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Newsletters 2009 > November 2009

In this issue:
1. Montreal Convention 1999 Carriage of Goods by Air Limitation Increase January 1, 2010
2. CIBC v. Nadiscorp Logistics Group Inc.: The Latest Chapter in the Prioritization of a Dispute Between a Secured Creditor and an Unpaid Carrier
3. TRADE ASSOCIATION SURVIVAL IN A COMPETITIVE WORLD: CONSEQUENCES OF NON-COMPLIANCE AND WAYS TO MINIMIZE LEGAL SCRUTINY



1. Montreal Convention 1999 Carriage of Goods by Air Limitation Increase January 1, 2010

On January 1st, 2010 the liability limit for the carriage of goods by air will increase from 17 SDR per kilogram to 19 SDR per kilogram where the value of the goods is not declared on the airway bill.

An SDR is a Special Drawing Right and currently equals about $1.68 Canadian. The increase is the result of the escalator clause in Article 24(1) of the Montreal Convention 1999, which requires the International Civil Aviation Organization (ICAO) to review the liability limits in this convention at five year intervals. The increase in the limits is designed to reflect inflation of 13% over the five year period. This figure is based on the International Monetary Fund world economic outlook database.

The International Civil Aviation Organization is the body that acts as depository for the Montreal Convention 1999. Notification was given by ICAO on June 30th, 2009 that the increase would enter into force six months later.

The Montreal Convention 1999 applies to air contracts where the convention is in force in both the country of departure and destination.

The Canadian law of carriage of goods by air is considerably more complicated than the law in relation to carriage of goods by sea or rail and possibly also by road. This is so because the law differs depending upon whether the carriage is domestic or international and because there is no single international regime governing all international carriage. To the contrary, the Carriage by Air Act implements four related but separate regimes that apply to international carriage. These are the Warsaw Convention, the Warsaw Convention as amended by the Hague Protocol, the Warsaw Convention as amended by the Montreal Protocol No. 4 and the Montreal Convention 1999. The determination of which regime applies depends on the countries of departure and destination.

Rui Fernandes


2. CIBC v. Nadiscorp Logistics Group Inc.: The Latest Chapter in the Prioritization of a Dispute Between a Secured Creditor and an Unpaid Carrier

This decision (2009 CanLII 50866) is the latest case installment pitting a secured creditor against unpaid carriers in a payment priority dispute arising from the financial failure of a transportation intermediary or broker.

The Facts

Nadiscorp Logistics Group Inc. ("Nadiscorp") was a logistics company providing services for shippers of goods. Nadiscorp engaged the services of third party carriers for its customers, who would pay freight to Nadiscorp, who in turn paid the freight charges to the carriers. In February of 2009 Nadiscorp entered into receivership. A. Farber & Partners Inc. was appointed the Receiver of all the property, assets and undertakings of Nadiscorp. The Receivership Order authorized the Receiver to deposit all funds received or collected by it "into one or more new accounts to be opened by the Receiver".

Accordingly, the Receiver opened a general trust account and began depositing into the same all the funds received or collected during the administration of the receivership. During this process the Receiver performed a detailed review of all accounts receivable it collected to determine whether Nadiscorp in turn had any liabilities due to third party carriers engaged by it for and on behalf of shippers of goods. The Receiver was aware that a "trust" may exist in favour of such third party carriers under the Highway Traffic Act R.S.O. 1999 c. H.8.

Section 191.0.1(3) of the Highway Traffic Act provides:

A person who arranges with an operator to carry the goods of another person, for compensation and by a commercial motor vehicle, shall hold any money received from the consignor or consignee of the goods in respect of the compensation owed to the operator in a trust account in trust for the operator until the money is paid to the operator.

This is the oft-quoted provision in Ontario law whereby freight brokers and other intermediaries are required to hold monies received from shippers (earmarked as payments to carriers) in a trust account. Based on its analysis as to the nature of the accounts receivable, the Receiver determined that some $300,000.00 were monies owing to carriers. The Receiver accordingly transferred this amount into a separate trust account opened specifically to fund potential carrier "trust claims".

During the course of the administration of the receivership of Nadiscorp certain thorny issues arose.

The first concerned whether certain of the unpaid carriers had a claim to the funds held in the "carriers trust account" in priority to the claim of a secured creditor of Nadiscorp, being the Hospitals of Ontario Pension Plan ("HOOPP").

