Case - Clark Wilson LLP

COURT OF APPEAL FOR BRITISH COLUMBIA 

Citation: 

Between: 

And 

Before: 

Kruger Products Limited v. First Choice 

Logistics Inc., 

2013 BCCA 3 

Kruger Products Limited / Produits Kruger Limitee 

First Choice Logistics Inc. and Terrance Bodnar 

The Honourable Madam Justice Newbury 

The Honourable Mr. Justice Hall 

The Honourable Madam Justice Garson 

Date: 20130109 

Docket: CA038662 

Respondent 

(Plaintiff) 

Appellants 

(Defendants) 

2013 BCCA 3 (CanLII) 

On Appeal from the Supreme Court of British Columbia, November 26, 2010, 

(Kruger Products Limited v. First Choice Logistics Inc., 2010 BCSC 1242, 

Docket Number L032139) 

Counsel for the Appellant: 

Counsel for the Respondent: 

Place and Date of Hearing: 

Place and Date of Judgment: 

W.G. Wharton 

N.J. Tuytel 

M. Skorah, Q.C. 

R. Bailey 

Vancouver, British Columbia 

December 3, 2012 

Vancouver, British Columbia 

January 9, 2013 

Written Reasons by: 

The Honourable Madam Justice Newbury 

Concurred in by: 

The Honourable Mr. Justice Hall 

The Honourable Madam Justice Garson

Kruger Products Limited v. First Choice Logistics Inc. Page 2 

Reasons for Judgment of the Honourable Madam Justice Newbury: 

[1] On July 31, 2001, a fire broke out in a New Westminster warehouse in which 

the plaintiff Kruger Products Limited (formerly known as Scott Paper Ltd. and 

referred to herein as “Scott”) was storing large rolls of paper. The fire destroyed the 

entire building and its contents, including 3713 tonnes of “parent rolls” of 

unprocessed paper, approximately 236,000 cases of finished paper products, and 

other materials and supplies. At the time of the fire, the warehouse was being 

operated by the defendant First Choice Logistics Inc. (“FCL”) pursuant to the terms 

of a warehousing agreement with Scott. 


The Litigation 

[2] Scott commenced this action against FCL in July 2003, alleging FCL had 

breached express or implied terms of the warehousing agreement to maintain the 

warehouse in a condition “that met or exceeded professional warehousing 

management practices”, to operate all equipment safely and efficiently, and to 

operate the warehouse “so as to minimize the risk of damage to the Plaintiff’s 

inventory, including the risk of damage by fire.” Scott pleaded that FCL had 

breached its common law duty of care, its duty of care as a warehouser under the 

Warehouse Receipt Act, R.S.B.C. 1996, c. 481, and its duty of care as an occupier 

of the warehouse under the Occupiers Liability Act, R.S.B.C. 1996, c. 337. 

Paragraph 10 of the amended statement of claim stated in part: 

The Fire, and the Plaintiff’s ensuring loss and damage, were caused by the 

breach of contract, breach of statutory and common law duties of care, and 

gross negligence of the Defendant FCL, and by the breach of common law 

duties of care and gross negligence of its employee the Defendant Bodnar, 

and of other employees of FCL, for whose acts FCL is vicariously liable. 

Particulars of the fault of FCL and its employees include: 

(a) 

(b) 

(c) 

Operation of the Warehouse and the storage of goods therein in such 

a manner as to create excessive waste paper and paper debris; 

Failure to maintain the Warehouse and thereby allowing for the 

accumulation and presence of waste paper and paper debris within 

the Warehouse; 

Use of a type of lift truck in areas of the Warehouse where paper 

debris would be generated and would accumulate which FCL knew or


(d) 

(e) 

(f) 

(g) 

... 

(i) 

... 

(l) 

ought to have known had a propensity to accumulate within its body 

paper and paper debris and knew or ought to have known of the risk 

that such paper would ignite; 

Failure to keep the body of the Lift Truck clean and clear of paper and 

paper debris; 

Failure to install or, alternatively, failure to instruct the dealer of the Lift 

Truck to install, safeguards against the ignition of paper and paper 

debris by the Lift Truck when FCL knew that such safeguards were 

readily available; 

Use of the Lift Truck when FCL knew or ought to have known that the 

Lift Truck incorporated no or insufficient safeguards to minimize the 

risk of ignition of accumulated paper and paper debris; 

Storage of goods within the Warehouse contrary to standard industry 

practices, in such a manner and configuration as to impair both the 

effective operation of fire suppression and firefighting equipment and 

personnel; 

Failure to exercise the care and diligence in regard to goods stored in 

the Warehouse as a careful and vigilant owner of similar goods would 

exercise in the custody of them in similar circumstances; 

Failure to warn the Plaintiff that the Lift Truck was operated in the 

Warehouse with no or insufficient safeguards to minimize the risk of 

paper debris ignition when FCL knew that such safeguards were 

readily available. 


[3] For its part, FCL denied the specific breaches of duty alleged in Scott’s 

pleading and stated that it had satisfied any duty of care owed to Scott. FCL 

pleaded that Scott itself had been negligent in certain respects, including: 

(a) 

(b) 

... 

(d) 

(e) 

failure to wrap the parent rolls in order to avoid paper sloughing off the 

rolls creating a housekeeping issue and fire hazard and to avoid the 

risk of ignition and/or fire transfer; 

instructing storage of parent rolls in such quantity and configuration at 

the Warehouse with the knowledge that such quantity and 

configuration created an increased fire hazard; 

demanding that the FCL Defendants utilize a Toyota Series 6 forklift 

at the Warehouse when they knew or ought to have known the 

dangers of using a Toyota Series 6 forklift; 

failing to warn the FCL Defendants about the risks inherent with the 

use of Toyota Series 6 forklift trucks including the Lift Truck ... 

[4] With respect to insurance, the warehouser also pleaded:


6. The FCL Defendants state that the [warehousing agreement] includes 

provisions requiring the Plaintiff to obtain insurance including, inter 

alia, “insurance of its inventory and property within the Warehouse” 

and that such insurance should name the FCL Defendants as 

additional assureds and stand as primary coverage. As a 

consequence of these insurance provisions, the Plaintiff is barred by 

the terms of the [warehousing agreement] and is otherwise estopped 

from claiming against the FCL Defendants to the extent of the 

indemnity which would have been provided by such insurance if such 

insurance had been placed by the Plaintiff. 

7. The FCL Defendants state that it was an express or implied term of 

the [warehousing agreement] that the parties restrict recovery 

between them for any loss or damage to the amount of available 

insurance. The Plaintiff is therefore barred by the terms of the 

[warehousing agreement] and is otherwise estopped from claiming 

against the FCL Defendants in total or, in the alternative, to the extent 

of the indemnity that would have been provided by such insurance as 

the Plaintiff was obliged to obtain and maintain under the terms of the 

[warehousing agreement]. 


[5] The action did not come on for trial until June 2008. By that time, the 

pleadings had been amended several times and assorted third parties had been 

joined by FCL, including various “Toyota” corporations alleged to have been involved 

in the design, manufacture, distribution or sale of the propane-powered lift truck (or 

forklift) allegedly involved in the starting of the fire, and Mason Forklift Ltd. 

(“Mason”), which had leased the forklift to FCL. These third parties in turn joined 

certain fourth parties. By the time of trial, however, the fourth party proceedings had 

been discontinued. 

[6] In an amendment to its statement of claim made pursuant to an order dated 

June 6, 2008, Scott expressly waived any right to recover from the defendants or 

any other party, any portion of its loss that might be attributable to the fault or breach 

of duty of any of the Toyota corporations or Mason and any other persons not 

named as defendants, for which the defendants might have been entitled to claim 

contribution, indemnity or apportionment. 

[7] Immediately before the trial commenced, the trial judge sitting in chambers 

ordered that the parties endorse an order dismissing the proceedings against Mason 

and the Toyota third parties, subject to the condition that the order would not be filed


until the conclusion of the trial. On September 17, 2008, the Toyota proceedings 

were dismissed and on November 5, 2008 those against Mason were also 

dismissed, the latter without prejudice to certain possible defences. 

