Source: https://www.fernandeshearn.com/newsletter-2015-december-fernandes-hearn-toronto-law-firm/
Timestamp: 2019-04-21 18:28:56+00:00

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Aerospark Press has just published the 2015 release to Rui Fernandes’ Transportation Law. The three volume work encompasses maritime law, aviation law, railway law and road carriage law. It is updated twice per year.
The firm is pleased to announce that Alan Cofman will be joining the firm on January 2nd, 2016. Alan was admitted to the bars of Upper Canada (Ontario) and British Columbia in 2006 after obtaining his Bachelor of Laws degree at the University of Ottawa in 2005. Until 2009 Alan practiced in the commercial litigation group of a large national firm, where he had a varied practice in all manner of civil, commercial and insurance litigation. Since 2009 he has focused his practice on transportation law and casualty claims and related insurance and commercial litigation in a boutique Toronto law firm. Alan has represented clients in the Ontario Superior Court of Justice and the Ontario Court of Appeal, the Federal Court, the British Columbia Supreme and Provincial Courts, and various administrative tribunals. He has also handled matters in other Canadian jurisdictions.
The Fernandes Hearn LLP Annual Seminar will take place on January 14th, 2016 at the Advocates Society Education Centre in Toronto.
In the recent decision of Leo Ocean S.A. v. Westshore Terminals Limited Partnership (*1) the Federal Court of Appeal addressed whether a claim for pure economic loss could be the subject of a summary trial, the claim resulting from the collision of the vessel Cape Apricot with the trestle carrying the conveyor system, roadway, electrical power and water to berth number 1 at the Westshore terminals in the Port of Vancouver.
The terminal was owned by the Vancouver Fraser Port Authority (the “Port Authority”) and operated under lease by Westshore Terminals Limited Partnership (“Westshore”). The Port Authority brought a claim for loss of “Participation Rent” in the amount of $1,027,166.00. Westshore and Leo Ocean S.A., (“Leo Ocean”), the owner of the vessel Cape Apricot, sought the dismissal of the Port Authority’s claim on the basis that it was a claim for pure economic loss and hence not recoverable.
The Port Authority argued that its claim was not barred by the economic loss rule. First, it said that it had sustained actual, physical damage to the property leased to Westshore and that, consequently, it was incorrect to assert that it had only sustained economic loss. Secondly, it said that even if it had sustained economic loss only, it was still entitled to recover its loss. More particularly, the Port Authority argued that, as it had a proprietary or possessory interest, including a future possessory interest, in the property damaged by the Cape Apricot, its claim fell within one of the exceptions to the exclusionary rule in respect of pure economic loss.
At trial, the Judge reviewed the jurisprudence pertaining to the recovery of an economic loss. In particular, the Judge paid attention to the Supreme Court of Canada’s decisions in Canada National Railway Co. v. Norsk Pacific Steamship Co.,  1 S.C.R. 1021,  S.C.J. No. 40 (Norsk), Bow Valley Husky (Bermuda) Ltd. v. Saint John Shipbuilding Ltd.,  3 S.C.R. 1210,  S.C.J. No. 111 and D’Amato v. Badger,  2 S.C.R. 1071,  S.C.J. No. 84 where the Supreme Court held that, as a general rule, there was a bar against recovery for economic loss and that certain exceptions to the rule had been recognized, namely cases where a claimant had a possessory or proprietary interest in the damaged property, maritime general average cases and where the relationship between the claimant and the damaged property constituted a joint or common venture. The Judge also examined the House of Lords’ decision in Anns v. Merton London Borough Council, 1977 2 All E.R. 492 (U.K. H.L.), where the House of Lords opined with respect to the issues of proximity and the duty of care and whether, notwithstanding that proximity between the parties had been established, there were policy considerations negating the imposition of a duty of care.
Turning to the facts before her, the trial Judge indicated that the Port Authority’s claim arose in the context of a lease between the Port Authority and Westshore and in the further context that the Cape Apricot had caused damage to the marine terminal facilities under the control of Westshore.
This led the trial judge to say that the lease gave “rise to a genuine issue that the Port Authority holds a proprietary or contingent possessory interest in the property that was damaged by Leo Ocean” and that “[t]he scope of that interest depends upon construction of all relevant terms of the contract, including the many clauses in the Lease that address rent”.
The trial Judge stated that, because there was a dispute between the parties as to whether or not the Port Authority had a proprietary or possessory interest in the leased premises, the motion for summary trial could not succeed.
The Federal Court of Appeal disagreed with the trial judge. Justice Nadon noted that the trial judge made it clear that there were no questions of credibility that had to be determined. Consequently, what needed to be decided by the trial Judge, in the context of the summary trial, was, firstly, whether the Port Authority had a proprietary or possessory interest in the property damaged by the Cape Apricot. If that hurdle was met, then the question was whether the Port Authority’s claim fell within the exceptions to the rule that precludes recovery of a pure economic loss. The Court of Appeal noted that the principal issue before the trial judge was the construction of the lease. Its construction would determine the question of whether or not the Port Authority had a proprietary or contingent possessory interest in the leased premises. The Court of Appeal was of the view that, in fact, a summary trial was the appropriate vehicle to determine the issue.
The Federal Court of Appeal returned the matter to the Federal Court so as to allow it to determine the meaning of the relevant provisions of the lease and the associated consequences.
A recent decision of the Quebec Superior Court demonstrates that all disputes involving maritime property trigger the application of Canadian maritime law.
In Transport Desgagnes Inc. v. Wartsila Canada Inc.(*1) the defendant supplied a reconditioned crankshaft to a vessel operator. The crankshaft sustained a catastrophic failure while the vessel was on route on the St. Lawrence River near Les Escoumins. The court held that the crankshaft sold was affected by a latent defect at the time of the sale, that the seller was presumably aware of the defect and, as a result, it was liable for all the damages resulting from this failure, which totaled $5,661,830.33.
