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Newsletters 2011 > June 2011

In this issue:
1. Firm and Industry News
2. Application of Pollution Exclusion Clause in CGL Policy Clarified
3. Court Actions Must Proceed With Reasonable Diligence
4. Suspect Transactions for Scrap Metal Warning

 

1. Firm and Industry News

  • June 3rd 2011 Quebec City: Canadian Maritime Law Association Annual Meeting and Dinner

  • June 16, 2011 Toronto: Canadian International Freight Forwarders Centraol Region Boat Cruise Networking Social Event

  • June 23, 2011 Richmond Hill Golf Club: Canadian Board of Marine Underwriters Spring Golf Tournament

  • September 8th 2011 Toronto or Montreal: Tentative Date for Association of Average Adjusters of Canada Annual Dinner

  • September 18-21 2011 Paris France: International Union of Marine Insurers Meeting.

  • September 28-30 Malahide Dublin Ireland: International Marine Claims Conference

  • October 6th, 2011 New York: Association of Average Adjusters of the U.S. Annual Meeting and Dinner

    Gordon Hearn represented the firm at the Conference of Freight Counsel meetings held in Chicago on June 26 and 276, 2011.

    Rui Fernandes will be attending the IUMI meetings in Paris France in September. He will be giving a short speech on Canadian maritime law and loss prevention.

    Kim Stoll will be the moderator on the Modal Update panel at the Canadian Transport Lawyers Association Annual Conference in Winnipeg, Manitoba. Martin Abadi will be presenting on the modal update for Marine Law.

    Fernandes Hearn LLP Named One of Top 6 Maritime Boutique Firms in the Country. "This boutique came on the scene in 1996, when Rui Fernandes and Gordon Hearn left Cassels Brock & Blackwell LLP. Maritime law is a major component of its general transportation law practice, which also deals with matters involving aviation, trucking, and rail carriage. Its nine lawyers serve key clients such as Royal & Sun Alliance Insurance, Allianz Insurance, Chubb Group of Insurance Companies, JEVCO Insurance Co., NYK Logistics, Quik X Transportation Inc., and Whirlpool Jet Boat Tours. Fernandes has helped solidify the firm's strong reputation by publishing five texts on transportation law." - Canadian Lawyer Magazine


 

2. Court of Appeal Clarifies Application of Pollution Exclusion Clauses in CGL Policies

In ING Insurance Company of Canada v. Miracle (Mohawk Imperial Sales and Mohawk Liquidate), 2011 ONCA 321, the Ontario Court of Appeal held that a "Pollution Liability" exclusion clause in a Commercial General Liability (CGL) insurance policy will apply where the insured participated in an activity that posed a known risk of pollution and environmental damage.

The insured, Andrew Miracle doing business as Mohawk Imperial Sales and Mohawk Liquidate (Miracle), operated a convenience store and gas bar. In a claim between the Government of Canada and Miracle it was alleged that gasoline escaped from an underground storage tank on Miracle's property and migrated on to adjacent lands owned by Canada. The claim, which alleged strict liability, nuisance and negligence, was for $1,850,000 in damages to cover the loss in value of the claimant's property, the costs of conducting an environmental assessment and the costs of remediating the property.

ING issued a Commercial General Liability policy to Miracle which contained a "Pollution Liability" exclusion clause excluding coverage for losses "arising out of the actual, alleged, potential or threatened spill, discharge, emission, dispersal, seepage, leakage, migration, release or escape of pollutants" from the lands or premises of Miracle.

ING sought a declaration that it had no duty to defend or indemnify Miracle [ in the action commenced by Canada] on the ground that the claim was excluded from coverage. The application judge dismissed the application on the ground that, as Miracle was not an "active industrial polluter" and as the claim was based on Miracle's alleged negligence, the pollution exclusion clause did not apply.

In dismissing ING's application for a declaration that it had no duty to defend or indemnify Miracle, the application judge relied on the decision of the Ontario Court of Appeal in Zurich Insurance Co. v. 686234 Ontario Ltd. 2002 CanLII 33365 (ON C.A.), (2002), 62 O.R. (3d) 447 (C.A.) (leave to appeal dismissed, [2003] S.C.C.A. No. 33). In particular, she relied on the finding in Zurich that nothing in the insured's regular business activities "place[d] it in the category of an active industrial polluter of the natural environment", and that the alleged "pollution" was "a result of the negligence alleged in the underlying claims".

