Addison & Leyen Ltd v Fraser Milner Casgrain LLP: An Illustration of Restitution

In Addison & Leyen Ltd v Fraser Milner Casgrain LLP, 2014 ABCA 230 [Addison & Leyen], the Alberta Court of Appeal (“ABCA”) handed down a short but significant decision. Fraser Milner Casgrain was forced to defend an action predicated on a legal opinion drafted in 1989 by a predecessor firm. According to the plaintiffs, the opinion was written negligently and exposed them to $490,000 in tax liability twelve years after the letter was written.

The plaintiffs applied the law of restitution and brought a claim for common law implied indemnity. The law of negligence was inapplicable because of the 10 year ultimate time bar in the Alberta Limitations Act, RSA 2000, c L-12 [Limitations Act]. This case derives its significance from the ABCA’s discussion of the cause of action in implied indemnity.

Facts

In 1989, the defendants (“FMC”) prepared a legal opinion explaining that the plaintiffs (“Addison”), as both shareholders and directors York Beverages (1968) Ltd. (“York”), would not incur any tax liability through the sale of their shares of York to another party (“the purchaser”). 12 years later, the plaintiffs received notice that they were statutorily liable for York’s outstanding income tax liability for that year. The charge amounted to $490 thousand in tax liability. Addison had to pay $1.75 million after expenses to settle the claim.

The liability arose from an alleged error in the purchaser’s assessment of a particular tax offset. The purchaser over-estimated the value of an asset they acquired after the 1989 sale. This meant that York owed more in taxes than was expected in 1989. In 2001, after the purchaser failed to pay what was required, the plaintiffs’ received notices of assessments of liability.

After the assessments were settled, the plaintiffs commenced this action against FMC for the cost of resolving the liability. For the purpose of this appeal, FMC conceded that the opinion was negligent and relied upon.

Previous Decisions

The trial judge held that the doctrine of implied indemnity did not apply to these facts. The primary reason for this decision was that “the [defendants] could have never been found liable to the [Minister of National Revenue] for the tax liability or for the [plaintiffs’] subsequent expenses … ” (Addison & Leyen, para 17). The proper claim was one of negligence, which was statute barred. The plaintiffs appealed the decision.

The ABCA upheld the trial judge’s decision.

Legal Analysis

The ABCA stated that there were three general ways to establish a right to indemnity:

(1) by express contract, if provided in the terms of a contract between the parties; (2) by implied contract, if the parties intended such indemnity; or (3) by implication, if the circumstances demand a legal or equitable duty to indemnify, by which the law recognizes an assumed promise by a person to do what, under the circumstances, he ought to do (ibid, para 22, citing Birmingham and District Land Co v London and Northwestern Railway Co (1886), 34 Ch D 261 (CA), 274)

The ABCA relied on another English decision (Eastern Shipping Company Limited v Quah Beng Kee, [1924] ACC 177 (PC) [Eastern Shipping]) to establish that “a common law indemnity may be implied “where the relation between the parties is such that either in law or in equity, [express or implied], there is an obligation on one party to indemnify the other” (Addison & Leyen, para 25, citing Eastern Shipping, 182, interjections by ABCA). The obligation arises, according the ABCA, in situations where “damages [are] paid by an innocent party to a third party on behalf of the true wrongdoer, where that wrongdoer should otherwise have been liable to pay” (Addison & Leyen, para 34).

Based on these principles, the ABCA found that the doctrine of implied indemnity was inapplicable to this situation. Its decision rested on two main reasons. First, it could not be said that the plaintiffs paid a liability owed by the defendants. FMC did not owe any such debt to the government, and as a result they could not be held responsible for the plaintiffs’ payments.

The other reason relates to the point above. According to the ABCA, the plaintiffs failed to distinguish their claim for implied indemnity from a typical right to damages. Their argument, as described by the ABCA, essentially claimed indemnity for a loss that arose form negligence. While that may normally give rise to liability in tort law, a mere right to damages under another body of law could not establish the relationship required by the restitutionary doctrine. The negligence was simply too distant from the harm they suffered. The court did say that negligence may, in some circumstances, create a relationship that could ground a common law right to indemnity; however, this was not such a situation.

The ABCA also indicated that its decision was supported by policy. If the plaintiffs were correct, the court held, this decision would carry significant implications for those who give professional advice. Addison argued that, under the doctrine of implied indemnity, the limitation period began to toll when the indemnity arose or the liability was imposed, not when the letter was presented. In the Court of Appeal’s opinion, the plaintiffs’ theory, if accepted, would lead to professional advisers experiencing “indeterminate litigation under a never-ending limitations period” (ibid, para 43). This undesirable result supported the ABCA’s decision not to extend the common law to accommodate the plaintiffs’ claims.

As a result, the ABCA upheld the trial judge’s decision and dismissed the appeal.

Conclusion

This case is mainly significant because it hints at the strength of restitutionary doctrines. In this sense, Addison & Leyen is best described as a case study on the importance of why one should not ignore the third branch of the law of obligations.

In this instance, no other area of the law had even a chance of success. Negligence, both decisions seemed to indicate, was the obvious claim to bring. However, the Limitations Act barred such an argument. A claim in contract law was also impossible: “[t]he agreement at issue in this case did not include a specific indemnity clause” (ibid, para 43).

Restitution, on the other hand, remained relevant. The law of unjust enrichment does not rely on contracts or tortious conduct to ground recovery. Instead, it grants certain types of recovery on other principles. One such instance is described above.

Thus, this case is important for two reasons. On a basic level, it is a relatively high court clearly describing the components of a restitutionary doctrine. This is strong authority that can provide guidance on a generally confusing area of the law. On another level, and arguably more importantly, this decision demonstrates how the law of restitution consists of creative and surprising paths to recovery. This is an important lesson for anyone interested in the law of restitution in Canada.