AUGUST 2001

Recent Federal Court Decisions of Interest to Insurers and Transportation Providers

The Arrest Remedy: Paramount Enterprises International, Inc. v. An Xin Jiang (The), [2000] F.C.J No. 2066 (F.C.A.)

Arresting marine property is an excellent way to obtain security for payment of claims, in the appropriate case. Marine vessel and cargo arrest is a statutory remedy available in Canada only in the Federal Court, under section 43 of the Federal Court Act. Arrest of vessels and cargo will result in costly delays. Ocean going vessels charter for thousands of dollars per day so the possibility that the vessel may be arrested often encourages potentially liable parties to pay money into court to avoid arrest or in discharge of arrest orders. Where arrest is available, an insurer or transportation provider can proceed with a claim knowing that there will be money to satisfy some or all of a judgment.

The decision in The An Xin Jiang deals with the scope of the arrest remedy. It makes it clear that the arrest remedy is not the equivalent of a Mareva injunction nor is it an all purpose method of forcing ship or cargo interests to post security to avoid arrest. It provides that the arrest remedy is restricted to claims that, in a relevant sense, involve the ship or cargo sought to be arrested. The arrest remedy is limited to situations of damage to cargo caused by the state of the ship or the conduct of the crew (where the owner is also in some way personally liable), damage to the ship caused by the state of the cargo, collision, contracts for the provision of services to the ship, and the other traditionally recognized categories of in rem claims. However, the remedy is not available just because the ship owners or charterers, or cargo owners, have some (potential) liability to the plaintiff arising out of events not related to the cargo or ship sought to be arrested.

In The An Xin Jiang, the charterers, Paramount Enterprises, and the shipper, Beston Chemical Corporation Inc. (and others) had agreed on a charter party for carriage of a cargo of explosives from the port in China to Grande Anse, Quebec. The cargo was to be carried aboard the ship "Len Speer." However, for unknown reasons, the shipper did not have the cargo loaded aboard the "Len Speer;" instead, had the cargo loaded aboard another vessel, the "An Xin Jiang".

Paramount sued alleging breach of charter party and wrongful interference with contractual relations. Warrants of arrest were issued against the cargo and the ship. The ship owners and cargo owners each sought orders from the Federal Court setting aside the warrants.. The case eventually reached the Federal Court of Appeal. The Court held that while an allegation of personal liability of the owner of a ship or cargo is required before the ship or cargo can be arrested, the mere fact of the owner's (potential) liability is not sufficient for the arrest of the vessel. There must be some non-fortuitous connection between the vessel or cargo sought to be arrested and the dispute producing the litigation before arrest of vessel or cargo is permitted. The Court held that, in this case, the nexus between the ship, the cargo and the cause of action (the claim for damages by the charterers of the "Len Speer" ) was merely fortuitous.

The "An Xin Jiang" had not been involved in the incident giving rise to the litigation in any way that that the Court held was significant. That it was now carrying the cargo was not significant, according to the Court, because the breach of the charter party (if it was a breach) was complete when the shippers informed the plaintiffs that the cargo would not be carried as agreed.

The "An Xin Jiang" was merely the ship that ended up carrying the cargo. The vessel was not, herself, involved in the breach.

Similarly, the cargo was not itself involved in the incident in a relevant sense. It was merely the cargo that was supposed to have been loaded on the "Len Speer". That, of itself, was not sufficient to create the required nexus.

Pantainer Ltd. v. 996660 Ontario Ltd.
[2000] F.C.J. No. 334 (Q.L.)

Every transportation provider that has ever commenced proceedings for unpaid freight has been faced with a claim for set-off (meritorious or otherwise), usually for cargo damage.

In Pantainer, the Federal Court Trial Division confirmed that set-off is no defence to a claim for freight charges under Canadian law.

