From China with Love
Re: The "Norman McLeod"- McAsphalt Marine
Transport Limited v. Liberty International Canada et al. 2005
CanLii 11794 (ON S.C.)
(counsel for Liberty and other Underwriters were Rui Fernandes and
Demetrios Yiokaris of Fernandes Hearn LLP; a full copy of the decision
is at http://www.canlii.org/on/cas/onsc/2005/2005onsc13459.html)
In this case, the applicant, McAsphalt, seeks leave
to appeal from an arbitration award. The arbitration was conducted
by agreement and under the Ontario Arbitration Act 1991.
At the heart of the arbitration was whether damage sustained to
McAsphalt's barge, the Norman McLeod, during a cross-Pacific tow
was covered under a marine insurance policy. If so, whether the
Underwriters were excused from paying the claim due to breaches
of the conditions of the policy and deviation.
The Norman McLeod was being towed along with a second
barge in a double tow by a Korean tug from Shanghai to Vancouver.
During the tow, the Norman McLeod sustained over $2.5 million in
damage. At the arbitration, McAsphalt claimed over $2 million from
the Underwriters, and the Underwriters counterclaimed for $595,000,
which they (except one Underwriter) loaned to McAsphalt while considering
After a month long arbitration in April and May of
2004, the arbitrator issued a 71 page decision. Though the arbitrator
found that the Underwriters agreed to hold the Norman McLeod covered,
he found for several reasons that the Underwriters were excused
from paying the marine claim. Specifically, the arbitrator found
1) a breach of a "weather warranty" excused
the Underwriters from paying the claim pursuant to s. 39(1) of the Marine Insurance Act;
2) a breach of an "attend and approve warranty" excused
the Underwriters from paying the claim pursuant to s. 39(1) of the Marine Insurance Act;
3) a deviation from the contemplated voyage route occurred within
the meaning of s. 43(2) of the Marine Insurance Act and excused
the Underwriters from paying the claim; further the "held covered
clause" in the policy would have protected McAsphalt against
the deviation but for its failure to give the Underwriters the requisite
4) the breaches of warranty and deviation could not be saved by
the principles of waiver and estoppel.
As such, the arbitrator dismissed McAsphalt's claim
and allowed the Underwriters' counterclaim. During costs submissions,
McAsphalt argued that costs should be reduced in light of alleged
"misconduct" and "uncredible" evidence by the
Underwriters. The arbitrator did not accept this position and awarded
the Underwriters over $340,000 in costs. McAsphalt appealed
the arbitration award claiming that the arbitrator made an error
of law in his rulings on the four above issues and on the fifth
issue of awarding costs without making a reduction for alleged "misconduct"
and "uncredible" evidence.
In 1999, McAsphalt commissioned the construction of the "Norman
McLeod", a multimillion dollar barge at the Jinling Shipyards
near Shanghai, China. The Norman McLeod was ultimately destined
for the Great Lakes and the Eastern Seaboard of North America. In
2001, the Norman McLeod was completed at Jinling at about the same
time as another barge. This second barge was destined for Vancouver
and built for the Island Tug and Marine Company ("ITB").
McAsphalt and ITB jointly decided to arrange for their
barges to be double towed by a single tug, the "99 Haedong
Star", across the Pacific Ocean from Shanghai to Vancouver.
At Vancouver, the second barge was to be released and a single tow
of just the Norman McLeod was to continue through the Panama Canal
and then up to Montreal.
The arbitrator found that the Underwriters agreed
to hold the Norman McLeod covered during the tow by way of endorsement
under a subscription policy of marine insurance for the "Everlast",
a tug owned by McAsphalt. Liberty was the lead Underwriter. The
arbitrator found that McAsphalt's broker issued a standard Survey
Warranty to McAsphalt regarding the tow. It warranted that the surveyor
1) Approve tug and any other towing conveyance,
as well as all towing equipment required.
2) Approve all loading, stowage, and securing of equipment or
3) Attend and approve all stages of the towing operation.
4) Approve prevailing weather conditions or stipulate acceptable
weather criteria for each stage of the towing operation.
