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March 2008
In this issue:
1. Firm News
2. Air Carriage and Consequential Damages
3. Court of Appeal Reverses Boutique Jacob -Himalaya Clause
Affirmed and Norfolk Southern Railway v. Kirby Referred To
1. Firm News
Fernandes Hearn LLP's 2008 Trucking
and Logistics Seminar will be held on April 17, 2008 in Toronto,
Ontario. Details are on our firm's News and Upcoming Events page
at http://www.fernandeshearn.com/news_&_upcoming_events.htm.
Tentative Agenda:
9am - So You Didn't Issue a Bill of Lading!
930 - Freight Forwarders & Load Brokers
10 - Unwanted and Undeliverable Goods
1045 - Workers Compensation
1115 - Transportation to and from the USA
1145 - Freight Claims: Getting Paid
12 - Lunch
Location: Royal & Sunalliance
Lecture Theatre, 10 Wellington St. East. For registration email
info@fernandeshearn.com
- Gordon Hearn will be moderating
a panel on "Transportation Intermediaries" on May 8, 2008
at the annual Transportation Lawyers Association conference in Fort
Lauderdale, Florida, on May 8, 2008. The panel will address recent
legal and industry developments concerning Transportation Intermediaries
and Logistics providers.
- Rui Fernandes will be presenting
a paper on "Road and Rail Carriage" on June 9th, 2008
in Vancouver at the Canadian Maritime Law Association's Seminar
Day on "Carriage of Goods and Passengers in the 21st Century"
2. Air Carriage and Consequential Damages
Ziai v. Maatschappij [KLM Royal Dutch Airlines]
2007 CanLII 21896 (Ont. S.C.): A Simple Lesson on When Courts will
Award "Consequential Damages"
This case is a must read. [Or, if I might be so
bold, at least this summary might be].
I consider this a wonderful case study example of
how the courts will assess, and determine whether to award "consequential
damages". The reference to "consequential damages"
is to most only a couple of legal words thrown together. However
consider that everyone involved in the carriage industry - shippers,
consignees, carriers and insurers [both cargo and carrier liability]
- will from time to time encounter a claim that as a result of goods
being lost, damaged or delayed in transit that losses were suffered
beyond what may have happened to the thing being shipped itself.
Maybe the receiver complains that goods are seasonal
and that mere delay has hurt it. Maybe it says that on account of
loss or damage to an article while en route that it has lost reputation
for not being able to fill inventory for timely sale to its own
customers. Just maybe a whole bunch of problems are alleged to have
arisen because something was 'late'.
Just how and should the courts "draw the line"?
While 'victims' of circumstance should be compensated, just how
much should carriers pay in terms of damages - beyond having to
replace or repair the thing itself - if we want a sustainable carriage
industry?
The answer, in terms of simple policy, is a rather
old one. It goes back to 1854, in fact. The decision of Hadley
v. Baxendale is still good precedent, in Canadian, British and
U.S. legal circles. The rule set down by this old English case is
that damages for a breach of contract [which would be the basis
for a claim against a carrier] are assessed and awarded based on
"what was in the reasonable contemplation of the parties to
the contract that it was entered into". Stated differently,
the general rule, to quote from this case is that
"…. the damages that the aggrieved party should receive
were those that may be fairly and reasonably considered to arise
naturally from the breach or those that may be considered to have
reasonably been in the contemplation of both parties at the time
of the contract. "
I mentioned the above as a general rule. There
might be a "specific exception". The judge in the Hadley
case in fact paved the way for an exception:
"Now, if special circumstances under which
the contract was actually made were communicated by the plaintiffs
to the defendants, and thus known to both parties, the damages resulting
from the breach of such a contract, which they would reasonably
contemplate, would be the amount of injury which would ordinarily
follow from a breach of contract under those special circumstances
so known and communicated. But, on the other hand, if these special
circumstances were wholly unknown to the party breaking the contract
he at the most could only be supposed to have had in his contemplation
the amount of injury, which would arise generally, and in the great
multitude of cases not affected by special circumstances, from such
breach of contract".
