In this issue:
1. Firm and Industry News
2. Captains & Engineers Allowed to Form Bargaining Unit
3. Update on Ship Bunkers and Necessaries
4. Improper and Unsupported Allegations of Fraud Leave Bank Empty
5. Covenants to Insure in Commercial Contracts
6. Wind Farm and Energy Update
1. Firm and Industry News
- April 14th, 2011 Toronto: Canadian International
Freight Forwarders Central Region Forwarders Choice Awards Dinner.
[Fernandes Hearn LLP is a Gold Sponsor for the event]
- April 15th, 2011 Ottawa: Canadian Maritime
Law Association Seminar on Maritime Law
April 20th 2011 Toronto: CBMU Loss Prevention
Seminar - Trucking Contracts and Load Brokers
(8:30 am Royal & SunAlliance Insurance Company (10 Wellington
Street East, Toronto))
May 6th -7th Montreal: McGill University
Aviation Legal Liability Conference
May 11-14 Las Vegas: CTLA and Transportation
Lawyers Assoc. Annual Meeting
May 25-26 2011 Collingwood: CBMU Semi-Annual
- June 3rd 2011 Quebec City: CMLA Annual
Gordon Hearn will be speaking in St. Louis,
Missouri at the Annual Conference of the Transportation & Logistics
Council on April 4, 2011 on "Regulatory and Liability Aspects
of the Carriage of Goods into and out of Canada
Gordon Hearn will be moderating a Transportation
Lawyers Association Webinar presentation on "Freight Intermediaries"
on April 13, 2011.
Rui Fernandes will be speaking in Toronto at
the CBMU Loss Prevention Seminar on April 20th on "Trucking
Contracts of Carriage, Load Brokers and Cross Border Movements"
AND ENGINEERS OF VESSELS ALLOWED TO FORM A BARGAINING UNIT
In Algoma Central Marine v. Captains and Chiefs
Association 2011 FCA 94, Algoma Central Marine applied to the
Federal Court of Appeal for a judicial review of the decision of
the Canada Industrial Relations Board dated April 9, 2010 (2010
CIRB 531) certifying the Captains and Chiefs Association as the
bargaining agent for a unit comprising:
"all regular and reserve Captains/Masters and
Chief Engineers employed by Algoma Central Marine, a Division
of Algoma Central Corporation, on vessels owned, operated or under
bareboat charter, or otherwise effectively controlled by Algoma
Central Marine directly or indirectly, excluding Training Captains
and Training Chief Engineers".
Algoma argued that the captains and chief engineers
were not eligible because they performed management functions and
therefore did not meet the definition of "employee" in
section 3 of the Canada Labour Code, R.S.C. 1985, c. L-2.
The Federal Court of Appeal was required to review
the CIRB's decision on the standard of reasonableness; that is,
whether the decision of the Board was intelligible and justifiable,
and fell within a range of possible, acceptable outcomes.
Algoma did not suggest that there was any error in
the summary of the relevant law set out in the Board's reasons nor
did Algoma take issue with any of the Board's findings of fact.
Rather, Algoma argued that, given the facts as found by the Board,
it was unreasonable for the Board to conclude that the captains
and chief engineers employed on Algoma's vessels did not perform
The Federal Court of Appeal noted that there was room
for debate as to whether, in general or theoretical terms, the captain
or chief engineer of a vessel performs management functions. However,
in the context of applications for the certification of bargaining
units, the Board had to deal with that question on a case by case
basis, considering all of the relevant evidence, informed by labour
The Court of Appeal found that the Board's reasons
in this case were detailed, thorough and cogent. The Board explained
clearly why it concluded that the captains and chief engineers employed
on Algoma's vessels fell within the statutory definition of "employee",
notwithstanding their important legal and supervisory obligations
The application for judicial review was dismissed with costs.
3. UPDATE ON SHIP BUNKERS AND NECESSARIES
In our April 2010 Newsletter we reported on the decision
of Justice Harrington of the Federal Court of Canada of World
Fuel Services Corporation v. The Ship "Nordems" 2010
FC 332. The fact situation was rather complex.
Parkroad Corporation, a Korean sub-time charter of
the vessel "Nordems," contracted (through communications
in Korea) with either the plaintiff, an American corporation, or
its affiliate World Fuel Services (Singapore) Pte. Ltd., a Singapore
corporation, for the purchase of bunkers taken on board in South
Africa. The vessel flew the Cypriot flag.
Parkroad Corporation went bankrupt without paying
for the bunkers.
Thereafter, the plaintiff arrested the "Nordems"
in Baie Comeau, Canada. The ship was released on bail furnished
by her German owners. Parkroad was named as a defendant but did
The plaintiff's claim was that Parkroad contracted
not only on its own behalf, but also on behalf of the ship and her
owners. The provisions of the contract deemed it to have been made
in the United States. It was expressly governed by American law,
which created a maritime lien over the ship, even should it be that
her owners and managers were not personally liable.
The court was required to decide the proper law governing
the relationship. The defendant German owners denied there was a
contractual relationship with the plaintiff. Both sides however
agreed to allow the Canadian court to decide the issues.
Justice Harrington made two findings which drove his
analysis of the legal issues in the case. He summarized these as
"Parkroad had no actual authority from the
owners or managers of the Nordems to contract for the supply of
bunkers on their behalf, or on the credit of the ship. They were
expressly prohibited from so doing. However, World Fuel Services
Corporation had no actual knowledge of that fact. The importance
of these findings is that, briefly put, the maritime law of the
United States, the law selected by World Fuel Services Corporation
and Parkroad to govern their contract, is such that a necessaries
man is presumed to have contracted on the credit of the ship.
That presumption can only be rebutted by establishing that the
necessaries man had actual knowledge that the contracting party
did not have authority to bind the ship. If that presumption is
not rebutted, American law creates a maritime lien on the ship.