The second issue turned on it being determined that the unpaid carriers did have a priority claim over the secured creditor. If they did, was such a "priority position" - premised on the application of the above provision of the Ontario Highway Traffic Act- thereby limited to a carrier resident in Ontario, or performing the carriage of goods into or out of Ontario? Or did such a priority position extend to other carriers who provided services in Canadian jurisdictions other than Ontario? This issue was raised as there is no statutory equivalent in the other provinces to the aforementioned provision of Section 191.0.1(3) of the Highway Traffic Act.

The First Issue: Who had priority to the funds set aside by the Receiver in the "carriers trust account"?

Citing well-established case law in the GMAC Commercial Credit Corporation Canada v. TST Logistics Inc. and the Norame Inc. decisions, counsel for HOOPP submitted that the Receiver had not complied with the requirements of Section 191.0.1 (3) of the Highway Traffic Act in the collection of the receivables so as to retain the monies earmarked for the carriers as a trust fund. In particular, it was argued that the Receiver had not demonstrated that the receivables, as collected as earmarked for the carriers, were segregated when received and kept in a separate trust account for the carriers. Rather, the assertion was that all monies were "co-mingled" by being placed into the general trust account upon initial receipt by the Receiver.

On the basis of the aforementioned decisions, counsel for HOOPP argued that the "co-mingled funds" had lost their status as trust funds and that the carriers could therefore not claim the benefit of any special priority accorded to them in the Highway Traffic Act. It was argued that the aforementioned precedents held that in order for carriers to obtain priority to funds collected by a Receiver over the interest of a secured creditor, that a trust account must conform to general trust principles. In particular, the trust property must be identified as being held in trust, segregated in a trust account, and not co-mingled with other property and that once the purported trust funds are co-mingled with other funds, they no longer constitute a "trust". If deprived of the nature of a "trust fund", the carriers would then lose the trust protection in the aforementioned Section 191.0.1 (3) and, accordingly, the carriers would then lose a priority battle to HOOPP as the secured creditor on a conventional priority adjudication.

The Ontario Superior Court, adjudicating the dispute, determined that the Receiver had to comply with both the aforementioned provision of the Highway Traffic Act as well as the relevant receivership appointment Order. The Court found that the Receiver in fact did comply with these requirements. The Court ruled that the funds in the Receiver's account are and were always funds held in trust for the creditors of Nadiscorp. There was nothing wrong with the Receiver taking in all initial monies into a general trust account, thereafter transferring the amount of $300,000.00 into a separate trust account to fund potential carrier trust claims. Accordingly the funds earmarked for the carriers had not lost their status as trust funds. As such the carriers enjoyed priority over the secured creditor. But …. exactly which carriers?

The Second Issue: How far does the "Carrier Priority Protection" Go?

As to the second question this raises a very important point as to the scope of or "reach" of the priority protection afforded by Section 191.0.1.(3) to carriers. Counsel for the Receiver took the position that any carrier who did not carry goods into or out of Ontario was not entitled to the benefit of Section 191.0.1.(3). Just what is the scope of, or reach of this provision of the Ontario Highway Traffic Act? The carrier litigants involved in the dispute did not carry goods for Nadiscorp into or out of Ontario. Nor were they resident in Ontario. As such they were not directly under the legislative rubric of the Highway Traffic Act of Ontario. Having carried goods for Nadiscorp in other Canadian jurisdictions (but into or out of Ontario) counsel for these carriers argued that the analysis as to the "reach" of the legislation should be whether or not Nadiscorp itself was bound by the Highway Traffic Act, as opposed to concerning an analysis as to where the carriers happened to undertake their mandate.

The Court ruled that the applicability of Section 191.0.1(3) did not depend on an analysis of the contracts as between the broker and the carrier. That is, there is no particular magic as to the geographic routing of the carrier for any shipment in question. Rather, the question was whether the operations of Nadiscorp are governed by the Highway Traffic Act. The Court found that on a plain reading the above section imposed an obligation on a person who arranges with an operator to carry the goods of another person. Nadiscorp conducted its business in Ontario and it engaged the services of various operators or carriers to transport various loads both interprovincially and intraprovincially. Counsel for the "outside of Ontario" carriers submitted that it followed that Nadiscorp's arrangement of the carriage of the goods in question therefore took place in Ontario, (with Nadiscorp being based there) and therefore insofar as the orders to carry goods originated or were arranged from Ontario, the "out of Ontario" carriers should get the protection of Section 191.0.1 (3).

