A Tale of Arson, Corporate Liability, and Insurance Covenants

Published on: December 2019 | What's Trending

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In a very interesting decision, the British Columbia Court of Appeal has provided invaluable insight into the doctrine of corporate identification and the application of a landlord’s covenant to insure commercial premises.

In Austeville Properties Ltd. v. Josan, 2019 BCCA 416, the court delved into issues regarding corporate liability and tenant protection after a downtown Vancouver restaurant was destroyed by fire.

The facts of this case are hard to believe.

The defendant Nandha Enterprises Ltd. (NEL) operated a Taco Del Mar restaurant franchise in British Columbia. Co-defendants, Manjeet Kaur Nandha and her husband Harjit Singh Nandha, were the directors of the company.

In November 2004, NEL leased commercial space in Vancouver, BC from the plaintiff landlord, Austeville Properties Ltd.  and opened another Taco Del Mar restaurant on the premises. Manjeet and Harjit were both indemnifiers under the lease.

The lease contained a covenant that required the landlord to insure the premises against fire damage in terms of which the landlord agreed:

“To insure the building to its full insurable replacement value against loss or damage by fire. The expense of such insurance shall be borne as provided in paragraphs 12.01 and 12.02 hereof. To the extent that any loss or damage to the building is covered by insurance maintained by the landlord hereunder, the landlord releases the Tenant from any and all liability for such loss or damage whether or not the same is caused by or contributed to by or through the negligence of the Tenant or its servants and agents.”

After the lease was executed, the landlord took out the required insurance.

Manjeet was responsible for running both restaurants. In the following years, the restaurants struggled and Manjeet and Harjit tried to sell them unsuccessfully in 2007.

At 2:30 am on February 13, 2008, the Vancouver restaurant exploded, resulting in vast property damage. The trial judge described the explosion as follows:

“The fire and impact of the explosion extended through the Building’s entire ground floor and into the parking garage. The resulting blast wave blew out the windows of a London Drugs store across the street and a Holiday Inn which was more than 90 metres from the Building. Needless to say, the Building was extensively damaged. All of the tenants were evacuated and it took about 18 months for ground floor units to be repaired and ready for occupation”.

Two days after the explosion, Manjeet was found dead in what was deemed to be suicide.

It was later determined that the explosion was caused by the defendant, Kamaljeet Singh Josan, a close family friend of Manjeet. Josan was charged criminally and admitted to intentionally causing the explosion and fire.

He testified that the fire was Manjeet’s idea. She had approached him three months before the incident and told him that she wanted to get out of the lease and the business and spend more time with her three children. She gave Josan a key to the restaurant and the alarm codes and told him the locations of the security cameras, which enabled him to orchestrate the fire. According to his testimony, he did not benefit from his act in any way and he only did it to help Manjeet.

The landlord made a claim to its insurance and was paid $3 million for property damage and business interruption. Then the landlord and the subrogating insurer brought a claim against Manjeet (through her estate) and Josan to recover the money paid by its insurer, arguing that they were both liable for the damages based on the tort of conspiracy. The landlord also claimed against NEL, arguing that Manjeet’s action could be attributed to the corporation, which would make NEL liable under the doctrine of corporate identification. And the landlord claimed against Harjit as a co-conspirator and indemnifier under the lease.

The issues at trial became whether NEL, as a corporate tenant, should be liable for its director’s act of conspiring to commit arson and, if so, whether it should be immune from tort liability by virtue of the insurance covenant.

The trial judge explained that, in order to establish the doctrine of corporate identification, it must be shown that the action taken by the directing mind of the corporation:

  • Was within the field of operation assigned to him or her;
  • Was not totally in fraud of the corporation; and
  • Was by design or result partly for the benefit of the company.

In this case, it was held that, in conspiring to cause the fire at the premises, Manjeet was personally motivated. She wanted to rid herself of the restaurant to see her children more and there was no evidence that her actions were designed to benefit NEL. Her actions lay outside the scope of her authority as a director of NEL and were not fraud in the “classic sense”. They were directed at destroying the restaurant and were not intended to (and did not) benefit NEL.

Accordingly, the doctrine of corporate identification could not be established and Manjeet’s act of conspiracy could not be attributed to NEL. The landlord’s claim against NEL was therefore dismissed. Given that the claim against NEL failed, the court also found that Harjit bore no liability as an indemnifier under the lease. There was also no evidence that Harjit was complicit in the conspiracy to cause the fire.

Having held that NEL was not liable, it did not need to be determined whether it should be immune from liability by virtue of the insurance covenant. Nonetheless, the trial judge still noted that the insurance covenant had the effect of shifting to the landlord the risk of damage to its property by fire. And that this was the case “regardless of whether the tenant’s conduct in relation to the fire is characterized as a breach of the lease, negligence, or even gross negligence. The insurance obligation under the covenant is concerned with the occurrence of the peril and not the cause of peril”. And as such, the insurance provision protected NEL from a subrogated claim from the landlord’s insurer.

The British Columbia Court of Appeal upheld the trial judge’s ruling on all the pertinent issues.

In regard to the corporate identification doctrine, it was confirmed that Manjeet ceased to be a directing mind of NEL for purposes of attributing her actions to the company in the circumstances. In conspiring to blow up the restaurant, she acted solely for personal reasons, which could not be attributed to NEL. The court also noted that “it would not protect community interests or advance law and order to attribute Ms. [Manjeet] Nandha’s wrongful acts directly to Nandha Enterprises [NEL] for the purpose of imposing civil liability”. And there was no reason for Nandha to be held vicariously liable for Manjeet’s conduct, as it was performed outside of her scope of authority as a director of the company.

Regarding the insurance covenant, the Court of Appeal also agreed with the trial judge’s analysis. It was held that the insurance covenant “clearly protected NEL from liability for the fire damage”. It was also noted that the perpetrator of the damages (Manjeet) was a third party to the insurance covenant and not a beneficiary under it. Given that NEL was held not to be liable for conspiring to cause the damage, it should not lose its protection from a subrogated claim.

Although the facts of this particular case are nothing short of outrageous, this decision still provides some good guidance on the doctrine of corporate identification and the operation of insurance covenants under a commercial lease. In particular, it sets out the limits under which a director’s conduct can bind a corporation and the protection provided by a landlord’s covenant to insure.

Author: Daniel Waldman, Lawyer

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