On the other hand, under Canadian maritime law, apart from a few
exceptions which are not relevant here, a necessaries man does
not enjoy a maritime lien. Under sections 22 and 43 of the Federal
Courts Act, he has a statutory right in rem against the ship,
but only if her owners are personally liable. As in American law,
there is a presumption that the necessaries were ordered on the
credit of the ship. However it is not necessary to establish actual
knowledge of lack of authority on the part of the necessaries
man to rebut that presumption."
The decision of Justice Harrington was appealed to
the Federal Court of Appeal. Justice Nadon wrote the decision of
the Court of Appeal. He agreed the case raised difficult issues,
namely, the liability of the owners of the vessel for the supply
of the bunkers and whether, irrespective of liability on the part
of the owners, the vessel itself is liable in rem for the amount
sought by the supplier. Justice Nadon felt compelled, again, to
set out the differences between Canadian and American law on the
supply of necessaries to a ship, stating:
The differences between our law and that of the
United States are of crucial importance in this appeal since Canadian
maritime law, contrary to American maritime law, does not create
a maritime lien in favour of a supplier of necessaries. Further,
under Canadian maritime law, personal liability of the shipowner
is required for a successful action in rem by a supplier of necessaries,
whereas, under American law, personal liability of the shipowner
is not required for such an action to be successful.
 Also of relevance is the fact that under American
law, a charterer is presumed to have authority from the owner
of the ship to subject the ship to a maritime lien for necessaries,
in the absence of the supplier's actual knowledge of a prohibition
of lien clause in the charter party. In other words, there exists
a presumption that a necessaries man has contracted on the credit
of the ship, which presumption can only be rebutted by showing
that the necessaries man knew that his contracting party was not
authorized to bind the ship. Failing rebuttal of the presumption,
the supplier of necessaries can enforce his maritime lien on the
 Although there is also a presumption under Canadian maritime
law that necessaries were ordered on the credit of the ship, our
law does not go as far as requiring actual knowledge of lack of
authority on the part of the supplier for a successful rebuttal
of the presumption. This is why the Judge, in the course of his
Reasons, characterized the presumption under Canadian law as a
"weaker presumption" (paragraph 40 of Judge's Reasons).
The Federal Court of appeal reviewed Justice Harrington's
decision and concluded that the Judge made no reviewable error in
finding that the shipowners were not a party to the supply contract,
that the presumption had been rebutted and that American law did
not govern the transaction at issue.
4. IMPROPER AND UNSUPPORTED ALLEGATIONS OF FRAUDULENT
CONDUCT LEAVE RBC EMPTY-HANDED
Stinson J. of the Ontario Superior Court of Justice
recently decided Royal Bank of Canada v. Boussoulas, 2010
ONSC 4650 wherein the Royal Bank of Canada ("RBC") brought
a motion seeking, amongst other things, appointment of an interim
receiver over the business and assets of the defendants and a Mareva
injunction. The underlying action was a suit brought by RBC to recover
money loaned by it to 4191153 Canada Inc. ("419"). Guarantees
of this loan were signed by Peter Boussoulas and his son Theo.
RBC later determined that Chris Boussoulas (Peter's
other son) was operating Edgebanding Solutions Inc. ("ESI")
in virtually the same business. Both 419 and ESI became insolvent,
and RBC believed the business was then being operated by 2200504
Ontario Inc. ("220"). 220 was allegedly controlled by
Peter's long time employee Joanne Bradbury, using the same equipment
as the two prior businesses. RBC also discovered a new million dollar
mortgage placed by Theo and Chris on the family home in favour of
their mother, Teresa, for no apparent consideration.
The Mareva Injunction
Based on the above, RBC sought a Mareva injunction
and appointment of an interim receiver to oversee these assets.
In its notice of motion, RBC alleged that the relief sought was
on the ground that, amongst other things, "there is a strong prima facie case that the defendants defrauded RBC"
of over $3.8 million, and that "Boussoulas obtained over half
of the total amount borrowed on the basis of a fraudulent equipment
appraisal. In its factum, RBC made "extensive reference to
these allegations of fraud". However, in its amended factum
and during oral submissions, there was no mention of any evidence
with respect to the allegations of fraud. During reply, counsel
for RBC advised the court that RBC still intended to reply on these
allegations of fraud, but did not consider that it was necessary
to rely on them as a basis for obtaining the release sought given
the other evidence available.
The defendants argued that the facts presented did
not warrant the remedy of a Mareva injunction or the appointment
of a receiver. They also submitted that RBC's unsupported allegations
of fraud should provide a basis for the court exercising at its
discretion and refusing to grant such equitable relief.
The court summarized RBC's argument by referring to
a "series of facts and events" as support for motion for
a Mareva injunction and the appointment of an interim receiver,
- the financial decline leading to the insolvency
of 419, coupled with significant "lifestyle" expenses;
- the fact that 419 defaulted on its loan from RBC;
- the drastic difference between the 2008 appraised
value for 419's equipment and the 2009 realized sum on liquidation
(being a $1.4 million difference), leading RBC to believe that
the defendants supplied it with a fraudulent appraisal report;
- the assignment by 419 to ESI of all its receivables
in the fall 2008, despite RBC's security interest in them;
- the fact that 419 ceased doing business and ESI
continued the same business;
- after ESI's insolvency, the fact that the same
business was continued by Joanne under the rubric of 220;
- the multiple relocations of 419, ESI and 220; and
- the defendants' non-compliance with the previous
court order regarding income expenses reporting, and their refusal
to answer questions about their assets.
The defendants admitted some of these allegations.
They did explain that the triggering event for the assignment of
419 receivables to ESI was the erroneous service of a notice of
garnishment of 419's account that had the result of freezing 419's
account. The court noted that the defendants had no logical explanation
for why, despite the fact that this garnishment issue was cleared
up within two weeks, ESI's collection and depositing of 419's receivables
continued for some six months thereafter. The defendants also alleged
that the businesses carried on by 419, ESI and 220 were independent,
notwithstanding the familial and personal connections. They also
asserted legitimate business reasons for the multiple relocations.
