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Newsletters 2011 > May 2011

In this issue:
1. Firm and Industry News
2. The Control of Subrogation Litigation by Insureds
3. Consignee's Liability for Unpaid Freight Charges Under the Bills of Lading Act
4. Vessel Limitation of Liability Decision


1. Firm and Industry News

  • May 6th -7th Montreal: McGill University Aviation Legal Liability Conference

  • May 11-14 Las Vegas: Canadian Transport Lawyers Association and Transportation Lawyers Assoc. Annual Meeting

  • May 25-26 2011 Collingwood: Canadian Board of Marine Underwriters Semi-Annual Meeting and Dinner

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

  • June 16, 2011 Toronto: Canadian International Freight Forwarders Central 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

    Rui Fernandes represented the firm at the McGill University Aviation Legal Liability Conference.

    Rui Fernandes, Gordon Hearn and Kim E. Stoll represented the firm at the Semi Annual meeting of the Canadian Transport Lawyers Association and Transport Lawyers Association Annual Meeting in Las Vegas. At the Transportation Lawyers Association Conference Gordon assumed the position of "President - Elect" of the Association and was awarded the 2011 Distinguished Service Award.

    Gordon Hearn will be representing the firm at the Conference of Freight Counsel meetings to be 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.

    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. The Control of Subrogation Litigation by Insureds

The recent case of Zurich Insurance Company Ltd. v. Ison T.H. Auto Sales Inc., 2011 ONSC 1870 involved a dispute between an insurer and its insured concerning the right to control litigation against the third party allegedly responsible for the insured's loss. The portion of the loss covered by the insurance policy had been paid by the insurer. The insured retained an uninsured claim and a claim for its deductible. The insured commenced an action against the third party asserting its own claim as well as the insurer's claim. The insurer wanted to have carriage of the action.

Justice Strathy described the facts giving rise to the dispute as follows:

On July 20, 2008, an explosion and fire occurred at an apartment building at 2 Secord Avenue in Toronto. The insured, an automobile dealer called Toronto Honda, was storing 71 new cars in rented space in the underground parking lot of the building. The cars were damaged and could not be sold as new. Toronto Honda made a claim under its policy and was paid approximately $1.9 million in October 2008. This represented the factory invoice price of the vehicles, less a deductible of $10,000. The insurers were subsequently able to recover about $900,000 in salvage for the cars, so they have a net subrogated claim of about $1 million.

In addition, Toronto Honda claimed that it had suffered a loss of profits as a result of the damage to the cars - namely, the difference between the manufacturer's price and the price at which the vehicles could be sold to customers. As well, Toronto Honda lost the ability to service the 71 new automobiles and the opportunity to resell trade-ins on those vehicles. It also claimed a loss of goodwill.

The policy was a manuscript policy, as opposed to a standard form, prepared by Marsh Canada Limited, the insurance broker for the insured.

The policy contained the following provision, under the heading "Release from Liability and Subrogation Clause":

The Insurer, upon making any payment or assuming liability therefor under this Policy, shall be subrogated to all rights of recovery of the Insured against any person, and may bring action in the name of the Insured to enforce such rights.

… [This paragraph waives subrogation against affiliates or subsidiaries of the named insured and against other named insureds and dealers] …

Where the net amount recovered after deducting the costs of recovery is not sufficient to provide a complete indemnity for the loss or damage suffered, that amount shall be divided between the Insurer and the Insured in the proportion in which the loss or damage has been borne by them respectively.
Any release from liability entered into by the Insured prior to loss hereunder shall not affect this Policy or the right of the Insured to recover hereunder.

The insurers' position on this motion was that the Subrogation Clause, properly interpreted, changes the common law rule and gives the insurer control of any litigation commenced against the third party.

The insured, Toronto Honda, took the position that it is well-settled law that until the insured has been fully indemnified for all its losses, insured and uninsured, it is entitled to control any litigation against the tortfeasor - the insured is, as the expression goes, dominus litis. Toronto Honda said that nothing in the Subrogation Clause altered this position.

