Subrogation rights can be contractually limited

Where a commercial lease purports to limit the lessor’s liability by curtailing the subrogation rights of an insurer of the lessee, the lease will prevail as a complete defence to a subrogated action, provided the action is within the scope of what is excluded by the terms of the lease.

Robichaud, Williamson, Theriault and Johnstone v. Pharmacie Acadienne de Beresford Ltee, [2008] N.B.J. 45, New Brunswick Court of Appeal, J.E. Drapeau C.J. N. B., W.S. Turnbull and J.T. Robertson JJ.A., February 14, 2008

This was an appeal by a Third Party from a motion judge’s decision. The Plaintiff operated a Pharmacy in premises leased from the Defendants. The lease agreement provided that all of the lessee’s policies of insurance were to contain a waiver of subrogation for the benefit of the lessor. The Plaintiff sustained water damage to its inventory and office equipment when water escaped from one of the pipes in the leased premises’ sprinkler system.

The Plaintiff filed with its insurer, which paid out in full settlement of the claims. The insurer then commenced a subrogated action in the name of the Plaintiff against the Defendants. The Defendants raised the lease provision as a complete defence to the claim and issued a third party notice to the law firm that had prepared the lease agreement, claiming indemnity in the event that the lease failed to protect the Defendants from the claims advanced in the underlying action. The Defendants then applied, under Rule 23 of the New Brunswick Rules of Court for a judicial determination as to whether, by virtue of the lease agreement, the Plaintiff could pursue its claims. The motion judge held that the lease agreement did not preclude the subrogated action. The Third Party law firm appealed.

In interpreting the lease clause purportedly barring the subrogated action, the Court was mindful of the fact that the clause was taken verbatim from a New Brunswick statute, which is enacted in both English and French. As a result, the Court had to take a nuanced approach in interpreting the contract, as some of the traditional principles of contractual interpretation, such as the contra preferentum rule, could not apply. The Court found that the motion judge had erred in finding that the lease agreement did not preclude the subrogated action. Rather, the Court held that the lease operated to “effectuate a loss-bearing scheme that bars the underlying subrogated action in nuisance and negligence.”

This case was originally summarized by W. Jay Havelaar and edited by David W. Pilley.

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