At issue was whether the civil law of Quebec applied or whether Canadian maritime law applied. The core of the dispute was a six month warranty period provided in the contract (which had expired). The court characterized such a clause as a limitation clause in the contract. Under the Quebec civil law such a limitation clause is not enforceable, but it is under Canadian maritime law.
Is the activity at stake so integrally connected to maritime matters such that it is practically necessary for Parliament to have jurisdiction over same, in order to properly exercise its legislative power over navigation and shipping?
More particularly, the contract for the sale of a marine engine is not integrally connected, for instance, to issues of safe carriage of goods over the sea, movement of goods on and off a ship (shipping), seaworthiness of a ship or good seamanship (navigation). It is also not integrally connected to applicable admiralty law, rules, principles or practices or international maritime conventions.
Moreover, there is no practical necessity for uniform federal law to prescribe, for instance, the rules governing the seller’s obligations to provide warranty regarding the quality of the product sold. The fact that such rules may vary depending on the applicable provincial law of contracts does no hinder the efficient and coherent conduct of the activities of navigation and shipping.
Neither the extraterritorial use of the good sold nor the fact that the good sold will be used in connection with maritime activities drag such sale out of the ambit of the legislature’s power over Property and Civil Rights. Although related to maritime activities, the current dispute is not integrally connected with same.
The court held that, as the contract for the sale of the crankshaft was formed in Montreal, the laws of Quebec applied to the dispute.
c) was hidden and unknown to the buyer at the time of sale.
For a professional seller, two presumptions come into play, which apply against a manufacturer or distributor of goods. Firstly, the defect is presumed to have existed at the time of the sale (article 1729, C.C.Q.). The first condition stated above is therefore automatically met; unless the seller or the manufacturer proves on the balance of probabilities that the defect is due to improper use by the buyer.
Secondly, the professional seller is presumed to have known the existence of the defect at the time of the sale and is deemed to be of bad faith.
The court noted that the presumption of knowledge and of bad faith against the professional seller and the manufacturer has a two-fold determinative impact.
a) Firstly, it extends the scope of the seller’s liability beyond the price of the good sold. In addition to their obligation to reimburse the price of the goods sold, they are bound to pay for the damages, which the buyer sustained as a result of the latent defect.
b) Secondly, the professional seller and the manufacturer cannot rely on a limitation of liability clause, unless they rebut the presumption of knowledge and bad faith. As they are presumed to be of bad faith and to be aware of the existence of the defect, allowing them to contractually exclude or limit their liability for such defect would amount to an endorsement of a fraudulent behavior.
The court summarized that only a narrow range of defences are available to the professional seller and the manufacturer if they want to rebut the presumption of knowledge and bad faith against them, and avoid the resulting legal consequences of such presumption.
Evidence of their good faith, of their ignorance of the defect or of their honest belief in the adequacy of the product sold is not enough.
The buyer’s expertise also does not nullify the presumption of knowledge and bad faith that applies against professional sellers and manufacturers. Such expertise is only relevant to assess whether the defect was apparent or not.
The evidence before the court was that the crankshaft was sold by a “professional seller” and that there was a presumption that the defect existed at the time of the sale. The big end stud of the connecting rod of a unit was insufficiently tightened at the time of the sale. This presumably occurred while the defendant employees mounted the crankshaft assembly at their facility.
The court rejected the defendant’s contention that the improper tightening resulted from maintenance work performed by the vessel operator after delivery of the crankshaft assembly. There was contradictory evidence on this issue and the judge concluded that rebutting the presumption of article 1729 C.C.Q. requires more than raising doubts on the adequacy of the buyer’s use or maintenance of the goods sold. Unless the professional seller or manufacturer shows, on a balance of probabilities, that the defect is due to improper maintenance by the buyer, the presumption that the defect existed at the time of the sale still applies.
The court then dealt with the contractual limitation clauses, which provided that the warranty ran for only six months and limited the seller’s liability to $79,000.00. The court held that the limitation provisions were not enforceable as the seller did not rebut the presumption of knowledge of the existence of the defect.
The court ordered the seller to pay the vessel operator the sum of $5,661,830.33.
(*3) Ibid, paras. 28, 29, 30.
a) Freshwater (Lake) Cage Culture: in cage culture operations, hatchery-produced stocks are grown in floating cages under provisions of a lease.
b) Land-based Systems: in land-based aquaculture operations, hatchery-produced stocks are grown in tanks or ponds located on private property.
c) Bottom Culture/Enhancement- Intertidal Zone: bottom culture/enhancement in the intertidal zone consists of two distinct activities. Marine plants or sessile shellfish are managed under provisions of a lease. Alternatively, marine plants or shellfish are managed without a lease, and a fishing licence is required for harvesting.
d) Long-line/Cage Culture: long-line and/or cage culture operations operate in subtidal waters. Typically, they consist of floating-rope or net-cage systems that are anchored to the seabed. Such systems operate within the provisions of a provincial or federal lease.
e) Bottom Culture/Enhancement- Subtidal Zone: subtidal bottom culture and enhancement is virtually identical to bottom culture and enhancement activities in the intertidal zone. The principal difference is the location of the activities in the coastal zone and the governing jurisdictions related to the activities.
f) Enhancement/Sea Ranching: in sea ranching operations, the sea may be regarded as an aquatic pasture where the hatchery- reared fish are released, forage for food and seek shelter. To facilitate recapture, sea ranching is commonly conducted with migratory stocks, such as salmon, that return to their natal streams to spawn.