Two decisions were referred to by counsel for the parties: the decision of the Supreme Court of Canada in Sommersal v. Friedman, 2002 SCC 59 (CanLII), 2002 SCC 59, [2002] 3 S.C.R. 109 ("Sommersal"), and the appellate decision of the British Columbia Court of Appeal in Farrell Estates Ltd. v. Canadian Indemnity Co. 1990 CanLII 721 (BC C.A.), (1990), 45 B.C.L.R. (2d) 223.

Justice Strathy referred to the principles of insurance policy interpretation set out in Sommersal:

In Sommersal, at para. 45, Iacobucci J., speaking for the majority, set out a methodology for the analysis of the issue before the court. He suggested that the court should consider:

(a) the plain language of the insurance contract;

(b) in relation to the terms of that contract:

(i) the special principles of interpretation; and

(ii) the general principles of law applicable to insurance contracts;

(c) the views of other courts; and

(d) particularly in the case of publicly regulated insurance contracts, the wisdom of the policy that will result from the interpretation adopted by the court.

Justice Strathy noted that the nature of the right of subrogation was described by Chancellor Boyd in the case of National Fire Insurance Co. v. McLaren (1886), 12 O.R. 682 at 687, [1886] O.J. No. 98 at para. 10:

The doctrine of subrogation is a creature of equity not founded on contract, but arising out of the relations of the parties. In causes of insurance where a third party is liable to make good the loss, the right of subrogation depends upon and is regulated by the broad underlying principle of securing full indemnity to the insured, on the one hand, and on the other of holding him accountable as trustee for any advantage he may obtain over and above compensation for his loss. Being an equitable right, it partakes of all the ordinary incidents of such rights, one of which is that in administering relief the Court will regard not so much the form as the substance of the transaction. The primary consideration is to see that the insured gets full compensation for the property destroyed and the expenses incurred in making good his loss. The next thing is to see that he holds any surplus for the benefit of the insurance company. In the case in hand the plaintiffs are in some sense sureties, by way of contrast with the wrongdoers, who are primarily liable, just as the defendant may be in some sense a trustee for the insurers of any such overplus. But it appears to me to be a begging of the question to assert that he is a trustee from the time of payment by the insurers.

Justice Strathy added that Chancellor Boyd confirmed the principle that the insurer has no right of subrogation until the insured has been fully indemnified. Justice Strathy commented on what "fully indemnified" means. "Fully indemnified" means not only indemnified for all losses covered by the policy, but also indemnified for uninsured losses, such as the insured's deductible, losses in excess of the policy limits, and losses (such as business losses) that are not covered by the policy. This principle has been followed, in the case of non-marine insurance, in numerous Canadian cases.

One very important comment in Justice Strathy's decision is that he noted that "in many areas of insurance, the rigours of the common law are frequently softened by contract, by statute, or by both. The requirement that the insurer cannot subrogate until the insured has been fully indemnified can lead to practical concerns where the insured is disinterested or dilatory in pursuing legal action. The insured has an obligation to pursue the claim against the third party until such time as the insurer is entitled to and in fact does control the claim (see Sommersal at para. 54), but the insurer's subrogation rights may be put in jeopardy if the insured fails to do so."

An insurance policy can alter the common law rule that the insured controls the litigation until fully indemnified. Such a provision in an insurance contract must be clear and unambiguous. Justice Strathy was therefore required to review the Subrogation Clause in the policy of insurance to determine if the clause ousted the insured's rights under common law. He reviewed the rules of interpretation of insurance policies and the case law in the area.

Having considered the authorities, Justice Strathy came to the following conclusions:

First, the case law in Ontario, as well as the decision of the British Columbia Court of Appeal in Farrell Estates, confirms that the insured is in control of the litigation, or dominus litis, until it has been fully indemnified for its insured and uninsured losses.