In Pantainer, the plaintiff transportation provider had arranged for ocean shipment of a cargo of pasta. The freight charges for the shipment were unpaid. When the transportation provider claimed for freight, the defendant raised a set-off for damage to the cargo.

Considering whether set-off constituted a defence to a claim for freight charges, Justice Teitlebaum held that unless parties specifically contract out of the general rule to the effect that freight is to be paid when due, without deduction, set-off cannot be raised as a defence to claim for freight charges.

Anraj Fish Products Industries Ltd. v. Hyundai Merchant Marine Co., [2000] F.C.J. No. 944

Both the business of providing transportation and the business of providing cargo and hull insurance are necessarily international. Choosing the jurisdiction in which claims are to be commenced can significantly influence both the cost of proceedings and the predictability of the result, for carriers and insurers alike.

In the recent case of Anraj Fish Products, the Federal Court of Appeal upheld the decision of a Prothonotary to enforce a jurisdiction clause in a contract of carriage requiring that proceedings be commenced in Korea. The Federal Court held that jurisdiction clauses will be enforced unless the party seeking to avoid the clause can show strong reasons (such as a serious prejudice or unfairness that would result) before a court will refuse to enforce a jurisdiction clause.

Z.I. Pompey Industry v. Ecu-Line N.V., [2001] F.C.J. No. 96

The limitations of liability imposed under the Hague-Visby Rules significantly affect the amount that can be recovered in subrogated actions for cargo damage. The limitations often provide a significant protection to transportation providers.

Before the decision of the Supreme Court of Canada in Hunter Engineering v. Syncrude, the doctrine of fundamental breach gave claimants a way to avoid onerous limitation of liability clauses, if it could be established that there had been a breach of contract so significant that the complaining party had been deprived of the entire benefit of the contract. Since Hunter v. Syncrude, limitation and exemption clauses have been enforce unless it can be established that enforcement of the clause would be unconscionable.

The doctrine of fundamental breach seems to survive in maritime law. If there is deviation from the route specified in a contract of carriage or a unilateral change in the mode of transport.

The facts at issue in Z.I. Pompey v. Ecu-Line involved shipment of a contract for carriage of two crates of cargo from Anvers, Belgium, to Seattle. Instead of shipping the goods from port to port by sea as agreed, the carrier travelled from Anvers to Montreal and had the goods shipped west by rail.

While the reasoning of the Court of Appeal in Z.I. Pompey v. Ecu-Line focuses largely on the standard of review to be applied by appellate tribunals in reviewing the decisions of lower courts, the Court of Appeal upheld the prothonotary's decision, and the prothonotary's decision included a finding that there had been a fundamental breach.

The Z.I. Pompey case thus suggests, indirectly, that some form of the doctrine of fundamental breach survives in Canadian federal law, and allows cargo interests to avoid contractual limitations of liability where a carrier has unilaterally deviated from an agreed route.

Governor of the Bank of Scotland v. The Nel, [2001] 1 F.C. 408; [2000] F.C.J. No. 1305 (F.C.T.D., Prothonotary)

The Nel was a Cypriot bulk and container carrier. The bank of Scotland held a mortgage against the Nel, and had the Nel arrested in Vancouver when the mortgage went into default, and she was sold for $5,000,000.00. The value of the mortgage was much greater than the amount realized by the sale, and there were maritime lien claims by bunker suppliers claiming under the provisions of foreign laws (United States, Panamanian and Greek) for maritime liens ranking in priority ahead of the claim of the mortgagee.

This case provides an up-to-date review of the ranking of Maritime liens and claims at Canadian law, and a discussion of the circumstances under which a Court may deviate from the usual ranking of maritime claims to give a statutory claim in rem priority over the claim of a mortgagee to avoid an inequitable result.

This newsletter is published to keep our clients and friends informed of new and important legal developments. The articles are not intended to provide legal advice as individual situations will differ and should be discussed with a lawyer. This newsletter may be printed or stored in electronic form for personal use.