this newsletter in PDF
In this issue:
1. News & Upcoming Events
2. Preparing to Sell a Family-Owned Transportation Business
3. Effect of “Mary Carter Agreement” on Joint Liability
4. Security for Costs Issues
5. Sanitary Transportation of Food
6. Punitive Damages Reduced
7. “Discoverability”: Flexibility in Determining Limitation Periods
1. News & Upcoming Events
Gordon Hearn, Kim Stoll and Louis Amato-Gauci will be representing the firm at the Transportation Lawyers Association Annual Conference being held April 27-30th in Destin, Florida. Louis Amato-Gauci is the Education Program Chair for this conference. Kim Stoll will be facilitating the Canadian Transport Law and Cross Border Issues Interactive Workshop.
Rui Fernandes, Kim Stoll and James Manson will be representing the firm at the Comite Maritime International conference being held May 4th to 6th in New York. The CMI meets every four years.
Rui Fernandes, Kim Stoll and Alan Cofman will be representing the firm at the Canadian Board of Marine Underwriters spring conference being held May 25th and 26th in Ottawa.
2. Preparing to Sell a Family-Owned Transportation Business
Throughout 2015 and the first quarter of 2016, there have been steady reports of “roll-up” mergers within the transportation and logistics industry, many of them backed by private equity. Lower fuel prices, higher consumer demand, and a stronger economic climate have triggered a heightened demand for transportation services, which has in turn increased the profitability of smaller companies, making them increasingly attractive targets. Buyers are seeking out targets for strategic acquisition in an effort to build scale, increase market share, expand service offerings, gain access to new markets, or acquire proprietary know-how. (*1)
For the owners of many family-owned or closely-held businesses, the decision to sell is a once-in-a-lifetime event. The founders may have reached retirement age and be looking forward to a less structured timetable with some new adventures, travel to exotic locations, or a spot of gardening. The decision may be motivated by the desire to convert a hard-earned investment into more liquid assets, and to diversify the wealth that been amassed in one corporate entity. The decision to sell may have been triggered by an unexpected change in the health of the founding shareholder, or perhaps, after years of careful observation, the owners have determined that current market conditions are optimal for a sale of their business. (*2)
Succession planning is, to many business owners, the corporate equivalent of making a last will and testament: it is rarely top of mind, and when it does surface, it serves as an unwelcome reminder of the founders’ mortality. Frequently, company owners are reluctant to make the tough choices about whether to pass the reins to a family member or a long-term employee, or whether to shop around for a suitable buyer. There is often a disconnect between the founders’ optimistic belief that their family will remain in control of the business for many years to come, and statistical evidence that around 70% of family-owned businesses do not make it through the second generation.(*3) No matter how distasteful the exercise may be, the savvy entrepreneur would be well-advised to plan ahead, to develop a roadmap that sets out when and how they intend to exit the business. A well-designed roadmap could help ensure that the company founders, or their heirs, will be able to “monetize” the investment at a fair value and in a tax-efficient manner.
The M&A Team
Once the controlling shareholders have set their minds on exploring a possible sale of the business, their first step should be to assemble an advisory team of lawyers, accountants and tax advisors with specialized mergers and acquisitions experience. This M&A team will help the owners to identify their primary objectives for the proposed transaction. They will work with management to determine whether any steps must be taken in preparation for, and after, a change in ownership to preserve the relationship with any of the company’s key customers, employees or suppliers. The team will require the assistance of key management personnel to undertake “seller due diligence,” arrange for a formal valuation of the business, and generally help prepare the company for sale.
The M&A team should also serve as a gatekeeper: vetting and pre-qualifying potential buyers in an effort to restrict access solely to those interested persons who have the financial means to complete the transaction. They will also try to sift out any serial “tire-kickers” and competitors who are simply interested in learning more about the inner workings of the target company.
It is not unusual for these pre-sale activities to take up to a year or more, but this is time well spent in order to maximize the return on the owners’ investment. Throughout this time, it is crucial that the business continue to be as profitable as possible, notwithstanding the distractions generated by a possible change in ownership. By setting up a team of experienced outside advisors to attend to the pre-sale analysis on behalf of the company owners, management should, for the most part, be able to carry on with their usual routine, with minimal disruptions.