In Zurich, the owner of an apartment building was sued by its tenants for damages caused by carbon monoxide poisoning caused by a defective furnace. The owner was insured and claimed indemnification from the insurer. The Ontario Court of Appeal held that a "Pollution Liability" exclusion clause did not apply to protect the insurer from having to indemnify the owner. In holding that the parties in Zurich would not reasonably have expected to exclude "carbon monoxide poisoning" from coverage under an exclusion clause dealing with "environmental pollution," the Court of Appeal relied on the determination that the insured party's regular business activities did not "place it in the category of an active industrial polluter of the natural environment." The Court of Appeal suggested that "active industrial polluters" would be in the nature of a manufacturer that discharges "effluent, overheated water, spent fuel and the like into the environment" in the normal course of its business.

In Miracle, the application judge found that, like the insured in Zurich, Miracle did not fall into the category of an "industrial polluter". Rather, the claimant alleged that the gas leak occurred as a result of Miracle's negligence. Since a reasonable insured would expect the exclusion to apply to industrial pollution and not to a gas leak, the claimant's claim was held not to fall within the pollution exclusion.

In this appeal [Miracle], Ontario Court of Appeal clarified its earlier decision in Zurich. In so doing it granted ING the declaration it sought that it had no duty to defend or indemnify Miracle. The Court of Appeal held that the application judge erred in holding that the pollution exclusion clause did not apply to exclude coverage for the claim as pleaded.

The Court of Appeal relied on a "commercially sensible interpretation" of the CGL insurance policy, based on the reasonable expectations of the parties, and indicated that:

"Unlike Zurich, in this case, the insured was engaged in an activity that carries an obvious and well-known risk of pollution and environmental damage: running a gas station. Indeed, the statement of claim is framed as a claim for damage to the natural environment caused by a form of pollution." (para. 22)

Justice Sharpe, speaking for the Court, held that the Court of Appeal's statement that the insured party in Zurich was not an "active industrial polluter" must be read in the context of that case, and that the phrase should not be read as restrictively as the application judge appeared to read it:

"Liability insurance is purchased to cover risks, not outcomes that are certain or inevitable. There is a general principle of insurance law that only fortuitous or contingent losses are covered by liability policies [citation omitted]. Accepting the argument that the pollution liability exclusion only applies to "active" industrial polluters - those who are already excluded from ordinary liability insurance coverage by virtue of the fortuity principle - would effectively denude the clause of any meaning. In my view, the exclusion clearly extends to activities, such as storing gasoline in the ground for resale at a gas bar, that carry a known risk of pollution and environmental harm." (para. 23)

The Court of Appeal went on to hold that applying the "Pollution Liability" exclusion clause to the present circumstances did not nullify the coverage sought by Miracle in the first place:

[We] see no merit in the submission that giving effect to the exclusion would effectively nullify the policy in this case. [. . .] [T]he operator of a convenience store and gas bar faces the risk of a wide range of liability claims for bodily injury and damage to property that the CGL will cover. By denying coverage for pollution liability, the court does not deprive the policy of a very significant measure of protection for the myriad other risks that the policy does cover. [. . .] [T]he pollution exclusion in this case is animated by a unique purpose: to preclude coverage for expensive government-mandated environmental cleanup required by legislation that makes polluters strictly liable. (para. 33)

The Court of Appeal concluded that it found no reason in this case to disregard the clear and unambiguous language of the pollution exclusion clause. The claim against Miracle fell squarely within the exclusion. ING was therefore not required to defend or indemnify Miracle against the claim brought by Canada.

Rui Fernandes



3. Court Actions Must Proceed with Reasonable Diligence

You're a defendant in a lawsuit. Growing tired of the plaintiff not taking steps to advance the matter, at some point you ask whether the claim might be dismissed by the court because of all the delays incurred. Invariably you are advised by counsel that 'it is hard to dismiss claims for pure delay'. While it is a fundamental goal that parties should have their day in court, the Ontario Court of Appeal has recently weighed in on the topic affirming a dismissal of an action for 'delay', citing egregious delays in the prosecution of a case.

Just when is 'enough enough'? The case of The Corporation of The City of Hamilton v. Svedas Koyanagi Architects Inc. et al. (2011) 104 O.R. (3d) 689 is an important illustration of the expectation that plaintiffs prosecute claims with reasonable diligence. Granted, as will be seen, the delays in the City of Hamilton case were very significant. Further, they were not adequately explained when put under scrutiny, and perhaps of paramount importance, the defendants showed that they had been prejudiced by the delay. As such, the case serves as an important 'nudge' to plaintiffs counsel; a reminder to move matters 'forward' with reasonable diligence. The facts are that dramatic in terms of delay that the case should not create a 'chilling effect' on counsel encountering the usual delays in advancing a case - but they do illustrate when 'enough is enough'.

