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November 2008
In this issue:
1. Firm and Industry News
2. "Faulty or Improper Design Exclusion"
3. Employee Duty Not to Compete
4. Non Resident Defendants
5. Electronic Records and Litigation
1. Firm and Industry News
- The Fernandes Hearn LLP 9th Annual Maritime
and Transportation Law Conference will be held on Friday January
16th. Mark the day in your calendar. The tentative program includes:
- New Transport Law Convention
- Class Actions in Transportation
- Passenger Carriage and Rights
- Mock Arbitration
- Foreign Market Update
- Review of Legal Cases in 2009
- Load Brokers, Intermediaries and Freight Forwarders and Insurance
The conference commences at 8:30 am and will be held at the Royal
& Sun Alliance Lecture Theater in Toronto.
- Kim Stoll has just completed the
Advanced ADR Workshop offered by the University of Windsor.
- Rui Fernandes will
be attending the Grunt Club's 74th annual dinner in Montreal on
December 5th. The Grunt Club dates back to the early 1930`s when
a small group of marine-oriented men decided to form a nautical
organization primarily to foster the spirit of good fellowship
throughout the industry in the Port of Montreal. The name of the
club was allegedly derived from the grunts and groans, which bellowed
out from the group in response to the suggestions offered by each
in attendance. Since its inception in 1931, one of the primary
purposes of the Grunt Club has been to promote fellowship amongst
its members and associated industries throughout the marine community.
- Gordon Hearn represented the firm
at the Transportation Law Institute in New Orleans, Louisiana
on November 14th and 15th. The Firm made a contribution towards
the Habitat for Humanity project in the Hurricane Katrina flood
reconstruction. Gordon and other lawyers attending the conference
worked on the construction of the "Musicians Village"
on November 15th.
- The Fernandes Hearn LLP firm will be well
represented at the 70th Annual Marine Club Dinner being
held in Toronto on January 16th, 2009 at the Royal York Hotel.
The Marine Club By-Laws describe the organization as:
The Marine Club is the fraternity of those persons engaged in,
concerned with, or directly interested in, the Water Carrying
Trades on the Great Lakes System and connecting waters of Canada.
The objects of the club are:
(1) To promote shipping and the Water
Carrying Trades in the Great Lakes area;
(2) To promote co-operation and fellowship amongst its members;
(3) To hold informal social functions for its members as a
means of promoting fellowship;
(4) To further knowledge of the Water Carrying Trades in the
shipping industry of the Great Lakes, both among its members
and the general public, and to that end to provide a forum
for the discussion and exchange of views on matters affecting
the industry.
2. Supreme Court of Canada Rules on "Faulty
or Improper Design Exclusion"
Hot off the press! The Supreme Court of Canada has
just (November 21st, 2009) released its much anticipated decision
in Canadian National Railway Co. v. Royal and Sun Alliance Insurance
Co. of Canada, 2008 SCC 66. In a 4-3 decision the SCC reversed
the Court of Appeal of Ontario and restored the trial judge's ruling
against the insurers. Justice Binnie wrote the majority decision
(McLachlin C.J., LeBel, Abella agreeing) with Justice Rothstein
writing the dissenting view (Deschamps and Charron agreeing). The
following is an extract from the court decision:
In the early 1990s, CNR established an
elaborate and sophisticated process to design and construct the
largest customized tunnel boring machine ("TBM") of
its kind in the world for use in the construction of a tunnel
under a river. CNR had insured the project under a builders' risk
policy covering all risks of direct physical loss or damage to
all real and personal property of every kind and quality including
but not limited to the TBM, plus any consequent economic loss
occasioned by delay in the opening of the tunnel. The cost of
making good faulty or improper design was excluded.
The design of a suitable TBM was a major challenge, partly because
structural steel deflects (bends) under pressure. While differential
deflection (adjacent components moving towards or away from each
other) is acceptable within stated tolerances, excess differential
deflection (deflection beyond acceptable tolerances) could lead
to failure. This TBM had to withstand 6,000 metric tonnes of pressure
from the soil and water above as it progressed under the river.
In addition, the main bearing had to be protected from contaminants.
To cope with the design challenge, an experienced tunnel equipment
manufacturer was selected to design, engineer, and construct the
TBM. A technical committee composed of expert tunneling contractors
and consultants was formed to advise on the conceptual design
parameters, and the technical committee's work was guided by a
steering committee which provided general guidance. A technical
review committee also monitored, reviewed and advised CNR on the
project as a whole.
As designed, the TBM was 32 feet (9.5 metres) in diameter and
its body was 278 feet (83 metres) long. The cuttinghead rotates
on roller bearings while the main bearing generates a hydraulic
thrust which drives the cutting tool through the earth. To shield
the main bearing from damage, a system of 26 independent seals
lubricated by the constant injection of pressurized grease was
designed to prevent excavated material from getting into the main
bearing and to stop the grease from leaking out. To get to the
main bearing, contaminants had to get through all 26 seals. The
design tolerances for the seals were precise and demanding, requiring
a gap of six millimetres, plus or minus three millimetres, between
the rotating cuttinghead and the stationary bulkhead. The best
engineering advice indicated that there would be no excess differential
deflection and that the configuration of the seals to provide
a margin of safety approaching redundancy.