Second, there is nothing in the plain language of the Subrogation Clause to alter the insured's right to control the litigation until such time as it has been fully indemnified. The Subrogation Clause is simply silent on the issue.

Third, there is no reason to imply a provision giving the insurer the right of control in order to give business efficacy to the contract. Nor does an entitlement to control the litigation follow by necessary implication from the insurers' right to be subrogated to the rights of the insured and to bring action in the name of the insured…

The right to be "subrogated to the rights of the insured" means that the insurer is entitled to stand in the shoes of the insured for the purpose of asserting the insured's legal rights against the third party. It does not mean that the insurer is entitled to assert claims of the insured in which it has no interest.

Fourth, the effect of the Subrogation Clause, including the right of the insurer to share proportionately in recoveries, coupled with the duty of good faith, will require the insured, although in control of the litigation, to consider the insurer's interests, to keep the insurer informed concerning the status of the litigation and concerning major issues in the litigation, and to consult with the insurer with respect to the prosecution of the litigation.

Fifth, for the reasons below, it is not necessary for me to consider whether the court has a residual discretion, in appropriate circumstances, to give the insurer control of the litigation, even where there is no express contractual or statutory provision.

Counsel for the insurers submits that if I have discretion as to which party has carriage, it should be given to the insurers who have a larger ($1 million) "hard" claim for property damage as opposed to Toronto Honda's smaller ($700,000) "soft" claim for business losses. There is no evidence before me to show that Toronto Honda's business loss claim is any less recoverable than the property claim.

There are, as well, other factors, including:

  • the insured has been diligent in pursuing claims on behalf of itself and the insurers - this action was commenced almost two years ago and is well advanced;

  • the insurers delayed for over 15 months after the fire before opening up discussions about subrogation and these were prompted by the initiative of counsel for the insured;

  • this application was not commenced until August 4, 2010, more than two years after the fire;

  • a great deal of time and effort has already been expended by Toronto Honda, and its counsel, in pursuing the claim;

  • Toronto Honda, and the insurers, will benefit from the fact that Falconer Charney and Sutts Strosberg act as class counsel and have control of that litigation as well, resulting in cost-saving and other synergies; and

  • there is no suggestion that the insurers' position has been or will be prejudiced in any way by leaving carriage with Falconer Charney and Sutts Strosberg, who are unquestionably qualified to act as counsel.

There may be cases where the insurer's interest is so vastly disproportionate to the insured's interest that it would be unreasonable to allow the latter to have control of the litigation. This is not such a case. [Emphasis added]

Sixth, as this is not a regulated contract, the policy considerations referred to by Iacobucci J. in Sommersal are not particularly pertinent. I do note, however, that in Portuguese Canadian (Toronto) Credit Union Ltd. v. Cumis General Insurance Co., above, Perell J. observed that there are sound policy reasons for the principle that the insured is in charge of the litigation - at para. 45:

It seems to me that the underlying principle to this rule that makes the plaintiff domitus litus when there is competing claims against a third party is salutary for at least three reasons. First, until fully indemnified, it seems just and fair that the insured should be able to control his or her claims. Second, the rule protects a third party who would otherwise be subjected to the same claim being brought by the insured and also being brought by the insurer in the name of the insured. Third, the rule avoids the evil of a multiplicity of proceedings.

Seventh, it would be a simple matter for the insurers to amend the Subrogation Clause to alter the common law position and to give carriage to the insurers, if they wished to do so. [Emphasis added] This very point was made nearly 50 years ago by Schatz J. in Kellar v. Jackson, above, at para. 5. I suspect that, at least in the case of sophisticated and powerful insureds such as Bank of Nova Scotia, there might be resistance to such a provision. Nevertheless, the choice belongs to the underwriters and if their pens are not prepared to write such a clause into the policy, they should not ask the court to do so.