It will then be clear that in the case where 'consequential
damages' (damages alleged to have occurred as a consequence of loss,
damage or delay in the delivery of goods) are claimed it will be
both factual and a policy issue as to whether the general rule
would apply, or whether the special circumstances as communicated
rule would apply.
The Ziai v. KLM case is a nice example of how
these principles are applied.
Factual Background
In late 1998 World of Art Inc. purchased 151 Persian
carpets in Iran and it contracted KLM to fly them to Toronto. The
carpets were packed in the usual fashion, in bales, and covered
with heavy plastic wrapping. KLM carried the goods from Iran, routing
them from Tehran to Amsterdam, then to Detroit en route to Toronto.
However the United States has for some time had certain trade embargoes
with Iran, as a result of which the carpets were seized while in
Detroit by the U.S. Customs authorities. As a result, the carpets
were detained for over one year, and it was noted upon eventual
release and arrival at Toronto that they were damaged. World of
Art Inc. ("World of Art") thereafter sold the carpets
by wholesale auction, at a considerable loss.
World of Art brought an action against KLM and obtained
an early declaration that KLM was i) liable for breaching the contract
of air carriage, as concerns the improper routing 'deviation' and
ii) that any limits of liability as generally applicable in the
governing international convention were not applicable on the particular
facts of this case. Thus, the matter proceeded in due course to
trial for proof of the damages alleged to have been caused by this
breach of contract.
Sometime after the arrival of the carpets at Toronto,
but before the trial on the amount of the damages to be awarded,
World of Art became bankrupt. It's right to claim against KLM was
purchased by one Mehdi Ziai, the sole shareholder and a secured
creditor of World of Art Inc, who continued to prosecute the claim
against KLM.
The Various Damages Claimed
Mr. Ziai alleged that KLM's conduct caused him and
his family great personal hardship and damage. While this may have
been the case - there may have been a 'causation' relationship between
what was complained of and KLM's conduct - the court had to apply
the above principles given the broad range of damage claims asserted
against KLM:
1. Could damages be recovered for the damaged
carpets, and if so, how much?
2. Could World of Art get reimbursement for interest paid on money
borrowed by it to purchase the carpets in question?
3. Is World of Art entitled to damages for loss of profit and,
if so, what was its loss of profit?
4. Could Mr. Ziai recover damages for the loss of World of Art's
business?
5. Could World of Art recover damages for the duty it paid to
obtain the carpets in question?
Analysis and Discussion: Applying the Relevant
Principles of Law to Each Damage Claim, One at a Time
World of Art purchased the carpets for a total
price of US $355,190.00. It paid a deposit towards this price of
US $230,000 in advance of receiving the carpets. The balance was
due by the terms of the purchase contract within 45 days of receipt
of the carpets.
Issues arose as to the value of the carpets.
KLM asserted that the World of Art overpaid for the carpets and
in any event that the most that World of Art could recover was the
amount of money actually spent [$230,000]. The Court held that World
of Art did not 'overpay'. The important point to register here is
that as is often the case, experts are called to testify at trial
on valuation issues. Once a value is established, the applicable
cost of repair or replacement for transit loss or damage will then
as a rule be awarded: the carrier would be taken to reasonably foresee
that aspect of damages inherent in the loss of or damage to the
article being shipped itself.
However as is often the case, things got tricky.
Apparently after it was learned that the carpets were detained in
Detroit, World of Art had to obtain replacement carpets and accordingly
it approached the seller of the affected carpets in Detroit for
the purpose of buying substitutes. World of Art simply had to do
this to keep in business. These replacement carpets cost $US 446,850,
and World of Art advanced US $200,000 as a deposit. World of Art
planned on paying the balance when it received funds from KLM in
compensation for the delay of the first shipment of carpets. Ultimately,
World of Art did not advance any more monies to the seller, nor
did it receive the follow up shipment. The seller ended up applying
the $US 200,000 received for the follow up shipment to the balance
owing from the first shipment, keeping the remainder on account
of damages it alleged to have suffered. The court accordingly found
that World of Art did in fact pay the entire purchase price of $355,190
which represented the value of the carpets.
This being a damage claim, how much should the
plaintiff then recover?
