The appeal by the owner of a warehouse (“Merchandise”) of an arbitrator’s decision dismissing its claims against the Insurer (“Aviva”) of an insolvent demolition company was dismissed where the Court held that the arbitrator made no palpable and overriding error

Merchandise Building Inc. v. Aviva Insurance Co. of Canada, [2006] O.J. No. 1119, Ontario Superior Court of Justice

In 1997, Merchandise owned and was in the process of converting space formerly used as a Sears warehouse into a mixed residential and commercial complex. It hired San-Mar Environmental Group (“San-Mar”), a demolition company, to demolish the interior structure of the building. While the demolition work was underway, a fire occurred which was caused by the negligence of a San-Mar worker. The next day, orders were issued by both the Fire Marshal and the Ministry of Labour requiring that a number of steps be taken prior to work continuing at the site. As a result, the project was delayed and Merchandise commenced an action claiming damages for the cost of the work required to repair, as well as damages for the delay incurred. At the time of trial, San-Mar was insolvent and Merchandise proceeded against San-Mar’s insurer, Aviva, directly.

Merchandise and Aviva agreed to proceed by way of arbitration on an agreed statement of facts. The arbitrator dismissed all Merchandise’s claims and found that the claims for property damage, cost of removal and disposal of debris were excluded under the Aviva policy. The increased cost of demolition associated with the installation of additional fire protection system required pursuant to the Fire Marshal’s orders were not recoverable as San-Mar was not liable for costs relating to fire protection systems. Merchandise appealed the arbitrator’s decision.

In determining the appropriate standard of review, the Court noted that an appeal was not a re-trial of a case and the arbitrator’s decision should be given due deference. The Court held that the arbitrator’s decision should not be disturbed “absent palpable and overriding error”.

The Court reviewed the arbitrator’s interpretation of the exclusion clauses in the Aviva policy which excluded coverage for property damage to the Insured’s work and property damage to “that particular part of any property that must be restored, repaired or replaced because your work was incorrectly performed on it”. The arbitrator had held that these exclusion clauses were effective to exclude coverage for the bulk of the claims being advanced by Merchandise relating to the cost of removal of the combustible debris. The Court held that the arbitrator’s decision in this regard was not “palpably wrong” and refused to overturn the decision on this point.

The arbitrator also found that the exclusion clause relating to property damage to “impaired property” arising out of a delay or failure by the Insured to perform a contract was applicable. The property at issue fit the definition of “impaired property” and any delay causing damage to Merchandise was referable to San-Mar’s failure to perform its agreement. The Court held that there was no indication of palpable or overriding error in the arbitrator’s conclusion on the application of this exclusion.

In the result, the appeal was dismissed.

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