The Court accepted this submission, ruling that insofar as Nadiscorp arranged the carriage of goods of another person while being a resident in Ontario, that there was no basis in upon which the Receiver could discriminate between carriers who are resident in Ontario and those who are not, or as concerns where they happened to undertake their services once mandated by Nadiscorp. The Court also noted that there is nothing in the definition of "operator" in the Highway Traffic Act to suggest that the term is limited to a carrier resident in Ontario.

Conclusion

Having found that the monies claimed by the unpaid carriers retained their nature as trust funds, the Court ruled that the deemed trust provision contained in Section 191.0.1 (3) applied to any carrier engaged by Nadiscorp.

Gordon Hearn


3. TRADE ASSOCIATION SURVIVAL IN A COMPETITIVE WORLD: CONSEQUENCES OF NON-COMPLIANCE AND WAYS TO MINIMIZE LEGAL SCRUTINY

Introduction

The Government of Canada has recently made some drastic amendments to the Competition Act ("the Act") in efforts to further protect Canadians from the effects of anticompetitive market behaviour. Some of the key areas of the Act that have been overhauled include sections that relate to deceptive marketing practices, conspiracies, and the merger review process. The focus of this article will be centered on understanding why the current competition regime in Canada ought to be considered by trade associations and their members in their dealings to avoid potentially serious legal consequences.

Trade associations have been described as "individuals and corporations with common commercial interests who, under the auspices of the organization, join together to take joint actions that further their commercial or professional goals". At first glance, this description may seem to lay the groundwork for completely legitimate activity such as discussing matters of industry importance, safety and quality standards and industry trends. In addition, because the Act lacks provisions dealing exclusively with trade associations directly, one may think that activities involving trade associations are not on the Government's radar. However, it must also be recognized that the risks associated with bringing market competitors together into such a tight forum creates a launching pad for trade association members to engage in anticompetitive conduct, which could very well be captured by the Act. However, this is not to downplay the legitimate roles trade associations have. As a result, the following will outline ways to maintain these legitimate purposes while being mindful of where to exercise caution.

Conspiracy

Conspiracy is conduct that is dealt with under section 45 of the Act. It is currently defined as conduct involving two or more persons, which prevents or lessens competition unduly. This could include conduct such as price fixing, bid rigging, or agreeing to control the production or supply of goods or services as a group.

Currently, there are three elements needed for conspiracy to be made out. The first element, requires that there be an agreement (although it need not be in writing). However, the agreement itself need not be implemented, just formed.

The second element requires that the agreement must result in an "undue" lessening of competition. "Undue" has been interpreted by the courts to be a function of how much market power the parties have along with consideration of how likely the conduct in question will create adverse market effects. For example, the more restrictive an agreement is, the less amount of market power needed in order to find the conduct "Undue". However, it is crucial to note that this "undueness" requirement has been repealed with the amendments and come March 12, 2010, it will not be necessary for adverse market effects to be established to prove criminal conspiracy.

The effect of this amendment will likely increase criminal conviction rates against companies and individuals across the board including smaller industry players with less market power who in the past had less exposure than market leaders. This change will likely lead to more civil actions as more companies and individuals will likely be found guilty of conspiracy related charges as a result of removal of the "undueness" requirement. Moreover, the recent Canadian case law on opening the door to certification proceedings for competition class actions is also more reason to expect a wave of competition lawsuits.

The final element requires that there be an intention amongst the parties to enter into the agreement. This would include having knowledge of the terms of the agreement and a mutual understanding that the consequences of the agreement if implemented would lessen competition.

It is important to note that in the context of trade associations, conspiracy may also take the form of conduct provided for in rules or codes of ethics set up by the trade association and its members. For example, this may include rules or fee guidelines dealing with the fixing of commission rates in the real estate industry or the setting of insurance premiums in the insurance industry to name but a few hypothetical examples.

The penalty for criminal conspiracy has been amended from a previous fine of up to 10 million dollars CDN or up to 10 years imprisonment to a new fine limit of up to 25 million dollars CDN or up to 14 years imprisonment.