On eventual receipt of the damaged carpets,
World of Art took steps to have then sold by public auction. No
bids were received and as such World of Art proceeded with a wholesale
liquidation sale. Ultimately, 5 bids were accepted, with the highest
one for the lost being CDN $148,500.00, which was accepted.
Could Mr. Ziai therefore recover the difference
between the purchase price of US $355,190 and this salvage recovery?
While through an expert KLM took the position that the carpets could
have been repaired for a much lower amount, the court held that
the damage complained of was permanent. The plaintiff was entitled
to the difference, however as indicated below, we get into the difficult
'consequential' loss areas of loss of profit and other types of
claims.
Interest Claim
In order to purchase the subject carpets, World of
Art borrowed money. This financing was at the rate of 48% p.a.,
through Iranian based financing. Apparently financing was not available
through Canadian based lenders. Mr. Ziai testified that the high
interest rate was acceptable to him as a cost of doing business
given the margin he expected World of Art to receive on the resale
of the carpets and the fact that he expected to resell the carpets
within 45 days of receiving them.
World of Art also borrowed money to purchase the second
shipment of replacement carpets, at the same high interest rate.
The plaintiff claimed as damages against KLM the amount
paid as interest to the aforementioned lender up until the date
of the bankruptcy of World of Art.
The Court ruled that the interest claims were exaggerated
as the loans in question pertained to more than the shipment in
question - they related to World of Art generally as a going concern.
Further, even if the interest claim pertained to the subject shipment
only, the Court applied Hadley v. Baxendale in ruling that
the 'special circumstance' of the loan was not within the knowledge
of KLM. To recover such interest payments as damages, the plaintiff
would have to establish that it communicated to KLM in advance of
the contract that the loan and the high interest rate were tied
into the very reason for KLM being contracted in the first place.
The plaintiff could not discharge this evidentiary burden and therefore
could not recover for this claim.
Loss of Profit Claim
The plaintiff claimed that it would have made a profit
on the local resale of the carpets. KLM argued the application of
Hadley v. Baxendale, that this would be too 'remote' from
its 'reasonable contemplation' when the carriage contract was made.
KLM based this argument on the fact that the air waybill, which
evidenced the contract of carriage, did not reveal the existence
of any interest in the carpets beyond World of Art: there was no
indication that World of Art would resell the carpets or be expected
to make a profit. To this assertion the Court ruled that it would
'not [be] unreasonable to assume, given the type of goods being
shipped, the quantity involved, their country of origin and destination,
and the consignee that they were destined to be resold at a profit.
As such, the loss of profit was not a 'remote' possibility and it
could be said to have been within the 'reasonable contemplation
of the parties at the time of the contract.'
[I should digress at this point and note how this
finding illustrates that the application of the 'reasonable contemplation'
rule of assessing and awarding damages is an objective test as opposed
to a subjective test - the Court ruling that 'the carrier should
have known, or that 'most carriers would have known', or thinking
along such lines].
In the result the Court found on the evidence that
the Plaintiff had a realistic chance of turning a gross profit of
10% on the purchase price for the carpets and it was awarded this
amount.
Loss of Business Claim
Another tricky factual issue: The plaintiff alleged
that as a result of the failure to timely deliver the carpets, that
World of Art was forced to declare bankruptcy and was put out of
business. The plaintiff accordingly claimed $200,000, which it says
was the value of World of Art before the carriage contract with
KLM.
The Court ruled that the plaintiff could not recover
for this claim. The Court ruled that in a breach of contract case,
"a claim for the loss of business, assuming it existed, would
clearly constitute "special circumstances" within the
meaning of Hadley v. Baxendale. In order to succeed, the plaintiff
must establish that at the time of the contract that KLM was made
aware that World of Art was in such precarious financial shape that
if it failed to deliver the carpets, that World of Art would be
put out of business." The Court found no such evidence
in this case and as such the plaintiff could not recover on this
claim.
Payment of Duty Claim
In order to ultimately obtain the carpets, World of
Art was required to pay duty to the Canada Customs and Revenue Agency.
The plaintiff alleged that on account of the problems caused by
KLM that it was unable to produce the prescribed Certificate of
Origin as a result of which it would have avoided having to pay
duty. The Court however found that the breach by KLM did not play
a factual role in the requirement of World of Art having to pay
duty.
