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Newsletters 2007 > November 2007

In this issue:
1. Firm News
2. Mechanical or electrical breakdown or derangement defined
3. Answers to some tricky quesitons


1. Firm News

The "International Who's Who Legal" Shipping & Maritime 2008 Magazine recently published the following commentary about the firm:

"Boutique marine, aviation and maritime firm Fernandes Hearn LLP is the only outfit with two lawyers in our Toronto listing. Rui Fernandes received more recommendations than any other practitioner and is said to be "experienced" and "well qualified", particularly on the cargo side. Gordon Hearn was also consistently endorsed, for litigation and insurance related advice especially".

Gordon Hearn has also recently been listed in the "International Who's Who of e-Commerce lawyers".

Rui Fernandes attended the 4th International Marine Claims Conference held in Dublin Ireland at the end of October.

Rui Fernandes recently did an in-house seminar to insurers on "Casualty Investigations in Trucking".

Gordon Hearn spoke on the topic "Small Passenger Vessels as Rescue Resources - Legal Implications" at the joint meeting of the Canadian Passenger Vessel Association and the U.S. Passenger Vessel Association held Niagara Falls Ontario on October 23, 2007.

Fernandes Hearn LLP's 2008 Maritime and Transportation Law Conference will be held on January 18, 2008 in Toronto, Ontario. Details are on our firm's News and Upcoming Events page at www.fernandeshearn.com/news.htm.

Gordon Hearn will be speaking at the Transportation Lawyers Association "Chicago Regional Seminar" on January 11, 2008. Gordon will be giving a presentation comparing the truck carriage limitation of liability regimes in Canada and the United States.


2. Mechanical or electrical breakdown or derangement defined

In Caneast Foods Ltd. V. Lombard General Insurance Company of Canada (2007), 86 O.R. (3d) 385 an insured suffered losses when its pickle production plant was shut down by a province-wide blackout. It was insured against all risks policy issued by Lombard. Lombard took the position that the loss came within the exclusion in the policy for loss or damaged caused directly or indirectly by "mechanical or electrical breakdown or derangement in or on the premises."

The court reviewed the case law in Ontario, Alberta and British Columbia and concluded "In my view, these cases support the conclusion that the phrase "mechanical or electrical breakdown" denotes a failure in the operation of a piece of equipment due to some mechanical or electrical defect in some part or parts of the equipment. It follows that where a machine ceases to operate because of an interruption in its power supply due to a regional blackout on the electricity grid, a mechanical or electrical breakdown of the machine does not occur."

The court also considered whether the loss was caused by a "mechanical or electrical derangement". Relying on the British Columbia Supreme Court decision in Cominco Ltd. V. Commonwealth Insurance Co., [1985] B.C. J. No. 174 for guidance the court stated: " Although somewhat cryptic, in my view the Cominco decision reinforces the notion that a "derangement" (which in the case of this Policy operates as an exclusion) involves some problem or defect internal to the piece of equipment." The court held that an electrical derangement would not include a power failure originating from outside a premise.

Rui Fernandes


3. Answers to some tricky questions

The Treaty Group Inc. v. Drake International Inc. (2007) 86 O.R. (3d) 366 (Ont. C.A.):
"Answers to Some Tricky Questions - All Under One Roof"

When can you sue one defendant after getting judgment against another?

Can the plaintiff have its recovery on a breach of contract claim reduced on account of "contributory negligence"? (Isn't a contract either breached, or not?)

When do you calculate the damages for a breach of contract claim? (Is this at the time of the breach? But what if the plaintiff complains of being deprived of property - in a "falling market"? Does it not gain an unfair windfall?)

The answers to these tricky questions, that have long been a thorn in the side of litigation lawyers, can all be found in the reasons for judgment in this case.

Facts

The defendant is a well-known employment agency. It supplied an employee to the plaintiff without checking her references. The employee defrauded the plaintiff over a period of more than two years. The plaintiff, The Treaty Group Inc., sued the fraudulent employee for damages and obtained a judgment in the amount of $261,951.81. The employee made limited payments against this judgment, and then was out of money. The plaintiff then sued the defendant employment agency for damages for breach of contract, negligence and negligent misrepresentation, based on the defendant's failure to conduct the reference checks.

The trial judge found the defendant liable for the plaintiff's loss, but held that the plaintiff contributed to its own loss in its failure to supervise the employee which lack of supervision facilitated the fraud. The trial judge accordingly reduced the plaintiff's damages by 50%. Both parties appealed, raising interesting questions:

  1. Drake International (the employment agency) was unhappy with the finding that the plaintiff could claim against it, notwithstanding that the plaintiff had already obtained a judgment against the employee. Would this not allow for an unfair or extra recovery on the plaintiff's part?