One recent example of conspiracy in the air cargo transportation sector involved British Airways, which pleaded guilty for conspiring with other airlines to fixing surcharges on the sale and supply of international air cargo from Canada between 2002 and 2006. As a result, British Airways was fined $4.5 million CDN dollars.

Trade Association Discussions

Certain topics of conversation and information sharing may be evidence of anticompetitive conduct especially if it involves the disclosure of commercially sensitive topics. This may include discussions on the standardization of pricing in the future, ideal profit levels, and planning of the allocation of customer or geographic markets.

In some industries, the sharing of certain types of information between competitors is an integral part of doing business in order to maintain a more efficient and competitive marketplace. This is common practice in the insurance industry with the exchange of statistical and credit information. With this in mind, section 45(3) of the Act explicitly permits the sharing of certain information. These permissible carve outs allow for the exchange of statistical information, credit information, and the defining of terminology used in a trade industry or profession. This section also permits for agreements about the size and shape of containers in which articles are packaged in an industry. Moreover, agreements or arrangements relating to measures to protect the environment or for cooperative research and development are also permissible. However, all of these arrangements are only permitted insofar as they do not lessen competition in respect of prices; quantity or quality of production; markets or customers; or channels and methods of distribution.

Best Practices For Avoiding Legal Scrutiny

Some tips on avoiding trade association scrutiny are set out below. The following is meant to be a non-exhaustive list of strategies for minimizing such legal scrutiny.

a. Trade Association Meetings:

All trade association meetings should have a clear agenda in place. All documents referred to in meetings should be kept on file in order to record a history of previous meetings so as to protect members from problems down the road. In addition, it may be useful to have legal counsel review the agenda ahead of time or attend the meeting itself where there is the potential for commercially sensitive information to be brought up.

b. Membership and Discipline:

Trade associations should avoid creating sanctions against other members or potential members aimed at achieving anticompetitive purposes. For example, refusing a potential member into a trade association on the basis that a pricing adherence policy will not be complied with can trigger the Act. However, sanctions against members on the grounds of safety issues will not breach the Act. Additionally, if any fee guidelines are in place, they should be issued in a manner making it clear that there is no intention or expectation for members to adhere to the guideline.

c. Advertising:

Marketing conducted by trade associations on behalf of all its members tend to represent the views of an industry through public statements and advertising practices. As such, it should avoid materially false or misleading representations to avoid scrutiny of Part VII.1 of the Act. Under this part of the Act, individuals will be liable for "administrative monetary penalties" up to $750,000 CDN and corporations will be liable for up to $10 million dollars CDN for breaching the provisions. These will come into force March 12, 2010.

In respect of advertising conduct of the association members themselves, it is important that the internal association rules or guidelines relating to the manner in which members may conduct advertising do not restrict their ability to compete in the marketplace.

d. Information Sharing

Generally speaking, from an anticompetitive standpoint, it is safer for trade association members to share data based on historical aggregated information rather than current data. Moreover, the more general in nature the information is, the less likely anticompetitive challenges will be raised. Also, information sharing should be voluntary amongst members, and the information shared should maintain the anonymity of the members. This can be accomplished through the use of a third party to gather and assemble the information.

e. Compliance Plans:

Trade associations should put into place a corporate compliance program so as to as to avoid becoming a platform for illegal conduct. This would involve educating members about the Competition Act provisions. In addition, it would be wise for trade associations to select a compliance officer to ensure all meetings, guidelines and actions taken are in compliance with the Act. Additional compliance officer responsibilities would include ensuring that the trade association board of directors are comprised of individuals who are not all competitors. This would maintain a healthy balance. A compliance plan is not a requirement under the Act, but it may be looked at as a mitigating factor in the event of a breach.

Conclusion

The legal landscape is changing in the area of competition law. The amendments to the Competition Act will open the door to greater and stricter criminal and civil culpability for companies and individuals who engage in anticompetitive market behaviour. Trade associations in particular must be aware of the implications of both oral and written agreements that are entered into as the effect could trigger scrutiny under the Act. Through proactive measures such as instituting compliance programs, obtaining legal counsel to review documents in advance of meetings, and educating members of the trade association about consequences of non-compliance, trade associations will be better equipped to continue exercising their legitimate purposes without the fear of legal scrutiny.

Lawson Hennick


 


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