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.
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.
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
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
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
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.
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.
3. TRADE ASSOCIATION SURVIVAL IN A COMPETITIVE WORLD: CONSEQUENCES
OF NON-COMPLIANCE AND WAYS TO MINIMIZE LEGAL SCRUTINY
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 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
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
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.
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
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.
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.
This newsletter is published to keep our clients and friends informed
of new and important legal developments. It is intended for information
purposes only and does not constitute legal advice. You should not
act or fail to act on anything based on any of the material contained
herein without first consulting with a lawyer. The reading, sending
or receiving of information from or via the newsletter does not
create a lawyer-client relationship. Unless otherwise noted, all
content on this newsletter (the "Content") including images,
illustrations, designs, icons, photographs, and written and other
materials are copyrights, trade-marks and/or other intellectual
properties owned, controlled or licensed by Fernandes Hearn LLP.
The Content may not be otherwise used, reproduced, broadcast, published,or
retransmitted without the prior written permission of Fernandes