Seller Due Diligence
Well before soliciting bids or expressions for interest, sellers would be wise to engage in extensive due diligence on the company they wish to sell. The sellers should identify and take steps to mitigate, where possible, every hidden wart and blemish in the company’s tax filings, financial records and compliance record. Where mitigation is not possible, or where the problem can be mitigated but the results of mitigation would be less palatable than the alternative, prior knowledge can give the sellers and their advisors sufficient time to think through, and prepare clear and cogent responses for, the inevitable questions that a prospective buyer will have about the issue in question.
Sellers often underestimate the value of the self-due diligence exercise, but they do so at their own peril. Forewarned is forearmed. Last-minute surprises are never a good thing in the context of delicate negotiations, and without any doubt, the buyer and its external advisors will turn over every rock, and question every line in the company’s financial statements, before they will complete negotiations and proceed with the purchase transaction.
Even if the buyer fails to identify the hidden “problem” prior to closing, that does not necessarily mean that the seller has successfully dodged the issue. Every standard purchase and sale agreement (with the exception of the sale of a business by a trustee in bankruptcy, who will sell on an “as is, where is” basis) contains representations and warranties by the seller about key aspects of the business, financial matters, and specific issues that are of direct concern to the buyer. Failure to address the issue directly during the due diligence period could lead to last-minute pricing disputes, or a demand by the buyer for an extensive holdback or escrow period, with a portion of the purchase price being held in trust pending the expiry of a limitation period, or both. Perhaps the worst of all possible outcomes would be for the buyer not to discover the hidden blemish until after closing, leading to breach of contract or indemnity claims. Nothing can shatter the image of a blissful retirement faster than a post-closing claim by the buyer for reimbursement of a portion of the purchase price and/or damages, forcing the sellers to fly back from their remote island hideaways to defend themselves in court or before an arbitrator.
In preparation for the sale of a transportation business, in addition to the standard pre-closing due diligence concerning tax filings, financial matters and corporate compliance, a well-advised buyer will carefully review the target company’s carrier safety record, and all records pertaining to driver selection, recruiting, and refresher training courses, hours of service compliance, workplace safety, and vehicle maintenance. If the target company is a transport service intermediary with a place of business in Ontario, then the buyer (and its lenders) will also want to see evidence that the buyer has properly maintained the statutory trust required for monies owed to carriers, pursuant to the Highway Traffic Act.
Note that in the case of a sale of the business by way of a share purchase transaction or a merger, the buyer will either inherit the target company’s carrier safety record, or that record may be merged with the buyer’s existing record. In Ontario and other Canadian jurisdictions, once a carrier has become tainted by association with the poor safety compliance record of a company that it has acquired, it will continue to be “red-flagged” in future inquiries by provincial transport authorities. This may also affect the buyer’s directors, officers and majority shareholders.
Business valuations can be costly, but they are a worthwhile investment that can serve multiple purposes, beyond simply forming the basis of the targeted selling price. In a situation where there are multiple shareholders, it is vitally important to minimize internal discord that could derail negotiations for the sale of the company. A well-reasoned valuation report can help resolve differences of opinion among family members and other shareholders, some of whom may be skeptical about the likelihood of a sale or the value of business, and others who may have unrealistic expectations for the sale of the business.
The outcome of a valuation can also help the founders to decide whether they should seek to remain involved in the management of the business for a period of time – perhaps a few years – following the sale, of whether they will be able to sail off into retirement the day after closing.
Valuations are typically expressed in cash flow multiples, after taking into account many factors concerning the target company, such as historical and prospective growth prospects, industry-wide conditions and volatility, and the scale and size of the company’s operations. Current market conditions, the availability of financing, and perceived trends in mergers and acquisitions generally will also play a significant role in the valuation process.
As early as possible during the pre-sale period, the M&A team and the company accountant should determine whether any pre-sale restructuring of the company ownership is needed in order to maximize tax efficiency. Ideally, any such restructuring should be finalized and implemented before a potential buyer has been identified: last-minute surprises concerning tax strategies and the corporate structure of the target company could derail pre-closing negotiations, and will almost always lead to demands for more stringent representations, warranties and indemnities.