Conclusions
The following general observations can be taken from
this case:
1. Plaintiffs have to prove that any damages claimed
were caused by the alleged breach of contract by a defendant carrier;
2. A 'causal connection' by itself is insufficient
as a ground for recovery. The damages caused by the breach must
also not have been 'remote' from the contemplation of the carrier,
from it's mindset as at the time that the contract was made. Just
what is a 'reasonable and foreseeable' result, in terms of damages,
that might be suffered by a plaintiff shipper, may be enhanced
or broadened, [thus invoking greater exposure on the part of the
carrier in the event of a breach of contract], if 'special circumstances'
are communicated by the shipper.
3. In the carriage of goods industry, one
rarely finds written communication of 'special circumstances'
by a shipper to a carrier. Bills of lading or carriage documents
rarely 'spell such things out'. Perhaps there are master contracts
between the parties addressing such matters, or there may have
been discussions between shipper and carrier at the time of the
initial freight quotation. There are critical questions of proof
if the shipper wishes to allege that the carrier was somehow provided
notice of 'special circumstances' so as to broaden its exposure
to liability, if the contract of carriage or carriage document
is otherwise silent beyond the usual items contained therein in
terms of points of origin, destination and the like. However,
as will be seen with the 'loss of profit' claim above, sometimes
in a particular case the Court might be able to imply knowledge
on the part of a carrier that particular damages will be suffered
in the event of a breach.
Gordon Hearn
3. Court of Appeal Reverses Boutique Jacob
- Himalaya Clause Affirmed and Norfolk Southern Railway v. Kirby
Referred To
The Federal Court of Appeal issued its much anticipated
decision in Canadian Pacific Railway Company v. Boutique Jacob
Inc. 2008 FCA 85 on March 6th, 2008. The decision was written
by Mr. Justice Nadon, a former respected maritime practitioner in
Canada.
The main issue raised in the appeal was the interpretation
of section 137 of the Canada Transportation Act, S.C. 1996,
c. 10 and specifically the interpretation of the word "shipper"
found in the section. At issue was CPR's entitlement to limit its
liability in respect of the loss suffered by Boutique Jacob.
The Facts
Boutique Jacob carries on business in Montreal as
a retailer of clothing. It was the owner of a shipment of assorted
garments which it purchased from suppliers in Hong Kong. It retained
a freight forwarder in Canada, Panalpina Canada, to make arrangements
for the carriage of its cargo from Hong Kong to Montreal. Through
this freight forwarder it entered into a contract of carriage with
Pantainer Ltd. an NVOCC (non-vessel operating carrier). Pantainer
issued an express bill of lading. Boutique Jacob did not declare
any value for its cargo.
Pantainer in turn entered into a contract with OOCL,
an ocean carrier who issued a bill of lading for carriage from Hong
Kong to Montreal. In turn OOCL retained the services of CPR pursuant
to a confidential contract wherein CPR agreed to carry the cargo
from Vancouver to Montreal. CPR did not issue a waybill but did
record the reception of the shipment on its online system relied
upon by Pantainer and OOCL.
During the transit from Vancouver to Montreal the
cargo was damaged by reason of a train derailment which occurred
near Sudbury Ontario.
Trial Judge's Decision
The trial judge had dismissed the action against all
the defendants (Pantainer and OOCL) except CPR. The judge held that
Pantainer could exclude its liability pursuant to clause 6.5(h)
of its bill of lading which excluded losses arising from "any
cause or event which the Carrier could not avoid and the consequences
of which the Carrier could not prevent by the exercise of due diligence."
The judge concluded that Pantainer was not liable for the loss which
occurred when CPR's train derailed.
As to OOCL's liability the trial judge found that
pursuant to clause 3.1 of the Painterner bill of lading Pantainer
could sub-contract its carriage obligations. This led the trial
judge to say that if OOCL owed any liability to Boutique Jacob it
was in its capacity as bailee for reward. The trial judge found
that bailment on terms has been accepted in Canadian maritime law.
The judge found that Boutique Jacob could sue OOCL as a bailee but
it was bound by OOCL's terms and conditions (the terms of the bailment).
