Parent Corporation Liable for Debt of Subsidiary

In a recent decision (City of Guelph v. Super Blue Box Recycling Corp.) the Ontario Court of Appeal held that a parent corporation was liable to indemnify a party who entered into a contract with the subsidiary corporation even though the parent was not a party to the contract. Eastern Power Limited ("Eastern") is a company that conducts laboratory testing for a technology that transforms municipal solid waste into recyclable products. Eastern was looking for a municipal partner willing to demonstrate the new technology and where it could build a demonstration plant in order to take the technology to the next step and show that it was workable and economically viable. The City of Guelph was interested in becoming a partner because it had a wet-dry facility that could accommodate Eastern's proposed plant.

Eastern made a formal proposal to the City and after a period of negotiation, persuaded Guelph to enter into an agreement with Eastern's wholly-owned subsidiary, Super Blue Box Recycling Corp. ("Super Blue"). Super Blue held the patents for the technology in question but otherwise had no assets.

Guelph and Super Blue subsequently entered into an agreement which contained a lease granting Super Blue an interest to the site on which the facility was to be built and which set out the respective rights and obligations of Guelph and Super Blue with respect to the project. Eastern was not a party to the agreement, however its proposal to the City contained an undertaking that Eastern would indemnify Guelph against liability that may arise as a result of the pilot demonstration project.

A dispute arose between Guelph and Super Blue as to whether the automatic three year extension in the agreement was triggered in January of 2000 leading to a termination of the agreement in January of 2003. The trial judge held in favour of the City.

The Court of Appeal considered, among other things, whether Eastern would be required to indemnify the City even though Eastern was not a party to the agreement and the parties had deliberately excluded a guarantee from Eastern in the agreement. The Court of Appeal accepted the trial judge's view that Eastern was "involved in the indemnity undertaking through its involvement in a larger transaction". In effect, Eastern asked the City to accept its proposal and enter into an agreement with its subsidiary to put the proposal into effect. In exchange, Eastern held out that it would give substance to the proposal and that the City would be indemnified from all costs and liabilities associated with the project. The City accepted the proposal by entering into the agreement with Super Blue.

The Court of Appeal held that these circumstances were sufficient to create an offer, acceptance and consideration to make the undertaking to indemnify enforceable even though Eastern was not a party to the agreement.

Regards,

Blair