Background

The City of Hamilton sued the defendants, Svedas Koyanagi Architects and Bradscot Construction for design and construction defects in an arena building. The arena was substantially completed in March 1994. The City alleges that serious defects such as cracks in the ice pad first appeared after the arena opened. The City commenced an action for damages in the spring of 2000. This suit was commenced towards close to the six year deadline for actions to be commenced in Ontario. (*1) Following the commencement of suit, other than asking for the delivery of statements of defence by the defendants and a failed application to add a third defendant to the action, the City did little to advance the action.

In due course, in accordance with the procedures of the Superior Court, the registrar issued a "status notice" whereby counsel for the plaintiff [usually, on notice to, or in concert with other counsel involved in the action] was called upon to account to the court on the status of the action.(*2) Accordingly, the City scheduled a status hearing for February 2009 but its counsel who was handling the file forgot to attend. As a result, On July 9, 2009 the registrar for the Superior Court issued an order dismissing the City's action for "delay".

The City brought a motion to a judge of the Superior Court on March 30, 2010 to set aside the registrar's dismissal order. This application was dismissed. The judge dismissed the application on the basis that the significant delay incurred in the prosecution [or lack thereof] of the action had not been explained, and further that the defendants had been prejudiced by virtue of the delay. The City appealed this order to the Court of Appeal.

At the Court of Appeal

The motion judge had the discretionary power to allow the City's appeal, but as mentioned he chose to affirm the step taken by the registrar. The main issue on the appeal concerned whether this discretion was reasonably exercised.

A secondary issue arose from the fact that a 'third party' brought into the litigation by the Svedas defendant was awarded costs by the motion judge notwithstanding the fact the third party - Group Eight Engineering - did not defend the main action.

On the appeal the City maintained that the motion judge improperly found that i) there was no reasonable explanation provided for the delay, ii) that the defendants were prejudiced by any delay and iii) that Group Eight Engineering should be awarded costs from the earlier proceedings wherein the action was dismissed. Counsel for the City asserted in this regard that Group Eight Engineering had no 'standing' in the earlier proceedings so as to have been allowed any award for costs. (*3)

The Court of Appeal reviewed the chronological highlights:

- the period of time between the first indication of the construction defects (late 1994) and the registrar's dismissal order (July, 2009) was 15 years;

- of these 15 years, there were, roughly speaking, three phases lasting 5 years each:

- the first, relating to the discovery of the defects, up until the commencement of the action [taking us from 1994 to March, 2000];

- the second, concerning the litigation itself, involving the City gathering in the statements of defence from the defendants [March, 2000 to November, 2005]; and

- the third, concerning the passage of time from November, 2005 up until July, 2009, when the initial dismissal order was issued.

Reviewing the chronology, the Court of Appeal noted with concern that in the middle time frame that "the City took no steps to move its lawsuit forward" and that "the defendants on the other hand, were not silent during this time period". The Svedas defendant had indicated a manifest intention to investigate the claim. The Bradscot defendant in turn had sent a request to inspect documents and a 'demand for particulars' to counsel for the City.(*4) The City did not respond to this request for particulars. Bradscot's counsel wrote 5 letters to counsel for the City about the action during the period of May 2000 to May 2001. Bradscot did not receive a reply to any of these letters. The Court noted that in Bradscot's last letter dated May 16, 2001, it's counsel said with some justification: "… it appears that the City is no longer interested in pursuing this claim".

Finally, in late November, 2005, the City delivered to counsel for Bradscot three expert reports that it had in its possession since 1999 which implicated the defendants in respect of the arena defects being complained of. It was at this point that the City requested delivery of statements of defence from Svedas and Bradscot. These were duly delivered by those parties, in late 2005 and the spring of 2006.

In March 2006 the City appointed outside counsel to handle the matter. In April, 2006, the City demolished the arena's concrete ice-pad, being the subject of many of the complaints. A consultant was retained to comment on the cracking who delivered a report in December 2006 concluding that a temperature control system manufactured by an entity not named in the law suit was defective which led to the cracks in question. The City wanted to add this 'new' entity - Honeywell - as a defendant, however it waited to bring the motion to add it as a defendant until June, 2008 which application was actually heard by the court in March, 2009. The application was dismissed because the City's delay in this regard was not explained and this delay had prejudiced Honeywell.

