Austeville Properties Ltd. v. Josan et al.: Exploding Taco Del Mar Decision – B.C. Court of Appeal Speaks on Corporate Attribution & Insurance Covenants in the Context of Arson

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exploding-taco

Many in Vancouver will remember when the Taco Del Mar restaurant on West Broadway (the “Premises”) exploded in the early morning hours of February 13, 2008. The explosion resulted in damage to the office building containing the Premises and to buildings across the street. The Premises’ landlord’s insurer commenced an action to recover amounts paid out to the landlord for property damage repairs and business interruption losses, in the amount of $3,000,000. The landlord’s insurer claimed against  the Premises’ tenant – Nandha Enterprises Ltd. (“NEL”) – and several other individuals including the only two directors of NEL, Mr. and Mrs. Nandha.

The Trial Decision

This matter proceeded to trial at the B.C Supreme Court in 2016 (Austeville Properties Ltd. v. Josan et al., 2016 BCSC 1963). Our Insurable Interest Bulletin on the trial result is located here:   https://www.cwilson.com/austeville-properties-ltd-v-josan-et-al-exploding-taco-del-mar-makes-for-interesting-application-of-the-corporate-identification-doctrine-and-new-law-on-insurance-covenants/

The facts of this case are extraordinary. Mrs. Nandha and her husband owned NEL which carried on a business operating two Taco Del Mar restaurants. Mrs. Nandha was unhappy with her life and believed that if she did not have to run both of NEL’s restaurants, she would have more time to spend with her children.  As a result, she asked a family friend, Mr. Josan, to set fire to the Premises in order to end NEL’s lease.  The trial judge found that Mrs. Nandha and Mr. Josan conspired to set the fire.

When the director of a small company which leases premises from a landlord conspires to set fire to the premises, should the corporate tenant be attributed with that director’s act of conspiring to commit arson and, if so, should the corporate tenant be immune from tort liability by operation of an insurance covenant found in the lease?

At trial, the Honourable Mr. Justice Bowden dismissed the action by the landlord and subrogating insurer in finding the following:

  1. In order to attribute Mrs. Nandha’s conduct to NEL pursuant to the corporate identification doctrine, Mrs. Nandha must be a directing mind of NEL and the action taken by her must be: (a) within the field of operation assigned to him; (b) not totally in fraud of the corporation; and (c) by design or result partly for the benefit of the company.
  2. The actions of Mrs. Nandha were found to be outside the scope of her authority as a director of NEL because she was acting for her own personal purposes (to spend more time with her children) in conspiring to set the fire, rather than acting in relation to the business of NEL (operating restaurants). The trial judge also found that Mrs. Nandha’s actions, while not fraud in the classic sense, were found to be directed at the destruction of one of NEL’s two restaurants.  As well, the trial evidence failed to establish that Mrs. Nandha intended to benefit NEL or that there was an actual benefit to NEL.
  3. Having found that Mrs. Nandha’s act of conspiracy could not be attributed to NEL in this instance, the Plaintiff’s breach of contract claim against NEL failed, as did the claim against Mr. Nandha as an indemnifier under the lease.
  4. In obiter, Justice Bowden determined that insurance covenants transfer the risk of loss between parties, regardless of whether the cause of the loss is an intentional tort. This was so, at least in this case, because “[t]he insurance obligation under the covenant is concerned with the occurrence of the peril and not the cause of the peril.” Had Mrs. Nandha’s conduct been attributed to NEL, NEL would still have been protected from the subrogated action brought by the Plaintiff because the losses had been caused by fire and were covered by the insurance the Plaintiff agreed to obtain pursuant to the lease’s insurance covenant.

The Court of Appeal Decision

The B.C. Court of Appeal released its reasons for judgment on the appeal on November 26, 2019 (Austeville Properties Ltd. v. Josan et al., 2019 BCCA 421).