The defendants specifically denied that the equipment appraisal
report was fraudulent, and noted that RBC dealt directly with the
appraiser who supplied it.
The court held that RBC met the preliminary requirement
of demonstrating that it had strong prima facie case for
a Mareva injunction, an extraordinary remedy freezing the defendants'
assets that are situate in Ontario so that they cannot be moved
out of the jurisdiction (and therefore away from the power of the
Ontario courts). The court took pains to point out that it was not
commenting on the allegations of fraud, merely whether RBC had made
its case with respect to the Mareva injunction.
The court then held that RBC had also proved the second
element of the Mareva injunction test, having shown that there was
a real risk that the defendants were dissipating or disposing of
their assets in a manner clearly distinct from the usual ordinary
course of business so as to render the possibility of future tracing
of the assets remote, if not impossible. The court noted that the
facts listed above disclosed a history of conduct by the defendants
that was inconsistent with the ordinary course of business.
The court then moved on to the final element to consider
a Mareva injunction test, being the "balance of convenience".
The defendants Joanne and 220 had advised the court that they were
prepared to abide by any court order with respect to the equipment
used in their business. The other defendants, however, were "living
off the goodness of others", but they were unwilling to disclose
their assets. Peter had previously claimed in a personal net worth
statement given to RBC that he owned a hotel in Greece worth some
$5 million, but then refused to answer any questions about it.
The court held that it is "difficult to see why,
in these circumstances, a Mareva injunction would be at all harmful
and inconvenient to the defendants". In fact, RBC's interest
may be "irreparably damaged" if a Mareva injunction was
not granted, "since the debt will be uncollectible". RBC
was therefore entitled to a Mareva injunction with respect to Peter,
Chris and Theo. RBC was not entitled to a Mareva injunction with
respect to Joanne and 220 given the lack of evidence of dissipation
of their assets, and their willingness to abide by any court order.
The Court's Discretion
The court then considered the defendants' argument
that RBC's actions disentitled it to relief of the Mareva injunction,
being equitable relief. The court noted that Mareva injunctions
are "discretionary, equitable remedies" that are granted
only where it is "just and equitable". As such, the court
is entitled to weigh the conduct of the parties seeking such relief,
and to decline the relief sought if the conduct of the party seeking
such relief is wanting.
The court cited I.C.F. Spry in Principles of Equitable
Remedies (London: Sweet & Maxwell, 2010) at 414:
An applicant who culpably misleads the court
in making his application may be refused equitable relief on this
The court held that RBC's conduct disentitled it to
an equitable remedy such as a Mareva injunction or the appointment
of a receiver. RBC made "unsupportable allegations in its notices
of motion, factums and affidavits" which were "unacceptable
in any court at any stage of a proceeding". The court recognized
the challenges in current commercial litigation matters, with complicated
fact situations and detailed and complex documentation, often requiring
resolution on short notice. It is a challenge to master the facts
and legal issues while meeting the parties' expectations to provide
swift and just determination of the dispute. The court noted that
"particularly in cases where the materials are voluminous,
the court looks to counsel and counsel's factum as reliable sources
of key information. If that information is overstated or unreliable,
the court is significantly impeded in performing its function."
The court noted the current practice of commercial
litigants to make "raw allegations of fraudulent conduct on
the part of their opponents", or to make allegations of fraudulent
conduct while lacking the requisite prima facie case to sustain
such allegations. The law has long held that making unfounded allegations
of fraud is improper, and ground for making punitive cost awards.
An allegation of fraud is an accusation of conduct involving "moral
turpitude" that is not to be made lightly, unless the lawyer
has been presented with the prima facie cases establishing
Improper and unproven allegations of fraud can result
in adverse and punitive costs orders, and misconduct by a party
in the course of a proceeding may also warrant the refusal of an
equitable relief. The court held in this case that there was no
reason why this principle should not extend to "extravagant
and unsupported" allegations of fraud.
RBC's materials failed to meet acceptable standards
in numerous respects:
- RBC's notice of motion and amended notice of motion
both alleged that there was strong prima facie case that
the defendants defrauded RBC of approximately $3.8 million;
- the initial three volume affidavit contained similar
allegations, with the word "fraud" or variations of
it use no less than four times in the third paragraph, and with
the affidavit concluding in its penultimate paragraph that RBC
had been a target of a fraudulent scheme to defraud it of assets
under its security;
- RBC did not mention the word "fraud"
at all in its amended factum and its submission-in-chief during
- RBC's initial factum used the word "fraud",
or variations thereof, no less than four times in the second paragraph,
including the allegation that its defendants "orchestrated
a fraudulent scheme to fraudulently borrow over $4 million from
RBC between 2005 and 2008"; and
- the defendants argued in their responding submissions
that RBC had alleged but did not argue let alone prove fraud,
and should therefore be denied equitable relief, but in its reply
RBC stood by its allegations of fraud, despite having said nothing
about them in chief.
The court went on to say that RBC misstated or overstated
its case and evidence on numerous points, including:
- alleging that the defendants fraudulently borrowed
over $4 million from RBC between 2005 and 2008, despite there
being no evidence in this regard;
- the allegation that the defendants obtained over
half of the total amount borrowed on the basis of a fraudulent
equipment appraisal was untrue;
- there was no direct evidence of a fraudulent appraisal,
but rather evidence that RBC dealt directly with the appraiser
to request the report;
- the affiant stating the facts underlining the fraudulent
appraisal allegation did not in fact have personal knowledge,
but failed to qualify his evidence as such;
- the sole basis for the allegation with respect
to the fraudulent appraisal was the difference between the two
appraised values, with no evidence that the defendants bore any
responsibility for the discrepancy;
- RBC's evidence in another affidavit sworn in a
different motion also contained hearsay evidence that was not
properly qualified, and was misleading; and
- RBC's affidavit included irrelevant and inadmissible
allegations against the defendants, including reference to pending
criminal prosecution against Peter.