One key trend affecting the logistics industry at present is the fact that non-asset, or “asset light” operating models continue to attract the highest transaction multiples. Non-asset companies typically use technology or intellectual property to act as an intermediary for the arrangement of transportation services, warehousing, and supply chain management. Transportation carriers are described as “asset light” when they are built around the services of owner-operators, with very limited real estate and company-owned equipment, and without the large capital expenditures typically required to maintain company owned fleets.
Private equity funds – investment firms that aggregate capital and seek to acquire private and publicly traded companies – have been particularly active in the transport and logistics industry, and have had considerable success in various sub-segments of the industry. Third-party logistics companies, expedited transportation services, freight forwarders, intermodal transportation, warehousing, reverse logistics, and transportation management companies are especially attractive to private equity buyers, due to high industry growth rates, and limited capital investment requirements.
Private equity firms often engage the services of an industry executive with a proven track record of value creation, to help identify potential target companies, and to serve as CEO following the acquisition. These executives will naturally gravitate towards companies that have capable management teams in place, which are likely to complement their own skills and talents post-closing. They will also assist their private equity partners in a qualitative analysis of the customer base and service offerings of a potential target company. Of course, those transport and logistics companies that have a well-diversified customer base, and that have developed a solid, positive reputation within the industry are likely to attract the greatest interest.
(*1) Brian Baskin, “Logistics M&A Wave to Continue, PwC Says” The Wall Street Journal (5 August 2015).
(*2) Currently, faced with a higher demand for their services, smaller trucking companies are faced with some stark choices: invest in a refreshed fleet, or simply “cash out”. See: Jonathan Kletzel and Julian Smith, “Third-quarter 2015 Global Transportation and Logistics Industry Mergers and Acquisitions Analysis” Intersections (PricewaterhouseCoopers, November 2015).
(*3) The statistics frequently cited by researchers and consultants are that 30% of family-owned firms survive the second generation of the family, 13% survive the third generation, and 3% survive the fourth. These figures are attributed to a 1987 study published by John Ward, based on a historical analysis of 200 manufacturing firms in Illinois.
3. Effect of “Mary Carter Agreement” on Joint Liability
In Cormack v. Chalmers, 2015 ONSC 5564, the court held that a “Mary Carter”(*1) type settlement agreement with one defendant, who was entitled to limit his liability, did not change the liability of the other defendant from joint liability to several liability.
The following is a reproduction of the court’s endorsement:
This motion is brought by the defendants Pitt and Rubadeau (“Pitt”) seeking summary judgement against the plaintiff, Cormack dismissing paragraph 14(b) of her Statement of Claim (which pleads the Negligence Act); and for an order that the plaintiff’s claims against Pitt are subject only to several, and not joint liability because of a partial settlement agreement entered into between the plaintiff and the defendant Chalmers. This partial settlement agreement (or Mary Carter agreement) between the plaintiff and the defendant Chalmers limited the liability of Chalmers in exchange for payment by Chalmers of a fixed sum to the plaintiff, and an agreement by the plaintiff to save Chalmers harmless from any liability above the fixed amount.
This motion was argued following a trial management conference held on the eve of a civil jury trial to commence at Picton.
Pitt’s position is that the partial settlement agreement has changed the legal relationships between the parties such that Pitt is no longer potentially jointly liable with Chalmers to the plaintiff, but is now only potentially severally liable to the plaintiff.
The plaintiff’s position is that the joint liability of Pitt to the plaintiff is unchanged, and Pitt’s motion should fail.
The plaintiff was badly injured while she was swimming in proximity to a harbour entrance. She was struck by Chalmers motor boat and was badly injured by its propeller. At the time the plaintiff went swimming, she was a guest of Pitt at their residence close to the harbour, had allegedly not been there previously, and allegedly had not been warned about possible hazards of swimming off their dock. The action was framed in negligence against all defendants, the Negligence Act was pleaded; and joint and several liability was claimed against the defendants Chalmers and Pitt.