Meanwhile, as at the end of 2007, as two years had elapsed since Bradscot had delivered its statement of defence -the matter not yet having been 'set down for trial' - the registrar issued a status notice under Rule 48 of the Rules of Civil Procedure to counsel for the City. In response, the City scheduled a status hearing for February 12, 2008. The City adjourned this hearing to August 19, 2008. On that day, as its motion to add Honeywell as a defendant was still pending, the City further adjourned the status hearing, to February 10, 2009. It did not advise the defendants of this new date. On February 10, 2009, no one attended the hearing. The motion judge found that this was on account of inadvertence. As mentioned above, the registrar thereafter issued an order dismissing the City's action for delay.

A Review of the Motion Judge's Analysis

The Court of Appeal reviewed several key findings by the motion judge:

- while the City did not have to explain its delay in the issuance of suit until just before the end of the limitation period, this, as a part of the 'cumulative delay', may be relevant on the question of prejudice raised by the defendants said to have been caused by the delay;

- the City did not explain its delay in the middle phase listed above - that is, why little happened in the period following issuance of suit;

- the City did not explain its failure to effectively investigate potential causes of damage - the Honeywell 'angle' being pursued only in early 2006 - adding to the spectre of 'unexplained delay;

- prejudice to the defendants may be presumed because "the recollection of memory of witnesses will erode over time, and evidence that would otherwise be available may be lost"; and

- the City's delay has caused significant actual prejudice to the defendants, in two ways. Many of their witnesses were either then unavailable or have little recollection of the arena project. In addition, the defendants were prejudiced by the City's failure to add Honeywell as a defendant.(*5)

The Court of Appeal's Analysis

Judges' decisions on whether to set aside a registrar's order dismissing an action for delay are discretionary. The general principles and specific considerations that structure the exercise of this discretion are well established in cases such as Scaini v. Prochnicki (2007) 85 O.R. (3d) 179. The court noted that two principles of our justice system and our Rules of Civil Procedure come into play. The first is that civil actions should be decided on their merits. As noted by the motion judge: "… the court's bias is in favour of deciding matters on their merits rather than terminating rights on procedural grounds". The second principle, reflected in the various time limits mandated by the Rules of Civil Procedure, and in the provision therein for a status notice and a hearing on point, is that civil actions should be resolved within a reasonable time frame.

The court noted that on motions to set aside an order dismissing an action for delay, invariably there is tension between these two principles. In seeking to give effect to these principles, motion judges must take into account and weigh a list of considerations, typically including:

- the length of the delay;

- whether the plaintiff has adequately explained the delay;

- whether the delay has prejudiced the defendants;

- whether the dismissal order resulted from a lawyer's inadvertence; and

- whether, after becoming aware of the dismissal order, the plaintiff moved reasonably promptly to set it aside.

The court's overriding objective is to achieve a just result - a result that balances the interests of the parties and takes account of the public's interest in the timely resolution of disputes. The Court of Appeal noted that the motion judge took the above framework into consideration and that his findings of unexplained delay and prejudice were well supported on the court record. Accordingly, it was found that the motion judge's conclusion that the registrar's order should not be set aside was reasonable and should not be disturbed on appeal. While the Court of Appeal was hesitant to deny the City a decision on the merits of the claim, the inordinate delay - in large part not explained - and the prejudicial effect of the delay on the defendants outweighed any such concern in upholding the dismissal of the action for delay. Interestingly, the Court of Appeal noted that while "defendants as well as plaintiffs have an obligation to move a matter along, the primary responsibility rests with the plaintiff". Accordingly, the Court of Appeal affirmed the ruling of the motion judge. The City of Hamilton lost the ability to prosecute its case towards trial.

In this case, the Court of Appeal found that the entire responsibility for the delay rested with the City. Further - having waited until close to the expiry of the limitation period to start its action, the City was obliged to move it along.

On the last issue, as to whether the motion judge erred in awarding costs to Group Eight Engineering, the Court of Appeal agreed with the findings of the motion judge that "Group Eight had a direct interest in the outcome of the motion, since setting aside the registrar's dismissal order would have resulted in the revival of the third party claims brought by Svedas…". Accordingly - without ruling generally as to whether in all motions of this kind a plaintiff should be at risk to pay the costs of a third party who did not defend the main action - it was found that the motion judge exercised his discretion correctly. This was not only because Group Eight was affected by the outcome of the motion, but because it was reasonably foreseeable that Svedas would have taken third party proceedings against Group Eight who was one of its sub-consultants on the arena project.