Aquaculture facilities and activities in Canada are regulated under a number of acts, legislation, regulations, and programs related to environmental management and shared use of aquatic resources. These instruments are administered by various federal, provincial and territorial bodies.
Aquaculture Activities Regulations: the Regulations clarify conditions under which aquaculture operators may treat their fish for disease and parasites, as well as deposit organic matter. They also impose public reporting on the environmental performance of the sector as well as specific environmental monitoring and sampling requirements.
Atlantic Fishery Regulations: The aquaculture industry is subject to these wild capture fisheries Regulations.
Fishery (General) Regulations: These Regulations set out Fisheries and Oceans Canada’s authorities for approving the release of fish into fish habitat and the transfer of live fish to fish rearing facilities. They also support the Department’s management of aquaculture in British Columbia in conjunction with the Pacific Aquaculture Regulations.
Management of Contaminated Fisheries Regulations: These Regulations authorize the Minister to close areas to recreational and commercial fishery harvests and to take other management measures when biotoxins, bacteria, chemical compounds or other substances are present in fish habitat to a degree that may constitute a danger to public health.
Marine Mammal Regulations: They set out authorizations for the management and control of aquatic mammals that cause a nuisance to fisheries activities.
Maritime Provinces Fishery Regulations: At present, aquaculture operators are constrained by these wild capture Regulations and unable to use current farming practices.
Pacific Aquaculture Regulations (Amendments): These Regulations set out Fisheries and Oceans Canada’s licensing and management authorities for aquaculture in British Columbia. The amendments establish fees for aquaculture licences in British Columbia and also enable payment by annual installments on a multi-year licence.
Pacific Fishery Regulations: These regulations set out Fisheries and Oceans Canada’s authorities respecting fishing in the Pacific Ocean and the Province of British Columbia.
Other federal departments are involved in the aquaculture business and its regulation.
Environment Canada uses the Species At Risk Act to support the protection of wildlife species at risk in Canada including fish, reptiles, marine mammals and molluscs. The Minister of Fisheries and Oceans, as competent Minister under the Species at Risk Act, is responsible for aquatic species at risk.
The Canadian Environment Protection Agency under the Canadian Environmental Protection Act provides governance respecting pollution prevention and the protection of the environment and human health in order to contribute to sustainable development.
The Canadian Food Inspection Agency uses the Health of Animals Act to support the management of animal diseases, including aquatic animals (e.g. finfish and shellfish). The program is delivered through the National Aquatic Animal Health Program (NAAHP) and the Health of Animals Regulations. The Agency uses the Feeds Act to govern the manufacture and sale of livestock feeds in Canada to ensure they are safe, effective and labeled appropriately. Similarly it uses the Fish Inspection Act to regulate food quality, food safety and identity of fish and seafood products that are processed in federally registered establishments or imported into Canada.
Aquaculture Activities Regulations (proposed): The proposed Regulations would clarify conditions under which aquaculture-related husbandry activities are undertaken under the Fisheries Act and impose greater public reporting on the environmental performance of the sector.
Atlantic Fishery Regulations: The proposed amendments would enable shellfish farmers to better manage their growing areas by permitting harvesting and maintenance activities unique to them.
Fishery (General) Regulations: Fisheries and Oceans Canada, with the support of the Canadian Food Inspection Agency, is proposing to amend these regulations to better align both organizations’ mandates and programs when it comes to fish health management. The proposed amendments would eliminate overlap and duplication and clarify roles and responsibilities.
Management of Contaminated Fisheries Regulations: The proposed amendments would enable shellfish aquaculture operations to manage their growing areas so as to further minimize health risks from consumption of bivalve shellfish.
Maritime Provinces Fishery Regulations: The proposed amendments would enable shellfish aquaculture operations to harvest undersized (“cocktail”) oysters from their own lease areas, an activity currently prohibited under the existing Regulations. A licence provision to allow the on- and off-tenure maintenance activities of normal business operations would also be proposed.
Pacific Aquaculture Regulations (Amended): Published on May 20, 2015, the amendments to the Regulations establish fees for aquaculture licences in British Columbia and also enable payment by annual installments on a multi-year licence. Licences in the Discovery Islands remain limited to one year pending further scientific assessments and regulatory work in the area.
(b) are cultured under the authority of a licence and in accordance with the regulations.
The Ontario Ministry of Natural Resources has issued an aquaculture issuing policy in accordance with the Fish & Wildlife Conservation Act 1997. The policy governs how aquaculture licences, renewals, transfers, amendments, refusals and cancellations are issued. The policy’s goal (and the regulations) is to minimize the risk of ecological damage from aquaculture activities.
Every agricultural sector has to deal with specific risks and issues. The risks resulting from the aquaculture industry are mainly environmental risks impacting the surrounding habitat and consumer health risks, as well as conflicts of interests between aquaculture facilities and neighboring fishery sectors.
While the main risks faced by onshore aquaculture facilities result from storms, tornados, diseases and predators, offshore aquaculture facilities are additionally subject to tsunamis, global warming, plankton blooming, and changes in sea level and water quality as well as other environmental impacts.
Risks caused by these impacts are mainly damage to the stock, but also damages to the facilities caused by storms, tsunamis etc.
Other risks that especially offshore aquaculture operators have to face are workers liability related risks, since operating aquaculture facilities offshore bares risks for workers and divers such as injuries and infections.
The most valuable asset of the aquaculture industry is the stock, thus threats to the stock pose the main risks faced by the facilities.