[8] The trial occupied 20 days beginning June 16, 2008. Even though no third or 

fourth party proceedings remained to be tried, there were many issues of fact and 

law to be resolved between the plaintiff and the defendants. Thus it is not surprising 

that the trial judge’s reasons ‒ indexed as 2010 BCSC 1242 ‒ are lengthy and 

detailed. I do not intend to review them as a whole, given that most of his factual 

findings are unchallenged on this appeal. I do note, however, that one of the difficult 

issues before the Court was to determine the exact terms of the agreement between 

Scott and FCL. Although the parties had discussed the terms of several drafts, they 

had never signed any written warehousing agreement. The trial judge ultimately 

found that their agreement (referred to as the “WMA”) consisted of a draft agreement 

and two appendices, “A” and “C”. Both parties had acted on the basis of these 

documents since early 2000. (Paras. 84-5.) No appeal is taken from that finding. 


[9] Another significant issue was the standard of care to which FCL was subject 

in operating the warehouse. Appendix A required FCL to maintain the facility in 

“food grade condition and cleanliness at all times”, and para. 7(a) of the agreement 

itself required FCL to perform its services in an “efficient, effective and professional 

manner, and properly, safely, efficiently and professionally ... all in accordance with 

the highest industry standards”. In addition, s. 2(4) of the Warehouse Receipt Act 

required that the warehouser exercise the care and diligence that a “careful and 

vigilant” owner of goods similar to those being stored would exercise in similar 

circumstances. (Para. 106.) The trial judge found that this standard of care was a 

higher one than that of reasonable care (para. 108), and again, no appeal is taken 

from that conclusion. 

[10] This appeal challenges only two substantive conclusions reached by the trial 

judge ‒ first, his finding of fact that Scott’s losses and damages were caused by 

negligence on the part of FCL; and second, his conclusion of law that Scott’s claim


against FCL (which we are told is a subrogated claim) was not barred by the 

application of certain insurance provisions in the WMA. It is to those two issues that 

I now turn. 

The Cause of the Fire 

[11] The factual background of the outbreak of the fire was described by the trial 

judge at paras. 7-27 of his reasons. He began by describing the services provided 

by FCL to Scott at the warehouse, which included not only storage but space 

management and the co-ordination of shipping on Scott’s behalf. (Para. 8.) The 

“parent rolls” of paper being stored for Scott were very large rolls being stored until 

they could be processed for packaging into final products such as paper towels and 

toilet paper. Unlike the smaller processed rolls, these rolls were not wrapped in 

plastic or at all and were moved around in the warehouse primarily by means of a 

Toyota propane-powered forklift, the only forklift with a turning radius short enough 

to move the rolls. The defendant Mr. Bodnar, who operated the forklift in the storage 

area, described the debris created just by moving the rolls around: 


The unwrapped rolls, when they'd come into a truck, it depends where they 

came from at the other end. From Scott Paper they've ‒ they've already 

come unravelled. Depending on the size of the roll they were held by just 

like, it looked like masking tape, practically. And the operator at the other 

end, by squeezing them so hard, would force them to come unravelled. 

And some of the rolls were a fair size, so if a roll unravelled once around 

that could be anywhere from six to eight feet around a piece of paper that 

would come off. And just from the force of the machine would tear it right off 

when -- when we went to unload it, and it would fall on the floor. 

[12] Until about one week before the fire FCL employees had noticed that the 

propane forklift (the “Original Forklift”) was, in the trial judge’s words, overheating 

“due to paper debris being sucked up into the body of the vehicle by the operation of 

the radiator cooling fan.” The drivers could smell smouldering paper “within the 

machine as a result of contact with various hot elements associated with the engine 

and exhaust system.” (Para. 11.) Mr. Bodnar stated in discovery that the first time 

this happened, he “stopped, turned the machine off, opened the bonnet and the


paper under there ‒ it wasn’t really on fire; it was smouldering. It was turning brown, 

kind of.” He was asked where the smouldering paper was located: 

A. That is the part I have difficulty with, is where the exhaust ‒ I can see 

part of the exhaust between the engine compartment and the radiator 

and there was a piece of paper like touching, but I think it was part of 

the exhaust. 

Q. Around the muffler? That far back? 

A. Yes. Yes. 

Q. That is on the opposite side of the radiator in the shaker screen, is it? 

A. It wasn’t the muffler, it was the exhaust pipe. If I remember ‒ like 

you’re saying the muffler was on the opposite side of the ‒ toward the 

back of the machine. I can’t recall what it looks like now. 

Q. But was it your experience that paper debris could get sucked up and 

get sucked through the shaker screen and the radiator into that back 

area where the tail pipe and the muffler were located? 

A. It has to come up past the exhaust pipe first to get to the shaker 

screen and the radiator. And being such a suction I guess since it’s 

happened earlier, no paper had ever gotten stuck by the exhaust pipe, 

it all went to the shaker screen. The radiator blocked the flow of the 

air and the machine overheated. It’s only a matter of time before it 

starts ‒ you know, before it got near the exhaust. Sooner or later it 

was bound to happen, which it did. That’s when I opened the bottom 

and it’s smouldering and there was a brown piece of paper there. 


[13] At trial, Mr. Bodnar testified: 

It would seem that the forklift would suck up paper like a vacuum cleaner, and 

doing so it would -- the paper would have packed itself in the exhaust pipe. 

And shortly after starting to operate the machine the -- I could smell -- I wasn't 

sure the first couple of times, but it was like a smouldering distinct paper 

smell. And the first time I had noticed this I lifted the bonnet and there was -- 

there was paper wrapped around the exhaust. And I would try to reach my 

hand down there and tear it out as best I could and clean it out. 

Mr. Bodnar said he attempted to deal with the overheating problem by “blowing out” 

and cleaning the radiator and then adding water to it (using an outdoor hose) until 

the temperature gauge went down. (The Original Forklift had also been fitted with 

venting at the front and sides of the hood.) 

[14] At some point, FCL mentioned the overheating problem to Mason. It was 

decided that an air compressor would be used to “blow out” the Original Forklift and,


in the trial judge’s words, that the exhaust pipe would be wrapped with fibreglass 

insulation “in order to shield paper and debris from the hot surface of the exhaust 

pipe”. These measures “greatly reduced”, but did not eliminate, the problems with 

smouldering paper. (Paras. 12-3.) 

[15] Unfortunately, the Original Forklift had to be taken out of operation due to an 

accident on July 20, 2001. Mason supplied a replacement of the same type and 

make which it delivered to the warehouse on July 26, fitted with a roll clamp so that it 

could handle the parent rolls. The exhaust pipes, however, were not wrapped, nor 

was the hood vented to reduce overheating. The replacement forklift (the “Forklift”) 

was put into service immediately. 


[16] On July 30, Mr. Bodnar returned from holiday. He noticed that the Forklift 

began overheating right away and had the same smouldering problems the Original 

Forklift had had. In his words, it “was right back to square one. Like smouldering, 

overheating, and just got [sic] to be really careful again.” (Para. 18.) The Forklift 

was blown out with compressed air about every ten or 15 minutes up to the time of 

the fire. 

[17] The trial judge found that on the morning of July 31, Mr. Bodnar was driving 

the Forklift, having picked up a roll. Mr. Bodnar testified that he did not notice any 

smell or detect any overheating, but a co-worker who was driving an electric forklift 

in the opposite direction saw something very concerning: 

Mr. Nijjar noticed a piece of paper approximately 2 to 3 feet long in the vicinity 

of the exhaust grill of the Forklift. The paper was on fire. Mr. Nijjar saw the 

paper drifting away from the back of the Forklift. The burning paper landed at 

the base of a stack of parent rolls. The burning paper immediately 

transferred flame to the stack of parent rolls. 

Mr. Nijjar made an attempt to stomp out the fire before running to get a 

nearby fire extinguisher. When Mr. Nijjar returned with a fire extinguisher, he 

felt the fire was already out of control so he left the area to report the Fire. [At 

paras. 23-4.] 

Mr. Bodnar testified that he immediately jumped off his machine, ran to the front of 

the Warehouse and yelled “9-1-1” to the office, ran back and tried to extinguish the


fire with a fire hose. He had to give up very soon thereafter. Fire and emergency 

trucks were called, but the entire inventory in the warehouse was quickly destroyed. 

