed to defend UPS.

Of interest is that this decision is one of the first decisions to give effect to the Supreme Court of Canada’s contract interpretation principles set out in Sattva Capital Corp. v. Creston Moly Corp. 2014 SCC 53 (CanLII). See the Fernandes Hearn LLP article on Sattva in the August 2014 newsletter. In Sattva the Supreme Court of Canada affirmed the contextual approach to contractual interpretation and explained the role of surrounding circumstances in contractual interpretation. The contract must be read as a whole and the words in the contract must be given their plain and ordinary meaning, consistent with the surrounding circumstances at the time of contracting. The surrounding circumstances – such as the genesis of the transaction, the background, the context and the market in which the parties operate – combine to aid a decision-maker (the arbitrator, the judge or jury) in ascertaining intention, since words do not have an immutable or absolute meaning. The Court cautioned, however, that “while the surrounding circumstances will be considered in interpreting the terms of a contract, they must never be allowed to overwhelm the words of that agreement,” and “the goal of examining such evidence is to deepen a decision-maker’s understanding of the mutual and objective intentions of the parties as expressed in the words of the contract. The interpretation of a written contractual provision must always be grounded in the text and read in light of the entire contract.”  The Court noted, that “while the surrounding circumstances are relied upon in the interpretive process, courts cannot use them to deviate from the text such that the court effectively creates a new agreement.” (at para. 57). The Court added that the nature of the evidence that can be relied upon under the rubric of “surrounding circumstances” will necessarily vary from case to case.  It does, however, have its limits. It should consist only of objective evidence of the background facts at the time of the execution of the contract; that is, knowledge that was or reasonably ought to have been within the knowledge of both parties at or before the date of contracting.  (at para. 58)

In this new UPS decision, Honeywell relied upon Sattva Capital Corp. v. Creston Moly Corp. to submit that it is appropriate for a court, when interpreting a contract, to have regard for the surrounding circumstances. Justice Matheson commented on  this issue at paragraphs 67 to 69:

[67]           To the extent that the service contract, as amended by the change order, is incorporated by reference into the insurance policy, it forms part of the insurance policy.  It is the insurance policy that must be interpreted to reach a conclusion about whether there is the mere possibility of coverage under that policy.  While I appreciate that there is an overlap between the two in the circumstances where the policy incorporates the scope of work in this way, I conclude that it does not change the essential task.  The task is to analyze the pleadings, assuming the alleged facts are true, and determine whether there is the mere possibility of coverage under the policy. 
[68]           In considering the nature and scope of Honeywell’s “commitments” I have regard for relevant surrounding circumstances.  However, I note that the nature and extent of evidence of the surrounding circumstances that may be considered in interpreting a contract is not unlimited.  As set out in Sattva, at para. 50, 58:
The nature of the evidence that can be relied upon under the rubric of “surrounding circumstances” will necessarily vary from case to case. It does, however, have its limits. It should consist only of objective evidence of the background facts at the time of the execution of the contract…, That is, knowledge that was reasonably ought to have been within the knowledge of both parties at or before the date of contracting… [Emphasis added.]
[69]           Some of the evidence in the Honeywell affidavit could properly be described as objective evidence of the background facts at the time of the execution of the service contract that was within the knowledge of both parties on or before that time.  One significant example is the evidence that the reference in the contract to cooler #2 is Cooler B and cooler #3 is Cooler C.
However, the Honeywell affidavit also describes how the work was actually done after the change order was made, and whether or not that work, in the view of the affiant, could have caused the problem with the Sanofi vaccines.  That evidence is not permitted under the rubric of “surrounding circumstances”.  And it is that evidence that leads to the conclusion that Honeywell and ACE argue for.


It is good to see that the judge in this case gave heed to the Supreme Court of Canada’s caution on the use of surrounding circumstances for contract interpretation. The judge only used objective evidence of the background facts at the time of the execution of the contract that was within the knowledge of both parties on or before that time.

0 Comments:

Post a Comment

<< Home