The warranty also provided that all recommendations
of the surveyor were to be complied with and that the surveyor was
to be advised of towing schedules and any amendments and given reasonable
notice of required attendances in order that the warranties could
be complied with.
Captain Mike Negus, the marine surveyor hired to survey
the tow, issued a Certificate of Approval which included the statement
that "Departure from Shanghai and any intermediate port or
place of shelter shall take place in favourable weather on receipt
of a suitable weather forecast." In addition, the Certificate
was subject to five recommendations. Two were of significance in
this leave to appeal:
1) The tow shall be visited and inspected at intervals
during the towage when conditions allow and after bad weather.
2) Dedicated weather forecasts were to be obtained on a daily basis
from a recognized service provider for the duration of the towage.
Ocean Routes, as mentioned in the voyage plan prepared by Samji
Shipping [managers of the Korean tug] the are acceptable.
On April 30, 2001, the tug and the two barges departed
from Shanghai. The contemplated route included taking bunkers (fuel)
in Hakodate, Japan. The captain decided, after leaving Shanghai,
to take bunkers (fuel) at Nakhodka, Russia instead of Hakodate,
Japan. Shortly after taking bunkers in Nakhodka, the tug encountered
heavy weather. The towline of the second barge became entangled
with the towing gear of the Norman McLeod. The two barges collided
and both sustained damage.
The arbitrator found that there were two "true" warranties
that were breached. Under Canadian law (see the "Bamcell II"
 1 WWR 97 (S.C.C.)), there are several different types of
marine warranties, including a "true warranty", a "representation",
a "description of the risk" and a "suspensive condition".
The type of warranty will determine what effect a breach of the
warranty has on the policy, including whether the breach must be
material to the loss. True warranties are warranties, which, if
breached, excuse the Underwriter from paying the claim regardless
if the breaches are material to the loss or not.
The abritrator found that there was a "weather
warranty "and an "attend and approve warranty" which
were breached and were both "true warranties". Further,
the arbitrator found that there was a deviation from the contemplated
voyage . Finally, the arbitrator also concluded that the breaches
and the deviation could not be saved by waiver or estoppel.
"The arbitrator further found that item 4 in
the survey warranty concerning approval of weather conditions,
together with the language in the body of the Certificate of Approval
that departure from Shanghai and intermediate ports were to take
place in favourable weather and on receipt of a suitable weather
"The arbitrator found that item 3 in the survey
warranty concerning attendance and approve by the surveyor at
all stages of the towing operation mean that the surveyor had
to attend at all intermediate ports to approve the tow arrangements,
regardless of whether or not there had been a material change
to the arrangement. He found that the failure of the surveyor
to attend at Nakhodka was a further breach of warranty."
In addition, the arbitrator found that the change
of course in the voyage to Nakhodka amounted to a deviation within
the meaning of s.43(2) of the Act, and that the held covered clause
in the policy would have protected McAsphalt against the deviation
but for its failure to give Liberty the requisite notice.
Finally, the arbitrator found that the breaches
of warranty and the deviation could not be saved by the principles
of waiver and estoppel. Specifically, he found that there was
no detrimental reliance on the part of McAsphalt for the purposes
of estoppel, and that the underwriters' actions in sending a surveyor
to survey the loss and approve the continuation of the tow did
not mean that they waived or forgave the breaches or deviation."
(per Justice Dambrot, para 15-18)
During costs submissions, McAsphalt took the position
that there was misconduct on the part of the Underwriters and uncredible
evidence given at the hearing by the lead Underwriter's employee.
The arbitrator did not accept this position and awarded the Underwriters
costs of over $340,000.
Leave to Appeal
At leave to appeal, the Underwriters argued that the parties excluded
a right for leave to appeal. McAsphalt argued that the arbitration
agreement was silent regarding appeals and as such, under section
45(1) of the Arbitration Act 1991, it may seek grant for
leave to appeal on questions of law. Section 45 (1) of the Arbitration
Act 1991 provides:
Appeal on question of law
45. (1) If the arbitration agreement does not deal
with appeals on questions of law, a party may appeal an award
to the court on a question of law with leave, which the court
shall grant only if it is satisfied that,
(a) the importance to the parties of the matters
at stake in the arbitration justifies an appeal; and
(b) determination of the question of law at issue
will significantly affect the rights of the parties. 1991, c.
