Contracts - Liability AllocationIt is common to contractually allocate or disclaim any liability that arises in the course of the activities of the contract, or for one party to require an indemnification of liability from third parties by the other. As well, sometimes the contract requires that one party take out insurance against risk, payable to one party or the other.
. Ferraro v. Neilas
In Ferraro v. Neilas (Ont CA, 2023) the Court of Appeal considers a clause whereby parties purport to allocate liability risk:
 The “Relationship” clause is a limitation of liability clause. As such, its meaning and effect fall to be determined in accordance with the analytical approach summarized in Tercon Contractors Ltd. v. British Columbia (Transportation and Highways), 2010 SCC 4,  1 S.C.R. 69, at paras. 62 and 122-123. The Tercon analysis requires a court to consider first whether, as a matter of interpretation, the exclusion clause even applies to the circumstances established in evidence. This will depend on the Court’s assessment of the intention of the parties as expressed in the contract: at para. 122. When interpreting whether an exclusion clause applies in the circumstances, the key principle of contractual interpretation is that the words of one provision must not be read in isolation but should be considered in harmony with the rest of the contract and in light of its purposes and commercial context: at para. 64.. 10443204 Canada Inc. v. 2701835 Ontario Inc.
In 10443204 Canada Inc. v. 2701835 Ontario Inc. (Ont CA, 2022) the Court of Appeal considered the effect of fraud on a contractual provision that would otherwise limit liability for misrepresentation (a 'disclaimer clause'):
(2) The Effect of Disclaimer Clauses. Chuang v. Fogler Rubinoff LLP
 A clause in a contract that purports to limit remedies arising from a misrepresentation does not immunize the maker of a fraudulent misrepresentation from the remedies available to the innocent party: Fea Investments, at paras. 49-54.
 In Hasham v. Kingston (1991), 1991 CanLII 7236 (ON SC), 4 O.R. (3d) 514 (Div. Ct.), the clause in issue excluded liability for all representations outside the terms of the contract. The Divisional Court found that the clause could not apply to a misrepresentation that was found to be fraudulent: at p. 524.
 The reasoning in Hasham was applied by this court in Fea Investments to conclude that a clause in a contract that limited remedies for misrepresentation did not apply to fraudulent misrepresentations: at paras. 52-54.
In Chuang v. Fogler Rubinoff LLP (Ont CA, 2022) the Court of Appeal considered a leading case in contractual liability allocation:
 To understand the dispute in the underlying litigation, it is necessary to consider the leading case on the enforcement of exclusion clauses – Tercon Contractors Ltd. v. British Columbia (Transportation and Highways), 2010 SCC 4,  1 S.C.R. 69. Writing for the Court on this issue (but in dissent in the result), Binnie J. at paras. 122-123 set out the framework for determining when exclusion clauses are enforceable. It involves the following three lines of inquiry: (a) does the exclusion clause apply on the facts as found?; (b) if it applies, was the clause unconscionable at the time the parties entered into the agreement?; and (c) if the exclusion clause applies and it was not unconscionable, should the court for public policy reasons which are sufficiently strong to outweigh the public interest in the enforcement of contracts, decline to enforce the contract?. Capital Sewer Servicing Inc. v. Crosslinx Transit Solutions Constructors
In Capital Sewer Servicing Inc. v. Crosslinx Transit Solutions Constructors (Ont CA, 2021) the Court of Appeal, in a large public venture involving several contractors, considered the duty of those contractors who insure against risk (and those who don't) and the ultimate allocation of risk between them:
 Relying on a line of authority from the Supreme Court of Canada and this court, Capital argues that a covenant to insure against a certain peril constitutes an assumption of the risk of harm or damage caused by that peril. As Crosslinx undertook to provide the requisite insurance, it assumed responsibility for any damages caused when the harm insured against occurred: see Agnew-Surpass v. Cummer-Yonge, 1975 CanLII 26 (SCC),  2 S.C.R. 221, at pp. 251-2; T. Eaton Co. v. Smith et al., 1977 CanLII 39 (SCC),  2 S.C.R. 749, at p. 755; Ross Southward Tire v. Pyrotech Products, 1975 CanLII 25 (SCC),  2 S.C.R. 35, at p. 39; Madison Developments Ltd. v. Plan Electric Co. (1997), 1997 CanLII 1277 (ON CA), 36 O.R. (3d) 80 (C.A.), at para. 9, leave to appeal refused,  S.C.C.A. No. 659.. Deswal v. ADT LLC (ADT Security Services)
