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
- 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
- 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
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
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,  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;
(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, 
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
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
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
- 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
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
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.
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 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 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
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.
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
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
- 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.
*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  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
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
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
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.
Second, relying on Lennard's Carrying Co Ltd v.
Asiatic Petroleum Co Ltd.,  AC 705 and R. v. Canadian
Dredge & Dock Co.  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)
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
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
Distancing Article 4 from its legislative predecessor
and, in the context, Justice Iacobucci's finding in Rhone (The)
v. Peter AB Widener (The),  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.
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
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
] an insurer is not liable for any loss attributable
to the wilful misconduct of the insured [
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
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
5. Interest and Costs
The plaintiffs were awarded interest. Both the plaintiffs
and the third party were entitled to their costs.
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
*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
This newsletter is published to keep our clients and friends informed
of new and important legal developments. It is intended for information
purposes only and does not constitute legal advice. You should not
act or fail to act on anything based on any of the material contained
herein without first consulting with a lawyer. The reading, sending
or receiving of information from or via the newsletter does not
create a lawyer-client relationship. Unless otherwise noted, all
content on this newsletter (the "Content") including images,
illustrations, designs, icons, photographs, and written and other
materials are copyrights, trade-marks and/or other intellectual
properties owned, controlled or licensed by Fernandes Hearn LLP.
The Content may not be otherwise used, reproduced, broadcast, published,or
retransmitted without the prior written permission of Fernandes