May 2005

In Beaulieu v. Day & Ross Inc., [2005] N.B.J. No. 77 (C.A.), the New Brunswick Court of Appeal, in its February 24, 2005 judgment, allowed the appeal and limited the legal liability to the amount specified under the limitation of liability clause in the contract of carriage.

The plaintiff Beaulieu purchased car parts from a vendor, Proto, over the Internet. Unbeknownst to Beualieu the vendor was located in Toronto. He assumed that Proto was located in Florida and requested that the shipment be taken to Maine from where the New Brunswick resident could easily pick up his purchase.

In fact, Proto arranged for the carrier Day & Ross to pick up the goods. Proto had an ongoing relationship with the carrier and used its blank bills of lading. When the carrier picked up the shipment, Proto issued a copy of its "straight bill of lading" without a declared value indicated in the applicable part of the document that advised a $2 per pound limit of liability would apply if the value was not declared. Proto also provided a commercial invoice indicating a value of $200.

In the transport of the shipment, the carrier was unsuccessful in getting the shipment across the border into Maine and subsequently carried the shipment to its facilities in New Brunswick where it was lost. Originally, the carrier offered to pay the limit of liability according the shipping contract, $60, but then offered the commercial value of $200, which Beaulieu rejected.

The case started its procedural history in the Small Claims Court and proceeded through to the Province's highest Court where the carrier won its appeal to limit its liability to $60 and not the $1,375, the amount paid by the plaintiff purchaser to a vendor.

The case covered key contract of carriage principles including privity of contract, fundamental breach and declared value. The Court of Queen's Bench held the limitation of liability clause to be unenforceable because 1) the carrier's failure to deliver the goods was a "fundamental breach" of the shipping contract and 2) the purchaser was not bound by the terms of the shipping contract because he was not a party. As the lower court held that the shipping contract was between the vendor and carrier of the goods, it also held that the purchaser was not bound by the limitation clause.

The Court of Appeal began its decision by rebuffing the notion of inequality in bargaining positions of the parties and underlining the commercial realities of transport:

Admittedly, the result will be antagonistic to those who perceive justice in terms of David slaying Goliath. After all, it is Goliath (an international trucking firm) who negligently lost David's goods (the university student). But there are times when legal principles and commercial efficacy must trump intuitive notions of justice. What must not be forgotten is that the limitation clause found in most bills of lading is a product of legislative intervention. While the trucking industry has been the subject of deregulation, the contractual terms on which carriers conduct their daily business remains highly regulated. Consequently, the perception that the limitation clause in question is the product of an inequality in bargaining power and, therefore, unfair, unconscionable or unreasonable, is simply misguided.

Thereafter, the Court touched upon a key arguments typically at issue in carriage cases in determining whether limits of liability apply.

Privity of Contract

The Court began its analysis by addressing the proper law of the contract, whether Ontario or New Brunswick law, in order to determine the privity of contract issue. While the laws were similar, the Court noted an obvious difference. In Ontario, similar to s. 2 of the federal Bills of Lading Act, s. 7(1) of the Mercantile Law Amendment Act, R.S.O. 1990, c. M.10, provides that every consignee named in a bill of lading is deemed to be a party to the contract and vested with all rights and liabilities that are prescribed. Legally, this establishes privity of contract, assuming that none exists at common law. The New Brunswick legislation has no equivalent, although s. 4(1) of the Law Reform Act, S.N.B. 1993, c. L-1.2, establishes that a person who is not a party to a contract, but who is identified as a person intended to receive a benefit, is entitled to seek performance in a claim for damages. Subsection 4(2) also states that in proceedings brought under subsection (1) the contracting party being sued may raise any defence that could have been raised in proceedings between the contracting parties.

However, the Court, noting the common law rule governing contracts of carriage, stated that Beaulieu could not avoid the application of the limitation clause by suing in negligence. The Court stated that in carriage of goods cases the doctrine of privity is defeated by holding that the contract was entered into by the consignor as agent for the consignee.