Following completion of the pleadings and discoveries, Chalmers initiated proceedings in the Federal Court for a declaratory judgement that his liability was limited under the Marine Liability Act to a maximum amount. In their Statement of Defence in the Federal Court Pitt admitted the allegations in Chalmers Statement of Claim, admitted that Chalmer’s liability was capped at the fixed amount, and except for costs, admitted that Chalmers was entitled to the relief he was seeking. A consent judgement was then obtained in the Federal Court, to which Pitt also consented. Before the consent order was obtained, the plaintiff and Chalmers entered into a settlement agreement which provided that Chalmers liability was capped in all respects, that Chalmers was to pay the fixed amount to the plaintiff, and the plaintiff would save Chalmers harmless in the event he was called upon to pay more than the capped amount. The agreement contained a number of other provisions which included the obligation on Chalmers to cooperate with the plaintiff in prosecuting the action, and not to contest the plaintiff’s damages. Pitt was not a party to the agreement and learned of it afterwards. It seems beyond question that Chalmers liability was correctly capped at $1,000,000.
The knub of Pitt’s argument is that the save harmless provision favouring Chalmers has so changed the relationship between the parties that it nullifies the joint liability provisions flowing from the Negligence Act, and has the legal effect of limiting Pitt’s liability to one of several liability.
Specifically the relevant provision of the partial settlement agreement relied upon is as follows:
12. Cormack agrees to indemnify Chalmers and to hold Chalmers harmless in respect of any crossclaim or any other proceeding or any other claim whatsoever arising from issues and allegations in Ontario Superior Court Action 11-0574 and in Federal Court Action T-812-13.
I don’t accept that the partial settlement agreement, or Mary Carter agreement, in this case has the effect of limiting Pitt’s liability to one of several liability to the plaintiff.
Essentially Pitt’s position remains unchanged following the agreement. Chalmer’s exposure was capped at the fixed amount with or without the agreement so that if a judgement against all of the defendants were to exceed Chalmers cap, Pitt would liable for the balance. The fact that the agreement provides for a refund to Chalmers up to a capped amount does not alter the rights or liability of Pitt.
If the judgement were to be less than the cap, then subject to the further submissions of counsel, there would be no enforceable judgement against Pitt because the plaintiff has already been paid. The question of costs is still a live issue for Pitt; and their rights are unaffected by the agreement.
In Moore v Bertuzzi,(*2) Perell, J, dismissed an appeal from the Master who had ordered disclosure of a proportionate share settlement agreement, on the ground that settlement agreements of the type in question change the adversarial process and the court must therefore understand what and why the change is present. His reasons do not support the argument that paragraph 12 of the partial settlement agreement (and paras 14 and 15) alter Pitts liability to one of several liability. His comments at paragraph 67 of his decision are not statements of law but statements of fact concerning the usual terms of Mary Carter agreements. At paragraph 85, Perrell, J discusses the typical terms of a Pierringer agreement and the reasons therefore. I take neither of these references to be statements of law that are of assistance on this motion.
The reference to the excellent article by Stephen Moore entitled “Limitations and Joint and Several Liability” (*3) is similarly of limited assistance in dealing with the legal effect of the above noted provision in the partial settlement agreement. Again it is a practical guide and explanation of the use of proportionate or partial settlement agreements and is not authority for the proposition that Mary Carter agreements as a matter of law result in several liability only as against the non-settling defendant. It depends solely on the language of the agreement in question.
This in fact may be analogous to a situation whereby one defendant enjoys immunity at law or limited liability at statute, or perhaps even no assets to pay their proportionate share. It has been held that any of those circumstances do not protect the remaining defendant or defendants from joint liability. (*4)
The authorities relied upon by Pitt for the most part dealt with the issue of privilege and disclosure of partial settlement agreements, and not the legal effect on the substantive rights of the parties. They also appeared to involve agreements that were similar to a ‘Pierringer’ agreement where the settling defendant was to be let out of the action, and required as a term for its own protection, that the plaintiff would limit its claim against the non-settling defendant to several liability in order to prevent any claims for indemnity by the non-settling defendant. Where the settling party remains as a defendant as in a ‘Mary Carter’ agreement, there is no authority that I am aware of that supports the proposition that the relationships between the parties has been altered as a matter of law to such an extent as to protect the non-settling defendant from joint liability. (*5) In this case, I am satisfied that the paragraph noted above does not have the effect of restricting the liability of Pitt to one of several liability.