On the basis of the above, the court concluded that
RBC's conduct disentitled it to the equitable relief of a Mareva
injunction or an appointment of an interim receiver.
Misstatements and overstatements of evidence as described
"impair and impede the court in the performance of its function,
and are to be strongly discouraged". It is no answer to say
that the motion was brought on notice and that the defendant therefore
had every opportunity to respond with his or her side of the story.
Whether a motion is on notice or not does not affect the moving
party's duty to be fair, accurate and candid with the court in its
notice of motion, affidavits and factum. Counsel advocates his or
her client's case, but at the same time also has a duty to assist
the court in arriving at a just and proper result.
RBC's conduct and shortcomings disentitled it to relief
that it was otherwise entitled to have granted in its favour (i.e.
the Mareva injunction). The court exercised its discretion and dismissed
RBC's motion for the Mareva injunction and an appointment of interim
RBC was otherwise entitled to rather unusual relief
in a form of a Mareva injunction, and despite satisfying the court
that it was entitled to such extraordinary relief, RBC was not entitled
to judgment solely because it made these unfounded allegations of
fraud. Allegations of fraud carry a higher burden than allegations
of breach of contract or negligence. A lawyer must have some supporting
facts and/or documents to show that an allegation of fraud is made
out before pleading such allegation. It is not enough to have a
feeling or suspicion that a party is acting fraudulently.
These considerations are important in transportation
law where there may occasionally be suspicion of connections to
organized crime. As above, it is insufficient to have only a suspicion
of fraudulent conduct. It is also insufficient to have merely some
evidence in the form of witness statements or documents that hint
at fraud, or raise your suspicions as to fraud. There must be some
concrete evidence, whether the evidence of an individual or contained
in documentation, that a fraud has been perpetrated.
This case is a clear warning sign to parties to ensure
that the facts and evidence as presented are clear and straightforward,
and assist the court in coming to a proper conclusion. The court
clearly wanted to discourage parties from making unfounded allegations
of fraud in order to gain a procedural or tactical advantage.
5. "Covenants to Insure" in Commercial Contracts:
The Case of The Greater Toronto Airports Authority Association
Inc. v. Foster Wheeler Limited and others
In the February edition of the Fernandes Hearn newsletter,
the undersigned wrote an article concerning recent judicial pronouncements
on rules for the interpretation of insurance policies. A predominant
theme regarding judges' interpretation of insurance policies is
a quest for a reasonable result in light of the intentions of the
parties to that contract.
The judicial interpretation of commercial contracts
aims for the same goal: to ensure a commercially reasonable outcome
of a dispute. The decision in the case of Greater Toronto Airports
Authority Association Inc. v. Foster Wheeler Limited and others [2011 ONSC 1442 (CanLII) presents a nice further study in this regard.
While the case deals with a construction contract dispute, the judgment
can be considered and applied to a general contractual context as
a further example of the search for a 'pragmatic' and 'fair' result.
Foster Wheeler Limited ("Foster Wheeler")
entered into a contract in February of 2000 with the Greater Toronto
Airports Authority Association Inc. (the "GTAA") to supply
four steam boilers ("Supply Contract"). During the course
of installation of one of the boilers, an explosion occurred, damaging
the boiler and other GTAA property. GTAA was compensated for the
damage by its insurance company, which insurer commenced a subrogation
claim against Foster Wheeler, and other defendants (sub-contractors
involved in the project) to recover its claim pay out.
Foster Wheeler and the other defendants brought a
motion for 'summary judgment' after having been served the insurer's
statement of claim, asserting that the Supply Contract in question
precluded suit by the insurer against them. Citing the provisions
of the Supply Contract, they maintained that, on the basis of the
interpretation and application of the contract terms, they should
be exonerated from any liability and that a trial was not necessary.
In a nicely set forth and reasoned decision, the judge
hearing the motion to 'strike the claim' set forth the key contractual
excerpts, and finished with a tight and very helpful summary of
guiding contractual interpretation principles and analysis.
The Key Contractual Provisions
The Supply Contract required GTAA to place "All
Risks" Course of Construction Insurance naming Foster Wheeler
and all its sub-contactors as additional insureds. Foster Wheeler
asserted that this "covenant to insure", as a matter of
contract law, relieved it from responsibility for damages caused
by its own negligence. The GTAA in turn asserted that, while a covenant
to insured can have this effect, certain parts of the Supply Contract
indicate a contrary intent that the GTAA in fact retained the right
to sue Foster Wheeler for any damages caused by its own negligence.
A review of the key contractual terms sets up the
rest of the story and analysis:
42.1 Without restricting any other responsibility for the
Supplier, under the Contract the GTAA shall provide, maintain and
pay for insurance described in paragraph 42.2 below from the date
of commencement of the Contract until the date of actual completion.
Coverage under these policies extends only to the activities of
the insured's in relation to the project. All dividends and refunds
payable under the policies are the property of the GTAA. Unless
otherwise stated, these policies will:
2. be non-contributing and primary; and
3. include as an additional insured the Supplier, Subcontractors,
consultants and such person, firm or corporations that the GTAA
may determine at its sole discretion.
42.2 The policies to be placed and maintained
by the GTAA are:
a) "All Risks" Course of Construction Insurance
only when the Equipment is delivered to the Site, including flood
and earthquake. To provide coverage against physical loss and/or
damage howsoever caused (subject to policy exclusions), including
buildings, structures, materials and real property to be incorporated
into and forming part of the Equipment
Other relevant contract provisions cited by the judge
are as follows:
19 Foster Wheeler
the Equipment will be in accordance with the Contract and free from
defects for 12 months following Provisional Acceptance. Foster Wheeler
is obligated to repair or replace the Equipment if it does not meet
the contractual requirements".
