August 2005

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 the loss.

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 that:

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 notice; and
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.

Background
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 was to:

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 cargo carried.
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 Award
The arbitrator found that there were two "true" warranties that were breached. Under Canadian law (see the "Bamcell II" [1984] 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 forecast…"

"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 of law".

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 the three.

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. [1997] 1 SCR 748 para 41).

The judge summarized the grounds of appeal raised by McAsphalt:

"(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 30-32:

"[30] 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 of law.

[31] 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.

[32] I see nothing in the discretionary exercise of the arbitrator's authority to impose costs that raises a question of law."

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