After completion of 14 percent of the tunnel, contamination was
detected. Inspection revealed that some seals had been worn and
destroyed due to excess differential deflection of the cuttinghead.
Operations were halted, the main bearing was cleaned, and modifications
were made. The project was then completed without further entry
of dirt, but the 229?day delay greatly increased costs. The experts
were unable to explain how dirt penetrated the 26 seals while
leaving some seals intact.
The insurers denied coverage on the basis of the "faulty
or improper design" exclusion. The trial judge held the insurers
liable. He found that, despite its failure, the innovative design
accommodated all foreseeable risks however unlikely or remote
and was not faulty or improper according to the state of the art
at the time the design was finalized. The majority of the Court
of Appeal set aside that decision, finding that the TBM's design
had been faulty within the meaning of the exclusion provision
since the foreseeability standard also mandated that the relevant
design succeed in withstanding all foreseeable risks.
Held (Deschamps, Charron and Rothstein JJ. dissenting): The appeal
should be allowed.
Per Binnie: Where, as here, the
risk is broadly defined ("metal deflects under stress")
and the design addresses that risk with state of the art diligence
and expertise, an insurer is not entitled to rely on the "faulty
or improper design" exclusion just because existing engineering
knowledge and practice lacked a proper appreciation of the design
problem. Failure is not the same thing as fault or impropriety.
In the interpretation of insurance policies coverage provisions
should be construed broadly and exclusion clauses narrowly. The
result should not be an unrealistic interpretation that would
not be contemplated in the commercial atmosphere in which the
insurance was contracted. The narrower interpretation of the exclusion
best accords with the intentions of the parties based on a plain
meaning of the words used in the policy. [5] [30] [32] [56]
At the time of contracting, all parties realized
that this was to be the largest earth?balance TBM ever built.
Leading experts were enlisted to provide a state of the art machine,
but, despite all efforts, there was an inevitable residual risk
with the innovative design. The CNR purchased the "all risks"
policy in recognition of that risk. The policy did not exclude
all costs attributable to "the design", but only costs
attributable to an "faulty or improper design". Although
the TBM failed, the insurers did not meet the onus of bringing
the loss within the exclusion. [5] [58]
The "faulty or improper design" exclusion
relates to faulty design, not designer fault. It implies a comparative
standard against which the impugned design falls short. Such a
standard can require no more than that the design comply with
the state of the art. Under that standard, the loss may have been
caused by the design, but the exclusion does not apply unless
the design is faulty or improper. As there is inevitably a gap
between the current state of engineering art and omniscience,
a standard of perfection in relation to all foreseeable risks
is too high, but the industry standard is too low. A design will
have fallen below the standard reasonably required in the circumstances
where the materialized risk was both foreseeable and avoidable
by use of a design that matched state of the art standards. [31]
[35] [41] [51] [53?54] [65]
While differential deflection was a known risk in the design of
the TBM, it had been properly explored in the design phase, as
found by the trial judge. Based on the existing state of the art,
excess differential deflection was not foreseeable, even as a
remote or unlikely risk, with this design in these circumstances.
Contrary to the finding of the majority of the Court of Appeal,
failure to withstand does not discharge the onus of establishing
fault - the insurer cannot rely on the benefit of hindsight to
discharge its onus of proof. The CNR was entitled to insure against
the possibility that the design might fail even though not faulty
or improper according to the state of the art. The design failed,
but, because it exhausted the state of the art, the insurers did
not meet the onus of bringing the loss within the exclusion. [5]
[48] [58] [61]
While the words of the exclusion may require interpretation, they
are not ambiguous, and the policy was a manuscript policy negotiated
between two sophisticated parties. The doctrine of contra proferentem
did not apply. [33]
Per Rothstein JJ. (dissenting): The exclusion
providing for faulty or improper design applies. The "faulty
or improper design" exclusion attaches to the thing designed,
not the work of the designers. Whatever standard their work meets
or does not meet, a design is faulty or improper if it does not
work for the purpose for which it was intended. While a design
cannot be expected to withstand "rare and unforeseeable conditions",
it must provide for and withstand all foreseeable risks, including
extreme examples of those foreseeable risks. In this case, the
insurers proved there was a design problem: differential deflection
was foreseeable, but the design was unable to cope with the degree
of differential deflection that occurred under normal conditions.
This type of risk was excluded from coverage under the "faulty
or improper design" exclusion. As there is no coverage under
Section I of the policy for faulty or improper design, there can
be no coverage under Section II for resultant damage or economic
loss. [86-87] [100] [103] [106] [108] [126-28] [130]
The term "faulty or improper design" does not imply
the introduction of a "state of the art" standard against
which an impugned design is to be compared. The relevant distinction
is between a design that is defective and a design that is free
from defect. Introducing a comparative standard essentially turns
a claim that must have its foundation in contractual terms into
a claim in tort or something akin to a tort that is entirely foreign
to the contract. It shifts the focus from the adequacy of the
design of the TBM for its intended purpose, having regard to all
foreseeable risks, to the adequacy of the work done by the design
engineers, a focus not suggested by the words of the exclusion.