Although neither Boutique Jacob nor Pantainer had actual knowledge
of OOCL's terms and conditions this was not a bar to finding that
they had consented (indirectly) to these terms and conditions. The
trial judge found that Pantainer had a history of prior dealings
with OOCL and Pantainer admitted using OOCL's web site for the purposes
of booking and tracking cargo. The OOCL terms and conditions were
on the web site. The trial judge therefore found that Pantainer
and Boutique Jacob were bound by the terms and conditions in the
Pantainer bill of lading (to which Boutique Jacob was bound) and
in OOCL's bill of lading (to which Pantainer was bound) which provided
that each carrier could sub-contract "on any terms." The
trial judge exonerated OOCL on the basis of clause 4(B)(1)(a)(viii)
of its bill of lading which excluded liability where the loss occurred
as by reason "of any cause or event which the Carrier could
not avoid …" The derailment was such an event.
The trial judge then turned his mind to CPR and section
137 of the Canada Transportation Act. Section 137 provides:
A railway company shall not limit or restrict its
liability to a shipper for the movement of traffic except by means
of a written agreement signed by the shipper or by an association
or other body representing shippers.
The trial judge held that there was no written agreement
with Boutique Jacob, the shipper, and therefore CPR could not limit
liability.
Federal Court of Appeal
The Federal Court of Appeal had occasion to refer
to the Quebec Court of Appeal decision in Canadian National Railway
Company v. Sumitomo Marine and Fire Insurance Company Ltd.,
[2007] J.Q. 7207, [2007] Q.C.C.A. 985 (dated July 10, 2007) and
that of the Supreme Court of the United States in Norfolk Southern
Railway Co. v. Kirby, 125 S. Ct. 385 (2004).
The Federal Court of Appeal concluded that the trial
judge erred in concluding that Boutique Jacob was a "shipper"
within the meaning of section 137 of the Canada Transportation
Act. The shipper was in fact OOCL. The Federal Court quoted
from the Quebec Court of Appeal in the CN v. Sumitomo case,
stating that Court of Appeal in Quebec addressed the issue of who
is a shipper squarely at paragraph 49 of the reasons:
49. …The shipper is therefore the one that,
given the possibilities available, made a concrete decision to
call on a rail carrier rather than another carrier. In other words,
the shipper has a direct connection and, especially, effective
and real control over the negotiation of an agreement or contract
made with the carrier.
The Federal Court of Appeal held that the shipper
was OOCL. "In effect, not only was OOCL the entity which contracted
directly with CPR by way of a confidential rate contract, it was
OOCL which handed over the container to CPR in Vancouver."
The Federal Court of Appeal then turned to the issue
of whether CPR could limit its liability based on the OOCL bill
of lading. The Federal Court of Appeal found that the OOCL bill
of lading had a Himalaya clause which allowed CPR to "have
the benefit of all the rights and defences provided for in this
Bill of Lading or by law." The OOCL bill of lading also allowed
the Carrier to sub-contract its duties of carriage. The Court held
that the OOCL bill of lading could be used by CPR to its benefit.
The Federal Court of Appeal examined the confidential
rate contract and found that it was subject to Tariff CPRS 7589.
The confidential rate contract stated that in no event shall CPR's
liability exceed the sum of $250,000 for any container. Tariff CPRS
7589 limited CPR's liability to the lesser of the value of the contents,
$10,000 for a 20 foot container, $20,000 for a 40 foot container
or an amount equal to the liability of the steamship company
pursuant to the ocean bill of lading.
The appeal court held that CPR could limit its liability
to the OOCL liability which amounted to $1,432.89. The court found
that the Tariff and the confidential rate contract limitation provisions
were not inconsistent.
It should be noted that the application for leave
to the Supreme Court of Canada in Canadian National Railway Company
v. Sumitomo Marine and Fire Insurance Company Ltd. from the
Quebec Court of Appeal was dismissed with costs on February 28th,
2008. So it appears the chances of an appeal to the Supreme Court
of Canada in Boutique Jacob is unlikely. The law now appears to
be settled in Canada. For the time being.
Rui Fernandes
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