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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 http://www.fernandeshearn.com/news_&_upcoming_events.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:
- 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?
- 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?
- 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.
- 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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