A typical risk for all agricultural industries is the weather; however, aquaculture is possibly more exposed to the uncertain overall effects of global warming than any other farming sector. Fish farmers around the world are particularly vulnerable to weather related disasters, because of their location and their overall high levels of exposure to natural hazards, livelihood shocks and climate change impacts. Since there has been an increasing trend in the number of natural disasters in the past century around the world, exposure and vulnerability to natural hazards is increasing.
The types of disasters that affect the fisheries and aquaculture sector include natural disasters such as storms, cyclones/hurricanes with associated flooding and tidal surges, tsunamis, earthquakes, droughts, floods and landslides. Disasters of human origin affecting the sector have included oil and chemical spills and nuclear/radiological material.
The effects of disasters on the sector can include the tragic loss of life, the loss of livelihood assets such as boats, gear, cages, aquaculture ponds and broodstock, post- harvest and processing facilities, and landing sites.
The aquaculture industry is prone to pollution from land and aquatic sources, and aquatic ecosystem degradation from farming, mining, industry and urbanization. Water pollution has increasingly threatened production in some newly industrialized and rapidly urbanizing areas. Agrochemicals, chemotherapeutants, metals, feed ingredients, feed additives and contaminants and organic pollutants, could pose chemical hazards. Metals of concern for public health include those usually grouped together as heavy metals, and some metalloids such as arsenic. Metals and metalloids are present in the aqueous environment mostly as a result of geochemical processes that cause them to enter into solution and so ultimately into watercourses and other bodies of water. They can also be introduced into aquaculture systems through certain cultural practices or as a result of pollution.
With the above-mentioned threats to the aquaculture industry and caused by the aquaculture industry often resulting in high costs, the demand for insurance increased eventually.
The term “aquaculture insurance” describes all the various types of insurance that would normally be used to protect an aquaculture business operation. For a reasonably large aquaculture company, this would include insurance cover for buildings and equipment, employees, stock, livestock, liabilities, motor vehicles, vessels and divers, goods in transit, and other insurable interests.
World aquaculture production was 63.6 million tonnes in 2011, with almost 90% of this production in Asia. In the same year, Canadian production was 162,000 tonnes or 0.25% of the global total. In 2009, Canada ranked 20th in the world in terms of the value of its aquaculture production. With the world’s longest coastline, and a skilled workforce. Canada has the potential for future expansion. However, the aquaculture industry in Canada faces economic and environmental challenges. (*9) The aquaculture industry is overseen by a combination of federal and provincial authorities. The federal government has jurisdiction over the regulation of fish products marketed for export and interprovincial trade; the protection of commercial, recreational and Aboriginal fisheries; and research and development. DFO is responsible for the application of the Fisheries Act, and Transport Canada grants authorizations for aquaculture facility plans under the Navigation Protection Act. The safety and quality of aquaculture products, feeds and veterinary drugs used by the industry are governed by other departments, including Health Canada, Agriculture and Agri-Food Canada, and the Canadian Food Inspection Agency. The complex legislative and regulatory environment may hinder the growth of the aquaculture industry. There are many challenges ahead.
(*1) Food and Agriculture Organization of the United Nations, Coordinating Working Party on Fishery Statistics (CWP) Handbook of Fishery Statistical Standards, Section J: Aquaculture.
(*6) “The State of World Fisheries and Aquaculture 2012”, FAO Fisheries and Aquaculture Department, Rome 2012, page 26.
(*7) “Aquaculture insurance industry risk analysis processes”, by P.A.D. Secretan, 2008, In M.G. Bondad-Reantaso, J.R. Arthur and R.P. Subasinghe (eds), Study on understanding and applying risk analysis in aquaculture, FAO Fisheries and Aquaculture Technical Paper, No. 519. Rome, FAO. pp. 229–245.
(*9) Thai Nguyen and Tim Williams, Industry, Infrastructure and Resources Division, 28 February 2013, “Aquaculture in Canada” Library of Parliament Research Publications.
According to the Ontario Court of Appeal, after a claim for coverage under a policy is made, whether there is a duty to defend should be determined expeditiously on the basis of the allegations in the underlying litigation read with the insurance coverage. A duty to defend may also extend to additional insureds and may include provision of a separate defence and funding of separate counsel’s fees. Any delay of these decisions may result in increased cost of litigation and delay for the parties.
Antonio Carneiro Jr. died in a car accident. His family brought an action against Durham and its maintenance contractor, Miller Maintenance Limited (“Miller”) amongst others for damages in respect of Mr. Carneiro’s death. The Carneiro family alleged that Miller and Durham were negligent in respect of their snow removal and maintenance duties on the accident date. There were also allegations against Durham of inadequate design and construction of the road and failure to close it in a heavy snowstorm. It was alleged that Mr. Carneiro’s vehicle had slid and spun on an icy road, careened down a hill and then collided with other vehicles, causing Mr. Carneiro’s death.
Durham had contracted with Miller to plough Durham’s roads in winter. Miller added Durham as an additional insured on their insurance policy, as required by the contract.
In the action, Durham and Miller each cross-claimed against the other. Miller alleged that (1) Durham was responsible for supervising its work and calling for snow removal equipment as necessary; and (2) the road in question was dangerous in design and construction.
Durham added the Insurer as a Third Party seeking a declaration that the Insurer had: (1) a duty to defend it in the action; (2) to pay for separate legal fees for Durham’s choice of counsel; and (3) a duty to indemnify Durham if it was found liable to the plaintiffs for damages. The Insurer acknowledged that Durham was an additional insured, but claimed that it had no duty to defend because some allegations of negligence were unrelated to Miller’s duties under the contract with Durham and were, thereby, outside the scope of coverage. The Insurer also conceded that some allegations in the Statement of Claim related to Miller’s duties and were covered under the subject policy.