 In many, if not most circumstances, a promise to insure against a certain risk will lead to the logical conclusion that the party undertaking to insure against the risk had agreed to be responsible for any damages should the risk ensue. That conclusion does not however reflect a free-standing legal principal of contractual interpretation but is an example of how the contractual intention of the parties is determined through an objective consideration of all of the circumstances. An undertaking to insure leads to the reasonable inference that the parties intended that the party promising to insure would undertake the risk to be insured against. However, that inference can only properly be drawn after a reading of the contract as a whole in the factual context of the particular circumstances. The language of the contract and the context control the interpretation of the contract, including any insurance covenant in the contract. There is no legal rule that a party’s covenant to insure against a risk must mean it was intended that the party undertaking to insure assumed the risk of the harm insured against: Royal Host G.P. Inc. v. 1842259 Ontario Ltd., 2018 ONCA 467, 422 D.L.R. (4th) 661, at para. 16, leave to appeal refused,  S.C.C.A. No. 316.
 The correct approach to the interpretation of insurance covenants is captured by G.R. Hall in Canadian Contractual Interpretation Law, 4th ed. (Markham, Ont.: LexisNexis, 2020), at pp. 340-41:
The interpretation of a covenant to insure as an allocation of risk is not a rule of law, meaning that if the contractual language indicates that the covenant is to insure, not to act as an allocation of risk precluding liability for the event subject to the covenant, the text will prevail and the covenant will not have that effect. Each contract containing a covenant to insure must be interpreted based upon its own wording. Decided cases can be helpful, when the wording considered is similar to that in the agreement in issue. However, differences in the wording between each case can be determinative. The application judge considered the same authorities the appellant put before this court. He correctly rejected the submission that the risk of loss associated with any peril must as a matter of law be on the party under an obligation to insure against that risk. The application judge, again correctly, held that the effect of the insurance covenant, like the effect of any term in a contract, depended on the objective intention of the parties determined by an examination of the contract as a whole and the consideration of individual terms within that broader context. The application judge correctly applied the applicable law.
In Deswal v. ADT LLC (ADT Security Services) (Ont CA, 2021) the Court of Appeal considered a contractual liability limitation provision:
 We are not persuaded that the motion judge erred in her application of the three-part analysis set out in Tercon Contractors Ltd. v. British Columbia (Transportation and Highways)), 2010 SCC 4,  1 S.C.R. 69, to determine the enforceability of the limitation clause for the following reasons:. Montrose Hammond & Co. v. CIBC World Markets Inc.
(i) The Agreement’s limitation of liability clause applied in the circumstances;
(ii) When the motion judge’s oral reasons are read as a whole, it is clear that she held the clause was not unconscionable. That finding was open to her on the evidence: the contractual limitations on liability were clearly set out in several provisions of the Agreement; they were not hidden or concealed in ways that would make it unfair to treat them as part of the contract; immediately above the signature line the contract contained language that the customer had read the entire agreement, including the limitation of liability clause; there was no pre-existing relationship between the appellants and ADT in which the appellants looked to the company for advice; the appellants are sophisticated and educated individuals; there was no evidence of duress or limits placed on the appellants’ time to review the Agreement at the time of its execution; and Ms. Deswal chose not to read the Agreement presented to her, notwithstanding the provision, in bold capital letters just above her signature line, acknowledging that she had “read both sides of this agreement and understands all terms and conditions of both this and the reverse side of this agreement, in particular, paragraph 1, Limited Warranty, and paragraph 7, Limit of Liability”; and
(iii) The motion judge held that public policy favoured upholding the contract on its terms, relying on decisions of this court in Fraser Jewellers and Suhaag Jewellers Ltd. v. Alarm Factory Inc. (AFC Advance Integration), 2016 ONCA 33, at para. 4, leave to appeal to S.C.C. refused, 36887 (June 23, 2016) the latter a post-Tercon decision. The motion judge adopted the public policy rationale supporting the limitation of liability clauses in alarm system service contracts set out by this court in Fraser Jewellers, at paras. 38 and 39, specifically that the service provider is not an insurer and its monitoring fee bears no relationship to the area of risk and the extent of exposure ordinarily taken into account in the determination of insurance policy premiums. We see no error in her so doing.