[18] The trial judge approached the issue of causation of the fire beginning at 

para. 107, noting the “but for” test enunciated by the Supreme Court of Canada in 

Resurfice Corp. v. Hanke 2007 SCC 7, [2007] 1 S.C.R. 333. After describing the 

high standard of care imposed by the Warehouse Receipt Act and the reverse onus 

applicable to a bailee, he found that: 

... [FCL] owed a duty of care to Scott not to allow paper debris to build up and 

to maintain the Warehouse as a “careful and vigilant owner”. A careful and 

vigilant owner would and should have foreseen that there was a risk of fire 

igniting due to smouldering paper debris coming into contact with various 

parts of a propane lift truck and if the Warehouse was not kept in a “foodgrade 

condition” so that paper debris was allowed to accumulate at the base 

of the stored parent rolls during each shift. A careful and vigilant 

warehouseman in the position of [FCL] would have taken steps to sweep up 

the paper debris not only in the aisles but also at the base of the stacked 

parent rolls on a regular basis and not just after each shift. I find that these 

failures amount to a breach of the duties owed by [FCL] to Scott. I am 

satisfied that Scott has demonstrated on a balance of probabilities that the 

damage which occurred would not have occurred but for the negligence of 

[FCL] in this regard. [FCL] has not shown that the duty that it owed to Scott 

has been discharged. As the standard of care if higher than merely not 

acting negligently, [FCL] has not met the onus of showing that the duty 

imposed upon it has been discharged. Scott has met the onus of showing 

that [FCL] did not discharge the duty that it owed to Scott. [At para. 116; 

emphasis added.] 


and further : 

I find that [FCL] did not act throughout as a careful and vigilant owner despite 

the fact that it had an obligation to do so pursuant to the obligations imposed 

at common law and under the Warehouse Receipt Act. Scott has met the 

burden of proving its losses and damages were caused through the 

negligence of [FCL]. [Para. 123.] 

[19] As to exactly how the fire had started, the trial judge found that: 

... it was paper debris coming into contact with the unwrapped exhaust 

system of the Forklift that caused the Fire. Burning tissue debris was seen by 

Mr. Nijjar to be trailing behind the Forklift. The fact that the burning paper 

was outside the Forklift, allows me to conclude that the paper had not been 

sucked up into the Forklift. This incident occurred only days after the Forklift 

had gone into service to replace the Original Forklift. This spatial and 

temporal proximity between the use of the Forklift with the unwrapped


exhaust system and the burning paper is sufficient to allow me to come to the 

conclusion that the Fire was caused when paper came into contact with the 

unwrapped exhaust of the Forklift. 

An inspection of the Forklift following the Fire disclosed no evidence of fire 

within the Forklift. I find this to be further evidence that the Fire was caused 

by paper coming into contact with an external part of the Forklift. I find that 

the unprotected exhaust of the Forklift came into contact with paper debris, 

either in the location where Mr. Bodnar had deposited a parent roll or in the 

aisle as he moved the Forklift back to that part of the Warehouse where he 

was to pick up another parent roll. I find that the heat of the unprotected 

exhaust of the Forklift caused the paper which was in the aisle or which had 

been blown into the aisle from debris at the foot of a stack of parent rolls to 

ignite, the ignited paper landed at the base of a stack of parent rolls, the 

paper transferred the flame to the parent rolls, and the fire spread from there 

[At paras. 51-2; emphasis added.]. 


The Court did not make any finding of gross negligence on the part of the 

defendants. 

[20] Beginning at para. 53, the Court also considered whether there were other 

possible causes of the fire. Most notably, FCL had adduced into evidence a report 

prepared by a professional engineer, Mr. West, of Baker Materials Engineering, who 

was instructed to assume inter alia that an examination of the Forklift did not reveal 

any possible source of ignition other than one “associated with the exhaust system.” 

He carried out certain tests on the overflow tube from the radiator reservoir of the 

Forklift. The tube was found charred and partly melted “where it passed adjacent to 

the exhaust pipe on the left side of the [Forklift].” The tests indicated that the 

temperature of the exhaust pipe in the Forklift during operation was “certainly 

sufficient to ignite paper” and that a molten or charred piece of the overflow tube 

could also have achieved temperatures sufficient to ignite paper. Mr. West 

concluded: 

We also understand that the fire started at approximately 10:30 a.m. and that 

forklift 1478 had operated as a replacement for FCL’s own unit for a period of 

four or five days before the fire occurred. The extended period of operation 

of the forklift before the fire indicates that either the overflow tube fell into 

contact with the exhaust pipe very shortly before the fire occurred, or the 

contact was intermittent over the time that the forklift was used before the fire. 

Our tests showed that the tube melted and charred within minutes of contact 

with a hot exhaust pipe. 

If the contact had been intermittent, this could then present an opportunity for 

fragments of toilet paper product to attach to the melted portion of the tube


after it separated or moved away from the exhaust pipe. When the tube next 

moved into contact with the exhaust pipe, these tissue fragments could be 

ignited as a result of contact with the exhaust pipe. 

Hence, contact between the overflow tube and the exhaust pipe also 

presents itself as a potential cause of ignition of the streamer observed by 

witness Nijjar. [Emphasis added.]] 

[21] The trial judge rejected this theory, however, noting that: 

There was no evidence as to when the overflow hose in the Forklift had been 

installed. I cannot conclude that the plastic radiator coolant overflow hose 

melted at the Warehouse where the Forklift had been used for less than a 

day and a half or that the alleged faulty installation caused or contributed to 

causing the Fire. No theory was presented how paper two to three feet long 

might have come in contact with the plastic radiator coolant overflow hose, 

been ignited, and then expelled from the Forklift in order that it would be 

streaming behind the Forklift. [At para. 53.] 


[22] The defendants also adduced evidence from an engineer, Dr. Colwell, who 

had conducted (and videotaped) certain tests in relation to the airflow characteristics 

of the Forklift. The purpose of the tests was “to evaluate whether ‘burning embers’ 

of paper could pass through the radiator, past the fan, past the exit grill and then 

ignite a strip of paper or streamer caught on the exit grill.” He described the test and 

the results thereof in his report as follows: 

With the engine running at full rpm, the paper samples were placed at locations that 

provided the best opportunity for them to flow around the radiator and come into 

contact with the radiator grill at the rear of the lift truck. These locations included 

above and below the exhaust pipe as it passed the right side of the radiator (on the 

right side of the lift truck) and underneath the radiator near the fan drive belt. 

Results of the testing, summarized in Table 1, demonstrated that none of the 

tissue samples were able to get past the radiator intact. The only piece that 

made it past the radiator was manipulated such that a portion of the paper 

was pushed completely underneath the radiator and then released. It was 

drawn out of the engine compartment and chopped up by the fan such that 

only confetti-sized paper exited the lift truck. Samples released near the 

exhaust pipe which passes around the right side of the radiator were drawn 

forward, not rearward, and did not exit the engine compartment. [Emphasis 

added.] 

[23] In cross-examination, Dr. Colwell acknowledged that in one or two of his 

tests, the video showed a piece of paper being released, moving forward in the 

engine compartment, becoming entangled in a “structure” there and, after the


camera had been shut off, being “sucked back onto the radiator screen.” He also 

confirmed that the cooling fan had been operating at maximum speed during the test 

and that accordingly, he had not made any observations “as to how burning paper 

debris and burning embers would move around in the engine compartment if the 

engine and the cooling fan were being operated at less than maximum speed.” 

Further, the engine had not been under load when the tests were carried out, nor 

had the Forklift been driven around “in piles of paper debris to see what would 

happen”. Significantly, the radiator had been cleaned out before each test. Counsel 

for the defendants successfully objected to counsel’s question to Dr. Colwell: 

I suggest to you, Doctor, that given these variables, you would have been 

surprised if you had seen fire propagate outside the lift truck? 


This witness, not having been called to provide expert evidence, was not asked to 

comment on the “exhaust pipe” theory ultimately adopted by the trial judge. 

[24] The trial judge said he accepted Dr. Colwell’s evidence. In his analysis: 

... I accept the evidence of Jeff Colwell, a professional engineer, that paper, 

once inside the body of a forklift, is drawn upwards towards the radiator with 

significant force so that the paper cannot get past the radiator and outside the 

vehicle unless manually forced past the radiator. I also take into account that 

there was no evidence of fire damage within the body of the Forklift after the 

Fire. I find that it would not have been possible for paper to be drawn into the 

Forklift, ignited and then expelled from the Forklift. [At para. 55; emphasis 

added.] 