Durham brought a motion to compel the Insurer to provide a defence to the action. The Insurer defended the motion arguing that, by defending Miller, Durham was effectively defended against any liability for Miller’s negligence. Further, given that there were allegations unrelated to Miller’s duties under the contract, the Insurer argued it should have no obligation to defend. Instead, the Insurer argued, Durham should pay for its own counsel and defend all of the plaintiffs’ claims itself, leaving the issue of any shared responsibility for costs to be determined after the completion of the litigation.
The motion judge dismissed Durham’s motion finding that the Insurer was only required to defend Durham regarding those claims relating to Miller’s duties and requiring Durham to continue with its own counsel “to defend with respect to all other causes as alleged in the claim” (*2). The Court of Appeal interpreted this comment as the motion judge’s acceptance of the Insurer’s argument that its defence of Miller was enough to protect Durham.
Durham appealed and the Court of Appeal disagreed with the motion judge.
The Court held that the allegations in the Statement of Claim “triggered”, in an unqualified manner, the Insurer’s duty to defend.
The Court confirmed, per Hanis v. Teevan (*7), that, where there is (1) an unqualified duty to defend in the policy and (2) where some but not all of the claims in an action are covered by that policy, the Insurer is required to pay all reasonable costs associated with the defence of those claims, even if those costs further the defence of uncovered claims. However, costs solely associated with defence of uncovered claims were not included in that obligation.
Here, the Court found that the policy imposed on the Insurer a duty to defend the additional insured against “any action”, as defined, seeking damages to which the insurance applied. There were no provisions that in any way qualified the Insurer’s duty to defend where there were both covered and non-covered claims.
Further, the Court found that the Insurer’s duty to defend was not satisfied by simply defending Miller regarding allegations relating to its contractual duties, citing that, if this were the case, status as an additional insured would be rendered “meaningless” (*8). As an additional insured, Durham had independent rights including its own right to a defence, even if a defence was already provided to the named insured. Otherwise, the insurer would rarely have to provide a defence to an additional insured given that it would typically already be defending the named insured.
The Court further noted that the Insurer’s own preference as to whether to defend (given the uninsured and insured claims) improperly put the Insurer’s interests over that owed to its Insured. The motions judge had ignored the Insurer’s duty to defend.
Lastly, the argument that Durham, if found not liable, could recover its costs after trial was dismissed by the Court as “missing the point” (*9), given that the duty to defend is a separate contractual obligation owed to Durham, an additional insured. The Insurer had, in fact, promised to defend Durham and was required to comply.
The Court held that the Insurer was required to pay for Durham’s own independent counsel and defence from the beginning of the action, not only because of the Insurer’s unqualified contractual duty to defend, but also because there were diverging interests between: (1) the named insured and the additional insured; and (2) the Insurer and Durham. Costs were also ordered for defence costs already incurred. The Court, however, also recognized that the Insurer was entitled to seek apportionment of the defence costs at the end of the proceedings to the extent that such costs dealt solely with uncovered claims.
This decision may assist parties, who are additional insureds, with their efforts to obtain a defence pursuant to a qualifying underlying policy. It may also change the typical scenario where the parties’ insurers negotiate a percentage of reimbursement, but then agree to ultimately “work it out later”. The named insured’s insurer can now be pressed to agree to pay for the entire defence and only seek contribution at the end of the proceedings. This arrangement should be more streamlined and thereby more economical for both insurers, assuming that the parties are still able to negotiate the final percentage rather than proceeding to an Application for a court’s determination.
(*3) 2001 SCC 49,  2 S.C.R. 699, at para. 28.
(*7) 2008 ONCA 678, 92 O.R. (3d) 594, at para. 2.
The recent decision of the Federal Court in UPS Asia Group PTE Ltd. v. Belair Fabrication Ltd. (*1) provides guidance on a commercial contracting issue frequently placed before the courts for adjudication. This case involved interested factual nuances arising from a dispute over the booking of space on a ship for the carriage of goods. The main issue concerned whether one party could enforce a provision in a contract stipulating a pre-determined amount of damages in the event of a breach by the other party. This particular discussion and analysis is of general importance in the preparation of commercial contracts. The courts have for some time now discerned between a contract clause being a “genuine pre-estimate of damages” (which, by our case law, are generally enforceable) from a “penalty clause” (generally regarded as being unenforceable).
A key “take away” from this case is the following trite consideration for both lawyers and business persons alike: one cannot overstate the benefit of a clearly worded contract. In the event of a commercial dispute the court will search for a mutual contracting intent of the parties. Where a mutual intent is found, the courts will, generally speaking, hold the parties to the bargain reached. This case involved the court sifting through a somewhat complicated factual situation and enforcing a rather exceptional (but clearly worded) contract term on a preliminary “summary trial”.
UPS Asia Ocean Services, Inc. (“UPS”) is a logistics company providing ocean freight services. It assists clients in shipping goods from China to North America. Belair Fabrication Ltd. (“Belair”) was one such client. Belair was interested in arranging a series of shipments from China to Vancouver.
Belair wanted UPS to arrange for the shipment of extremely large crane parts manufactured in China as “break bulk”, or non-containerized cargo (the “goods”) to North America. UPS doe not own or operate ocean vessels. Accordingly, as a second contracting phase (following Belair and UPS coming to terms on the services to be provided by the UPS), UPS would in turn have to enter into a contract for the charter of the required space on an ocean vessel for the carriage to North America.
Consistent with industry practice (and the adopted contract structure whereby UPS would assume the carriage arrangement obligations for its own account as a “principal”) UPS and Belair executed a “booking note” on May 13, 2013 calling for an estimated sailing date of May 23, 2013 (the “Belair-UPS Booking Note”). A booking note is a contract that has been drawn up for ocean charter contracts, usually between a shipper and an ocean carrier for the carriage of cargo. A booking note differs from other forms of contract in that, once the cargo is shipped, its terms and conditions are superseded by those in the bill of lading.