There is no foundation for the inference that a "state of
the art" standard was the parties' common intention. [70]
[111-113] [115]
Since the term "faulty or improper design" is not ambiguous,
it is unnecessary to apply the contra proferentem doctrine, which
only applies when other rules of construction fail to enable a
court to ascertain the meaning of the words in question. [74]
[76]
Rui Fernandes
3. The Death Knell of the Employee's Duty Not to
Compete Unfairly and Employee Raiders Beware
Employees are imbued with a number of duties that
arise from the implied terms of their employment contracts, including
a duty of fidelity, a duty of confidentiality and a duty to provide
reasonable notice of resignation. These duties are most often pleaded
in cases where an employee resigns his or her employment to take
up with a competitor. For a time jilted employers would also plead
an employee's implied duty not to compete unfairly and there developed
a lively jurisprudential and academic debate as to whether such
an implied duty exists. The recent Supreme Court of Canada case
in RBC Dominion Securities Inc. v. Merill Lynch Canada Inc.,
2008 SCC 54 has eliminated any doubt - there is no implied duty
not to compete unfairly.
The facts of the case are rather simple. A manager
of an RBC branch in Cranbrook, British Columbia, coordinated the
mass migration of that branch's investment advisors to a nearby
branch of its competitor, Merill Lynch. The RBC branch was decimated.
The trial judge held that the departing investment
advisors breached their implied obligation to give RBC reasonable
notice of termination of their employment. RBC was awarded a total
of $40,000 in damages against the investment advisors for failure
to give reasonable notice. The award was calculated based on the
profits that the investment advisors would have contributed to RBC
during a reasonable notice period of 2.5 weeks.
In addition to these limited damages for a failure
to provide notice of resignation, the trial judge awarded a total
of $225,000 against the investment advisors for unfair competition.
The trial judge held that during the 2.5 week notice period, the
departing employees remained subject to their contractual duties
and specifically their general duty of fidelity to RBC, which precluded
them from competing with RBC during the notice period.
On appeal, the Court of Appeal of British Columbia
unanimously upheld the award against the investment advisors for
their failure to provide notice, but overturned the trial judges
award for unfair competition. In overturning the award for unfair
competition, the Court of Appeal strongly asserted the employees'
right to compete with his or her employer upon termination of his
or her contract of employment.
The majority of the Supreme Court of Canada accepted
the Court of Appeal's view writing:
The contract of employment ends when either
the employer of the employee terminates the employment relationship,
although residual duties may remain [i.e. a duty not to misuse
a former employer's confidential information]. An employee terminating
his or her employment may be liable for failure to give notice
and for breach of specific residual duties. Subject to these duties,
the employee is free to compete against the former employer.
To the extent that the trial judge awarded damages on the basis
that the employees continued to be under a general duty not to
compete, this award of damages was wrong at law.
The Supreme Court of Canada has left no doubt; there
is no independent duty not to compete unfairly.
I would be amiss to comment on the Supreme Court of
Canada's decision in RBC Dominion Securities Inc. v. Merill Lynch
Canada Inc. without mentioning the court's reinstatement of
the nearly $1.5 million award against the branch manager made by
the trail judge.
On first instance, the trial judge awarded damages
in the amount of $1,483,239 against the branch manager for loss
of profits suffered by RBC as a result of his failure to perform
his duties in good faith. The obvious breach of that duty was his
coordinating the departure of nearly all of RBC's investment advisors
for Merill Lynch. The award rested on the specific findings by the
trial judge that the branch manager's job description included retaining
the investment advisors for RBC. The trial judge found that the
branch manager's acts and failures in breach of his duty of good
faith led directly to the circumstances in which the investment
advisors left RBC for its competitor.
The Court of Appeal overturned this award against
the branch manager on the ground that it had not been properly pleaded
and on the further ground that the damages were not 'proximate'
enough by contract law.
The majority of the Supreme Court of Canada rejected
the Court of Appeal's rationale and reinstated the trial judge's
sizable award.
The majority decision in RBC Dominion Securities
Inc. v. Merill Lynch Canada Inc. creates does not create any
superadded duties for departing managers or supervisors. In fact,
the award against the branch manager is reflective of the unique
facts of the case, including the near collapse of RBC's Cranbrook
branch, and, frankly, the branch manager's incredible display of
poor judgment in orchestrating that result. However, the Supreme
Court's willingness to uphold the trial judge's sizable award against
a lowly branch manager nonetheless stands as a stern warning to
all managers and supervisors to guard their behaviour when departing
an employer for a competitor, especially with regard to employees
under their supervision.
Fred Fischer
4. When will the Courts of Ontario Hear Cases Involving
Non-resident Defendants? A Review of the Guiding Principles: Charron
v. Bel Air Travel Group Ltd. 2008 Can. LII 53834 (On.S.C.)