In Montrose Hammond & Co. v. CIBC World Markets Inc. (Ont CA, 2020) the Court of Appeal set out the test for interpreting exclusion of liability clauses in a contract:
 The trial judge’s interpretation of articles 5.1 and 6.1 was reasonably open to him and reveals no palpable and overriding error or extricable error of law. He referenced and followed the three-part analytical approach articulated by Binnie J. for the Supreme Court in Tercon Contractors Ltd. v. British Columbia (Transportation and Highways), 2010 SCC 4,  1 S.C.R. 69, at paras. 122, 123: whether the exclusion clause even applies to the circumstances; if it applies, whether the exclusion clause was unconscionable at the time the contract was made; and if valid, whether the exclusion clause should nevertheless not be enforced because of an overriding public policy.. Chuang v. Toyota Canada Inc.
 In Tercon, at para. 122, Binnie J. further stated, “If the exclusion clause does not apply, there is obviously no need to proceed further with this analysis.” That was the case here.
In Chuang v. Toyota Canada Inc. (Ont CA, 2016) the Court of Appeal discussed the factors applicable to interpreting and enforcing a liability exclusion clause, being a contractual clause purporting to limit or exclude a party's liability on breach of the contract:
 Tercon Contractors Ltd. v. British Columbia (Minister of Transportation and Highways), 2010 SCC 4 (CanLII),  1 S.C.R. 69, is the leading Canadian authority on exclusion clauses. Binnie J., at paras. 122-23, speaking for the court on this issue, but in dissent in the result, described a three-step approach to the interpretation of exclusion clauses:. D.L.G. & Associates Ltd. v. Minto Properties Inc.
• Does the exclusion clause apply in the facts as found?
• If the clause applies, was the clause unconscionable at the time the parties entered into the agreement?
• If the exclusion clause applies and was not unconscionable, should the court for policy reasons which are sufficiently strong to outweigh the public interest in the enforcement of contracts, decline to enforce the contract?
 The first step in the three-step Tercon inquiry engages the general principles of contractual interpretation: see Rankin Construction Inc. v. Ontario, 2014 ONCA 636 (CanLII), 325 O.A.C. 201, at paras. 57-60; 1465152 Ontario Limited v. Amexon Development Inc., 2015 ONCA 86 (CanLII), 330 O.A.C. 344, at paras. 11-18. Contractual interpretation usually raises questions of mixed fact and law. Absent a clearly identifiable error in law, an appellate court will defer to the trial court’s interpretation of the agreement and will only intervene in the case of palpable and overriding factual error or an unreasonable interpretation: see Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53 (CanLII),  2 S.C.R. 633, at paras. 49-52; Martenfeld v. Collins Barrow Toronto LLP, 2014 ONCA 625 (CanLII), 122 O.R. (3d) 568, at paras. 39-42; Iroquois Falls Power Corporation v. Ontario Electricity Financial Corporation, 2016 ONCA 271 (CanLII), at para. 93; 2123201 Ontario Inc. v. Israel Estate, 2016 ONCA 409 (CanLII), at para. 44; D’Antonio v. Monaco, 2015 ONCA 274 (CanLII), at para. 12.