The Belair – UPS Booking Note contained a “dead freight” clause. A “dead freight” clause is a standard clause in booking notes and provides that a charterer will pay the full freight charge if the charterer (i.e. the party wishing to charter the use of the vessel) cancels a booking or reduces the cargo to be shipped after a booking is confirmed.
Belair maintained that it executed the Belair – UPS Booking Note on the condition that UPS would confirm with the Chinese manufacturer that the goods would be ready on time for sailing. Just one day after the completion of the Belair – UPS Booking Note the manufacturer advised Belair – who in turn advised UPS – that the goods would in fact not be read until roughly one month later. This delay totally frustrated the arrangements as had been made by UPS with an actual ocean carrier for the carriage of the goods. During this time frame, UPS itself entered into a separate booking note with Eastern Car Liner Ltd. (“ECL”) for the ocean shipment of the goods on the anticipated sailing date May 23, 2013. This “UPS – ECL Booking Note” thus complemented, the Belair – UPS Booking Note. The UPS – ECL Booking Note also contained a ‘dead freight’ clause.
On May 26, 2013 the original vessel sailed without Belair’s goods. Both booking notes were accordingly “breached”: the cargo not being provided for sailing in fulfillment of either booking note. UPS was invoiced by ECL for dead freight of US $163,000 calculated in accordance with that booking note. UPS was however able to negotiate an agreed reduced amount of US $57,000 payable to ECL. In turn, UPS sent Belair an invoice for dead freight charges for US $210,000 for dead freight charges calculated in accordance with the Belair – UPS Booking Note.
Belair ultimately came to ship the goods with another carrier as a result of which it says it incurred storage, transportation, labour and other costs.
UPS sued Belair and brought a motion for summary judgment, asserting that Belair was liable to UPS for the full dead freight amount pursuant to the Belair-UPS Booking Note. Belair in turn denied liability for the dead freight charges, and filed a counterclaim, asserting that it had incurred storage transportation, labour and other costs as a result of the failure by UPS to find a substituted charter arrangement that could eventually accommodate the new sailing schedule for the goods.
Belair submitted that the matter should not be dealt with by way of summary procedure. Belair cited issues calling for a conventional trial, noting that there were significant inconsistencies in the evidence relating to whether or not the Belair – UPS Booking Note had been modified by UPS agreeing to confirm with the manufacturer that the goods would be ready to ship in accordance with the agreed schedule. Belair argued that the implication of such an obligation would be that it be released from any liability for the payment of dead freight.
In addition to other defences raised, Belair also argued that UPS did not suffer any loss. In this regard, Belair asserted that the dead freight charges were not paid by UPS but by another UPS entity (i.e. UPS – SCS Inc.) that had not been reimbursed by UPS. Belair also complained that UPS would be gaining a windfall in light of the reduced payment negotiated with ECL.
Belair argued that the dead freight provision in the Belair – UPS Booking Note was unenforceable as amounting to a penalty rather than a legitimate stipulated damages clause. In this regard Belair pointed to the fact that UPS is not a carrier or a ship owner: accordingly, whether or not cargo was delivered for loading, UPS would not necessarily be out of pocket for the loss of freight charges. Belair argued alternatively that if it was liable for anything it should only be for the actual loss sustained by the UPS interests (i.e. the amount of US $57,500 paid to ECL).
As to Belair’s counterclaim, UPS simply took the position that it had not agreed to assume the obligation of confirming the availability of the goods being timely available for sailing.
The Federal Court reviewed the record of affidavits filed by the parties on the motion and determined that this was in fact a suitable case for summary judgment and that it was in a position to assess the relevant evidence on key points and to make a decision on the facts underlying the claim and the counterclaim.
The Court came to the conclusion that it was possible to deal with this matter summarily, and that, even though there were conflicting affidavits, there was other admissible evidence before the Court making it possible to make findings even on contested facts.
The Court found it to be clear on the evidence that Belair fully understood that it would be liable to pay the dead freight charge – being why in these proceedings it alleged the “collateral verbal agreement” that UPS assumed the responsibility of dealing with the manufacturer to ensure that the goods would be delivered to the port in time for loading.
Recall that Belair also sought to avoid liability on the basis that UPS was not the corporate entity that paid the dead freight liability under the UPS-ECL Booking Note. The Court ruled that it was not necessary for it delve into the question as to whether UPS ultimately compensated the other entity that had paid the ECL dead freight invoice. Whether UPS ultimately paid this invoice was not relevant. There was nothing in the Belair-UPS Booking Note that made payment by UPS to the actual ocean carrier a condition precedent to Belair’s obligation to pay dead freight charges. In this regard the Court found that Belair’s liability was a clearly worded, free standing obligation, simply triggered by the cancellation of the Belair – UPS Booking Note.
Was the “Dead Freight” Clause Enforceable?
As mentioned above, Belair asserted that the clause was not enforceable. Alternatively, Belair argued that it should not have to pay more than what was paid to ECL in accordance with the dead freight clause in the UPS-ECL Booking Note.
i) Though the parties to a contract use the words “penalty” or “liquidated damages” and, at first blush, are supposed to mean what they say, the expression used is not conclusive. The Court must find out whether the payment stipulated is, in truth, a penalty or liquidated damages.
ii) The essence of a “penalty” is a payment of money stipulated to compel contractual performance through an element of fear, whereas the essence of “liquidated damages” is a genuine covenanted pre-estimate of damage.
iii) The question of whether a sum stipulated is a penalty or liquidated damages is a question of construction to be decided upon the terms and inherent circumstances of each particular contract, judged as of the time of the making of the contract, not as of the time of breach.