A plaintiff has the choice of where a lawsuit is issued.
What say might a defendant have on the matter, if the plaintiff
sues it away from it's home base?
Cross-boarder transactions increase in number and international
travel is common- place. As such and invariably incidents will occur
or disputes arise of an international nature whereby an Ontario
resident, may wish to take suit in Ontario against a defendant,
based elsewhere. How, and on what basis will a court in Ontario
"exercise jurisdiction" over a such a defendant, allowing
the Ontario lawsuit to proceed against it? The question is academic
should for any reason the defendant in question consent to the jurisdiction
of the Ontario Court. Perhaps that individual or company has confidence
in Ontario judicial system. It might be considered more economical
for the battle to be waged in an Ontario based on the location of
witnesses or other factual considerations. Of course, a defendant
might instead challenge the Ontario jurisdiction, if sued here…..
The Charron v. Bel Air Travel Group Ltd. case illustrates
the principles that will be applied in such a situation as the court
determines how to resolve the issue.
The Facts
Claude Charron died on February 12, 2002 while scuba
diving on vacation in Cuba. This accident occurred while the Charron
family was visiting the Breezes Costa Verde Resort, which held itself
out as a tourist destination providing, amongst other items, "scuba
adventures". Mr. Charron's estate, his widow and adult children
(living in Ontario and in the United States) brought suit against
the following entities:
(i) Bel Air Travel Group Ltd., which is an
Ontario corporation carrying on business as a travel agency. It
offers for sale "all inclusive" vacation packages to
Cuba and other Caribbean destinations. The Bel Air representative
had recommended Cuba to the Charron family as a good place for
scuba diving and it provided brochure materials to the Charron
family to review.
(ii) Hola Sun Holidays Ltd. who is a tour operator
offering vacation packages to Cuba and, as such, co-ordinates
with airlines, hotels and ground transportation to provide a fixed
price holiday for travelers. The brochure materials provided by
the Bel Air representative to the Charron family was from Hola
Sun Holidays Ltd. The Hola Sun brochure advertised the Breezes
Costa Verde Resort, which is where the Charron family came to
book their vacation and which facility offered scuba diving adventures.
(iii) Breezes Costa Verde, the resort in question, which is owned
by the defendant Gaviota Sa (Ltd.), a Cuban company.
(iv) Village Resorts International Ltd., which is
the corporate entity carrying on business as Super Clubs Breezes
Costa Verde.
(v) Club Resorts Ltd., who operates and manages
the Breezes Costa Verde resort and other Cuban properties.
(vi) Individuals were also named as defendants,
all being Cuban nationalist. Marine Gaviota provided the scuba
diving equipment and personnel for the fateful excursion. The
defendant Andres Ricardo was the scuba diving boat captain for
the voyage and the defendant Leonardo Ricardo was the scuba diving
instructor at the material time.
The Charron family arrived at the Breezes Costa Verde
Resort on February 2002. The scuba diving adventure was offered
amongst other amenities, as part of the "super inclusive facilities
at the resort" and could be signed up for one day in advance.
Divers were required to provide a copy of their diving certification
and diving logbook. Mr. Charron went diving on February 11, 2002,
without incident however on February 12, 2002 he did not return
from the dive. The plaintiffs, including Mr. Charron's estate, filed
suit in the Ontario Superior Court, alleging breach of contract
and negligence against the various named defendants.
The Lawsuit and the Jurisdictional Issues
Two of the defendants, Village Resorts International Ltd. (being
the corporate entity carrying on business as the Breezes Costa Verde
resort) and Club Resorts Limited (the resort manager) brought an
application for an order that the action be dismissed or stayed
against them on the basis that the Ontario Court did not have jurisdiction
over them (being foreign entities), and alternatively, for an order
that even if the Ontario Court could exercise jurisdiction over
them that Cuba is a much more appropriate and sensible venue for
the litigation and accordingly the action should be transferred
to Cuba. The Plaintiff's opposed this application, as did the defendants
Bel Air Travel Group and Hola Sun Holidays. They were prepared to
have the dispute continue in Ontario. The individual defendants
(while served with the Statement of Claim in Cuba) did not respond
to this lawsuit and therefore had no representation on this court
application.
This case, and other similar ones before it illustrate the inherent
tension between the policy interest of opening up the Courts of
Ontario as a means for access to justice for Ontario residents for
damages suffered and the interest of the court being fair and not
excessively "reaching" over foreign nationals who may
want to rely on a foreign legal system in the determination of their
liability. As stated by the court, it is important:
"…to prevent over-reaching, Courts
have developed rules governing and restricting the exercise of
jurisdiction over extra territorial and transnational transactions.
In Canada, a court may exercise jurisdiction only if it has a
"real and substantial connection" with the subject matter
of the litigation."