The primary issues on appeal were:

  1. Did the trial judge err in his application of the corporate identification doctrine?
  2. Did the trial judge err in finding that NEL was not vicariously liable for Mrs. Nandha’s actions?
  3. Did the trial judge err in his interpretation of the insurance covenant in the lease?

The Court of Appeal held that the trial judge did not err on any of the issues on appeal.

On the first issue, the Court of Appeal found that while Mrs. Nandha was a directing mind of NEL, she ceased to be so in the circumstances because “it cannot realistically be said that she was acting within the field of corporate operation assigned to her when she directed her energies at “the destruction of the undertaking of the corporation” by conspiring with Mr. Josan to commit the arson and thus to destroy one of Nandha Enterprises’ major income-generating assets…” Despite Mrs. Nandha’s desire to bring an end to NEL’s lease for the Premises, she acted for her own personal, rather than for corporate, purposes. Further, the Court agreed that the trial judge’s decision was reasonable in that there was insufficient evidence to show NEL benefited from, or was the intended beneficiary of, Mrs. Nandha’s arson plan. In the circumstances, “it would not protect community interests or advance law and order to attribute Ms. Nandha’s wrongful acts directly to Nandha Enterprises for the purpose of imposing civil liability” and the Court declined to attribute Mrs. Nandha’s conduct to NEL.

On vicariously liability for Mrs. Nandha’s conspiracy, the Court of Appeal found that this was conduct well-outside of the scope of Mrs. Nandha’s authority within the company. In the circumstances, NEL could not be vicariously liable.

The insurance covenant in the lease stated:

  1. LANDLORD’S COVENANTS

7.05. To insure the building to its full insurable replacement value against loss or damage by fire. The expense of such insurance shall be borne as provided in paragraphs 12.01 and 12.02 hereof. To the extent that any loss or damage to the building is covered by insurance maintained by the Landlord hereunder, the Landlord releases the Tenant from any and all liability for such loss or damage whether or not the same is caused by or contributed to by or through the negligence of the Tenant or its servants and agents.

With respect to the effect of the insurance covenant, the Court of Appeal did not directly address the trial judge’s conclusion that a waiver of subrogation exists even where the tenant may have committed an intentional act such as arson, as it was unnecessary to dispose of the appeal.

The Court of Appeal held that despite the underlying act being conspiracy and arson, a waiver of subrogation arose under the insurance covenant which barred the landlord’s insurer from subrogating against NEL. The Court of Appeal’s focus was on “who” committed the act, not “how” the loss occurred. Mrs. Nandha was not a beneficiary under the insurance covenant – she was a third party to it. NEL, having been found not to have conspired to commit arson under the corporate identification theory, should have the benefit of the subrogation waiver because a third party committed the intentional act, not NEL.

In Canada, insurance covenants have been interpreted to extend tort immunity to cases where the causes of action alleged included negligence, vicarious liability, breaches of contract and gross negligence. However, no Canadian decision had determined whether an insurance covenant ought to apply to prevent parties from suing one another for loss or damage caused by an intentional tort.  It is now the law in British Columbia that insurance covenants can operate to protect the beneficiary in the context of intentional and criminal acts where the beneficiary is not the perpetrator of the acts in question. The Court of Appeal did not decide whether, had NEL been found to have conspired in the arson, the insurance covenant would still give rise to a subrogation waiver in its favour.

Whether an insurance covenant will pass the risk of an insured peril from the beneficiary to the covenantor is a matter of contractual interpretation which, in turn, requires consideration of the surrounding circumstances to the contract’s formation. For the purpose of risk management, insurers should examine what risks may pass to or from their insured under an insurance covenant, and under what circumstances those risks may pass, and factor those considerations into their underwriting decisions.

We are proud to advise that the team who appeared on behalf of NEL, the successful respondent on appeal, was Samantha Ip and Sean Tessarolo of the Clark Wilson Insurance Group, with the assistance of Erin Barnes as articled student (as she then was) and Zora Udovicic, paralegal.