42.3 - this provided Foster Wheeler with the "right
to require the GTAA to deliver certificates of insurance."
42.4 "The policies described in paragraph
42.2 will be placed and maintained with insurers acceptable to the
GTAA and will contain terms and conditions determined by the GTAA
at its sole discretion. The GTAA is not liable to the Supplier for
any deficiency or alleged deficiency in coverage, provided that
the policies comply with the description set out in paragraph 42.2.
The Supplier shall place and maintain such other insurance as the
Supplier considers necessary or desirable for its own protection,
but in each case at the sole cost of the Supplier."
It should be noted that the contract also required
Foster Wheeler to place "All Risks" insurance on machinery
owned or used by it or its subcontractors. This coverage was specifically
required by the terms of the contract to contain a 'waiver of subrogation'
against the GTAA. (Note: The subject supply contract did not expressly
contain 'waiver of subrogation language in favour of Foster Wheeler
and the sub-contractors, as concerns suit taken by the GTAA, which
was the subject of debate and is addressed below).
42.13 Suppliers' Liability Preserved: The provisions of paragraph
42.7 do not diminish, limit or otherwise affect the liability of
the Supplier to the GTAA under or in relation to any other provisions
of the Contract.
42.14 Protection of GTAA's Property: The Supplier
shall protect the project, the GTAA's property and property adjacent
to the Site from damage. The Supplier is responsible for damage
that occurs as the result of the Supplier's operations under the
Contract, except damage that occurs as the result of acts or omissions
by the GTAA, the Consultant, other Contractors or their employees,
agents, or representatives. If the Supplier, in the performance
of the Contract, damages the work, the GTAA's property or property
adjacent to the Site, the Supplier is responsible for making good
that damage at its expense. This does not apply to injury, loss
or damage to the extent that GTAA receives proceeds of insurance
described in paragraph 42.2, but the Supplier is responsible for
any deductible and any uninsured portion of the GTAA's loss.
[Note: Emphasis added: this will 'loom large' in the
42.15 GTAA Furnished Insurance: The principal
cause of the stipulations for insurance in this Contract is the
protection the interests of the GTAA. This Contract stipulates
that the GTAA, rather than the Supplier, shall provide and maintain
insurance as set out herein in order to achieve efficiencies in
the cost of the insurance and so that the GTAA can be assured that
such insurance is in fact in place for the GTAA's benefit. The
Supplier agrees that its claims under the insurance provided by
GTAA are subordinated to the full recovery by the GTAA of its claims
under such insurance.
[Note: Emphasis added: this will likewise 'loom large',
in the discussion below on the importance of 'commerical practicality'
in the resolution of this dispute]
42.16 - this provides that Foster Wheeler
and the sub-contractors have no obligation to pay premiums for the
insurance provided by GTAA.
Analysis - Relevant Principles of Contractual Interpretation
The judge cited the following key precedent, in Salah
v. Timothy's Coffees of the World, Inc.  O.J. No. 4366,
at para. 16:
The basic principles of commercial contractual interpretation
may be summarized as follows. When interpreting a contract, the
court aims to determine the intentions of the parties in accordance
with the language used in the written document and presumes that
the parties have intended what they have said. The court construes
the contract as a whole, in a manner that gives meaning to all of
its terms, and avoids an interpretation that would render one or
more of its terms ineffective. In interpreting the contract, the
court must have regard to the objective evidence of the "factual
matrix" or context underlying the negotiation of the contract,
but not the subjective evidence of the intention of the parties.
The court should interpret the contract so as to accord with sound
commercial principles and good business sense, and avoid commercial
absurdity. If the court finds that the contract is ambiguous, it
may then resort to extrinsic evidence to clear up the ambiguity.
On the question of the interpretation, and application,
of 'covenants to insure', the court cited the following key excerpt
from Canadian Contractual Interpretation Law, First Edition,
by Geoff Hall (at p. 225):
Covenants to insure have been given a specific interpretation
in the case law. They not only obligate one party to obtain insurance
(the meaning apparent from the wording of the covenant) but also
relieve the other party of liability for losses, subject to the
covenant, even if such losses are caused by its own negligence.
This is a meaning which does not flow directly from the words
of a covenant to insure, but it is a meaning which inexorably
flows from the context of such a covenant. As such, it is a good
example of contextual contractual interpretation, in which meaning
is derived not only from the text but also from all relevant circumstances,
which are drawn upon to give a provision a meaning that makes
good commercial sense.
The judge cited case law precedent applying these
principles to a general commercial context (e.g. losses arising
during the tow of a barge in the case of St. Lawrence Cement Inc.
v. Wakeham & Sons Ltd. 1995 CanLII 2482 (ON C.A.)) and then
addressed 'covenants to insured' in the immediate 'construction
project' context. Reviewing the case law and authorities on point,
the judge listed key principles and factors as follows:
the Supply Contract was entered into at a
time when the 'typical attributes and benefits in the course of
construction insurance had long been recognized':
on a construction site, the possibility of
damage by one contractor to the property of another and the construction
as a whole is ever present;
there is a common interest in avoiding the
necessity to debate issues of negligence and responsibility in court;
parties can focus on the common goal of completing
construction instead of fighting amongst themselves;
given the obligation of the owner or general
contractor to obtain comprehensive insurance it makes 'no business
sense for sub-contractors to pay premiums to duplicate that coverage';
the insurer sets the premium recognizing that
there is no right of subrogation; and
the owner purchasing comprehensive insurance
on behalf of contractors and sub-contractors is less expensive than
each party obtaining its own insurance.