– The stipulated payment will be held to be a penalty if the quantum is extravagant and unconscionable in comparison with the greatest loss that could conceivably be provided to have flowed from the breach.
– the stipulated payment will be held to be a penalty if the breach relates only to the nonpayment of a sum of money, and the sum so stipulated is a sum greater than the sum which ought to have been paid.
– There is a presumption that the stipulated payment is a penalty where a “single lump sum is made payable by way of compensation, on the occurrence of one or more or all of several events, some of which may occasion serious and others trifling damage”.
In reviewing the above tests, the Court found that, at the time the Belair – UPS Booking Note was entered into, the dead freight clause was a reasonable attempt to estimate the damages that UPS would suffer in the event of cancellation because of Belair’s non delivery of the cargo to the vessel by the stipulated loading time. The Court found this from explanations given in the written exchanges between the parties. Also, UPS itself had to sign a booking note with ECL that contained the same clause, and it seemed obvious to the Court that the clause was intended to cover a loss incurred where a vessel is booked to arrive at a particular port to pick up a particular cargo and space is reserved for that cargo, which is then not used.
The Court noted that UPS had put significant work into finding a vessel and then booking it for Belair under conditions where timing was extremely important to Belair. No fee was charged for this intense and extensive work and precise damages would be difficult to calculate. Accordingly, a dead freight charge made sense in the circumstances. It seemed clear to the Court from the record that the parties did not intend this as a penalty, but as an attempt to reasonably account for the loss should the booking be cancelled for Belair’s failure to deliver.
The Court further noted that the cancellation of the shipment in question meant that UPS became liable to ECL under the dead freight clause in their contract, which liability amounted to $US 163,000. ECL demanded payment for this amount. However, UPS negotiated a discount with ECL so that, in the end, UPS paid US $57,500 to ECL but did not pass that discount on to Belair.
Belair accordingly complained that UPS would enjoy a “windfall” should Belair have to pay the full amount claimed UPS under the dead freight clause in the Belair-UPS Booking Note. In this regard, the Court made an important determination: an enforceable liquidated damages clause is assessed at the time the parties entered into the associated contract and not at the time when the damages occur. The fact that the actual damages may later turn out to be either more or less than the estimate is not an indication that the original estimate was unreasonable. The dead freight clause in the Belair-UPS Booking Note did not say that the charge would be reduced to reflect the amount that UPS ultimately paid to ECL. As the Court noted, if Belair’s liability was only for actual damages calculated at the time of breach, then the purpose of the dead freight clause – being an agreed estimate of damages, providing certainty that comes from knowing in advance what the liability will be in the event of a cancellation – would be meaningless.
The Court also noted that, while UPS and Belair both knew that the dead freight charge in the Belair-UPS Booking Note was intended to cover losses under the UPS-ECL Booking Note, there was no agreement that the amount payable would be reduced if UPS managed to reduce its liability to ECL through negotiations.
Accordingly, subject to the argument raised by Belair that UPS had assumed the responsibility of dealing with the Chinese manufacturer of the cargo to ensure that the goods would be at the port and ready for loading on time, Belair would thus be liable to pay to UPS the full amount claimed by it under the subject dead freight clause.
The Court noted that the evidentiary basis for this alleged collateral contractual arrangement was in the affidavits filed by the parties. The Court found that the evidentiary record was clear, such that a full trial was not necessary as it could determine the key factual issues. In this regard, the Court found that there was no basis in fact that UPS assumed the obligation that it had the responsibility of confirming the readiness of the goods with the Chinese manufacturer. On the other hand, the Court confirmed that the written record simply confirmed that Belair agreed to pay the dead freight amount and fully understood the meaning of the dead freight clause.
The Court, accordingly, found Belair liable for the payment of the dead freight to UPS. The Court dismissed Belair’s counterclaim, finding that, on the evidence, there was no contract ever concluded between UPS and Belair to ship the goods after the termination of the initial Belair-UPS Booking Note. Accordingly, there was no basis for Belair to claim damages of any sort from UPS.
“A contract is a contract is a contract”– especially when it is clearly worded. As a general rule, parties will be held to their obligations, unless a court should find that the contract was negotiated in circumstances where it would be unconscionable to hold a party to their obligations (being unlikely in the commercial context with sophisticated parties) or that the contract offends public policy.
This decision is a nice illustration of the Court sifting through a rather complex fact pattern and applying the terms of the contract agreed upon by the parties, in an efficient and timely summary judgment process.
To date, the Canadian legislature has not followed in the footsteps of its European and – to a lesser extent – American counterparts by enacting protective air passenger rights laws.
Although Mr. Lukàcs has been a frequent litigant before the CTA, his complaints have been far from vexatious. Mr. Lukàcs has prevailed in the vast majority of his approximately thirty complaints brought before the CTA since beginning his mission to reform air passenger rights law in Canada in 2009.
On November 27, 2015, however, Mr. Lukàcs challenged a decision of his regular administrative forum, the CTA, before the Federal Court of Appeal (“FCA”) (*1). Self-represented Mr. Lukàcs prevailed as the Federal Court of Appeal overturned a Decision of the CTA concerning the payment of compensation to passengers denied boarding by the U.K. flag bearing airline, British Airways (“BA”).
At issue in Mr. Lukàcs’s complaint dating to early 2013 was whether certain provisions of BA’s international tariff, governing the international carriage of passengers from and/or to Canada were just and reasonable (*2). This is the legal standard as required by s. 111 of the Air Transport Regulations (*3), enacted under the Canada Transportation Act (*4).