For the same reason, he also rejected the defendants’ submission that the Toyota 

third parties were responsible for the fire ‒ although it was not necessary for the 

Court to decide the point. The judge rejected the notion that paper had been: 

... drawn into the body of the Forklift as a result of the negative air pressure 

created by the exhaust fan and that, after coming into contact with an 

exposed portion of the exhaust pipe, caught fire and escaped from the body 

of the Forklift. I am satisfied that this theory is disproven on the evidence due 

primarily to the inability of paper to escape once it has entered the body of 

the Forklift and the inability of ignited paper to move past the radiator fan to 

outside of the Forklift. [At para. 55; emphasis added.]


On Appeal 

[25] On appeal, the defendants submit that the trial judge made a palpable and 

overriding error in finding that the fire occurred when paper debris came into contact 

with the unwrapped exhaust system of the Forklift, while at the same time finding 

that paper had not been “sucked up into the Forklift.” (Para. 51.) The defendants 

say these findings require that some part of the exhaust system (the part that was 

wrapped on the Original Forklift) must have been “external” to the Forklift. Citing the 

reports of Mr. West and Dr. Colwell, the defendants contend the entire exhaust 

system was inside the machine and that there was no evidence of any external 

portion that could cause paper to ignite. Further, they argue: 


... there was no evidence that anyone at [FCL], Scott, the manufacturer 

(Toyota) or supplier (Mason Lift), had ever seen or heard of paper being 

ignited by an external part of a forklift. On the evidence, therefore, ignition of 

paper by an external component of the forklift would not just be 

unforeseeable, but physically impossible. 

As the only parts of the exhaust system wrapped on the original forklift were 

internal to the machine, and there was no part of the exhaust system outside 

the body of the replacement Forklift, such fire could not have been caused by 

contact with the exhaust system. While the Forklift may conceivably have 

caused a fire, such fire would have been caused in a manner completely 

unknown to [FCL]. 

It was also the uncontroverted evidence and finding of the Court that the 

Forklift had a propensity to vacuum up paper debris from the floor around the 

base of the machine while it was operating. Such paper would then be 

sucked up into the engine compartment, and would not exit the machine. 

[Emphasis added.] 

[26] With respect, I believe this argument takes an overly literal approach to the 

trial judge’s reference to “an external part” of the Forklift in his analysis of 

Dr. Colwell’s evidence. As Scott points out in its factum, no witness was asked 

directly whether the exhaust system was “internal” or “external”; and some of the 

photos of the Forklift in evidence show that the exhaust system is, in Scott’s words, 

“encased on the sides within an exterior housing”, that there is an open exhaust grill 

at the back, and that the underside of the machine was open. Arguably, the part of 

the exhaust system that travels from underneath the internal engine compartment to 

a location beside the radiator and then behind the radiator and up into the muffler is


not “inside” or is external to the engine compartment itself. It seems to me that 

para. 56 of Scott’s factum aptly describes the reasoning adopted by the trial judge: 

Since the evidence at trial was clear that: (i) the actual strip of paper that 

caused the Fire was somehow attached to the exhaust grill; (ii) all other 

possible sources for the ignition of the Fire other than the [Forklift] were 

eliminated by the Appellant; (iii) the unwrapped exhaust pipes were known to 

be hot enough to start paper fires; and (iv) paper cannot escape from inside 

the engine compartment, it must be that the Fire started by paper touching 

that part of the exposed exhaust pipe near the muffler at the back of the 

[Forklift]. 

[27] As Scott notes, this explanation is consistent with Mr. Bodnar’s experience 

with the Original Forklift described above. It is also consistent with the discovery 

evidence of Mr. Woykin, another FCL employee who worked in the warehouse. He 

recalled that before the exhaust system of the Original Forklift was “wrapped”, he 

had seen paper “smouldering” with smoke coming from a location under the driver’s 

seat of the machine, which was then being operated by a Mr. Bertie. By the time he 

and Mr. Bertie located an operating fire extinguisher, Mr. Woykin could see flames. 


[28] Significant evidence in this regard was also given by a Mr. Reinders, an 

employee of Toyota Canada Inc. He recalled “problems” experienced by Toyota 

early on in the production of its GM262 engines – the kind used in the Original 

Forklift and the Forklift. According to his testimony, these machines had a 

“propensity to suck up paper into the engine compartment and through into the 

radiator”, and to overheat. These problems were experienced where the units were 

“working extremely hard in the environment where there is significant debris on the 

floor that leads to plugging of the rads, and there is a ... very heavy use of the 

attachments that are on the truck.” The witness was referred to an internal Toyota 

memorandum to Toyota Canada describing overheating in pulp and paper 

applications of the machine. Toyota Canada recommended the following measures 

in response: 

1) Increase size of engine pipe diameter to allow for easier exhaust flow. 

2) Improved air flow around exhaust pipe to remove excess heat. 

3) Add fibreglass insulation wrap to engine pipe. 

4) Reduce hydraulic pressure, thus lowering hydraulic load on engine.


[29] A couple of years later, in 1998, another Toyota customer complained about 

overheating of the exhaust pipe – to over 400 degrees F. “very rapidly”. The writer 

of the memo stated: 

If this customer for some reason rotates the clamp attachment on a regular 

basis in this application (short travel distances) the hydraulic oil has no time 

to cool and will keep the temperature rising until something fails. Further to 

this the engine is being loaded during rotation causing the exhaust pipe to 

drastically increase in temperature. When these units deliver damaged rolls 

to the recycling area (loose paper on floor) the possibility of paper igniting can 

happen if the exhaust temperature is extremely high. [Emphasis added.] 

The solution suggested by Toyota Canada Inc. was to install a “flow regulator” in the 

rotating circuit. In 2001, it also recommended inter alia that suppliers install vents in 

the hood, and “exhaust wrap”. 


[30] In late 2000, a paper recycling plant in Washington state reported continuing 

difficulties to Toyota, having had two small fires start “from the exhaust manifold 

downpipes and trapped paper”. The fires were small and resolved quickly. Again, 

Toyota recommended using, inter alia, a “heat wrap on the exhaust pipe”, and hood 

vents. There were similar reports from other customers of “excessive amounts of 

paper sucking up underneath the engine compartment and clogging the radiator” 

and “paper sucked up into the engine bay”, threatening to ignite on the exhaust 

manifold. 

[31] All of this in my view supports the trial judge’s findings as to how the fire 

started, although he was apparently under the impression that because the third 

party proceedings against the Toyota corporations had been discontinued, it was not 

open to him to consider Mr. Reinders’ testimony. (Para. 125.) Even without the 

benefit of the reverse onus imposed by the Warehouse Receipt Act, there was 

substantial evidence that the fire began, as fires or near-fires had on previous 

occasions known to Toyota, when paper came into contact with the extremely hot 

exhaust system of the Forklift. Whether one sees this as ‘internal’ or ‘external’ to the 

engine is not in my view material. FCL was of course also aware of this problem 

which, in combination with the fact that paper debris was all around the warehouse, 

created a ‘perfect storm’ of dangerous conditions.


[32] I would dismiss FCL’s appeal on the question of causation. 

Was the Subrogated Claim Barred? 

[33] Paragraph 17 of the WMA contained covenants on the part of both parties 

with respect to insurance. Paragraph 17 stated: 

INSURANCE 

A. Liability Insurance 

The Contractor [FCL] will maintain, throughout the Term of this Agreement, 

and any Extension Term, comprehensive general liability insurance and 

industry standard warehouseman’s legal liability insurance. Scott will 

maintain general liability insurance, tenant’s legal liability insurance, and 

insurance of its inventory and property within the warehouse. 

All insurance shall name Scott or the Contractor as applicable as an 

additional insured against all liability for bodily and/or personal injury and 

property damage, arsing from the insured’s fault or negligence, or the fault or 

negligence of any of its or their shareholders, directors, officers, employees, 

servants and agents, its and their affiliated, related, parent and subsidiary 

companies, and its and their appointees, successors and assigns, in 

connection with the Management Services hereunder. 