The Submissions of the Parties
The GTAA raised case law wherein such covenants to
insure existed in a contract, but it was held regardless that a
subrogated claim could still be pursued by the affected insurer
at interest. The judge however distinguished these cases as a matter
of the specific language (as they say, the "devil is always
in the detail") in those other cases, whereby the net effect,
in considering the contract in those cases as a whole, was that
there was in fact an intention to allow the 'customer' or its insurer
to still sue for damages at the end of the day.
Foster Wheeler and the others asserted that the claim
should be dismissed against them - it not being necessary to go
to trial or for it to be determined whether or not they were negligent
- because the Supply Contract was clear that they were to be released
from liability by virtue of the covenant to insure contained in
the policy language summarized above.
The Court Rules
Starting with a citation from Canadian Contractual
Interpretation Law, the judge noted that:
'Covenants to insure have been given a specific
interpretation in the case law. They not only obligate one party
to obtain insurance
. But also relieve the other party for
losses subject to the covenant, even if such losses are caused
by its own negligence.' [Emphasis added].
Starting with this backdrop - clearly favouring the
defendants, the judge noted that if GTAA wanted to depart from this
'well understood interpretation of a covenant to insure' and to
maintain rights of subrogation, that 'clearer language' should have
been used in the Supply Contract.
The judge noted that it was 'crystal clear' that GTAA
had to place insurance naming Foster Wheeler as an additional insured.
The insruance in fact placed did cover the damages for which it
is being asserted that Foster Wheeler and the other defendants were
The judge noted the policy language above, and took
the following factors and submissions into account in coming to
Foster Wheeler was given, by the terms of
the contract, the right to 'enforce' the requirement against GTAA
that the insurance coverage in question actually be placed;
clause 42.14 cited above makes it clear that
Foster Wheeler was to be relieved from liability. Recall the emphasized
wording above: while the term stated that, as a supplier, Foster
Wheeler was responsible to 'make good any damages that occur as
the result of its operations', the last sentence provided an important
exception to this rule:
"This does not apply to the injury, loss or damage
to the extent that GTAA receives proceeds of insurance
the judge noted that this sentence would be
rendered meaningless [or, per the aforementioned February newsletter
article, 'nugatory'] if, by means of subrogation, Foster Wheeler
was held responsible for damages compensated for by the insurance
further, clauses 42.15 and 42.17 above indicate
that the parties intended to avoid duplicative insurance costs.
while the GTAA argued that the opening words
to 42.1 above (e.g. "Without restricting any other responsibility
of the Supplier
" ) should be interpreted to allow the
subrogation claim, the judge refused to allow this 'general phrase'
to alter the interpretation of the thrust of the rest of the contract
whereby the covenant to insure should apply as stated above
as to the argument by the GTAA that the application
of the 'covenant to insure' in this fashion would 'negate the suppliers
warranty obligations' the judge ruled that he was still 'caught'
by the 'specific interpretation' given to covenants to insure cited
above. The judge also noted that Foster Wheeler was only in effect
being relieved from warranty obligations that relate to the damage
caused by the insured event and there might still be other items
coming within the suppliers warranty obligations, and as such, this
approach being taken would not in and of itself render the supply
the GTAA argued that there was an express
'waiver of subrogation' in 42.7, relating to the insurance that
had to be placed by Foster Wheeler. Why was this language not included
in the contractual obligations whereby GTAA had to place insurance
for Foster Wheeler? The judge however ruled that the Foster Wheeler
obligation to place insurance was very limited in scope relative
to the project. The GTAA had no interest in being named as an additional
insured in such incidental coverage. Accordingly, it would follow
that the 'waiver of subrogation' against the GTAA was provided in
42.7 whereas in the operative contract section (42, for our purposes)
the GTAA provided a covenant to insure Foster Wheeler against the
much more extensive risk it faced as the one contractor working
on a project. (Note: In effect, while it might have made things
easier for Foster Wheeler in the context of the present dispute
for there to have been an express 'waiver of subrogation' in its
favour, the lack of this language was not fatal against it, given
all the other arguments cited herein applied in its favour that
the claim should not continue against it).
The Disposition of the Case
On the basis of the foregoing, the judge ruled that
"considering the totality of the Contract, in my opinion, the
proper and only reasonable interpretation is that the GTAA, by reason
of the covenant to insure, agreed to relieve Foster Wheeler of liability
for damages caused by its own negligence. As the GTAA has no right
claim against Foster Wheeler, its insurer can have no subrogated
right to do so."
Accordingly, GTAA's insurers subrogated claim was
dismissed against Foster Wheeler and the other defendants.
This decision is a tight illustration of commercial
reason being applied in the interpretation of a contract. While
in a narrow sense one might limit it to the construction contract
context (where, certainly, the 'covenant to insure' has a well established
meaning), one should note the reference to general contract interpretation
principles. Applied more broadly, this case is simply an example
of the general approach taken by the courts in the interpretation
of commercial contracts; that is, consideration of what is reasonable,
commercial, and fair, in the context the parties dealings.
6. Wind Farm and Energy Update
This past January, the undersigned presented a paper
at the Fernandes Hearn LLP Annual Transportation Seminar on the
topic of Arising Issues in Energy Claims. One of the arising issues
was that concerning the ecological, environment and potential health
effects for humans and animals associated with the promotion and
use of wind energy including the building and development of wind
At the time of the seminar, we were just days away
from the commencement of a lawsuit relating to the set back intended
by the Ministry of the Environment of 550 metres. The following
is a report of the status of this litigation.
Wind Energy Issues Revisited
The primary complaint regarding the use of wind turbines
is noise. Wind turbine blades can be 125 feet long and the towers,
themselves, can measure over 400 feet (120 metres). The World Health
Organization recommends the noise level in a bedroom be a maximum
of 30 decibels (dBA) to avoid sleep disturbance. Ontario sets the
limit for wind turbine noise at 40dBA, with a setback of 550 metres,
depending on the size of the industrial wind farm.
