The Second Opinion: A Trap for the Unwary - The Ontario Court of Appeal Addresses the Limitation Period for Contractual Indemnification Claims

Imagine the following scenario. Party A contractually agrees to indemnify Party B against claims by third parties. Both Party A and Party B are then sued by Party C. Party B settles the claim with Party C and then seeks indemnification from Party A. Party A refuses to indemnify Party B. What limitation period applies to party B’s contractual indemnification claim against Party A? Does the general limitation period for breach of contract apply? Or does the special regime for contribution and indemnity claims apply? The Ontario Court of Appeal ruled in a very recent decision that the latter regime, as set out in s. 18 of Ontario’s new Limitations Act applies: Canaccord Capital Corporation v. Roscoe, 2013 ONCA 378.

In a breach of contract claim, the limitation period begins to run, at the earliest, only when Party A has breached its indemnification obligation to Party B. However, in a claim for contribution or indemnification, the limitation period is deemed to run when Party B is served with a claim by Party C. The characterization of the claim therefore has important ramifications.

The facts of the Canaccord decision are as follows. Roscoe was an investment advisor with Canaccord. Roscoe’s employment agreement provided that Roscoe would indemnify Canaccord for any claim made against Canaccord arising out of Roscoe’s conduct. Roscoe’s former clients sued both Canaccord and Roscoe for alleged negligence. Canaccord funded the defence and the ultimate settlement of this claim. Canaccord did not cross-claim against Roscoe for indemnity even though Roscoe put Canaccord on notice that it would dispute any indemnity claim.

Three years after the claim was initially served, but within two years of the underlying settlement, Canaccord commenced an action seeking indemnification from Roscoe under the agreement. Roscoe brought a summary judgment motion, claiming that Canaccord’s claim was time-barred. The motions judge characterized the claim as a breach of contract claim and ruled that the limitation period had not lapsed as less than two years had passed since the underlying claim was settled. The Ontario Court of Appeal reversed the decision, and dismissed Canaccord’s stale claim.

In arriving at its decision, the Ontario Court of Appeal emphasized the literal wording of s. 18 of the Limitations Act, along with its historical background. Specifically, the Court noted that s. 18 of the Limitations Act expressly applies to indemnification by one “wrongdoer” (as opposed to “tortfeasor”) against another “in respect of a tort or otherwise” (at para. 28). Moreover, the Court ruled that the objective of the Limitations Act was to create uniformity, which would be compromised if contractual indemnification claims were treated differently from contribution and indemnification in a tort context pursuant to the Negligence Act (at para. 24). Also, the Court ruled that waiting for an underlying judgment or settlement to crystallize before a limitation period begins to run would undermine other purposes reflected in the new limitations legislation, namely certainty and finality (at para. 24). Furthermore, it is in the interests of justice to have related claims dealt with at the same time, the Court concluded. If the wrongdoers want to preserve a united front in the underlying litigation, the Court reasoned, they can enter into a tolling agreement with one another (at paras. 35-37).

The decision in the Canaccord case is an important one. A party to an indemnification agreement who intends to seek contribution or indemnity from another party implicated in an underlying action should ensure that it initiates a proceeding against that other party within two years of being served with the underlying claim, or consider entering into a tolling agreement to preserve its rights.

The McCarthy Tétrault Opinions Group consists of members of the firm’s litigation department whose practices focus on written advocacy and the provision of strategic advice and opinions in the context of complex business disputes and transactions.  The members of the Opinions Group are Anthony Alexander, Martin Boodman, Brandon Kain, Hovsep Afarian and Kirsten Thompson.

agreement Canaccord contract Contribution Cross-Claim Indemnification Indemnity limitation period Limitations Act Negligence Act Ontario Ontario Court of Appeal Roscoe section 18 tort Wrongdoer



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