The "real and substantial connection" test,
set down by the Supreme Court of Canada in 1994, has been refined
and recently considered by the Ontario Court of Appeal through a
series of decisions dating from 2002 whereby the Ontario Court of
Appeal identified eight facts to review as to whether there in fact
is a "real and substantial connection" to warrant an Ontario
Court assuming jurisdiction against an out of province defendant
as a result of damages complained of as being sustained by an Ontario
resident. They are as follows:
(a) The connection between Ontario and the plaintiffs
claim;
(b) The connection between Ontario and the defendants;
(c) Unfairness to the defendant in assuming jurisdiction;
(d) Unfairness to the plaintiff in not assuming jurisdiction;
(e) Involvement of other parties to the lawsuit;
(f) The courts willingness to recognize and enforce a similar
judgment against domestic defendant rendered on the same jurisdictional
basis; and
(g) Whether the case is international or inter provincial in nature;
(h) Comity and the standards of jurisdiction, recognition and
enforcement prevailing elsewhere.
Analysis into "Real and Substantial Connection"
The Court looked at the nature and essence of the
lawsuit, as based on the pleadings filed in court and the affidavit
evidence filed and considered the aforementioned criteria:
(a) Connection between the claim in Ontario
As mentioned above, the plaintiffs reside in Ontario
save and except two of the children who reside in the United States.
Based on their American residency they were reluctant to travel
to Cuba in the event that a trial was to be held there. They have
no issue with respect to traveling to Ontario. The Court also
noted that the Charron family noted the advertisement for the
Cuban destination through Bel Air Travel in Ontario and that it
was Bel Air that booked this all inclusive vacation through Hola
Sun, being an Ontario company, (which had an arrangement with
Club Resorts Limited to promote the Breezes Costa Verde resort
to Ontario residents). Mr. Charron's plans to scuba dive were
known to the Ontario travel agent, and scuba diving was specifically
marketed to Ontario as part of the all-inclusive vacation. The
Court reasoned that it could be argued that a contract was entered
into in Ontario not only for the vacation but also for the specific
scuba diving adventure. These factors all weighed heavily in favor
of the Ontario Court assuming jurisdiction over the foreign defendants.
(b) Connection between the defendants in Ontario
The two defendants who brought the application,
Village Resorts International Limited (the Costa Verde Resort)
and Club Resorts Ltd. have no assets in Ontario. They are both
companies incorporated in the Cayman Islands. It is unclear as
to whether they have any assets in Cuba. The Court noted that
these entities rely heavily on international travelers and that
Canada (and in particular Ontario) provides a large portion of
the tourist trade purchasing such vacation packages. In essence,
the Club Resorts Limited defendant had a legal obligation to market
the Breezes Costa Verdes Resort internationally and as mentioned
the Breezes Costa Verdes Resort welcomed international visitors.
Both entities contemplated Hola Sun and in turn Bel Air selling
such vacation packages to customers in Ontario. Accordingly the
Court had little difficulty finding that both defendants had a
connection with Ontario in terms of how they marketed and secured
business. (Certainly the court had little sympathy for these defendants
arguing that they were foreign entities when they were aware or
ought to been aware that international travelers, including Ontario
residents, would be visiting the resort.)
(c) Unfairness to the Defendants if the Ontario
Court assumes Jurisdiction
The Court noted that the plaintiffs had undertaken
to make arrangements in respect of accommodating the defendants,
if they were to require evidence from Cubans who might not be
able to travel to Canada for trial. The Court also noted the importance
presence of insurance coverage, for the defendants seeking
to stop the Ontario action. Historically, our Courts are more
readily able to play down concerns of economic inconvenience (suffered
by a defendant not having its choice of court venue) if it has
insurance coverage. The Court also noted that the insurance coverage
in question applied to claims advanced in jurisdictions such as
Canada, even though the facts in question actually occurred in
Cuba, giving further credence to the notion that the defendants
reasonably foresaw that they might be sued in a jurisdiction other
than Cuba, underscoring Ontario as a reasonable jurisdiction to
the lawsuit. In sum, there was no unfairness with the Ontario
jurisdiction, particularly in light of insurer of the "moving
parties" paying the defence costs.
(d) The unfairness to the Plaintiff and not accepting
jurisdiction
While there was no evidence filed that a fair trial
could not be held in Cuba, there would be significant prejudice
to the plaintiffs if the action were to take place in Cuba instead
of Ontario. In Ontario the Family Law Act provides for
certain remedies for loss of care and companionship, which would
not be awarded by a Cuban court. In addition, the principal plaintiffs'
claim for damages for pain and suffering could not proceed in
Cuba as it would in Ontario. Accordingly, the plaintiffs would
be deprived of certain elements of justice in a Cuban action and
there was no corresponding prejudice to the defendants of the
action were to proceed in Ontario.
(e) The involvement of other parties in the lawsuit
The court noted it as significant, (further grounding
the lawsuit as having a reasonable connection with Ontario), that
the other corporate defendants sued who were not contesting the
Ontario jurisdiction. It would make sense that the lawsuit proceed
against the two foreign entities, together with the other defendants
in one overall action in the Ontario jurisdiction. Bel Air and
Hola Sun were agreeing to the Ontario jurisdiction, (likely on
the basis that the all inclusive vacation package was purchased
by the Charron family in Ontario.) The court considered this to
be a significant factor in indicating that Ontario had a reasonable
connection with the facts of the case for the Ontario Court to
exercise jurisdiction.