Justice Strathy concluded his by pointing out that in the case of large losses it is prudent and common for the insurers and the insured to discuss subrogation at the time the insurance claim is paid, and to agree on such matters as legal counsel, sharing of costs, and procedures for the resolution of any disagreements.

In summary, while the door has been left open by Justice Strathy for insurers to take control of the litigation in very limited circumstances, the general rule is that unless there is a written clear provision in the policy of insurance to the contrary, the insured will be able to control the litigation in a subrogation action where it has not been fully indemnified for the loss. A secondary issue that was not addressed by the court in this decision is who pays for the litigation costs of subrogation. When the insured controls the litigation, can the insured ask or force the insurer to pay the proportional costs of the litigation in the same ratio as the insured claim bears to the total claim? The answer to this and other issues will have to wait for another article.

Rui Fernandes

3. "Sock it to Me": The Consignee's Liability for Unpaid Freight Charges Under the Bills of Lading Act

A carrier who is not paid for its freight charges by the shipper may have recourse to seek payment from the consignee pursuant to the provisions of the federal Bills of Lading Act (*1). Section 2 of the Bills of Lading Act provides as follows:

Every consignee of goods named in a bill of lading, and every endorsee of a bill of lading to whom the property in the goods therein mentioned passes on or by reason of the consignment or endorsement, has and is vested with all rights of action and is subject to all liabilities in respect of those goods as if the contract contained in the bill of lading had been made with the consignee.

The Ontario Superior Court of Justice recently had occasion to consider this provision in a dispute concerning an unpaid carrier in the case of Cassidy's Transfer & Storage Limited v. 1443736 Ontario Inc. operating as Canada On Sourcing and the Attorney General of Canada.

The Facts

The plaintiff carrier transported several million dollars of socks from North Carolina to Canadian Forces bases in Montreal and Edmonton. Invoices for freight charges exceeding $50,000 were unpaid by the shipper, Canada One Sourcing ["Canada One"] who went into bankruptcy.

As concerns the underlying contract for the purchase of the socks, the Government of Canada had entered into a contract with Canada One for the supply and delivery of the socks for the Canadian Forces.

The freight costs were included in the price of the product and were payable only after the consignees confirmed safe delivery of the product shipped.

Standard form bills of lading were issued at origin by the carrier. Eight bills of lading were issued in total, each accompanying the shipment to destination. The bills of lading were signed by the receivers at each of the military bases on behalf of the Government of Canada.

Six of the eight bills of lading freight charges as "Prepaid". The seventh was silent on the point and the eighth was a "Collect" shipment.

The unpaid carrier brought a claim against the Government of Canada [in the name of the Attorney General] for the unpaid freight charges, seeking to rely on s. 2 of the Bills of Lading Act. The Government in turn asserted that it had already paid Canada One for the freight component of the purchase price. It also asserted that it had no contract with the carrier, that its contract with Canada One specifically bound subcontractors to its terms by language in the bill of lading [to the effect that by the underlying purchase contract Canada One - and only Canada One - was responsible to pay freight] and finally that the bills of lading in question do not come within what was contemplated as being a 'Bill of Lading" for the purposes of the governing legislation. The Government also raised in argument that it paid the supply invoices - including the freight component - after the delivery of the shipments, and after the delivery bills of lading were seen by of which several contained the 'freight prepaid' language as noted above.

Legal Analysis

Justice Ray of the Ontario Superior Court of Justice reviewed recent case law concerning this provision, first citing the Quebec Court of Appeal case of SGT 2000 v. Molson Breweries of Canada (*2). Involving almost identical facts to the present case, in SGT 2000 the consignee, Molson Breweries was held liable for the unpaid freight charges after the shipper/supplier of the product shipped became insolvent - notwithstanding that Molson Breweries paid the supply invoices after the receipt of the cargo with the bills of lading in question marked 'prepaid'.

