Limitation Period Applicable to a Claim for Indemnification

What is the limitation period applicable to a claim for indemnification, where the right to indemnification is contained within an employment contract? According to a recent decision from the Honourable Justice Heidi Polowin, Canaccord Capital Corporation v. Roscoe, 2012 ONSC 5714 (CanLII), two years from the date upon which the employer is found liable to a third-party plaintiff.

[EDIT: The Superior Court decision was overturned by the Court of Appeal for Ontario on June 7, 2013. For a summary of that decision see: Employers Must Sue for Indemnification Within Two Years: ONCA.]

The case raises the issue of the rights of third parties and the ability to add third parties after the expiry of limitation dates, especially those set out in section 18 of the 2002 Limitations Act.

Facts

Canaccord Capital Corporation is an investment dealer. The defendant employee was employed in Canaccord’s Ottawa office, initially as a trainee and, upon completing his training, as an investment advisor. He worked at Canaccord from September 1999 to August 2008 when he left the company to be employed by a competitor.

After completing his training period, Roscoe became a registered securities representative and signed an employment contract with Canaccord (the “Employment Contract”). Under the terms of the Employment Contract, Roscoe agreed to indemnify or reimburse Canaccord for losses stemming from the employee’s client dealings. Article 5.02 of the Employment Contract provides as follows:

In the event that any claim is made against the Company or the Company is found vicariously liable or jointly or severally liable with the Registered Representative resulting from a claim made against the Registered Representative and/or the Company principally arising out of an act or omission of the Registered Representative within or without the course of his activities or employment, the Registered Representative shall be responsible for and shall indemnify, reimburse and save harmless the Company for all losses, damages or amounts due to any claimant and as well as e [sic] expenses or costs including legal fees reasonably incurred by the Company in defence of any claim or legal action arising from such act or omission. Such liability of the Registered Representative shall extend to indemnify and reimburse the Company as aforesaid whether or not such liability arises as a result of a judgment of a court of law, decision of an administrative body, an arbitration aware [sic] or a settlement reasonably made by the Company to avoid the necessity of a trial or hearing.

On July 15, 2008, former clients of Canaccord, the Cavanaghs, issued a statement of claim against Canaccord and Roscoe with respect to losses arising out of their investment in the Olympus hedge fund (the “Cavanagh Action”). The statement of claim was served on Roscoe and Canaccord on or about August 21, 2008. Canaccord funded the entirety of the joint defence. At no time did Canaccord issue a cross-claim against Roscoe in the Cavanagh Action.

According to Canaccord, it was always Canaccord’s and Roscoe’s mutual intention, and their litigation counsel’s advice, to present a unified front to the plaintiffs in the Cavanagh Action and not to point fingers at one another. Canaccord and Roscoe were initially represented by the same counsel; although Roscoe did obtain separate counsel following a failed mediation. According to Canaccord, under no circumstances would Canaccord have asserted a cross-motion against Roscoe in the Cavanagh Action.

Agreement was reached to settle the Cavanagh Action on July 31, 2009 and settlement documents were executed as of that date.

On January 15, 2010 Canaccord wrote to Roscoe requesting that he indemnify Canaccord in relation to the Cavanagh settlement.

Roscoe refused.

Issue

The issue that had to be resolved was whether Canaccord could commence a fresh action against Roscoe following its settlement with the Cavanaghs, such settlement being reached roughly two years after Canaccord and Roscoe were served with the Cavanagh’s statement of claim, or whether by operation of section 18 of the Limitations Act, 2002 the claim was statute barred.

Section 18 of the Limitations Act provides that:

18.  (1)  For the purposes of subsection 5 (2) and section 15, in the case of a claim by one alleged wrongdoer against another for contribution and indemnity, the day on which the first alleged wrongdoer was served with the claim in respect of which contribution and indemnity is sought shall be deemed to be the day the act or omission on which that alleged wrongdoer’s claim is based took place.

18.  (2)  Subsection (1) applies whether the right to contribution and indemnity arises in respect of a tort or otherwise

Decision

In resolving that the claim was not statute barred Justice Polowin made a number of important and interesting findings. Of critical importance was Justice Polowin’s decision that, “Canaccord’s action is an action for breach of Roscoe’s Employment Contract. It is not a claim for “contribution and indemnity” as between one wrongdoer and another.” [Emphasis added.] (Para. 30)

To this statement, Justice Polowin later added:

It is a fact that the words “indemnity’ and “indemnification amount” have been used in the demand letter and the statement of claim. However, to focus simply on that language in the context of this case is simplistic and misconceived. It is the Employment Contract between Canaccord and Roscoe on which this claim is based. It is in that contract that Mr. Roscoe’s obligation to pay is grounded. The contract sets out Mr. Roscoe’s obligation to “indemnify, reimburse and save harmless”. That is the promise Mr. Roscoe made and the performance he must render. How else could Canaccord have framed its pleadings in this matter? The fact that the damages claimed are measured by the Cavanagh settlement amount does not conflate this matter into a claim for contribution and indemnity within the language of s. 18 of the Limitations Act. [Emphasis added.] (Para. 32)

Based on that conclusion, Justice Polowin held that, section 18 of the Limitations Act had no application to the matter and that Canaccord’s action was not statute-barred.