(f) The Ontario Courts' willingness to recognize
and enforce an extra provincial judgment rendered on the same
jurisdictional basis
The Court noted that it would be unfair for a company
such as the "moving" party defendants to invite Ontario
residents to come to Cuba to use their services and then after
a claim comes forward in Ontario to assert that they have no connection
to Ontario, and to wash its hands of Ontario's jurisdiction. The
Court also noted that the defendants resisting the Ontario jurisdiction
are not domiciled in Cuba and there is no information on record
as to whether they have any assets there or not. As such, it was
fair, in the overall context, that the Ontario court "exercise
jurisdiction".
(g) Whether the action is interprovincial or international
in nature.
This case is international in nature, as opposed
to involving parties from different provinces. The courts have
long recognized that, all things being equal, it is necessarily
harder for a court in Ontario or another province to assume jurisdiction
over foreign based parties involved in an international incident
then over parties involved in an incident arising out of a different
province. This is on a count of the international policy of recognizing
autonomy and minimizing "interference" with other legal
systems and foreign nationals. Accordingly, this is one factor
that would weigh in favor of the defendants resisting the jurisdiction
of the Ontario Court in this case. The courts should employ more
deference with extra "weighting" required on the other
seven factors under this test, if the incident in question is
internationally in scope. As stated by the Courts in the past,
"….an international case requires a more restrained
approach to the assumption of jurisdiction….."
(h) Comity and the standards of jurisdiction recognition
and enforcement prevailing elsewhere
Finally, as to the eighth and final factor, it was
also considered whether or not there are any treaties or conventions
suggesting where the action should go to trial. There are no such
agreements with Cuba. It being unclear as to whether the defendants
resisting the Ontario jurisdiction had any assets in Cuba, the
Court noted that it would be unfair to force the plaintiffs to
litigate there where, if successful, they might have to take further
steps to have the Cuban judgment enforced in the Cayman Islands
(where the moving parties are based) if there were insufficient
assets in Cuba to answer to any judgment. All things being equal,
there being no rules or agreements between Cuba and Canada working
against Ontario exercising jurisdiction over this claim, this
factor would work in favor of the plaintiffs being able to litigate
their claims in Ontario.
It follows from the foregoing that the large majority of the factors
weighed in favor of the Ontario Court assuming jurisdiction over
the claim and the moving party "foreign" defendants
on the basis that Ontario had a real and substantial connection"
with the facts of the case.
Forum Non-Conveniens
The attack, by the foreign based defendants, on the
Ontario Court exercising jurisdiction was accompanied by a conventional
"second prong" argument. The foregoing analysis addressed
whether or not the Ontario Courts, could, exercise jurisdiction
over a claim. However the Ontario Court always has inherent discretion,
even if it has jurisdiction and the ability to adjudicate a claim,
to "stay" the action and have it referred to a foreign
court if the evidence shows that there is another jurisdiction or
venue that is significantly and clearly more appropriate to achieve
the ends of the justice. Typically this involves an analysis as
to whether the foreign court would involve significantly less expense
and whether a transfer of the action to the foreign court would
involve a legal disadvantage to the plaintiffs who express an interest
that the claim proceeded in Ontario. This legal analysis involves
consideration consideration on the following seven factors:
(i) The location of the majority of witnesses;
(ii) the location of key witnesses and evidence;
(iii) the existence of any contractual provisions that specify
what law will govern or what courts will have jurisdiction over
the claims;
(iv) the interest in avoiding a multiplicity of proceedings;
(v) applicable law and its weight in comparison to the factual
questions to be decided;
(vi) geographical factors suggesting a natural forum;
(vii) would declining jurisdiction deprive the plaintiff of a
legitimate legal advantage available in the domestic court where
the plaintiff initially took suit?
In a brief and simple analysis, the court noted that
the majority of the plaintiffs were in Ontario and that they continued
to suffer damages in Ontario. It was arguable that the breach of
contact took place in Ontario and that Ontario law may accordingly
govern. The foreign defendants resisting jurisdiction are not domiciled
in Cuba and it is unclear as to whether or not they have any assets
in Cuba. As noted, there was insurance available in Ontario to the
foreign defendants and as mentioned, most significantly, the plaintiffs
will not have access to all of the legal remedies in the Cuban courts
system that they would otherwise have in Ontario.
Accordingly, in addition to finding that in first
instance that the court had jurisdiction over the foreign defendants
resisting the Ontario Court jurisdiction (on the basis of Ontario
having "real substantial connection" to the facts of the
case), the Court further reasoned that the Ontario Court was the
most appropriate and effective venue for the matter to be worked
out.
The court did stay the action as against the defendant
Village Resort Internationally Limited carrying on business as Super
Clubs Breezes Costa Verde simply on the basis that there was no
real cause of action as against it but that the claim would continue
as against Club Resorts Limited (the actual resort manager and operator)
and accordingly this matter is now proceeding towards trial as against
all remaining defendants.