The motion on behalf of Pitt and Rubadeau is dismissed. I will hear submissions on costs at the conclusion of the trial unless the parties have in the meantime reached an agreement
Rui M. Fernandes
Follow Rui M. Fernandes on Twitter @RuiMFernandes and on Linkedin. See also his blog at http://transportlaw.blogspot.ca
(*1) A Mary Carter Agreement is a settlement between the plaintiff and one or more defendants wherein the settling defendant guarantees to the plaintiff a minimal financial recovery. In return, the plaintiff agrees to limit the exposure to the settling defendant including to indemnify for any cross claims. A significant term of a Mary Carter agreement is that the settling defendant remains in the lawsuit. Traditionally, in a Mary Carter agreement the settling defendant’s payment to the plaintiff is tied to a determination of liability. The more the liability found against the non-settling defendant the less the settling defendant has to pay. While the settling defendant has agreed to pay to the claimant a value to the claim, that value has the potential to decrease, depending on the net result at trial. As such, the settling defendant has a stake in the outcome of the trial.
(*2) 2015 ONSC 3248, 110 O.R. (3d) 611
(*3) CLE program, Ontario, June 23, 2006
(*4) Ryan Estate v. Canada.(Attorney-General), 2015 NLTD(G) 90, 2015 CarswellNfld 221, 2015 NLTD(G) 90 paragraphs 59- 62
(*5) Noonan v. Alpha-Vico, 2010 ONSC 2720 (CanLII). although the case deals primarily with disclosure, privilege, and discovery issues where there are partial settlement agreements, an excellent summary by Master McLeod appears at paragraphs 28 and 29.
4. Issues in Security for Costs Considered: Daigneault v. Canjet et al 2016 ONSC 78
The plaintiff in this ongoing case is a longtime paraplegic who resided in Quebec but spent significant time in Florida during winter. The plaintiff suffered a fall during his wheelchair-assisted disembarkation from an aircraft, he has not been strapped to the wheelchair. The exact circumstances of the alleged accident remain contentious, but the incident occurred at the cusp of the aircraft and the jet bridge connecting the airplane to the airport terminal building.
The wheelchair involved was provided by the Toronto Ground Airport Services (“TGAS”), which also provided human assistance in the disembarkation process. TGAS had a ground-handling contract to provide services at Toronto airport to Canjet, an Canadian international leisure airline. The plaintiff had flown with Canjet from Florida to Toronto; he sued both TGAS and Canjet in the Ontario Superior Court of Justice.
Prior to examinations for discovery, Canjet had successfully brought a motion for security for costs (*1). The court held that the plaintiff failed to evidence his allegation that he was impecunious and hence ordered the plaintiff to make a payment into court of $16,000 as first tranche of security for costs.
Following examinations for discovery, Canjet sought a “top-up” tranche of the security for costs amount to proceed to trial. TGAS also made its first claim for security for costs from the plaintiff. The parties were unable to reach an agreement and so they appeared before the court for the same Master to rule on the application to vary the order with respect to the quantum of security for costs.
At this second hearing, over a year after the initial order, the plaintiff about-turned and argued that he should not be required to post security for costs as he could prove his ability to pay any eventual costs award.
Canjet alleged that the court could not reopen the debate as to whether or not the plaintiff was able to fulfill a costs order on the basis of res judicata. Master Haberman hearing the motion found that this was rather an instance of issue estoppel, whereby the plaintiff was prevented from re-litigating issues previously decided by the court on the basis of a record embellished with documents which had been available at the time of the first hearing and so should have been used at that time.
Further, and in any event, Master Haberman opined that the evidence now tendered by the plaintiff as demonstrative of his ability to pay an adverse costs order would have been insufficient even if admitted into evidence. The Master held that the plaintiff had a significant burden to demonstrate sufficiency of assets with a detailed level of particularity, which would not have been met in this case.