Justice Ray then considered the decision of the Federal Court of Canada in H. Paulin & Co. Ltd. v. A. Plus Freight Forwarder Co. Ltd. (*3) which came to the finding that a 'freight prepaid' notation on a bill of lading was a representation by the carrier to the consignee that the freight charges had in fact been paid, thereby preventing the carrier from claiming payment from the consignee in accordance with the language of the Bills of Lading Act. Justice Ray did note, with some caution, that in the H. Paulin & Co. Ltd. decision that it appeared that evidence was not heard by the Federal Court as to what the consignee understood the reference to 'freight prepaid' in the bill of lading to mean and he further observed that at first blush the results in SGT 2000 and H. Paulin & Co. Ltd. appeared to be at odds with each other on the treatment to be given on the 'freight prepaid' notation. However Justice Ray noted that on a closer scrutiny the decisions could be reconciled: in SGT 2000, the evidence was that Molson Breweries did not interpret the notation "freight prepaid" as literally meaning that the shipper had already paid the freight. Accordingly, it would perhaps be a factor in each case as to what the understanding of the consignee was on this point. (*4)

The Government of Canada argued that the Bills of Lading Act is not applicable because the contractual arrangements between it and Canada One displaced the presumption arising from s. 2 of the Act. It argued that while the plaintiff was not a party to the purchase contract, and had no notice of its terms, that the language in the bills of lading "subject to the contact between the Shipper, Consignee or Third Party and the carrier in effect" incorporated it by reference. In other words, the carrier carried the goods subject to the underlying agreement between the Government and Canada One that the latter would be the only party responsible for the payment of the freight charges.

Justice Ray however noted that there is no legal authority for the proposition that a carrier's rights or liabilities can be affected by the terms of a contract of which it had not notice. In fact, Justice Ray noted that it was not necessary to "embark upon a review of the various contractual rights, interests and terms to determine the liability of the Government of Canada to the plaintiff in the fact of the Bills of Lading Act, which creates a statutory privity of contract where the carrier can bring himself within its terms." The analysis accordingly falls to be determined "in the evidence in each case and the respective findings of fact.

Justice Ray noted that as the plaintiff is a federally regulated company, and the carriage of the goods being interprovincial and/or international that the Bills of Lading Act, being federal legislation, would in fact govern over what might exist in any provincial legislation on point. Justice Ray also found while the term 'bill of lading' is not defined in the federal legislation, that the bills of lading issued in this case came within the reach of the Bills of Lading Act.

Proceeding further with the analysis, Justice Ray noted the following about the Bills of Lading Act regime:

- s. 2 was enacted to create a statutory privity of contract so as to eliminate the need for a finding of privity of contract between the carrier and the consignee in order to permit the carrier to recover its freight charges. There is a presumption that the consignee is responsible for the freight charges. It is not required that the consignee know the terms of the freight agreement to be bound by it

- to avoid liability, the consignee must rebut the presumption by proving the existence of a further arrangement that the shipper alone would be responsible for the freight charges and the carrier had not waived the protection of the Act.

- The carrier's waiver in this regard may be express or implied, but it may not be presumed from the silence of the parties, and

- The term 'freight prepaid', may on the evidence amount to a waiver if it is found to be a representation to the consignee that the carrier charges had been paid. However, if the evidence of the consignee were that it understood as a fact that the freight charges had not been paid, then it would not amount to a waiver. Alternatively, if the evidence of the consignee was that it knew that the term was understood in the industry to mean something that its ordinary meaning, then it may be found not to constitute a waiver.

Justice Ray found that the bill of lading 'fine print' was intended to incorporate any tariff or fee arrangements concerning the carriage mandate, and did not and was not intended to incorporate by reference the terms of the contract between the Government of Canada and Canada One.

Justice Ray also found that there was no evidence of waiver by the plaintiff. The Government knew at the time of delivery that the freight charges had not been paid. In addition, the carrier put the Government of Canada on notice of its claim early on, and then it launched this action.