This case is a nice illustration of the principles
that will be applied by an Ontario Court in trying to achieve the
fine balance between international cooperation and not asserting
heavy handed on unfair jurisdiction over foreign entities on the
one hand and in trying to provide access to justice for Ontario
residents coming before the court with claims rising from accidents
occurring abroad.
Gordon Hearn
5. Electronic Records and Litigation - Implications in the Insurance
Setting : Part I - Preservation of Records and 'Litigation Holds'
Introduction
Recent amendments to the Rules of Civil Procedure
in Ontario and Alberta, as well as other jurisdictions, relating
to electronic records and e-discovery processes, have significant
implications for litigants in relation to discovery obligations
and the potential for prejudice to the prosecution or defence of
claims. As discussed below, the developing obligations put significant
new demands on insureds and insurers where the claim (or notice
of claim) gives rise to potential insurance coverage.
In Ontario, the recently introduced Ontario E-Discovery
Guidelines, combined with the expanded definition of "document"
in the Rules of Civil Procedure to include "data and information
stored in electronic form" (Rule 1.03), requires litigants
to locate, preserve, list and produce potentially massive amounts
of material for the purpose of discovery, even in routine cases.
In Alberta, Practice Note 14, combined with the expanded definition
of "Record" (R. 186) in the Alberta Rules of Court, triggers
a similar obligation.
The foregoing amendments and changes in civil practice
grew out of the work initiated by the Sedona Conference (see www.thesedonaconference.org)
and its related Sedona Canada Principles, which were developed to
respond to the explosion in the amount and nature of information
being created and facilitated by the introduction of computer technology
in business.
One of the fundamental concepts which is highlighted
by all of the amendments and the Sedona Conference work is the dynamic
nature of electronic data, relative to the relatively static nature
of the traditional paper records which businesses maintain. Data
and records can be found in various formats - active work, where
files are continually modified (potentially after litigation is
commenced), in archive or backup storage and on individual devices
(whether laptops, Blackberries, or the like). The facility with
which such material is reproduced and stored ensures that volumes
of information are duplicated, forwarded, copied and stored in multiple
locations.
Further, the type of information which is available
(i.e. metadata) which can be gleaned from the actual electronic
document, including dates of creation, authorship, identity of recipients,
and their receipt or review, dates of modification, etc…, may
be relevant and, depending on the case, critical to mounting a full
defence against, or advancing the prosecution of, a claim.
Over the next several issues of this Newsletter, I
will trace some of the specific implications of the expanded e-discovery
process in relation to the mutual obligations between insureds and
insurers. The focus of this edition will be on the obligations arising
upon receiving notice of a potential claim and the requirement to
enforce a "Litigation Hold" to preserve records.
Preservation Obligations
Parties involved in litigation have always been subject
to an overarching obligation to maintain relevant records or risk
being accused of spoliation of evidence - with implications for
adverse inferences being drawn against the party guilty of the destruction,
as well as other potential sanctions. To that extent, the new guidelines
and the Sedona Canada Principles do not change the law. What does
arise, however, in the e-discovery environment is a significant
expansion of the nature, type and volume of records which may be
caught by the obligation. The expansion of those records carries
with it expanded risks if parties fail to recognize what is required
and to address their obligations.
The Ontario Guidelines, which are expressly referenced
by the Alberta Practice Note, combined with the Sedona Canada Principles,
provide guidance with respect to the preservation obligation.
Under the Ontario Guidelines, litigants are reminded
of the obligation to preserve relevant records at the earliest possible
time and counsel are instructed to advise what steps may be prudent
or required to implement a "Litigation Hold". A "Litigation
Hold" is an instruction or protocol directed to relevant staff
within a litigant's organization which includes steps to:
1. collect all relevant document retention, back-up,
archiving, and destruction policies;
2. issue appropriate instructions to staff, or at
least all relevant staff, to cease or suspend personal activities
and practices that could result in the destruction or modification
of relevant electronic documents, such as the deletion of e-mailbox
entries or archives;
3. create litigation copies of potentially relevant
active data sources, for example by means of electronic backup or
forensic copying of documents, so as to preserve potentially relevant
meta-data; and
4. cease or suspend overriding of back-up tapes, and
other document retention practices that could result in the destruction
or modification of relevant electronic documents in the ordinary
course of business. (Taken from the Commentary to Principle 5)
As indicated above, the demands to preserve documents
or records requires an assessment of a wide-variety of data types,
storage locations, involved personnel, as well as the applicable
applications to retrieve such information (if it relates to out-of-date
or older archived records), all of which must be assessed against
what might be 'relevant' to the actual or threatened litigation.
For the litigant, this will likely mean engaging their Information
Technology personnel, along with the personnel who may have records
or information pertaining to the case, and assessing all of the
available sources with their counsel.
Significant difficulties arise when the claim is only
threatened and any sense of what may be 'relevant' may remain illusory.