If the comprehensive general liability policy contains a general aggregate, 

that aggregate limit shall apply separately, per location, so that the 

Warehouse will have its own aggregate limit. All insurance policies 

contemplated hereunder shall constitute and respond as primary coverage to 

any insurance otherwise available Scott and any of its shareholders, 

directors, officers, employees, servants and agents, its affiliated, related, 

parent and subsidiary companies, or its and their appointees, successors and 

assigns. 

. . . 

B. Insurance on Building Contents 

Scott shall, at its own costs and expense, insure and keep insured any of its 

own property in, on or about the Warehouse, in which Scott itself has an 

insurable interest, including, without limitation, Scott’[s] inventory, furniture, 

fixtures, and equipment. 

D. Warehouseman’s Legal Liability Insurance 

The Contractor shall obtain and maintain industry standard Warehouseman’s 

Legal Liability Insurance that covers against risk of loss of inventory and 

property belonging to Scott or its divisions, subsidiaries, affiliated or related 

corporations, and arising from or relating to the Contractor’s gross 

negligence, which insurance shall be in the amount of (Cdn.) five million 

dollars. Damaged or lost inventory and products insured hereunder will be 

valued at Scott’[s] selling price to the trade. 

2013 BCCA 3 (CanLII)


The Contractor will add both the Landlord and Scott as additional insureds. 

The Contractor will obtain and pay the premiums for such insurance coverage 

as an Allowable Operating Expense. 

E. Notice of Loss or Damage to Goods 

The Contractor agrees to notify Scott promptly in writing of any loss or 

damage of any kind to any product or goods stored or handled under the 

terms of this Agreement. [Emphasis added.] 

(Paragraph 17 contained no section “C”.) 

[34] As mentioned earlier, we were told this action is a subrogated action, i.e., one 

brought by Scott’s insurer, which (presumably) paid Scott out in respect of its losses 

due to the fire. As also noted, FCL’s statement of defence at least suggested that 

Scott failed to name FCL as an additional insured under the “primary coverage” 

referred to in para. 17A. However, we were not referred to any evidence on this 

point, and the trial judge did not refer to any. In any event, this question of fact 

would seem irrelevant to the “covenant to insure” (also called “tort immunity”) 

defence raised by FCL as a bar to Scott’s subrogated claim. That defence depends 

entirely on the terms of the contract between Scott and FCL, whether they were 

performed or not: see Greenwood Shopping Plaza Ltd. v. Beattie [1980] 2 S.C.R. 

228. 


[35] The starting point on the question of whether a subrogated claim may be 

pursued against FCL in the circumstances of this case is the Supreme Court of 

Canada’s “trilogy” of cases, Agnew-Surpass Shoe Stores Ltd. v. Cummer-Yonge 

Investments Ltd. [1976] 2 S.C.R. 221, Ross Southward Tire Ltd. v. Pyrotech 

Products Ltd. [1976] 2 S.C.R. 35, and T. Eaton Co. v. Smith [1978] 2 S.C.R. 749. 

Each involved landlord-tenant insurance arrangements and damage by fire, but each 

involved slightly different contractual provisions. In Agnew-Surpass, the lease 

required the landlord to insure its shopping centre “against all risk of loss or damage 

caused by or resulting from fire.” In Ross Southward, the lease required the tenant 

to pay all “insurance rates”. The landlord regularly charged the tenant for, inter alia, 

its share of the cost of fire insurance. In T. Eaton, two landlords covenanted to 

insure the leased premises against fire; the tenant on the other hand promised to 

repair on notice, damage by fire excepted. In each instance, a fire was caused by


negligence attributed to the tenant. Subrogation was barred partly in Agnew- 

Surpass, where the Court was split, and was barred completely in the latter two 

cases. 

[36] The three cases are well-known to insurance practitioners and I do not intend 

to rehearse their legal reasoning in detail. It is fair to say that Chief Justice Laskin’s 

minority position in Agnew-Surpass evolved into the majority position in the other 

two cases, such that by the time T. Eaton was decided, the landlords’ covenant to 

insure their tenant’s premises was regarded as a “supervening covenant” that 

prevailed even where the tenant’s negligence had caused the loss. The Chief 

Justice characterized the issue in T. Eaton thus: 


... It is whether, in circumstances where, by the lease, the tenant is under an 

obligation to repair, and where its obligation to repair does not extend to 

repairing damage from accidental (as contrasted with negligent) fires, it is 

entitled, as between it and the landlord, to claim the benefit of a fire insurance 

policy (providing indemnity for loss arising from fires negligently caused), 

which the landlord had covenanted with the tenant to provide. 

... This is not a case where one has to consider whether there is some 

provision exonerating one contracting party from liability to the other for the 

former's negligence. Rather is it a case where a supervening covenant has 

been given and taken to cover by an insurance policy the risk of loss from a 

fire caused by negligence. An insurer could not refuse to pay a claim for loss 

by fire merely because the fire arose from the insured's negligence. I can see 

no reason why its position can be any better against a tenant, whose 

negligence caused loss by fire, if the lease with the landlord makes it clear 

that a policy was to be taken out by the landlord to cover such fires, and a 

policy is written which does so. In short, the insurer can claim only by 

subrogation under the lease. [At 755-6; emphasis added.] 

[37] A helpful summary of the evolution of the trilogy was provided in Madison 

Developments Ltd. v. Plan Electric Co. (1997) 36 O.R. (3d) 80 (Ont. C.A.), where 

Carthy J.A. stated: 

... The law is now clear that in a landlord-tenant relationship, where the 

landlord covenants to obtain insurance against the damage to the premises 

by fire, the landlord cannot sue the tenant for a loss by fire caused by the 

tenant's negligence. A contractual undertaking by the one party to secure 

property insurance operates in effect as an assumption by that party of the 

risk of loss or damage caused by the peril to be insured against. This is so 

notwithstanding a covenant by the tenant to repair which, without the 

landlord's covenant to insure, would obligate the tenant to indemnify for such 

a loss. This is a matter of contractual law, not insurance law, but, of course,


the insurer can be in no better position than the landlord on a subrogated 

claim. The rationale for this conclusion is that the covenant to insure is a 

contractual benefit accorded to the tenant, which, on its face, covers fires with 

or without negligence by any person. There would be no benefit to the tenant 

from the covenant if it did not apply to a fire caused by the tenant's 

negligence. [At 84; emphasis added.] 

(See also 1044589 Ontario Inc. (Nantucket Business Centre) v. AB Autorama Ltd. 

2009 ONCA 654.) 

[38] The Court in Madison echoed the reasoning in Ross Southward that the 

tenant had paid for “an expected benefit” as between itself and its landlord ‒ 

insurance coverage via the landlord’s policy. Carthy J.A. extended this reasoning 

beyond landlord-tenant relationships to complex construction cases, emphasizing 

the “anticipation” that subcontractors would “contribute their efforts to the overall 

project and ... that if a fire occurred it would most likely be caused by the negligence 

of one of those subcontractors.” In the Court’s analysis, it would make no business 

sense for each subcontractor to pay premiums to duplicate the comprehensive fire 

coverage to be obtained by the contractor and there would be no purpose for a 

covenant on the latter’s part to obtain such insurance if it were not to protect the 

subcontractors from claims caused by their own negligence. (At 85.) The 

subcontractor’s employees were also held to be entitled to be protected from liability: 

see 92. (See also Tony & Jim’s Holdings Ltd. v. Silva (1999) 43 O.R. (3d) 633 

(C.A.); Orange Julius Canada Ltd. v. Surrey 2000 BCCA 467; London Drugs Ltd. 

v. Kuehne & Nagel International Ltd. [1992] 3 S.C.R. 299; and Madison, supra, at 

88-92.) 