The majority of the energy of wind turbine noise is
said to be in the low frequency spectrum, which travels greater
distances than high frequency noise waves. Low frequency noise waves
are said to travel through building materials into living space
and are not filtered out or masked in any way and penetrate deep
into the body. The noise of wind turbines is alleged to create greater
problems than the white noise people are accustomed to, such as
traffic, and such noise as been described as more annoying than
traffic, aircraft and almost every industrial sound.
On the other side of the equation, supporters of wind
energy argue that the noise level of industrial grade wind turbines
is no different than that of a refrigerator (45 dBA) and that normal
conversations are 50 to 60 dBA. The noise or "swooshing"
of the wind blades passing the wind tower are different, however,
due to amplitude and can exceed the regulatory limit allegedly because
the turbines' configuration is based on computer models and not
live measurements. The swooshing, which is never ceasing, is said
to cause stress.
Recently, a phenomenon called "wind turbine syndrome"
has been coined to define the syndrome as the effect of infrasound
(low frequency sounds - below 20 dBA) not readily perceptible to
the human ear. Apparently, the cochlea and inner hairs of the inner
ear detect audible sounds while the outer ear hairs are stimulated
by the lower frequency but inaudible spectrum. The outer ear hairs
pass on infrasounds to the brain.
While not necessarily perceived as sound, infrasound
can apparently cause sleep disturbance, headaches, balance difficulties,
tinnitus (ringing in the ears), concentration and short term memory
deficits, vertigo and, possibly panic attacks. Sleep disturbance
is said to lead to fatigue, headache and nausea. Regular intrusive
noise is said to affect children's cardiovascular system, memory,
language development, and learning acquisition and causes an adverse
effect on school grades. Those working and living near wind turbine
facilities experience similar effects.*1
Sound energy from wind turbines has apparently a more
disruptive sleep effect than any known industrial noise of the same
sound pressure likely caused by the complex tones generated by the
turbine blades as they pass by the tower.
Low frequency noise allegedly impacts the emotion
centres of the brain, which release stress hormones that trigger
fear, anxiety, suspense, flight and arousal. Further, this exposure
may also cause the rare vibro-acoustic disorder, which causes changes
to the structure of certain organs such as the heart and lungs and
may be caused by vibrations from turbines. Another powerful side
effect is allegedly the light reflected from the blades or "flicker"
which can lead to migraines and impact those with epilepsy.*2
The above health issues allegedly arise from the audible
and sub-audible sounds of wind turbines and are said to have caused
people to move from wind farms areas thereby causing a reduction
in the value of land and homes.
Such concerns warranted the Council of Ontario Universities
to appoint a new Ontario Research Chair in Renewable Energy and
Health to study heath effects of renewable energy including wind
and effects of wind turbines. Ontario's Chief Medical Officer further
provided a report in May 2010, which concluded that there are no
direct adverse health consequences from wind turbine noise.
The setback proposed, as indicated, is 550 metres;
however, citizens groups and medical sources argue that the residential
setback in Ontario should be a minimum of 1.5 to 2 km. Various health
organizations around the world contend that the setback should be
a minimum of 1.5 kilometres from residences for wind turbines on
Update - Onshore Wind Farms
Litigation thus far regarding litigation turbines
has been focused upon attempts to stop the development of wind farms.
The Ontario case of Hannah v. Ministry of the Environment,
2010 ONSC 4058 has now faced the its judgment regarding wind turbine
farm safety and development.
The Hanna case is a class action challenge
launched in the Belleville-Trenton area on behalf of the citizens
in the area who have a concern for the adverse health affects described
above. The suit focuses on the 550 metre set back as regulated by
the Green Energy Act, 2009 S.O. 2009, c. 12. and which setback
is alleged to be insufficient to avoid the associated health issues.
Under the Green Energy Act, renewable energy developers are
to consult with municipalities in advance of planning including
the planning of wind farms. This suit alleges that, as a result,
the Ministry of the Environment failed to adhere to the "precautionary
principle" in its decision-making required under the Environmental
Bill of Rights where an action or policy has a potential for
harm to the public or environment; that is, in the absence of scientific
consensus that the policy/action is not harmful, the burden of proof
that the policy or action is not harmful falls to those taking the
action. It is submitted in the action that the industrial wind turbine
company on the project in question must prove that there are no
adverse effects to human, or animal health or the local environment
due to the wind turbine farm and produce the associated certificates
to be issued by Health Canada and other agencies. Further, all construction
on the wind farm is sought to be stayed until all appeals regarding
any approved wind farm are heard by the Environmental Appeal Tribunal.
If such challenge were ultimately successful, continued
growth in the wind turbine industry would be significantly affected
and would require further inquiries and studies regarding the health
effects of wind generation on the environment.
The application for judicial review of the setback
proposal was heard by the Ontario Divisional Court on January 24
and 25, 2011.
The road in this lawsuit was not easy however. Counsel
for the Ministry of the Environment previously had brought a motion
within the litigation to exclude portions of evidence, that of Dr.
Robert McMurtry, who had been the acting Dean of Medicine at University
of Western Ontario. He is also the brother of former Chief Justice
and Attorney General, Roy McMurtry's brother. Dr. McMurtry more
importantly though is a founding member of an anti-wind group. The
court regarding this motion found that any references in his affidavit
to studies post-dating the September 30, 2009, the day the regulations
were in effect, should be struck. Given Dr. McMurtry's activism
in the anti-wind turbine movement, counsel had also raised objection
to Dr. McMurtry's role as an expert witness given possible issues
with impartiality and potential advocacy. An expert must be impartial
and neutral as to the outcome of a particular case to be appropriate
and of assistance to the court.
