Indemnification Clauses and Recovery of Legal Costs

Indemnification clauses are often placed into contracts, without parties giving them much attention. However, when these clauses are triggered, the consequences can be devastating. 

In the recent case, Burr v. Tecumseh Products of Canada Limited, 2023 ONCA 135, the Ontario Court of Appeal dealt with the consequences of an indemnity clause with respect to costs of a proceeding. The Court upheld the trial judge’s decision in finding that there was an agreement to indemnify between the parties. However, the Court granted leave to appeal with respect to a part of the cost order and remanded that issue back to the trial judge for his re-determination. The Ontario Court of Appeal held that the trial judge erred in failing to consider the indemnity clause when providing his reasons for costs. 

The indemnification clause required Venmar to indemnify Fasco for:

“[A]ny and all claims, actions, causes of action, liabilities, liens, losses and costs … relating to the Goods or any device, material or things to which the Goods or attached or of which the Goods are made a part of or within which the Goods are enclosed, regardless of whether Fasco may be wholly, concurrently, partially, jointly or solely negligent or otherwise at fault.”

The Ontario Court of Appeal held that the trial judge reasonably concluded that the indemnity provision in the Contract was operative such that, if Fasco had been liable to the plaintiffs, Venmar was contractually bound to indemnify Fasco for any damages payable to the the plaintiffs (Para 118). However, despite the indemnity clause, the trial judge declined to consider it in his analysis of costs of the proceeding.  

The Ontario Court of Appeal noted that failing to consider the indemnity clause was an error. “Ontario courts have consistently held that contractual terms that touch on the issue of costs do not bind the court in the exercise of judicial discretion to determine a costs award (see para 129)… However, the trial judge “mistakenly believed that in determining the scale and quantum of costs, his task did not require him to consider the terms of the Contract and how, if at all, those terms affect the exercise of his discretion… This was a legal error.” (See paras 141-142).

When there is a contractual right to costs, the court will exercise its discretion so as to reflect that right. The agreement of the parties cannot exclude the court’s discretion, but the agreement should be considered in the court’s analysis. 

This is an important decision for counsel to consider when advising clients about indemnity clauses and about cost consequences that may arise from such clauses.