In such cases, judgment calls are made within the litigant's organization
which may or may not accurately reflect what ultimately becomes
the issue in the litigation. If judgments are incorrect, the litigant
may be exposed to allegations of spoliation and sanctions may be
sought or enforced.
Spoliation
Spoliation has been summarized in North American
Road Ltd. v. Hitachi Construction Machinery Co. (2005) by the
Alberta Court of Queen's Bench, as follows:
Spoliation is the destruction or material alteration
of evidence, or potentially the failure to preserve property for
another's use as evidence in litigation that is pending or reasonably
foreseeable (Osepchuk v. Tim Hortons 1645, [2003] A.J.
No. 542, 2003 ABQB 364 at paras. 43-44). Spoliation creates the
rebuttable presumption that the evidence would have been unfavourable
to the party that destroyed it (St. Louis v. Canada (1896), 25
S.C.R. 649 at 652-653).
In the discovery setting, inappropriate records preservation
or counsel's failure to advise the litigant of the records preservation
obligation, may affect the litigant's chances for success in its
claim or defence. This risk becomes particularly acute where electronic
records and data are concerned, given the volume, nature and ease
of erasure or modification of such material, and where the scope
of what may be relevant remains uncertain.
In one of the few appellate cases to address the point,
the Alberta Court of Appeal in McDougall v. Black & Decker
Canada Inc. (2008), summarized the Canadian law on spoliation
as follows:
1. Spoliation currently refers to the intentional
destruction of relevant evidence when litigation is existing or
pending.
2. The principal remedy for spoliation is the imposition
of a rebuttable presumption of fact that the lost or destroyed
evidence would not assist the spoliator. The presumption can be
rebutted by evidence showing the spoliator did not intend, by
destroying the evidence, to affect the litigation, or by other
evidence to prove or repel the case.
3. Outside this general framework other remedies
may be available -- even where evidence has been unintentionally
destroyed. Remedial authority for these remedies is found in the
court's rules of procedure and its inherent ability to prevent
abuse of process, and remedies may include such relief as the
exclusion of expert reports and the denial of costs.
4. The courts have not yet found that the intentional
destruction of evidence gives rise to an intentional tort, nor
that there is a duty to preserve evidence for purposes of the
law of negligence, although these issues, in most jurisdictions,
remain open.
5. Generally, the issues of whether spoliation has
occurred, and what remedy should be given if it has, are matters
best left for trial where the trial judge can consider all of
the facts and fashion the most appropriate response.
6. Pre-trial relief may be available in the exceptional
case where a party is particularly disadvantaged by the destruction
of evidence. But generally this is accomplished through the applicable
rules of court, or the court's general discretion with respect
to costs and the control of abuse of process.
The combination of the potential for sanctions (including
dismissal of claims and striking of defences) where spoliation is
found with the problems inherent in electronic records management
and discovery raises several concerns and issues which insureds
and insurers must consider.
Implications for Litigation and Insurance Coverage
For Underwriters, it is essential that an insured's
document retention policy be scrutinized and, where applicable,
protocols identified to deal with potential claims if and when they
arise. Most organizations do not have consistently maintained or
enforced document retention policies (although there are a plethora
of regulations requiring same). It is important to understand the
risk associated with document management for two reasons, namely,
(1) the risk to litigation if documents or records are destroyed
contrary to policy or regulation and in the face of pending litigation
and (2) the costs associated with putting in place a litigation
hold for the organization (eg. who will bear that cost and will
it be covered under the subject policy) and who will bear the cost
of reviewing the insured's records for relevance and privilege.
The geometric expansion of the volume, nature and location of records
and documents entails sharply increased costs associated with the
records management in the litigation. Both Underwriters and the
insureds will want some certainty on who is bearing that risk and
what premiums may be applicable as a result.
For the Insurer as claims manager, it will be imperative
to address document preservation and litigation holds immediately
upon notification of a potential claim. This will require an assessment
of what protocols the insured is adopting for the litigation hold,
as well as documenting what is perceived to be 'relevant' in the
identification of records. Maintaining a written record of the considerations
of what is relevant may allow the insurer (and the insured) to mount
a defence to an argument that there was intentional destruction
if, in good faith, relevance was assessed with counsel and appropriate
protocols were put in place. Similarly, an early evaluation of what
may be relevant will allow for the determination of the scope of
the litigation hold, including whether a forensic copy of records,
backup tapes, hard drives or other items are necessary.
Insurers should also be aware of the potential prejudice
which may arise if an insured reports a claim late or fails to put
in place an appropriate litigation hold. The ease with which documents
and records can be erased or modified, or relevant metadata deleted
or overwritten, raises the risk of prejudice to new levels over
the traditional paper-based litigation.
Lastly, Insureds must be alive to the risks of failing
to develop an organization-wide document retention policy or to
put in place an appropriate litigation hold when litigation is threatened.
The risks of a loss of coverage (whether defence costs or indemnity)
where spoliation is alleged which causes potential prejudice to
the Insurer's position can best be mitigated by appropriate and
written litigation holds at the earliest stages.
John Kingman Phillips
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