The plaintiff also failed to satisfy the court of his burden to show that in the event of an adverse costs order, that this could be easily enforced in Quebec where the plaintiff resided and owned encumbered property. Quebec does not have a reciprocal enforcement of judgments legislation. An opinion from Ontario counsel who was not educated in the Quebec legal system and who had not practiced in Quebec, as tendered by the plaintiff, did not constitute admissible expert opinion evidence.
Adverse costs insurance
Master Haberman also had to consider how to weigh into her analysis the fact that the plaintiff had subscribed to an insurance policy with respect to an adverse costs order. Coverage was provided by the Bridgepoint Indemnity Company.
This is an emerging legal issue considered by the Ontario Superior Court in a series of decisions in 2015 (*2). The precedent cases established that the existence of an insurance policy in this respect was not dispositive of the issue of security of costs, but was a relevant factor to be taken into the consideration. Moreover the consideration is contextual and depends upon the “circumstances of the case and the terms of the policy”. In this case the policy was in part illegible and provided coverage only up to $100,000, which was insufficient given that there were two defendants.
Merits of the case
As the plaintiff was now arguing that he was able to fulfill any costs order made against him, Haberman J. indicated that he would be held to a higher standard of demonstrating the merits of his case and that therefore the “just order” to be made by the court was that the plaintiff need not provide security for costs.
Master Haberman was unconvinced as to the strength of the plaintiff’s substantive case. The plaintiff relied on the no-fault regime of the Montreal Convention of 1999 (*3), an instrument of private international air law governing certain claims arising out of carriage by air. The convention is in force in Canada pursuant to the Carriage by Air Act (*4). The plaintiff argued that as his accident occurred in the process of disembarkation, and as the Montreal Convention provided for absolute liability up to 113,000 Special Drawing Rights, his case could not be defeated on the merits.
Master Haberman was not swayed by this argument. She criticized the plaintiff’s materials for a failure to explain the Special Drawing Rights currency, or rather “SDRs” as they were unhelpfully referred to in their short form by plaintiff’s counsel. Moreover, Master Haberman underlined that even under a regime of absolute liability, if found to apply, damages must be proven by the plaintiff, and these must have been caused by the impugned misconduct of the defendants.
Moreover, contributory negligence of the plaintiff would also be expected to factor into any damages assessment since the plaintiff, from his examination evidence, failed to advise the TGAS attendants that he was not strapped into the wheelchair, and he and his personal carer, who was present at the time, were in the best position to advise the employees with respect to the plaintiff’s disabilities and how he should be transferred.
Accordingly, even if the plaintiff had succeeded in demonstrating financial capacity to satisfy an award of costs, he would not have prevailed in exempting himself from being subjected to a security for costs order given that he failed to meet his burden of demonstrating a good case as against either defendant.
Master Haberman ordered the plaintiff to pay a top up payment of $60,000 for security for costs through trial for Canjet, and to make payment of $80,000 for security for costs through trial for TGAS.
*1 Security for costs is provided for by Rule 56 of the Rules of Civil Procedure (R.R.O. 1990 Reg. 194) and is a mechanism primarily used by defendant(s) where the plaintiff is from out of jurisdiction raising concerns for the defendant(s) as to their ability to enforce any costs order in their favour made by the court. The plaintiff is required to make a payment of security into Court.
*2 Stamp v. Sun Life Assurance Co. of Canada  OJ No. 2324, Alary v. Brown 2015 ONSC 3021, Shah v. Loblaw Companies Ltd. 2015 ONSC 5987.
(*3) Formally known as Convention for the Unification of Certain Rules for International Carriage by Air done at Montreal, May 28, 1999.
(*4) Carriage by Air Act (R.S.C., 1985, c. C-26)
5. New Obligations for Shippers and Carriers regarding Sanitary Transportation of Food for Consumption in the U.S.
This article provides an update with regard to the finalization of the proposed rule on Sanitary Transportation of Human and Animal Food (“the Rule”) (*1), which was initially discussed in the October 2015 Fernandes Hearn LLP Newsletter. The purpose of the Rule is to prevent practices that create food safety risks, such as failure to properly refrigerate food, inadequate cleaning of vehicles between loads and failure to property protect food during transportation. (*2) The Rule was published in the U.S. Federal Register on April 6, 2016 and becomes effective on June 6, 2016.
