An engineering firm sold its assets through an asset purchase agreement that included a broad indemnity clause. Years later, when a grain elevator it had negligently designed before closing was found to be defective, the seller settled the claim and sought to recover from the buyer under the indemnity.
In Strongco Corporation v Nordstrong Equipment Limited, [1] the Alberta Court of Appeal (the “Court”) held that broad indemnity language does not transfer liability for a party’s own pre-closing negligence, unless the contract makes that intention unmistakably clear.
The decision reinforces a principle with direct implications for anyone drafting or relying on indemnity clauses in asset purchase agreements.
Background: A negligent design, a closing, and a claim 7 years later
The appellant, Strongco Limited Partnership (“SLP”), entered into an asset purchase agreement (the “Agreement”) for the sale of all of the assets of Strongco Engineered Systems (“Engineered”) to the respondent, Nordstrong Equipment Limited (“Nordstrong”).[2] The transaction closed on May 29, 2009 (the “Closing Date”).[3] As part of the Agreement, Nordstrong was required to indemnify SLP for certain assumed liabilities specified under the Agreement.[4] The assumed liabilities included liabilities or obligations under any assumed contracts as specified by the Agreement.[5] Assumed contracts consisted of specified ongoing projects, with liability relating to these projects allocated as follows:
- If the cause of action arose on or prior to the Closing Date, liability would not be part of the assumed liabilities and would remain the responsibility of SLP;
- If the cause of action arose after the Closing Date, liability formed part of the assumed liabilities and would be assumed by Nordstrong; and
- If it was not clearly determinable whether the cause of action arose prior to, on or after the Closing Date, liability would be allocated between SLP and Nordstrong based on the percentage of completion of the ongoing project.
The Agreement also provided that SLP would remain solely liable to third parties for damages suffered before the Closing Date caused or attributable to SLP’s negligence or wilful misconduct.[6]
Prior to the Agreement, in 2008, Engineered had entered into a contract for the design, manufacturing, and building of portions of a grain elevator with Sheets Grain Systems Ltd. (the “Sheets Contract”).[7] The Sheets Contract was an ongoing project as set out in the Agreement to be assumed by Nordstrong.[8] Prior to the Closing Date, Engineered had completed the design and engineering work on the Sheets Contract and delivered most of the materials. Nordstrong delivered the remaining materials.[9] It was later discovered in 2016 that the grain elevator had been negligently designed by Engineered.[10] SLP proceeded to settle a negligence claim relating to the grain elevator and then sought to recover the settlement amount from Nordstrong, based on the indemnity clause within the Agreement.
Trial judge: General indemnity language does not cover pre-closing negligence
The issue at trial was whether Nordstrong had agreed to indemnify SLP for damages arising from Engineered’s pre-closing negligence where the resulting loss accrued after the Closing Date. Relying on Canada Steamship Lines Limited v R (Canada Steamship),[11] the trial judge applied a three-stage “test” for interpreting indemnity or exclusion clauses that seek to protect a party from liability arising from its own negligence:
- The language of the exclusion clause must expressly exclude liability for negligence;
- If there is no express reference to negligence, the language must be broad enough to cover negligence; and
- Even if the language is broad enough to cover negligence, there must be no other bases other than negligence upon which the party could be made liable.[12]
The trial judge also relied on Consumers’ Gas v Peterborough (Consumers’ Gas)[13], which held that if a party is to be indemnified for its own negligence, there would have to be an indemnity clause spelling out this obligation on the other party in the clearest terms.[14]
For the following reasons, the trial judge rejected SLP’s claim for indemnity from Nordstrong:
- The indemnity language used in the Agreement was general and did not expressly refer to negligence;[15]
- The Assumed liabilities under the Assumed Contracts only began to accrue after the Closing Date and did not include liability arising from pre-closing conduct;[16]
- Nothing in the commercial context supported a finding that Nordstrong intended to indemnify SLP. The Sheets Contract was 83% complete and SLP had been paid in full at the Closing Date. Nordstrong received no value for the negligent design work performed by Engineered;[17]
- There is no presumption that a contract for the sale of a business absolves a seller of past negligent conduct and it is commercially unreasonable to make an assertion that the buyer agreed to pay full book value for accounts receivable while accepting unknown liabilities;[18] and
- The Sheets Contract was entered into by Engineered in the ordinary course of business and the indemnity clause did not demonstrate an intention of Nordstrong to indemnify SLP for the negligent design of the grain bins.[19]
Court of Appeal: Canada Steamship is a guide, not a test, but the result stands
The Court held that Canada Steamship and Consumers’ Gas did not create a strict test for determining whether one’s own negligence is within the scope of an indemnity clause.[20] Rather, that case provided interpretive principles that supplement the exercise of contractual interpretation. A contract must be read as a whole, in its ordinary grammatical sense, and in light of its purpose and commercial context.[21] The Court found that the trial judge did not apply the principles of Canada Steamship rigidly and instead used them as guidance to discern the intentions of SLP and Nordstrong.[22]
The indemnity clause between SLP and Nordstrong was not intended to indemnify SLP for its own negligence. The clause contained no clear language indicating such an intention and Nordstrong never expressed an intention to assume any liability for SLP’s pre-closing conduct.[23] Parties are free to contract for the transfer of risk associated with one party’s negligence, but courts will not interpret broad indemnity language as transferring liability for a party’s own negligence unless the contract as a whole makes that intention clear.[24]
Finally, the Court held that the Agreement itself did not support the proposition that SLP would have a “clean break” from liability. Rather, it was found that multiple provisions of the Agreement created ongoing liabilities for SLP.[25]
Practical takeaways: Drafting indemnity clauses after Strongco
Indemnity clauses are not subject to special rules of interpretation and will be considered like any other provision of an agreement. They will be read in light of the agreement’s purpose and commercial context. Accordingly, if parties intend to contract for an indemnity to cover one party’s negligent acts, that intention must be stated expressly and in clear language to be effective. General language may create uncertainty and encourage broad interpretation, which will not ordinarily be interpreted as transferring liability for a party’s own negligence.
If you are drafting indemnity clauses, reviewing existing clauses in light of Strongco, or assessing a potential claim under an indemnity clause, please do not hesitate to reach out to a lawyer from Miller Thomson’s Commercial Litigation Group.
[2] Ibid at para 9.
[3] Ibid at para 10.
[4] Ibid at para 12, 13.
[5] Ibid at para 11.
[6] Ibid at para 16.
[7] Ibid at para 8.
[8] Ibid at para 15.
[9] Ibid at para 17.
[10] Ibid at para 18.
[11] 1952 CanLII 260 (UK JCPC), 2 DLR 786.
[12] Westlock Terminals (NGC) Ltd. v Sheets Grain Farmco Ltd., 2024 ABKB 475 (Westlock) at para 42.
[13] 1981 CanLII 66 (SCC), [1981] 2 SCR 613.
[14] Westlock, Ibid at paras 43-44.
[15] Westlock, Ibid at paras 48-50.
[16] Westlock, Ibid at paras 51-54.
[17] Westlock, Ibid at para 55.
[18] Westlock, Ibid at paras 57-59.
[19] Westlock, Ibid at paras 60, 65-67.
[20] Supra note 1 at para 37.
[21] Ibid at paras 58, 59.
[22] Ibid at paras 62-64.
[23] Ibid at para 67-70.
[24] Ibid at para 71.
[25] Ibid at para 75.