On March 3, 2011, the Divisional Court dismissed the
application for judicial review of the provincial regulations that
established the minimum setback of 550 metres. Justice David Ashton
writing on behalf of the panel found that the Minister had complied
with the process mandated by the Environmental Bill of Rights/ Environmental
Statement of Values and went on to says as follows at paragraph
"The health concerns for persons living in
proximity to wind turbines cannot be denigrated, but they do not
trump all other considerations. This is particularly so because
those persons do have a remedy. Any person resident in Ontario,
whether or not the person lives in proximity to a proposed wind
turbine, can challenge the approval of an industrial wind turbine
under the EPA amendments that came into force with the GEA. This
challenge takes the form of an appeal to the Environmental Review
Tribunal (the "Tribunal") which has the mandate to determine,
on a case by case basis, whether a renewable energy approval would
cause serious harm to human health."
The court then explained that if the Tribunal is persuaded
by evidence that the 550 metre minimum setback is inadequate to
protect human health from serious harm it can revoke the decisions
made regarding the setback or increase the minimum setback prescribed
for the proposed wind turbines. The Tribunal during the process
would hear relevant expert evidence and would be able to consider
topography, wind patterns, make, model, size and dBA specifications
of the wind turbine, its exact location, and the location of any
other proximate turbines or noise receptors (i.e. residences). Further
the Tribunal can conduct site inspections. It has authority to appoint
its own scientific experts to assist it in its endeavours.
The court further reminded us that it was not the
court's place to question the wisdom of the Minister's decision
or whether it was reasonable but rather simply whether the mandated
process was followed. The court found that this process as taken
by the Minister included public consultation and review of science
based evidence, expert acoustical engineering evidence and reports
from the World Health Organization. The court found that the "precautionary
principle" did not preclude the decision taken by the Minister.
But the Hanna challenge is not over yet. Counsel
for Hanna advised in a prepared statement (as reported to the Law
Times March 29,2011) that they are considering their appeal options
including the issues of standard of proof and adequacy of evidence.
There is also the potential to use the appeal route to the Environmental
Review Tribunal. On April 1, it was announced that the decision
of the Divisional Court would be appealed. No date has been set
for the appeal.
Counsel for Hanna further indicated that it is significant
in the March 3, 2011 decision that the Environmental Statement of
Values is legally binding and reviewable by the courts though no
environmental regulation has ever been struck down on the basis
of the "precautionary principle".
There is also another appeal to the Environmental
Review Tribunal regarding a Township of Camden wind facility that
is also to be heard in early April with a decision to be made no
later than May 29, 2011.
The first round appears to have been won by the wind
turbine interests and development of wind energy farms appears to
now be stronger ground. The development of offshore wind farms appears
to have recently faced a different challenge.
Off Shore Wind Farms
Regarding off shore wind turbine farms, the Ministry
of the Environment had made a policy proposal in 2010 for renewable
energy approval requirements (REA) for offshore wind facilities.
Specifically, input was sought on proposed rules for offshore wind
turbines, including a five (5)-kilometre distance limit from the
shoreline. The exclusion zone was apparently intended to ensure
that potential noise levels from an off-shore wind facility are
within "acceptable" levels (40 decibels at an on-shore
noise receptor), taking into consideration the combined contributions
from all wind facilities located in the area, both on and off-shore.
Local opposition to offshore wind farms has been increasing
amongst lakefront communities.
On February 11, 2011, the Ontario Government announced
(to much surprise) that it was not proceeding with proposed offshore
wind projects on the Canadian side of the Great Lakes until further
scientific research is conducted and more data accumulated. This
includes cancellation of all existing Crown Land lease applications
(without Ontario Feed-in Contracts). Mr. John Wilkinson, Minister
of the Environment stated that, "Offshore wind on freshwater
lakes is a recent concept that requires a cautious approach until
the science of environmental impact is clear. In contrast, the science
concerning land based wind is extensive."
The decision to halt the offshore projects has met
with criticism from opposition parties in the provincial parliament
who criticize the failure to move forward on stated green principles.
Wind energy proponents also criticize the McGuinty government for
failing to take the lead and provide certainty in the area of green
energy. Further, Ontario's reticence to move forward occurs at the
same time as other jurisdictions in Canada (such as British Columbia,
Quebec) as well as numerous American states move boldly forward.
The US Government even recently proposed a 50.5 million dollar project
in the mid-Atlantic. Bold decisions can be expensive whether moving
forward or deciding to delay.
Needless to say, there may also be further litigation
over the cancelled applications and associated rights given the
previously stated position of the Ontario government in this area
and all of the money spent developing such activities in this regard.
The first round in the battle regarding offshore wind
turbines goes then to the anti-wind energy proponents and their
hope that further research will bear not only on the proposed use
on freshwater lakes but will also have bearing regarding onshore
The litigation and challenges continue to be fought
primarily in the area of development of wind farms given the area's
infancy. There may also be spillover into other green energy areas
regarding the government's reticence to move "too quickly"
forward. The US and Europe are further down the road regarding litigation
concerning adverse effects or personal injury resulting from wind
turbine use. We will continue to watch for developments in this
regard, if any.
Kim E. Stoll
*1 First International Symposium on the Global Wind Industry and
Adverse Health Effects, held Oct. 29 to 31, 2010 including papers
by Dr. Nina Pierpont leading NY paediatrician, Prof. Arline Bronzaft,
City University of New York, Dr. Christopher Hanning, U.K. Honorary
Consultant (Sleep disorder medicine) and his study, The Torment
of Sleep Disturbance. Dr. Michael Nissenbaum, a radiologist at Northern
Maine Medical Centre and certified by the Royal College of Physicians
*2 First International Symposium on the
Global Wind Industry and Adverse Health Effects, held Oct. 29 to
31, 2010 - Dr. Nina Pierpont leading NY paediatrician, Dr. Michael
Nissenbaum, a radiologist at Northern Maine Medical Centre and certified
by the Royal College of Physicians of Canada
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