Does the Rule apply to your business?
The Rule applies to shippers, receivers, loaders, and carriers by motor or rail vehicle who are involved in transporting human and animal food in the United States and establishes requirements that they use sanitary practices to ensure the safety of that food. The requirements do not apply to transportation by ship or air. (*3)
The Rule also applies to persons in other countries, such as Canada, who ship food to the United States directly by motor or rail vehicle, or by ship or air and arrange for the transfer of the intact container onto a motor or rail vehicle for transportation within the U.S., if that food will be consumed or distributed in the US. The Rule does not apply to exporters who ship food through the United States, for example, from Canada to Mexico, if that food does not enter the U.S. distribution stream. (*4)
The Rule does not apply to:
- shippers, receivers, or carriers engaged in transportation operations that have less than $500,000 in average annual revenue;
- transportation activities performed by a farm;
- food that is imported into the U.S. then subsequently exported and is neither consumed nor distributed in the U.S.;
- transportation of compressed food gases and food contact substances;
- transportation of human food byproducts transported for use as animal food without further processing;
- transportation of food that is completely enclosed by a container except a food that requires temperature control for safety; and
- transportation of live food animals, except molluscan shellfish. (*5)
Food transported in bulk (e.g. in a tanker where the food is in direct contact with the walls of the vehicle) and packaged food that is not fully enclosed by a container (e.g. fresh produce) are subject to the Rule. (*6)
The Rule was enacted under the United States’ Food Safety Modernization Act (“FSMA”) and works in conjunction with other rules under the FSMA, including the Rule on Preventative Controls in Human and Animal Food (“Preventative Controls Rule”) which came into effect on November 16, 2015.
As noted in the October 2015 Newsletter, under the Preventative Controls Rule, certain facilities must implement a food safety system that includes hazard analysis and risk-based preventative controls. The Preventative Controls Rule establishes requirements for food manufacturers to develop plans aimed at determining which hazards a certain type of food may be subject to during production and setting out methods of controlling said hazards. The requirements include: a written food safety plan, hazard analysis, preventative controls, monitoring, corrective actions and verification, supply chain programs, recall plans and record keeping.
Requirements for Vehicles and Transportation Equipment
Pursuant to section 1.906 of the Rule, vehicles and transportation equipment
- must be designed and of such material and workmanship to be suitable and adequately cleanable for their intended use to prevent food from becoming adulterated;
- must be maintained in such sanitary condition for their intended use to prevent food from becoming adulterated;
- used for food requiring temperature control for safety must be designed, maintained and equipped, as necessary, to provide adequate temperature control to prevent the food from becoming adulterated; and
- must be stored in a manner that prevents harborage of pests or becoming contaminated in any other manner that could result in food becoming adulterated.
The Food and Drug Administration (“FDA”) has noted that it does not consider “sanitary condition” to be synonymous with “sanitize.” They consider “sanitary condition” to be a state of cleanliness. Additionally, the requisite sanitary conditions of vehicles and transportation equipment are to be determined by the intended use of the vehicles and equipment.
Requirements for Transportation Operations, Generally
Section 1.908 (a) sets out general rules that must be followed by anyone covered by the Rule. These persons must assign competent supervisory personnel to ensure compliance with the requirements of the Rule. They must also ensure that transportation operations are conducted so as to prevent food from becoming unsafe, including taking measures such as:
- segregation, isolation, and packaging to separate foods;
- taking protective measures for food in bulk vehicles or not completely enclosed in a container from contamination and cross contact; and
- ensuring that food that requires temperature control for safety is transported under adequate temperature control.
These persons should also specify relevant factors (e.g. whether the food is raw material or finished product) that must be taken into account in determining the necessary conditions and controls for the transportation operation.
If such persons become aware of an indication of a possible material failure of temperature control or other conditions that may render the food unsafe, the food cannot be sold or otherwise distributed until it is determined that the temperature deviation or other condition did not render the food unsafe.