In reaching the decision that the claim was not for “contribution and indemnity” Justice Polowin wrote that:

A breach of contract claim for damages is fundamentally different at law from a claim for contribution and indemnity. A claim for contribution and indemnity involves two wrongdoers. A claim is served on one wrongdoer (X) by a plaintiff. That wrongdoer X wishes to claim contribution and indemnity from another wrongdoer (Y). X’s claim arises in respect of the plaintiff’s claim. X should cross-claim or third party Y (depending on whether Y has been sued by the plaintiff). This is the situation to which s. 18 of the Limitations Act speaks. In this case, the claim is based on a breach of the Employment Contract. There is only one wrongdoer in these circumstances: Roscoe. (Para. 36)

Commentary

With respect to Justice Polowin, it is my opinion that she erred in her decision.

Two other recent decisions, which were referenced by Justice Polowin in her reasons for decision, cast doubt on the correctness of the decision.

In Waterloo Region District School Board v. Truax Engineering Ltd., 2010 ONCA 838 (CanLII), the Court of Appeal for Ontario held that:

[10] The purpose of contribution and indemnity is to provide a mechanism to ensure that all those who caused or contributed to the plaintiff’s loss or damage should share the financial responsibility for that loss. Therefore, the basis of the claim is that each person who is held liable to the plaintiff for all or part of the loss is also liable to contribute or is entitled to receive contribution proportionally to or from the other tortfeasors.

…

[28] Section 18 also signals that a defendant who wishes to claim contribution and indemnity should bring the claim not after judgment in the main action, but as part of it. Although in theory a defendant could commence a new action for contribution and indemnity within two years of being served with a statement of claim, the more likely procedure is to bring a cross-claim or third party proceeding in the main action. Even if a new action were commenced, one could envision that, for reasons of economy and efficiency, the actions would likely be joined and tried together. [Emphasis added.]

In Wright v. Wal-Mart Canada Corp., 2010 ONSC 2936 Justice Price held that:

[342] When section 18(2) of the Limitation Act, 2002 states that “subsection (1) applies whether the right to contribution and indemnity arises in respect of a tort or otherwise”, it is referring to the tort or contractual breach from which the loss, damages or costs arise in respect of which one wrongdoer claims contribution from another, not the source of legal entitlement to indemnification for them.  Thus, the starting point, for purposes of the Act, of the time within which the claim must be made for contribution or indemnity, whether for damages or costs, is the date when [the plaintiff]’s Statement of Claim was received, not the date when knowledge of a contract providing for indemnification, or of the fact of an injury or loss covered by such a contract, is received.  The contract is one fact, but not the only one, that the wrongdoer may rely on in support of its right to indemnification.  [Emphasis added.]

In my view, the ability of an employee such as Mr. Roscoe to defend his actions both as against his employer and as against the plaintiff are the sin qua non of why the right to be brought into an action, as contemplated by Justice Feldman in Waterloo Region, exists.

Under Justice Polowin’s decision, had Mr. Roscoe not been named as a defendant he would have had no right to defend himself. Accordingly, his employer, Canaccord could have entered into any settlement with the Cavanaghs, improvident or otherwise, and then sought indemnification from Mr. Roscoe. Somehow this seems inequitable to employees who have such provisions in their employment agreements and contrary to section 2 of the Negligence Act.

Furthermore, I am not convinced that Canaccord’s claim is properly described as a breach of contract. The proximate loss of Canaccord’s damages is not Mr. Roscoe's breach of his employment agreement, but rather his earlier negligence, if any. If the damages for that loss for which Canaccord seeks contribution and indemnity, and on that basis I respectfully fail to see how section 18 would not apply.

Whether the decision will be appealed, and whether the decision will be affirmed is yet to be seen.

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As always, everyone’s situation is different.  The above is not intended to be legal advice for any particular situation and it is always prudent to seek professional legal advice before taking any decisions on one’s own case.

Sean P. Bawden is an Ottawa, Ontario employment lawyer and wrongful dismissal lawyer practicing with Kelly Santini LLP. He tweets from @SeanBawden.