[39] The trilogy was also applied by this court in North Newton Warehouses Ltd. 

v. Alliance Woodcraft Manufacturing Inc. 2005 BCCA 309, lve to app. refused [2005] 

S.C.C.A. No. 375. Mr. Justice Hall for the majority held that a subrogated claim 

brought by the insurer of a landlord against a tenant whose employees had 

negligently caused a fire was barred. The landlord had covenanted in the lease to 

take out and maintain insurance against “all risks” of loss or damage to the building 

and to repair the premises in the event of damage by “fire or other casualty not


caused by the negligence of the Tenant”; the tenant had agreed to reimburse the 

landlord for its insurance premiums as a component of “additional rent”. Adopting 

the “benefit” reasoning of Ross Southward, Hall J.A. stated: 

Here the tenant Alliance has paid the landlord an amount for the insurance 

obtained by North Newton covering fire damage to the building. It seems to 

me that, as Laskin C.J.C. observed in the Ross Southward case at 39, a 

tenant who has paid for an expected advantage as between itself and its 

landlord should benefit from those payments, and loss issues thereafter are 

between the landlord and its insurer. In such circumstances, to allow the 

insurer of North Newton to pursue its subrogated action against Alliance 

would render nugatory benefits accruing to the tenant under the covenant of 

the landlord to insure. [At para. 42; emphasis added.] 


and further: 

Ultimately, the policy rule underpinning the proposition that the insurer cannot 

pursue a tenant for damages in circumstances such as those present in the 

instant case is based on the proposition that it makes little business sense for 

a landlord to covenant to insure and for a tenant to pay the premiums if the 

tenant is not to derive some benefit from the insurance. One might properly 

say that there is something approaching a presumption in favour of a tenant 

benefiting from a landlord's covenant to insure. That is the legal principle that 

I take to be established from the trilogy of cases decided by the Supreme 

Court of Canada. [At para. 45; emphasis added.] 

(See also Orange Julius, supra, at para. 22.) 

[40] Finally, reference may be made to Commonwealth Construction Co. Ltd. 

v. Imperial Oil Ltd. [1978] 1 S.C.R. 317. Like Madison, it involved a contract entered 

into by a general contractor with an owner, Imperial Oil, for the construction of a 

fertilizer plant. A subcontractor, Commonwealth, had been engaged to install piping 

and had caused a fire to break out, causing damage not only to its own property but 

to other parts of the project. Imperial Oil had taken out property insurance that 

named not only its own subsidiaries, but their contractors and subcontractors as 

insureds. The entire amount of damage was claimed by and paid to Imperial Oil by 

its insurer, which then purported to bring a subrogated action against 

Commonwealth. The Alberta Appellate Division ruled that the policy insured 

Commonwealth only to the extent of its portion of the work performed under the 

subcontract, and therefore permitted the subrogated action to proceed.


[41] Commonwealth appealed successfully on the basis that it had had an 

insurable interest in the entire “works”. De Grandpré J., speaking for the Supreme 

Court, began his analysis by referring to the “basic principle” that subrogation cannot 

be obtained against the insured himself. This was also true, he said, in cases of 

“true joint insurance” and in cases of several insurance “if the different interests are 

pervasive and if each relates to the entire property, albeit from different angles”. (At 

321.) As to whether Commonwealth had a “pervasive” interest in the entire project, 

he drew an analogy to longstanding law in the field of bailment. 

The question is: in the context of the construction contracts, did the various 

trades have, prior to the loss, such a relationship with the entire works that 

their potential liability therefor constituted an insurable interest in the whole? 

In certain fields of mercantile law, e.g. bailment in the widest sense, full 

insurable interest has for a long time been held to exist in others than the 

owner because of their special relationship with the property entailing 

possibility of liability. 

It is sufficient to refer to the now classic decisions of Waters v. Monarch Fire 

and Life Assurance Co. [[1843-60] All E.R. Rep. 654] and London and North 

Western Railway Co. v. Glyn [(1859), 1 El. & El. 652], applied by the House 

of Lords as recently as 1966 in Hepburn v. A. Tomlinson (Hauliers), Ltd. 

[[1966] All E.R. 418.] These two classic decisions were also referred to with 

approval by the Supreme Court of the United States in Phoenix Insurance 

Co. v. Erie and Western Transportation Co. [(1886), 117 U.S. 312], which 

was followed in Wager v. Providence Insurance Co. [(1893), 150 U.S. 99]. 

The decisions of the Canadian Courts applying this doctrine are numerous 

and I will only refer to Smith v. Stevenson [[1942] 1 D.L.R. 681, [1942] O.R. 

79], a judgment of the Ontario Court of Appeal. Although these judgments 

were pronounced on policies issued to the bailee and not to the owner and all 

other interested parties, as in the case at bar, I do not see that circumstance 

making any difference when it comes to determining the existence or nonexistence 

of an insurable interest in a person who is not the owner of the 

property. 

In all these cases, there existed an underlying contract whereby the owner of 

the goods had given possession thereof to the party claiming full insurable 

interest in them based on a special relationship therewith. [At 322-23; 

emphasis added.] 


[42] The Court went on to observe that by recognizing an insurable interest in all 

tradesmen based on the ‘possibility’ of damage, the courts would “apply to the 

construction field the principle expressed so long ago in the area of bailment.” Doing 

so would allow all parties engaged on one construction project to be “spared the 

necessity of fighting between themselves should an accident occur involving the


possible responsibility of one of them.” (At 324.) In the result, Commonwealth was 

held to be “an insured whose insurable interest extended to the entire works”. The 

subrogated claim brought by Imperial Oil was disallowed. 

The Trial Judge’s Reasons 

[43] Most if not all of the Canadian authorities described above were cited to the 

trial judge in the case at bar. As he noted at para. 202, Scott took the position that 

the “covenant to insure” defence did not apply in this instance because FCL had not 

paid (nor been required by the WMA to pay) any of Scott’s insurance costs and 

because: 


(a) there is no language in the Warehouse Management Agreement which 

suggests an intent that the property insurance policy of Scott should benefit 

[FCL]; (b) there is a valid commercial reason for the parties to a warehousing 

agreement to stipulate that it is incumbent upon the bailor to insure its 

property against loss; (c) there is a critical distinction between leases and 

construction contracts on the one hand and contracts of bailment on the other 

hand regarding the insurable interest of the parties in the bailed property; and 

(d) barring a claim against a bailee in respect of losses arising from a breach 

of its duty of care because of an insurance provision would effectively 

extinguish the rights of a bailor in entirety and such an interpretation of an 

insurance clause would contravene the common law obligations of a 

warehouseman and would make meaningless the requirement that [FCL] act 

as a careful and vigilant owner 

[44] In considering these arguments, the trial judge turned his attention not to 

para. 17A of the WMA, but to a provision in Appendix C, the form of warehouse 

receipt attached to the WMA. It provided that all goods were stored at the owner’s 

risk. (The WMA provided that in the event of a conflict between the receipt and the 

agreement itself, the latter would prevail.) The trial judge reasoned that contractual 

language of this kind simply means that the bailee does not accept risk of loss to 

goods which may arise other than as a result of its own fault, citing Rose v. Borisko 

Brothers Ltd. (1981) 33 O.R. (2d) 685, aff’d (1983) 41 O.R (2d) 606 (Ont. C.A.) 

[45] The facts of Rose v. Borisko were very different from those in the case at bar: 

there was no indication in the agreement between owner and warehouser or in their 

correspondence that the owners would obtain insurance for the warehouser’s


benefit. Indeed, before entering into the bailment agreement, the warehouser had 

assured the owners that it would provide “maximum” insurance coverage and would 

take other precautions for the safety and protection of the owners’ goods. It failed to 

do so and the goods were destroyed by a fire caused by unknown third parties. 

[46] The owners’ insurance covered part of their loss and the insurer relied on 

Commonwealth to argue that because part of the owners’ loss had been covered, 

the action should be barred. The trial judge held, however, that: 

... before an insurance policy will bar subrogation there must exist some 

special relationship between the insurer and the person against whom 

subrogation is sought. In general terms, the cases stand for the proposition 

that an insurer cannot assert against a third party any rights which the 

insured has, by contract, put beyond his own reach. In this case, I find neither 

any special relationship that should preclude subrogation nor any contractual 

terms that would prevent subrogation in this case. [At 691; emphasis added.] 


The Court went on to rule (arguably as the ratio of the case) that the storage 

contract had been fundamentally breached by the defendant and that the plaintiffs 

had been “grossly misled” as to the type of facility to be used. Judgment was 

entered for the plaintiffs. 

[47] The Ontario Court of Appeal agreed with the trial judge’s comments regarding 

the absence of any special relationship that would preclude the insurer’s right of 

subrogation. Presumably, a “special relationship” (a phrase used in Commonwealth) 

would have existed if the owners had covenanted to obtain insurance for the 

warehouser’s benefit as well as their own. (See also Lafarge Canada Inc. v. JJM 

Construction Ltd. 2011 BCCA 453.) 