  2. Drake International also protested the finding that its admitted failure to conduct background checks "caused" the plaintiff's losses, so as to form the basis for a claim in damages. Was the cause of loss in fact not the plaintiff's own failure to supervise the employee during the period of employment?

  3. Drake International complained that the judge attributed 50% of the responsibility to it, with Drake suggesting that at least a greater portion of blame (85%) should be levied at the plaintiff who should have had appropriate controls in place.

  4. The plaintiff in turn protested the finding that it was "contributorily negligent" with the result that the plaintiff's damage claim was reduced by 50%.

Issue #1: Could the Plaintiff "go after" the Defendant, it having already gone after the fraudulent employee to get a judgment?

This is an interesting point and of concern to counsel, as concerns the general problem as to exactly when it is that, two or more defendants being responsible for the plaintiff's losses, the plaintiff is allowed to "pick and choose"? Can a plaintiff pursue one defendant, to judgment, to see if it can recover on that judgment, or if not, can it then pursue another defendant? What controls can be put in place to prevent a double recovery, with the plaintiff potentially recovering from different defendants from different lawsuits amounts exceeding its losses?

On appeal, the Court of Appeal analyzed the essence of the two different lawsuits. The first, being the plaintiff's case against the employee was for fraud. It was based on the employment contract. In contrast, the basis for the second lawsuit against Drake International, which alleged both breach of contract and tort, was that the defendant failed to conduct reference checks on the employee and did not check her background in breach of the "headhunter" agreement. The trial judge had held that the judgment against the employee did not bar the plaintiff from seeking damages for the same loss from the defendant because the "causes of action" (that is, the basis for claim) were in fact different.

It is critical to note that the trial judge found that Drake International and the fraudulent employee were severally - rather than jointly - liable on the basis that Drake International and the employee were not acting in concert or in furtherance of a common purpose. In short, liability of one did not automatically liability of the other so as to create "joint" liability. The Court of Appeal confirmed that subject to the rule barring double recovery (plaintiffs cannot recover more than the amount of the loss in question), that where a plaintiff elects to pursue a claim against one of severally liable defendants, there is no legal principle that holds that a plaintiff is precluded from pursuing a second action against another defendant. In short, it is not the damage award that amounts to "satisfaction" and bars action, but the recovery by the plaintiff in the first action would. In essence, the plaintiff can proceed to obtain judgment in the second action but the question then is whether any recovery that has been obtained by the plaintiff in the first action would affect the amount of recovery in the second action. Again, the distinction must be drawn from cases where there are alternatively liable parties that are sued on one contract or one cause of action (in which case there is very much a risk to a plaintiff that taking judgment as against one might preclude the judgment being taken out as against the other). This was not the case in this situation, as there were separate contracts between the plaintiff and the defendant and as between the plaintiff and the fraudulent employee. As such, the causes of action were different.

The only way that the plaintiff would have been therefore barred from commencing the second action against the defendant would have been if it had at that point already received the full amount of the loss from the fraudulent employee. However, this had not been the case.

The question arose as to why the plaintiff did not act more economically in terms of naming both the fraudulent employee and Drake International as defendants in the first lawsuit. Interestingly, the trial judge in this case dealt with the problem of the resulting duplication of court time and unnecessary costs by declining to award costs to the plaintiff.

The foregoing analysis still however does not dispose of the concern that where two different actions are taken against different parties, arising from the same "loss", that there remains the possibility that the plaintiff might recover greater than 100% of its damages. As this would not happen had there been one action (the one and only judge then dealing with all liabilities in one "swoop") what can be done about this if there are different actions?

Drake International raised the argument that it is unfair for it to have to pay the full amount apportioned to it of 50% of the plaintiff's damage claims, arguing that the amounts that the fraudulent employee had paid under its judgment should be deducted from the total amount of the damages awarded and that it should then in turn have to pay only 50% of the remaining amount. The Court of Appeal did not give any effect to this argument because of the general rule that "insolvency is not relevant to the allocation of fault". Liability has nothing to do with recovery and therefore Drake International was still liable its full 50% of the damages.

The Court of Appeal agreed that the issue of double recovery was properly dealt with by an undertaking given by the plaintiff who confirmed that it would not actually enforce the portion of the judgment collected from Drake International (i.e. 50%) against the fraudulent employee. This undertaking required the plaintiff to advise the sheriff (who would be involved in the enforcement of the judgment against the fraudulent employee) of the satisfaction of that amount from other sources (i.e. as paid by Drake International) in directing the sheriff not to enforce the judgment against the employee to that extent. Thus, the plaintiff would be able to continue to enforce the judgment remainder of its judgment that it still had outstanding against the fraudulent employee less the 50% Drake International paid.

Issue #2: Can the Plaintiff have its recovery, on a Breach of Contract claim reduced on Account of "Contributory Negligence"?