Amongst Mr. Lukàcs’s complaints against BA, only one issue reached the FCA; this pertained to the contentious issue of passenger compensation in instances of denied boarding owing to overbooking. Overbooking has diminished in recent years owing to the widespread use of restrictive discounted ticket sales, which has reduced the number of “no show” passengers; however, air carriers continue to figure into their yield management calculations an assumption as to the number of passengers who will not appear for their confirmed flight.
Within the European Union, the seminal Regulation 261/04 (“Reg. 261/04) (*5), which laid the foundation for global air passenger rights, governs air carrier liability. Article 4 of Reg. 261/04 grants carriers the right to negotiate with passengers for voluntary denied boarding on terms to be agreed between the carrier and passenger.
Where sufficient volunteers are not forthcoming, air carriers are required to compensate passengers whom they involuntarily “bump” from the flight. Compensation of €600 is payable to the passenger for all flight stages exceeding 3,500 kilometers. This may be reduced by 50% if the passenger is re-routed to reach her/his final destination less than four hours later than scheduled.
The geographic scope of Reg. 261/04 is established by Art. 3, which provides that the Regulation applies to all carriers for flights departing from an E.U. Member State airport, as well as to European Union carriers only in respect of flights from third countries to Member State airports. This stipulation indicates that in enacting Reg. 261/04, the European Union deemed that it had jurisdiction over its own carriers on flights into and out of the E.U., but could only dictate the terms governing carriage by third country air carriers for their flights from points of origin within the E.U.
Despite Reg. 261/04 calling for BA to pay its passengers an amount of €600 or €300 if involuntarily denied boarding in Canada depending on the duration of delay, Rule 87(B)3(B) of BA’s international tariff stated that the carrier would pay passengers an amount of only between $50 and $200 in such circumstances.
Mr. Lukàcs, was likely mindful that the CTA had previously refused to require carriers to file tariffs which reflected their legal obligations pursuant to the laws of other States (*6). As such, in disputing the BA tariff before the CTA, he argued that the reasonableness of BA’s tariff had to be considered in light of Reg. 261/04 as opposed to claiming that Re. 261/04 had to be directly transposed into BA’s tariff.
On January 17, 2014 (*7), the CTA ordered BA to show cause as to why it should not be required to bring its tariff into line with one of the compensation frameworks endorsed by the CTA (*8) or propose an alternative framework.
On March 17, 2014, BA answered the show cause order by stating that it would amend its tariff to reflect that compensation would be payable to bumped passengers traveling from Canada to the U.K. in the amount of $400 or $800 contingent upon the duration of delay.
Mr. Lukàcs was given the opportunity to respond to BA’s answer to the show cause order, albeit on the narrow point of whether BA’s proposal was consistent with CTA precedent approved compensation frameworks. Mr. Lukàcs impugned the restricted scope of the amendment as proposed by BA on the basis that it did not cover travel inbound into Canada.
Mr. Lukàcs’s comments – which exceeded the narrow scope granted to him to respond to BA’s answer – were struck down by the CTA.
The CTA issued its final decision on May 26, 2014 (*9). The CTA noted Mr. Lukcas’s comments that the BA proposal was not consistent with precedent approved compensation schemes on the basis that it only applied to flights ex-Canada.
Notwithstanding these comments, the CTA found that the BA proposal was only non-compliant with precedent insofar as it was limited to passengers travelling from Canada to the U.K. as opposed to all outbound destinations from Canada to the E.U.
Mr. Lukàcs brought an appeal before the Federal Court of Appeal. Mr. Lukàcs raised issues of substance and of procedural fairness. In respect of substantive issues within its field of expertise, the standard for review by the FCA of the administrative decision of the CTA is reasonableness (*10), whereas the standard of correctness prevails in respect of issues of due process (*11).
Mr. Lukàcsargued that the CTA decision was unreasonable since it did not impose upon BA any requirement to file a tariff governing its liability for denied boarding on flights from the E.U. to Canada. This violated s. 122(c)(iii) of the Air Transport Regulations, which specifically require that an air carrier’s tariff contain terms and conditions for “compensation for denial of boarding as a result of overbooking”.
Although Reg. 261/04 provides a legal framework setting out liability of air carriers including BA for flights from the E.U. to Canada, as outlined above, the CTA has previously held that it does not have jurisdiction to enforce foreign law. Accordingly, absent a tariff provision on point, the CTA could not enforce a denied boarding provision as against BA on flights to Canada from the E.U. This situation was distinct from other major E.U. transatlantic carriers Air France and Lufthansa whose tariffs in Canada reflected the carriers’ obligations under Regulation 261/04, thereby making such obligations enforceable by the CTA.
Near J.A., supported by Ryer J.A., gave the majority decision of the FCA finding in favour of Mr. Lukàcs, holding that the final decision of the CTA was unreasonable.
The majority decision agreed with Mr. Lukàcs that the CTA decision flew in the face of the agency’s own jurisprudence. The CTA had clearly set out in precedent cases that carriers must provide in their tariff for denied boarding provisions for flights inbound to Canada as well as out bound ex-Canada (*12). Given the agency’s own findings that foreign law could not be enforced, E.U. Reg. 261/04 was not a substitute for a filed tariff provision on denied boarding for flight departing from the E.U. to Canada.
Accordingly, the CTA final decision was unreasonable.
With respect to Mr. Lukàcs’s complaint as to the fairness of his comments having been struck by the CTA, the FCA found the issue to be moot given that the decision of the CTA had been overturned substantively and would have to be reconsidered. The FCA deferred to the CTA to establish the admissibility of submissions in its reconsideration of the issue.
(*6) Decision No. 432-C-A-2013, Nawrot et al v. Sunwing Airlines Inc.

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