The Court found that the Government had not met the onus placed upon it to displace the legal effect of the Bills of Lading Act by proving that the plaintiff had entered into another arrangement to exonerate the Government. Further and in any event, the Government had failed to prove that the plaintiff had waived the protection of s. 2 of the Act.

In the result, the Government of Canada was ordered to pay the unpaid freight charges to the plaintiff.


This is a well reasoned decision and a nice reconciliation of what at first blush was a conflict between the SGT 2000 and H. Paulin & Co. Ltd. decisions. This decision does however open up the discussion on "estoppel" or "waiver" and seems to put a premium on decisive, and early communications between a carrier who apprehends that it may not be paid by a shipper with a consignee. Query whether something now might be added to the simple 'freight prepaid' notation on a bill of lading. There may now be a premium on a carrier inserting language in a bill of lading to the effect that all rights are preserved, and that this notation does not necessarily mean that at the time of delivery of the goods that it has in fact been paid.

Gordon Hearn


*1 R.S.C. 1985 c.B-5 [Note that Ontario legislation has a similar feature in s. 7(1) of the Mercantile Law Amendment Act, R.S.O. 1990, Chapter M-10]

*2 (2007) QCCA 1364 *CanLII), 2007 QCCA 1364

*3 [2009] F.C. 727

*4 It is important to recall that as far as the carriers are concerned, it is said that the industry norm is that 'freight prepaid' as much refers to the fact that a credit arrangement or terms have been worked out with the shipper whereby it has undertaken one way or another to pay the freight. The freight may not have already been paid. The salient point here is that it has often been maintained by these interests that 'freight prepaid' simply means that the shipment is not moving 'Freight Collect' whereby the consignee is exclusively being held responsible for the payment of the freight charges.


4. Stupid Is As Stupid Does: The Federal Court Considers Conduct Barring Limitation Under The Convention on Limitation of Liability for Maritime Claims, 1976, as Amended.

In Société Telus Communications v. Peracomo Inc., 2011 FC 494, Justice Harrington of the Federal Court of Canada dealt with the question whether Article 4 of the Convention on Limitation of Liability for Maritime Claims, 1976, as amended by the 1996 Protocol ("1976 Convention") barred a liable party from limiting its liability under section 29 of the Marine Liability Act, S.C. 2001, c. 6, in what was the first decision of its kind by a Canadian court. His decision, released on May 6, 2011, opens with a frank and somewhat poetic statement:

Réal Vallée is a good man; a decent man; an honest man - a fisherman. However he did a very stupid thing. He cut the plaintiffs' submarine fibre optic cable in two. It cost them almost $1,000,000 to repair it. (*1)

Mr. Vallée, the master of the fishing vessel Realice, was engaged in snow crab and whelk fishing. The Realice is owned by Peracomo Inc. Mr. Vallée is its president and sole shareholder. In the course of fishing, strings of cages were laid on the St. Lawrence river-bottom and secured by small anchors, which were attached to buoys. One of the anchors got hooked onto the cable. The anchor and cable were hauled out of the water by Mr. Vallée. With regrettable pragmatism, he freed the anchor by cutting the cable with an electric saw. A few days later the same thing happened and, once again, he cut the cable.

The plaintiffs, Telus, Hydro-Quebec, and Bell Canada, shared the cost of repair and took action in personam against Peracomo Inc. and Mr. Vallée and in rem against the Realice. In turn, the defendants instituted third party proceedings against their underwriters, Royal and Sun Alliance Insurance Company of Canada, who denied coverage.

Five issues were considered by the Court:

1. Whether the defendants were liable;
2. the quantum of damages;
3. whether, if liable, the defendants were entitled to limit their liability under the Marine Liability Act;
4. whether the defendants had lost their insurance coverage under the Marine Insurance Act, S.C. 1993, c. 23; and
5. interest and costs in the principal action and third party proceedings.