17, s. 45 (1).
Final and Binding
The arbitration agreement provided that the arbitration was "final
and binding". The court ruled that this reflects an intention
to exclude a right of appeal, but does not necessarily exclude a
right of appeal. The court then concluded that it must "engage
in a fact-driven attempt to determine the intention of the parties".
The only relevant evidence put before the court on this issue was
an exchange of emails between the Lead Underwriter's representative
and McAsphalt's broker during the negotiation of the arbitration
agreement. In this email, the Lead Underwriter's representative
explained the intention behind the various paragraphs in an earlier
proposed arbitration agreement. With respect to the reference to
the arbitration being "final and binding" the Lead Underwriter's
representative specifically wrote that the Underwriters saw:
"no need for a judicial resolution of this
matter. The costs for all parties would likely be heavy and in
the final analysis only were to pad the pockets of the legal profession"
McAsphalt agreed to the inclusion of the arbitration
being "final and binding" and that language was used in
the arbitration agreement. The judge ruled:
"Taken together with the language of the agreement,
this suggests to me that the parties saw no issue that required
judicial determination, and were confident that an arbitrator
could be relied upon to finally resolve their dispute, without
the need for appeals."
Section 45(1) Analysis
Though the judge ruled that McAsphalt had no right to seek leave
to appeal, in case he was wrong, the judge continued on with an
analyses under s. 45(1) of the Arbitration Act 1991. The
judge ruled that the second and third prong of the test were met,
except for the costs issue; however he did not find that the issues
appealed met the first prong i.e. they were not all "Questions
There are three types of findings a judge can make:
a "Question of fact", a "Question of Law" and
a "Mixed Question of Fact and Law". Though there are many
decisions on this issue, including Supreme Court of Canada decisions,
it is not always easy for an appellate court to differentiate between
Generally, "the construction of a statutory enactment
is a question of law while the question of whether the particular
matter or thing is of such a nature or kind as to fall within the
legal definition of its term is a question of fact." Questions
of law are questions about what the correct legal test is; questions
of fact are questions about what actually took place between the
parties; and questions of mixed law and fact are questions about
whether the facts satisfy the legal tests (see Canada v. Southam
Inc.  1 SCR 748 para 41).
The judge summarized the grounds of appeal raised
"(1) Wrong interpretation of the "weather
warranty" as a true warranty rather than a suspensive condition;
(2) Wrong interpretation of the "attend and
approve warranty" as requiring the surveyor to attend at
all intermediate ports despite the industry practice;
(3) Error in law in concluding that the notice requirement
of the hold cover clause had not been satisfied;
(4) Error in law in finding that the principles
of waiver and estoppel did not apply; and
(5) Error of law in imposing costs, having regard
to the unreasonable position of the respondents and the "uncredible"
evidence of Mr. Verconich.
I note that it would be pointless to grant leave
on any of the first three grounds of appeal unless all three of
them raise errors of law, and I decide to give leave on all three.
If only one or two of them raise an error of law, then the determination
by the arbitrator that a condition of the insurance policy had
been breached would be unassailable. Ground four, however, and
of course ground five, can stand alone."
The judge ruled that the appeals regarding issues
1 and 2 (the "weather warranty" and the "attend and
approve warranty") were questions of law as they "involved
nothing more than the proper construction of a policy of insurance."
With respect to the other three issues the judge ruled at paragraphs
" I am of the view that the determination
that the notice requirement of the hold cover clause had not been
satisfied is clearly a finding of fact, and raises no question
 I am of the view that the determination that
the principles of waiver and estoppel did not apply was also a
finding of fact, and raises no question of law.
 I see nothing in the discretionary exercise
of the arbitrator's authority to impose costs that raises a question
In conclusion, the court refused leave to appeal both
on the basis that the parties excluded a right for leave to appeal
and on the basis that even if the parties did not exclude this right,
the test under s. 45(1) Arbitration Act, 1991 was not met.
By: Demetrios Yiokaris
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