[48] The trial judge in the case at bar did not comment further on Rose v. Borisko, 

but noted that FCL had (at para. 8 of the WMA) expressly disclaimed any “right, title 

or interest” in the goods stored for Scott, other than a possible lien under the 

Warehouse Receipt Act. He went on to distinguish bailment cases from landlordtenant 

and complex construction cases in terms of insurable interest. In his 

analysis:


I am satisfied that the landlord-tenant and construction project cases that 

have found a bar to subrogation can be distinguished from cases involving 

bailor and bailee. A warehouser does not have a generalized property 

interest in the goods which it stores. On the other hand, tenants have an 

insurable interest in the continuing existence and availability for use of 

demised premises. Similarly, the insurable interest of all trades and 

subtrades in a construction project is obvious and was recognized in 

Commonwealth Construction Co. v. Imperial Oil Ltd., [1976] 1 S.C.R. 317. 

[At para. 205; emphasis added.] 

[49] On a policy level, the trial judge was also of the view that barring the 

subrogated action would impair the duty of care owned by FCL to Scott, contrary to 

s. 2(4)(b) of the Warehouse Receipt Act. He noted that there were no Canadian 

cases on point, but that in two American decisions, Brown v. Sloan’s Moving & 

Storage Co., 296 SW2d 20 (S.C. Mo., 1956) and Kimberley-Clark Corporation 

v. Lake Erie Warehouse, Division of Lake Erie Rolling Mill Inc. 375 NYS2d 918, 49 

A 2d 492 (S.C., App. Div.), the courts had declined to give effect to clauses requiring 

a bailor to obtain its own insurance, on the basis that the bailee should not be 

exempted from its contractual or statutory duties of care. As well, the trial judge 

said, disallowing the subrogated claim in this instance would “make meaningless” 

the indemnification provisions at para. 12 of the WMA, under which each of Scott 

and FCL had covenanted to hold the other harmless from all losses and claims 

arising, inter alia, from property damage ‘related to’ the negligence of the other. 

Given the policy implications of barring a party from enforcing its rights to indemnity, 

he suggested that very clear and specific language would be required for that 

purpose. 


[50] In the result, he held that there was no bar to the subrogated claim against 

FCL. The claim was allowed as against both defendants, with damages to be 

assessed at a later date. 

On Appeal 

[51] In this court, the defendants submit that the trial judge erred in declining to 

apply the “covenant to insure” principle established by the trilogy and in particular, in 

distinguishing bailment situations from the landlord-tenant and complex construction


situations discussed in the authorities. In the defendants’ submission, the trial 

judge’s concern regarding the “impairment” of the warehouser’s standard of care is 

based on a misapprehension of both the immunity defence and the intent of the 

Warehouse Receipt Act. It is said that Scott’s covenant to insure and to name FCL 

as an insured in respect of the primary coverage for liability and property damage 

must be construed “in effect as an assumption by that party [here, Scott] of the risk 

of loss or damage caused by the peril to be insured against”. (Madison, at 85.) The 

defendants say that para. 17A of the WMA was, like the subject clause in Ross 

Southward, intended to benefit FCL, and that FCL did have an insurable interest in 

the contents of the warehouse, contrary to the trial judge’s holding. I will attempt to 

deal with each of these arguments below. 


Does a Warehouser have an Insurable Interest in the Stored Goods? 

[52] It seems to me that this question was answered by the Supreme Court of 

Canada in Commonwealth. As seen above, de Grandpré J. for the Court observed 

that in the field of bailment “in the widest sense”, persons other than the owner have 

been held to have insurable interests in the subject property “because of their 

special relationship with the property entailing [the] possibility of liability.” (At 322- 

23.) His Lordship cited various English and Canadian cases but found it necessary 

to refer only to Smith v. Stevenson [1942] 1 D.L.R. 681 (Ont. C.A.). I repeat here for 

convenience the observations of de Grandpré J.: 

... Although these judgments were pronounced on policies issued to the 

bailee and not to the owner and all other interested parties, as in the case at 

bar, I do not see that circumstance making any difference when it comes to 

determining the existence or non-existence of an insurable interest in a 

person who is not the owner of a property. 

In all these cases, there existed an underlying contract whereby the owner of 

the goods had given possession thereof to the party claiming full insurable 

interest in them based on a special relationship therewith. ... By recognizing 

in all tradesmen an insurable interest based on that very real possibility [of 

damage by one tradesman to the property of another], which itself has its 

source in the contractual arrangements opening the doors of the job site to 

the tradesmen, the courts would apply to the construction field the principle 

expressed so long ago in the area of bailment. [At 323-24; emphasis added.]


[53] These comments are consistent with many venerable English and American 

cases. The locus classicus is Waters et al. v. Monarch Fire and Life Assurance Co. 

[1843-60] All E.R. Rep 654 (Q.B.), where it was held that two insurance policies 

taken out by the plaintiff warehousers were not limited to the amount of their charges 

(for which they had a lien on the goods) but extended to the “whole amount of the 

loss.” The majority relied on an analogy to trust, given that the goods had been 

‘entrusted’ to the bailee. Waters was adopted by the U.S. Supreme Court in 

Phoenix Insurance Co. v. Eerie and Western Transportation Co. 117 U.S. 873 

(1886). More recently, the principle was affirmed in England in Hepburn 

v. A. Tomlinson (Hauliers) Ltd. [1966] 1 All E.R. 418 (H.L.), at 421 and in Petrofina 

(U.K.) Ltd. v. Magnaload Ltd. [1983] 3 All E.R. 35 (Q.B.), at 40-3, where the Court 

cited and agreed with Commonwealth. See also Nicholas Legh-Jones, John Birds, 

David C. Owen, eds., MacGillivray On Insurance Law, (10th ed., 2003) at §1-137; 

Norman Palmer, Palmer on Bailment (3d ed., 2009) at §1-060 and ch. 39 generally; 

and ch. 4 of N. Palmer and E. McKendrick, Interests in Goods (2 nd ed., 1998), by 

John Birds. 


[54] Obviously in this case, the warehouser was subject to the “possibility of 

liability” under the WMA. I conclude that the trial judge erred in ruling that FCL did 

not or could not be said to have an insurable interest in the property that was 

destroyed by the fire. 

[55] Even if it were otherwise, this court has already held that the absence of an 

insurable interest given to a tenant under the landlord’s insurance policy is not 

determinative of the question of tort immunity. In North Newton, the lease in 

question provided expressly that no insurable interest would be conferred on the 

tenant under the policies of insurance to be carried by the landlord, and further that 

the landlord’s insurance would not cover any of the tenant’s property. Hall J.A. for 

the Court stated: 

In my opinion, the fact that no insurable interest is given to the tenant under 

the landlord's policy is not determinative. That issue was considered in the 

case of Amexon Realty Inc. v. Comcheq Services Ltd. (1998), 37 O.R. (3d) 

573, 155 D.L.R. (4th) 661 (C.A.). That was a case in which, as in the case at 

bar, the landlord was required to insure and the tenant was obliged to


contribute to the premiums. The Ontario Court of Appeal held that the insurer 

could not pursue a subrogated claim against the tenant. Reference was 

made to the Supreme Court of Canada trilogy. On the question of insurable 

interest, Goudge J.A. said this at 576: 

It is true that the lease provides that the tenant has no 

insurable interest under the landlord's policy. While this 

provision would presumably preclude the tenant from asserting 

a claim for his own loss under that policy, it does not speak to 

the claim asserted by the appellant in this case. It is the 

bargain I have referred to rather than the tenant having an 

insurable interest under the landlord's policy that is the basis 

upon which this action is precluded. 

I agree with this reasoning. 

It does not appear to me that the clause stating the insurance of the landlord 

is not to cover property of the tenant has much relevance in the 

circumstances of this case. This case is concerned with damage to the 

building. [At paras. 36-7; emphasis added.] 


I know of no reason in principle why similar reasoning would not extend to the 

bailment context or to the case at bar. 

Impairment of Standard of Care? 