1. Liability of the Defendants

The Court found that the case fell to be determined by Canadian maritime law, which includes the English common law of negligence. (*2) On this basis, Justice Harrington first found that Mr. Vallée owed a duty of care to the plaintiffs and that he was in breach thereof; therefore, he was liable individually. (*3)

Second, relying on Lennard's Carrying Co Ltd v. Asiatic Petroleum Co Ltd., [1915] AC 705 and R. v. Canadian Dredge & Dock Co. [1985] 1 SCR 662, the Court found the owner of the Realice, Peracomo Inc., a one-man company with Mr. Vallée as its directing mind or alter ego, to be liable on the basis that Mr. Vallée's act or omission was the company's act or omission. (*4)

Third, the Court found that the ship was liable in rem as the claim was for damage caused by a ship within section 22(2)(d) of the Federal Courts Act as Mr. Vallée's act was in the management (or mismanagement) of the ship. (*5)

Interestingly, in considering whether Telus was contributorily negligent by virtue of the fact that the cable laid unburied on the river bottom, the Court acknowledged that "Telus deliberately ran a risk, in the statistics in the reports given it indicated that such cables are torn up once every 19.5 years." (*6) Nonetheless, the Court held that because this risk was contemplated in the context of the cable being torn up by a dragging anchor, the fact that the cable was deliberately cut with a saw in this case put it outside the anticipated risk as contemplated by Telus and, on this basis, the Court found that there was no contributory negligence. (*7)

2. Damages

The Court accepted the plaintiff's submissions on damages with limited contention.

3. Limitation of Liability

The bulk of Justice Harrington's decision is dedicated to this issue. Given the nature of the loss and tonnage of the Realice (gross tonnage 44), section 29 of the Marine Liability Act limits their liability to the principal amount of $500,000.00. (*8) However, that right to limit is lost in accordance with Article 4 of the 1976 Convention, which has the force of law in Canada by virtue of section 26 of said Act, in the following circumstances:

A person liable shall not be entitled to limit his liability if it is proved that the loss resulted from his personal act or omission, committed with the intent to cause such loss, or recklessly and with knowledge that such loss would probably result.

Therefore, the burden was on plaintiffs to prove that the loss resulted from the "personal act or omission committed with the intent to cause such loss, or recklessly and with knowledge that such loss would probably result." In its consideration, the Court was careful to note that this was the first time that Article 4 of the 1976 Convention had come up for decision in Canada and, painstakingly, parsed its way through the provision's legislative history.

Distancing Article 4 from its legislative predecessor and, in the context, Justice Iacobucci's finding in Rhone (The) v. Peter AB Widener (The), [1993] 1 S.C.R. that "actual fault or privity" denoted something personal and blameworthy to a shipowner, Justice Harrington held that "[n]owadays it is not enough that there be something personal and blameworthy, there must also be an intention to cause such loss or reckless conduct with knowledge that such loss would probably result." (*9)

On the subject of loss, Justice Harrington remarked that "loss" in the 1976 Convention certainly includes physical damage, but that the presence of loss in itself did not trigger Article 4; restrictions applied. (*10)

The positions of the parties in regards to limited liability were as follows:

  • The plaintiffs argued that the defendants were not entitled to limit their liability;
  • the defendants denied their liability altogether, which the Court had already rejected; and
  • the third party underwriters who had refused to take up the defendants defence did not argue that the defendants were not liable, nor could they, for risk of being found in breach of their obligation to defend; therefore, as safe bet, they argued that the defendants were entitled to limit their liability.

Justice Harrington compensated for the lacuna of Canadian case law on Article 4 by turning his attention to decisions of the courts of France and England. Surprisingly, and what is arguably a tip of the hat to the analytical thoroughness of Canadian legal practice, Mr. Justice Harrington found the French authorities' consideration of the provision lacking in depth. He found the English cases to be slightly more helpful except they focused on reckless conduct, not intentional conduct, which was the primary subject of the case before him as Mr. Vallée clearly intended to cut the cable. (*11)

Without helpful authorities, Justice Harrington narrowed his analysis to the actual wording of the Article and broke it down into its constituent elements: (*12)

Unlike in an ordinary negligence action, in order to succeed under Article 4 of the 1976 Convention, the plaintiff must prove that the defendant's personal act or omission was committed either

a. with intent to cause such loss; or

b. recklessly and with knowledge that such loss would probably result.