The appeal decision also raises the tricky if not confusing area concerning the concept of "contributory negligence" in actions for breach of contract. Most of us are familiar with the notion of "contributory negligence" applying in a tort claim (where negligence is alleged on the part of a defendant) to the extent that if a plaintiff has facilitated or in part caused damages, the negligent defendant in effect gets a credit, with the plaintiff receiving a correspondingly reduced judgment, on account of the extent to which the plaintiff caused the loss.

What does the concept of "contributory negligence" have to do with a claim for a breach of contract? Is a contract either breached or not? In its analysis, the Court of Appeal noted that while contributory negligence does not ordinarily reduce damages for breach of contract, the trial judge was properly of the view that the results should be the same whether the plaintiff recovered for the defendant's breach of contract or for the defendant's negligence. Accordingly, damages were apportioned in the claim for breach of contract. (It is important to note that as a general rule when a plaintiff has a grievance as to how a defendant performed (or as the case might be, did not perform) a contract, while the basis might exist in law for the plaintiff to allege a negligence claim against the defendant, the rule is that the plaintiff cannot sue in the law of negligence with a view to avoiding the terms and obligations in the contract which formed the relationship between the parties. In short, while one might sue in both contract and in tort, one cannot sue in tort to avoid the application of the contract terms in question. As such, the notion is interesting that tort principles, which provide for apportionment of liability between a contributorily negligent plaintiff and a negligent defendant, might apply to apportion damages, that is reduce the award given to a plaintiff, for a breach of contract claim).

Issue #3: What is the date when Damages for a Breach of Contract should be Fixed?

In its analysis, the Court of Appeal also revisited the general rule as to the date for the assessment of damages in a case involving a breach of contract. The Court of Appeal confirmed that the general rule is that a plaintiff is entitled to have his or her damages assessed at the day of the breach, not the date that judgment is obtained. This is a very important rule of application whenever the plaintiff claims in respect of the loss of property and where the property declines in value between the date of the wrong and the date of the judgment. As stated, the general rule is that the plaintiff is entitled to damages at the date of wrong. (The same rule applies when the value of the property increases between the day of the wrong and the day of judgment). Thus, in a breach of contract case, the theory is that the damage is "crystallized" at the date of the breach. This involves the potential for a windfall to the plaintiff in a falling property value, or a falling currency market, but also the potential of loss in a rising property value or currency market.

The Court of Appeal Review of the "Causation" Issue and the Apportionment of Liability

The next issue dealt with on the appeal was on the causation issue. Drake International argued that the judge made an error in finding that the plaintiff would not have hired the employee even if it had received the background information about her. In effect, the defendant argued that the most important hiring criterion to the plaintiff was "fit" with the employee rather than her credentials. The trial judge however found on the facts that the plaintiff did not only care about "fit" but that it clearly wanted a competent employee and not one with a negative track record (as would have been revealed had the background checks been done). As such, the Court of Appeal found no basis to interfere with the trial judge's finding that the plaintiff would not have hired the employee if it was given the negative track record that in fact existed. As such, Drake International played a role in the loss.

The defendant then proceeded with an argument that the judge erred in apportioning it with 50% responsibility when it says that the plaintiff should bear the lion's share of the losses in terms of having been contributorily negligent in failing to police the employee during her employment. The defendant argued that the plaintiff should be found 85% contributorily negligent. The appellant essentially argued the "last clear chance" doctrine, where liability would be apportioned to a much greater degree to the party who had the last opportunity to avoid the loss. The Court of Appeal refused to interfere with the trial judge's apportionment of damages. It is important to note the general rule that appellate courts will employ significant deference to determinations of liability by a trial judge. This is both of economic necessity (the system simply does not want trial judges being overturned on appeal simply because appellate judge's might "simply disagree" with a finding by a trial judge) and also on the basis that trial judges have the unique opportunity to hear witnesses and assess credibility of witnesses. As such, Courts of Appeal will only overturn findings of fact by judges at trial on the basis of a "clear or overriding error". In the jury context, appellate courts will not interfere with a jury verdict unless the verdict is so "plainly unreasonable and unjust" to satisfy the appellate court that no jury reviewing the evidence as a whole and acting judicially could have arrived at that conclusion".

It is also important to note that the Court of Appeal in effect dismissed the existence of the "last clear chance" defence. This defence is to be rejected on the basis that it tends to focus only on the conduct of the plaintiff and as a result tends to place less emphasis on the blameworthiness of the negligent defendant.

Finally, the Court of Appeal had to consider the cross-appeal filed by the plaintiff, who was unhappy with the finding that it was contributorily negligent. The plaintiff argued that the defendant was much more significantly "in the wrong" in failing to do any background checks. However, the Court of Appeal again refused to alter the trial judge's finding on the basis that the same should be allowed a great deal of deference.

In the result, both the appeal and cross-appeal were dismissed.

Gordon Hearn

 



 


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