Fundamental Breach

The next issue the Court addressed was whether the clause was unenforceable under the common law doctrine of fundamental breach, which states that a defaulting party cannot rely on an exemption or limitation of liability clause where there is a breach of a fundamental term of the contract. The Court stated that a carrier's failure to deliver goods constitutes a breach of a fundamental term of the shipping contract.

However, the Court also stated that "Canadian law rejects the idea that a fundamental breach terminates a contract and as a result an exemption or limitation clause is unenforceable as a rule of law," citing Beaufort Realties (1964) Inc. v. Chomedey Aluminium Co., [1980] 2 S.C.R. 718. Essentially, the Court noted that a fundamental breach does not automatically nullify and exemption or limitation clause, and stated "[i]In short, there is no substantive rule of law that nullifies an exemption or limitation clause where there has been a fundamental breach." As the Court explained, the issue requires evaluating the entire contract:

...whether there has been a fundamental breach and whether the limitation clause is applicable to the breach is to be determined according to a construction of the entire contract. Where the meaning of the clause is plain it cannot be construed in a manner that deprives the defaulting party of its contractual force. In the present case, there is no ambiguity and, therefore, Day & Ross is entitled to the benefit of the limitation clause.

The Court further noted that in cases where courts "find a fundamental breach of a contract and declare limitation or exemption clauses unenforceable, as a rule of law, they do so on the implicit understanding that the contractual provision clause is "unfair", "unconscionable" or "unreasonable". Accordingly, in the Day & Ross case the Court determined that the limitation clause in the bill of lading was not unfair, unconscionable or unreasonable for three stated reasons.

Unfair, Unconscionable or Unreasonable

In determining whether the limitation clause was reasonable, the Court looked to freedom of contract, the failure to declare value, and the application of motor transport legislation in Ontario and New Brunswick that prescribe terms deemed to be part of contracts of carriage.

First, the Court cited the unfairness of not permitting carriers to obtain the benefit of a contractual term that is otherwise properly a term of the contract. The Court stated:

A carrier and its insurer is entitled to know the potential magnitude of any risk of loss. In turn, the carrier is able to impose a shipping charge that reflects the degree of risk being assumed. Had Mr. Beaulieu paid, for example, $100,000 for the car parts, the idea that he could recover the full amount without having first informed Day & Ross of the extent of its potential liability is simply unfair.

Secondly, the Court focused on the declared value, which the consignor did not insert onto the bill of lading, which the Court characterized as possible grounds for the consignor being held liable to the shipper, the latter of whom is responsible for declaring a value. Thus, the real liability lies not with the carrier.

Thirdly, the Court upheld the limitation clause as a prescribed term under both Ontario and New Brunswick legislation, which deems certain terms as part of contracts of carriage. The Court stated:

In light of the statutory framework applicable in both Ontario and New Brunswick, I cannot subscribe to the view that the limitation clause found in the bill of lading in question is unfair, unconscionable or unreasonable. Even if one were to hold a contrary view, the fact that the legislatures have imposed a statutory solution to a problem is a sufficient basis on which to oust the application of the fundamental breach doctrine to the extent that it continues to be viewed as a rule of law.

The Court went on to examine the adjudicator's findings before the Small Claims Court, which were not technically under appeal. The adjudicator ascribed to the theory that the limitation clause does not apply where the carrier commits gross negligence. However, the Court stated "that the carrier is liable for all loss or damage to goods irrespective of whether the carrier was at fault." Unless exemptions such as acts of God apply, "the carrier is responsible for all acts of non-performance and it makes no difference whether they qualify as simple or gross negligence."

The Court also examined the adjudicator's other basis for holding the clause unenforceable, which was based upon noncompliance with a New Brunswick statute requiring that the consignor and carrier must sign the bill of lading, not merely initialing it. Thus, the Court looked at the illegality doctrine on the issue of whether the carrier's alleged failure to have its driver lace his signature on the bill of lading cause it to be void ab initio. The Court, citing Waddams, held that this was not the effect: "If every statutory illegality, however trivial, in the course of performance of a contract, invalidated the agreement, the result would be an unjust and haphazard allocation of loss without regard to any rational principles".

TM