Considering intention, Mr. Justice Harrington found that loss, as caused by the personal act or omission of both Mr. Vallée and Peracomo Inc., to have been caused intentionally. Specifically, Mr. Vallée "intended the very damage, he just didn't think the cable would be repaired because he thought it had no value."(*13) Analogizing, he likened the act to battery:

One might push another out of the way not intending to cause harm. The person might slip and fall and become seriously injured or die. In that case, the loss arose from a personal act or omission with the intent to cause the battery, even though the consequences were not intended.

Finishing what he started, Justice Harrington nonetheless went on to consider whether the act constituted "reckless conduct." Considering a slew of authorities as to the definition of "knowledge" in the context of the provision, Justice Harrington found that knowledge did not include "blind-eye" knowledge and, on the facts, found that Mr. Vallée's failure to make himself aware of the dangers to navigation in the area, as was his duty, was "reckless in the extreme." (*14)

Based on the above, the Court found that the defendants were not entitled to limit their liability.

4. Liability of Underwriters

Section 53(2) of the Marine Insurance Act provides that "[…] an insurer is not liable for any loss attributable to the wilful misconduct of the insured […]" [emphasis added].

On this point, the plaintiffs and the underwriters reversed roles, with the plaintiffs, keen to collect on their judgment, making the submission that there was no willful misconduct by the insured, while the underwriters made submissions to the opposite effect. (*15)

Justice Harrington turned to well-worn authorities for a definition of "willful conduct" and found that it connoted something more then mere negligence, as negligence is usually covered, and was covered in the policy in issue. Quoting the text by Mr. Justice Strathy and Moore, The Law and Practice of Marine Insurance in Canada, he found that willful conduct implied either "a deliberate act intended to cause the harm, or such blind and uncaring conduct that one could say that the person was heedless of the consequences." Finding that Mr. Vallée's conduct was a marked departure from the standards by which responsible and competent persons in his situation would have governed themselves, Justice Harrington found that there was "willful conduct" and, with that, ruled that the assureds lost the benefits of the policy. (*16)

5. Interest and Costs

The plaintiffs were awarded interest. Both the plaintiffs and the third party were entitled to their costs.

6. Conclusion

This case is important insomuch that it represents the first decision by a Canadian Court that includes a consideration and application of Article 4 of the 1976 Convention. On the other hand, thanks to Mr. Vallée's unhesitating decision to use a power saw, the facts were gratuitous in that they were almost black and white such that minimal analysis was required by the Court to connect the facts to the constituent elements of the subject-article; notably that the act was "committed with intent to cause such loss," which is the very aspect of Article 4 that will likely give rise to the most litigation going forward. Nonetheless, a body of case law must begin with a single case and Justice Harrington's decision represents a well-decided first venture.

As for poor Mr. Vallée, anyone who has ever done something very stupid, should take comfort in the fact that though the consequences of their actions may have cost them some grief, it almost certainly cost them less than $1.2 million dollars, which poor Mr. Vallée found himself owing to the defendants.

James G. Lea


*1 Para.1.
*2 Para. 48.
*3 Para. 49.
*4 Para. 50.
*5 Para. 51.
*6 Para. 53.
*7 Para. 54.
*8 Note: if the vessel's gross tonnage was greater than 300, Article 6 of the 1976 Convention would apply, which would impose a limit of liability of 1 million SDR ($1,567,255.64 CAD).
*9 Para. 63.
*10 Paras. 71-72.
*11 Para. 74.
*12 Para. 76.
*13 Para. 77.
*14 Paras. 82-83.
*15 Para. 89.
*16 Para. 91-92



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