Executive Summary: Key Legal and Evidentiary Issues

• The Court of Appeal considered whether Canada Steamship's three principles operate as a strict test for interpreting indemnity clauses.
   
• Strongco argued the trial judge misapplied that framework in denying indemnification for its pre-closing negligence.
   
• Nordstrong's predecessor, Nord-sen, acquired Strongco's Engineered Systems division under a 2009 Asset Purchase Agreement.
   
• Westlock's underlying claim over defective grain bins was settled by Strongco for $10,750,000 in 2023.
   
• Justices Feehan, Woolley, and Feth confirmed that Canada Steamship provides interpretive guidance rather than a rigid test.
   
• Ultimately, the panel upheld the trial judge's finding that the Agreement lacked clear language extending indemnity to Strongco's own negligence.
   

Facts of the case

Strongco Limited Partnership operated a business division known as Strongco Engineered Systems. On May 14, 2009, Strongco entered into an Asset Purchase Agreement with Nord-sen Metal Industries Ltd (later Nordstrong Equipment Limited) to sell Engineered Systems as a going concern. The Agreement's effective date was May 8, 2009, and the transaction closed on May 29, 2009. Among the assets transferred was a July 25, 2008 contract between Engineered Systems and Sheets Grain Systems Ltd (the "Sheets Contract"), under which Engineered Systems had agreed to design, engineer, manufacture, supply, and erect portions of a grain elevator for Westlock Terminals (NGC) Ltd. Engineered Systems completed the design and engineering work and delivered most of the materials before closing; the Sheets Contract was approximately 83% complete by that date, and Nord-sen paid dollar-for-dollar to acquire the associated accounts receivable. Construction of the elevator was not substantially finished until February 1, 2011. In 2016, Westlock discovered the grain bin system was failing and sued Sheets, Strongco, and Nordstrong for defects. Strongco issued a third-party notice against Nordstrong. Westlock settled with Sheets for $1,000,000 and with Strongco for $10,750,000 on October 14, 2023, and the action against Nordstrong was dismissed without costs. Only Strongco's third-party claim against Nordstrong survived, with Strongco seeking to recover its $10,750,000 settlement payment under the Agreement's indemnity provisions.

Policy and legislative provisions at issue

The case turned on several clauses of the Asset Purchase Agreement. Section 4.4 provided that the purchasers had not assumed and would not be responsible for any of Strongco's liabilities "whether known or unknown," other than the defined "Assumed Liabilities." Section 4.6 required the purchasers to indemnify Strongco for the Assumed Liabilities "as of the Effective Date." Section 6.3.3 similarly obligated the purchasers to indemnify Strongco for losses arising from "any of the Assumed Liabilities." Section 1.1.6 defined Assumed Liabilities as those accruing "as of and from the Effective Date," expressly excluding other liabilities of Strongco. Section 7.1 addressed "Ongoing Projects," including the Sheets Contract, and allocated liability for such projects between Strongco and the purchasers depending on when the relevant cause of action arose. Section 10.6 separately made Strongco solely responsible for damages to third parties caused by its own negligence or wilful misconduct up to the closing time. Strongco argued these provisions, read together, reflected a "clean break" intended to shift all liability, including for its own prior negligence, onto Nord-sen.

Reasoning and analysis

The trial judge had applied the three principles from Canada Steamship Lines Limited v R, together with the Supreme Court of Canada's "clearest terms" requirement from Consumers' Gas v Peterborough, to conclude that an indemnity clause must expressly or clearly extend to a party's own negligence before it will be interpreted to do so. On appeal, Strongco contended this amounted to treating Canada Steamship as an exhaustive, strict test rather than an interpretive aid, contrary to the modern approach to contractual interpretation set out in Sattva Capital Corp v Creston Moly Corp and Tercon Contractors Ltd v British Columbia. The Court of Appeal agreed that Canada Steamship's principles are guidance rather than a binding test, tracing this understanding through ITO-International Terminal Operators v Miida Electronics, the House of Lords' decision in HIH Casualty and General Insurance Ltd v Chase Manhattan Bank, and Alberta authority including Canadian Natural Resources Limited v Wood Group Mustang (Canada) Inc and Dow Chemical Canada ULC v NOVA Chemicals Corporation. However, the panel found the trial judge had not misapplied the law: he began by asking whether the Agreement contained clear language extending indemnity to Strongco's own negligence, found none, and then considered the commercial context and the parties' intentions, consistent with Sattva. The trial judge noted the indemnity clauses used general language and did not mention negligence, that the Assumed Liabilities were defined as accruing only from the Effective Date, and that Nord-sen received no meaningful value for the pre-closing negligent design work given the Sheets Contract was already 83% complete. Section 10.6's express treatment of "past negligence" for premises-related claims, contrasted with the silence on negligence in sections 4.6 and 6.3.3, supported an inference that the omission was intentional. The Court of Appeal found no palpable and overriding error in these findings and agreed that a commercially reasonable reading of the Agreement placed post-closing liability on the party at fault.

Ruling and overall outcome

The Court of Appeal dismissed Strongco's appeal, holding that the trial judge correctly treated the Canada Steamship principles as interpretive guidance rather than a strict test and properly concluded that the Agreement did not contain clear language obligating Nordstrong to indemnify Strongco for its own pre-closing negligence in the design of the grain bins. Nordstrong was the successful party on appeal. The decision does not order any new monetary payment; it confirms that Strongco is not entitled to recover its $10,750,000 settlement with Westlock from Nordstrong, and no costs or damages were awarded by this Court of Appeal decision itself.