Conclusion

As mentioned at the beginning of this article, it would take an extraordinary or a 'severe' set of facts for a case to be dismissed for 'delay'. The facts in the City of Hamilton decision are extraordinary. While it is often difficult to advance multi-party litigation with dispatch, especially where there are complex factual or expert related questions involved, the basic lessons for counsel and litigants should be clear. Plaintiffs counsel need to manifest an intention throughout to prosecute cases and to take steps to move things along. Certainly, if and when status notices are issued [a common occurrence] a cautious approach must be taken. If one or more defendants are an on going cause of any delay, the record should be developed accordingly so that the plaintiff will not be found to have been the only cause of any delay as was the case in this decision.

For their part, defence counsel are by and large expected to cooperate in the prosecution of matters, and to timely enforce the plaintiff's obligations, in seeking appropriate remedies in that regard, to advance court cases. However they must also be aware that if inordinate delays accumulate, combined with prejudice to the defence of a matter, that this case might serve as an important precedent in seeking a dismissal for delay.

Gordon Hearn

Endnotes

*1 The suit time of six years, relevant in this case, is not longer the law in Ontario. Presently the time period for suits for breach of contract and negligence is 2 years from the "day on which the claim was discovered".

*2 Usually this culminates in a timetable being prepared by counsel, with some form of scheduling attendance or a timetable filing as a means to satisfy the court that a 'go forward' plan has been agreed upon and that the parties are prepared to meet timing deadlines in that regard.

*3 It will be recalled that in our system, as a general rule, that the successful party will recover a portion of their legal costs. Accordingly, the defendants had been awarded some of their costs in the initial proceedings before the motion judge. In addition, in the same vein, the third party was awarded some of its legal costs.

*4 A "request for particulars" is a list of questions that counsel for a defendant can send to counsel for the plaintiff, soliciting details of the claim in advance of delivering a statement of defence. These 'particulars' can, generally speaking, be demanded if the provision of more information than is pleaded in a statement of claim is key to the preparation of a meaningful defence.

*5 As it turns out, while the motion judge cited this as something left unexplained, the Court of Appeal did not have a concern with this one discrete item, but it did have a grievance over all other aspects of the plaintiff's delay in this case.

 

 

4. The ICC International Maritime Bureau (IMB) has uncovered a number of suspect transactions for scrap metal.

The following notice can be found at http://www.icc-ccs.org/news/448-imb-identifies-bogus-scrap-shipments

"The Bureau has identified a number of purported shipments of Heavy Melting Scrap (HMS) which, upon closer scrutiny, appear not to have taken place at all. The documents represented containerised cargoes of HMS allegedly shipped, by an Austrian beneficiary, from a northern Italian port to various ports in Asia. IMB enquiries quickly established that although the nominated vessels were at the port at the stated time of loading and the containers as per B/L are in existence, the said cargoes were not loaded as.

IMB Director Pottengal Mukundan commented: "These transactions were supported by a very convincing set of documents, which on first glance appear to be genuine. Furthermore, the vessels named on all of the Bills of Lading were all in the ports of loading at the stated time- which suggests a degree of familiarity with the local trade. IMB was able to use third-party sources to establish that these shipments had, in fact, never taken place."

All of the suspect transactions have included Bills of Lading issued by the same NVOCC. The NVOCC had a website that offered an 'Automated Tracking System', which allows users to enter shipment details in order that they receive email confirmation that the shipment had taken place. The information provided by third-party sources, however, directly contradicted that provided by the NVOCC.

The documents included an inspection certificate issued by a UK-based inspection company. The company, registered less than one month prior to the first purported shipment was said to have taken place, have a similar name and logo to that of an established inspection company.

Mr Mukundan continued: "These documents have clearly been produced by someone with an in-depth knowledge of trade finance and are designed to deceive those without specific shipping or trade knowledge. Most worrying, we have seen several referrals of this type of document from various members in recent days- suggesting that there may be numerous transactions under way with several banks."

Stringent due diligence checks on all parties involved in any major transaction are strongly recommended by IMB, even on parties with established trading records. Furthermore, the Bureau advises that all details of the shipment appearing on the documents are verified independently to prevent losses."

Rui Fernandes






 

 


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