[56] With respect to the trial judge’s policy concerns regarding the warehouser’s 

obligation to indemnify Scott for negligent acts, I must also, with the greatest of 

respect, disagree. First, I do not see any conflict between a general covenant to 

indemnify given by a warehouser (in this case, by FCL at para. 12 of the WMA), and 

insurance provisions such as para. 17A. Indeed one may see insurance covenants 

as a means of strengthening indemnification obligations, which alone are only as 

strong as the indemnifier’s particular financial circumstances. Furthermore, the 

obligation of a negligent warehouser to indemnify its bailor for breaches of its duty of 

care arises even without a provision such as para. 12. It would make no commercial 

sense to permit an indemnity provision to overwhelm or supersede an insurance 

provision such as para. 17A ‒ the “supervening covenant” discussed in T. Eaton. As 

was stated in Economical Mutual Insurance Co. v. 1072871 Ontario Ltd. [1998] 20 

R.P.R. (3d) 154 (Ont. Ct. J. (Gen. Div.)), aff’d (1999) 9 C.C.L.I. (3d) 224: 

Counsel for the plaintiff further seeks to distinguish the T. Eaton case on the 

basis that para. 8(1) of the lease before me contains a provision requiring the


tenant to keep the Landlord indemnified with respect to any damage to the 

premises occasioned by the negligence of the tenant ... whereas there is no 

such provision in the leases in the T. Eaton case. 

I do not accept this submission. In my view para. 8(2) does not impose upon 

the tenant any greater liability for fire caused by its negligence than exists in 

the absence of such a provision ... 

... 

This [omitted quotation from T. Eaton at 428] clearly indicates that even in the 

absence of a specific provision requiring the tenant to indemnify for damage 

caused by its negligence, there is no doubt as to the liability of the tenant for 

a fire caused by its negligence. I therefore cannot see how the presence of a 

provision such as para. 8(2) changes the effect of the landlord’s obligation to 

insure. I note that para. 8(2) does not ... purport to override the operation of 

the para. 8(1) [i.e., the covenant to insure]. In my view the practical effect of 

the T. Eaton case is that the presence in a lease of a covenant on the part of 

the landlord to insure for fire, unless a clear intention to the contrary is 

expressed, will result in the tenant being protected from liability for negligently 

caused fires. I do not regard para. 8(2) as expressing such a contrary 

intention. [At paras. 11-3; emphasis added.] 


[57] Nor can I agree on a more general level that the application of the “covenant 

to insure” defence in the case at bar would “make meaningless” the warehouser’s 

obligation to maintain the warehouse premises to the standard specified in the 

Warehouse Receipt Act, or “impair” the duty of care owed to Scott as the owner of 

the goods. A similar argument was raised and rejected in Evans Products v. Crest 

Warehousing [1980] 1 S.C.R. 83. It did not involve insurance but concerned the 

validity of a clause in a bail agreement that limited the warehouser’s liability for loss 

or damage of the stored goods to $50 per package unless a higher value was 

declared by the owner. The warehouser’s negligence caused a fire that damaged 

the goods and the warehouser sought to rely on the limitation on its liability as a 

defence to the owner’s claim for damages. The owner argued that giving effect to 

this limitation of liability would “engender carelessness” on the warehouser’s part, 

thus contravening what was then s. 3(4)(b) of the Warehouse Receipt Act. (See 

now s. 2(4)(b).) Various American authorities were referred to in this regard, but the 

majority, per Mr. Justice MacIntyre, did not find them persuasive. In his words: 

It is clear, in my opinion, that a contractual limitation of liability does not 

impair the obligations to take care declared in s. 14 of the Act. That 

obligation is statutory and not subject to modification by private contract. 

Even if a limitation of liability did have the effect of inducing carelessness on


the part of the warehousemen it would not impair the obligation. It might very 

well impair performance but the obligation remains untouched and in the 

event of loss whatever the consequential damage the responsibility of the 

warehouseman must depend upon whether or not he met the obligation fixed 

upon him in s. 14. [At 93; emphasis added.] 

[58] In my view, the argument that an insurance clause such as para. 17A of the 

WMA would “impair” the warehouser’s standard of care contrary to s. 2(4) of the 

Warehouse Receipt Act is even weaker than the argument with respect to the 

limitation of liability clause discussed in Evans, given the specificity and importance 

of the insurance provisions. As well, as FCL argues in its factum, if the trial judge 

were correct, similar reasoning could apply in any case where a party was obliged to 

insure for its own negligence. I know of no authority that would suggest such a 

requirement should be regarded as contrary to public policy because it might 

encourage carelessness on the insured’s part. 


Construction of Insurance Provisions and “Benefit” 

[59] Finally, I turn to the wording of para. 17A and the issue of “benefit”. I note 

that at para. 201 of his reasons, the trial judge acknowledged that the trilogy is 

generally recognized as standing for the proposition that in the context of a 

commercial lease, “a covenant to insure by a landlord should flow to the benefit of a 

tenant unless that result would be inconsistent with something in the lease itself.” 

(North Newton and Madison were cited for this principle.) The trial judge appeared 

to adopt, however, Scott’s contention that there was no language in the WMA 

suggesting an intention that the property insurance taken out by Scott should benefit 

FCL. (Para. 202.) In doing so, he focussed on the stipulation in the form of 

warehouse receipt that the warehouser was not an insurer of the goods and that it 

was the owner’s obligation to obtain insurance. Such clauses, he reasoned, are 

“simply a means of stipulating that the warehouser does not accept the risk of loss to 

goods which may arise other than as a result of its own fault.” As seen above, he 

cited Rose v. Borisko for the proposition that a “special relationship” must exist 

between the parties before the tort immunity principle will apply.


[60] With respect, it appears the trial judge erred in failing to apply the trilogy and 

North Newton, among other authorities, to the WMA. Paragraph 17A, like the 

insurance clauses in those cases, went much farther than the terms of the receipt, 

which contained no relevant covenants regarding insurance. Paragraph 17A 

required Scott to maintain “insurance of its property and inventory within the 

warehouse” and to name FCL as an additional insured under this “primary 

coverage”. The terms of the agreement itself were to prevail over those in Appendix 

C in the event of a conflict. 

[61] Assuming that the question remains one of interpretation, I acknowledge 

that some of the decided cases are difficult to reconcile on the question of 

what wording is necessary for the “covenant to insure” principle to result in 

the barring of a subrogated claim. (See the online article by Mr. Nigel Kent, 

Tort Immunity: Covenants to Insure and Waivers of Subrogation, 

www.cwilson.com/publication/insurance/tort-immunity.pdf.) Mr. Kent notes in 

particular a short oral judgment of this court delivered in April 1980 in Leung 

v. Takatsu and reported at [1992] 3 W.W.R. 129. The better view seems to be, 

however, that the insertion of a covenant to insure (which was not present in Rose 

v. Borisko) on the part of a bailor or landlord is generally regarded as intended for 

the benefit of the bailee or tenant. The wording of para. 17A in this case is not 

identical to that of any of the cases to which we were referred, but is clearly 

analogous to the wording in cases in which subrogated claims were disallowed. As 

the Court stated in North Newton, “where there is in a lease a covenant by a landlord 

[in this case bailor] to insure, the tenant [in this case warehouser] should benefit 

from it unless there is something inconsistent with such a result contained in the 

lease document [here the WMA].” (At para. 33.) 


[62] I see no inconsistent wording in the WMA, and indeed the parties’ express 

acknowledgement that insurance obtained under para. 17A would “respond as 

primary coverage” strengthens the case for tort immunity on FCL’s part. I conclude 

that Scott’s obligations under para. 17A were clearly intended for the benefit of FCL.


Paraphrasing Madison, there would be no benefit to FCL from the provision if it did 

not apply to a fire caused by FCL’s beach of the applicable standard of care. 

[63] In the result, I find that the trial judge did err in proceeding on the basis that 

the various Canadian authorities discussed above were not applicable to this case. 

I would allow the appeal, grant a declaration that Scott’s subrogated claim against 

the defendants is barred, and dismiss the action. 

[64] Counsel may make written submissions regarding costs, if they wish, within a 

reasonable time. 


“The Honourable Madam Justice Newbury” 

I Agree: 

“The Honourable Mr. Justice Hall” 

I Agree: 

“The Honourable Madam Justice Garson”

Case - Clark Wilson LLP

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