Subcontractors may not benefit from a third party lease.

Defendant construction company could not benefit from a clause in a lease between the plaintiff lessee and a third party lessor requiring plaintiff to obtain construction insurance to defeat a claim by the plaintiff against the defendant arising out of damage to the plaintiff's building caused by the defendant and its subcontractors.

Bank of Nova Scotia v. Lockerbie & Hole Industrial Inc., [2013] O.J. No. 1167, March 14, 2013, Ontario Superior Court of Justice, E.M. Morgan J.

The plaintiff, the lessee of the Scotia Plaza building in Toronto, brought a claim against the defendant, PCL Constructors Canada Inc., the lead contractor on a renovation project. The contract between the plaintiff and PCL required that PCL take out an insurance policy to cover the value of the project and for builder's risk insurance.

While PCL and its subcontractors, including the defendant Lockerbie, were performing work under the contract, there was a large leak which caused substantial damage to the plaintiff's property, which damage was the subject matter of the action.

The plaintiff's lease with the lessor, a wholly-owned subsidiary, required the lessee to insure the building in the event of construction or reconstruction. When PCL and the other defendants learned of this, they advanced a subrogation bar defence arising from the plaintiff's obligation as lessee under the land lease to insure the building. PCL submitted that as a contractor, it was a third party beneficiary under the lease. PCL and its subcontractors brought an application for summary judgment dismissing the plaintiff's claim.

The court concluded that PCL and the other defendants were hoping for a windfall due to the provisions of the lease. The key was that, in breach of the lease, the plaintiff did not actually have insurance coverage. The court held that PCL could not benefit from the provision of the lease to which it was not a party and that had been superseded by the construction contract it entered into with the plaintiff. The court dismissed the application for summary judgment.

This case was digested by Cameron B. Elder and edited by David W. Pilley of Harper Grey LLP.

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