In D.L.G. & Associates Ltd. v. Minto Properties Inc. (Ont CA, 2015) the Court of Appeal considered whether a contractual duty on one party to a contract to obtain liability insurance (here a tenant) immunized the other party (the landlord) from claims that would have been covered by that insurance, where it was not obtained:
The covenant to insure
 D.L.G. in para. 7.1 of the lease undertook to obtain “all risks” insurance which specifically included insurance for “sewer back-up”. D.L.G. accepts that a claim in negligence against Minto for failure to properly maintain the plumbing is barred by the covenant to insure, but submits that it is not plain and obvious that the covenant also bars a claim based on Minto’s breach of its “quiet enjoyment” and “good repair” obligations under the lease.
 D.L.G. argues that a trial is necessary to properly interpret the covenant to insure in the context of the entire agreement. I do not accept this argument. The covenant to insure focuses on risk and the responsibility as between D.L.G. and Minto for losses covered should the identified risks materialise during the term of the agreement. The provision is not concerned with the legal characterization of claims for losses arising out of the materialization of the risks.
 D.L.G.’s submission runs aground on this court’s judgment in Madison Developments Ltd. v. Plan Electric Co. (1997), 1997 CanLII 1277 (ON CA), 36 O.R. (3d) 80 at para. 9. Carthy J.A., speaking of a situation in which the landlord had covenanted to insure against all risks said:
The law is now clear that in the landlord-tenant relationship, where the landlord covenants to obtain insurance against the damage to premises by fire, the landlord cannot sue the tenant for a loss by fire caused by the tenant’s negligence. A contractual undertaking by 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 fire 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. [Emphasis added.] The language from Madison applies here. A covenant to insure is one of several provisions within a lease which allocates risk as between the parties to the lease. The allocation of risk is presumably reflected in the rent to be paid. A covenant to insure would hardly serve the purpose of risk allocation if it were read as allocating the risk to the tenant if the landlord was negligent, but to the landlord if the same act amounted to a breach of a provision in the lease, e.g. the obligation to maintain and repair. As almost any act of negligence would also be a breach of the obligation to maintain and repair, the interpretation urged by the appellant would effectively put the risk on Minto despite D.L.G.’s obligation to obtain “all risks” insurance.
The enforceability of the covenant to insure
 D.L.G. submits that the covenant to insure is an exclusion clause and is unenforceable under the principles set down in Tercon. In my view, the covenant to insure cannot be read as a clause excluding Minto from liability it would otherwise carry but for the clause. Instead, the covenant to insure assigns risk for certain losses by requiring that the tenant, D.L.G., obtain insurance coverage for those losses: Smith v. T. Eaton Co., 1977 CanLII 39 (SCC),  2 S.C.R. 749 at 756, St. Lawrence Cement Inc. v. Wakeham & Sons Limited (1995), 1995 CanLII 2482 (ON CA), 26 O.R. (3d) 321 at paras. 37-39 (C.A.).
 As I am satisfied that the covenant to insure cannot be read as an exclusion clause, I need not address the enforceability of that clause. I would, however, observe that in the context of a negotiated lease between arms-length commercial entities I see little room for an argument that a covenant to insure, whether directed at the landlord or the tenant, could be viewed as unconscionable.
 Nothing in the pleadings alleges any inherent unfairness in placing the burden of obtaining “all risks” insurance on D.L.G. I reject the argument that the relationship between D.L.G. and Minto during the lease negotiations was one of unequal bargaining power because Minto had knowledge about the plumbing that D.L.G. did not have. Nothing in the pleadings suggests that D.L.G. could not have made the relevant inquiries and conducted the necessary inspections to obtain whatever information about the plumbing it deemed necessary. Although D.L.G.’s claim that it relied on fraudulent/negligent misrepresentations by Minto gives rise to tort claims against Minto, it does not provide the basis for the assertion that D.L.G. was in a position of unequal bargaining power during the lease negotiations: see also the reasons of the motion judge at paras. 85-89.