Of note is the fact that shippers, receivers, loaders and carriers, which are under the ownership or operational control of a single legal entity, may conduct transportation operations in conformance with common, integrated, written procedures that ensure the sanitary transportation of food consistent with the requirements of section 1.908.
Requirements for Shippers
Section 1.908 (b) sets out the requirements under the Rule with which shippers are obliged to comply.
The shipper must provide in writing to the carrier and, when necessary, the loader all necessary sanitary specifications for the carrier's vehicle and transportation equipment to prevent the food from becoming unsafe.
Except with respect to a carrier who transports food in a thermally insulated tank, the shipper, and when necessary, the loader, must specify an operating temperature in writing to the carrier, including, if necessary, the pre-cooling phase for a food requiring temperature control for safety.
The shipper must develop and implement written procedures that are adequate to ensure that vehicles and equipment are in appropriate sanitary condition for the transport of food. Where food requires temperature control, the shipper must include measures in their written plan to ensure that such control is adequate. Shippers of bulk cargo must also address in their plan procedures to ensure that a previous cargo does not make the food unsafe. Measures to implement the procedures may be done by the shipper or be delegated to another party under the terms of a written agreement.
Requirements for Loaders and Receivers
Pursuant to section 1.908 (c), before loading food not completely enclosed by a container, the loader must determine, based as appropriate on shipper specifications, that the vehicle or transportation equipment is in appropriate sanitary condition (e.g., adequate physical condition, free of visible evidence of pest infestation, and previous cargo that could make the food unsafe).
Before loading food requiring temperature control for safety, the loader must verify, considering as appropriate the shipper specifications, that each mechanically refrigerated cold storage compartment or container is adequately prepared, including proper pre-cooling if necessary.
Subsection (d) addresses requirements for receivers, and indicates that upon receipt of a food requiring temperature control for safety, receivers must take steps to adequately assess that the food was not subjected to significant temperature abuse, such as determining the food's temperature, the ambient temperature of the vehicle, or smelling for off-odors.
Requirements for Carriers
Section 1.908 (e) sets out the requirements for carriers.
Carriers must develop and implement written procedures that specify practices for cleaning, sanitizing if necessary, and inspecting vehicles and transportation equipment to maintain them in appropriate sanitary condition. The procedures must describe how it will comply with the temperature control requirements and describe how it will comply with any requirements for use of bulk vehicles.
Where there is an agreement with the shipper that the carrier is responsible, the carrier must:
- ensure that vehicles and equipment meet the shipper's specifications and are otherwise appropriate to prevent the food from becoming unsafe;
- upon completion of the transport and if requested by the receiver, provide the operating temperature specified by the shipper and demonstrate that temperature conditions were maintained during transport consistent with shipper specifications;
- pre-cool each mechanically refrigerated cold storage compartment as specified by the shipper before offering a vehicle for transport; and
- if requested by a shipper, identify the previous cargo of a bulk vehicle and provide information that describes the most recent cleaning of the vehicle.
Section 1.910 requires carriers to provide awareness training to personnel engaged in transportation operations and must maintain records documenting the training. Carriers must retain employee training records for 12 months after the person stops performing the duties for which they were trained.
Small businesses, other than motor carriers who are not also shippers and/or receivers, employing fewer than 500 people, and motor carriers having less than $27.5 million in annual receipts must comply with the Rule by April 6, 2018 (2 years from the date of publication in the Federal Register).
A business that is not small and is not otherwise excluded from coverage has one year to comply after the publication date of the Rule, namely April 6, 2017.
The FDA has advised that they intend to publish a Compliance Guide for smaller entities. They also intend to develop a one-hour online course to enable carriers to comply with training requirements under the Rule. (*7)
(*1) 81 FR 20091
(*2) U.S. Good and Drug Administration – FSMA Final Rule on Sanitary Transportation of Human and Animal Food, online: <http://www.fda.gov/Food/GuidanceRegulation/FSMA/ucm383763.htm>
(*7) FDA Final Rule webinar, held on April 25, 2016.
6. Unprecedented Punitive Damages Reduced by Court of Appeal: Leave to Appeal to Supreme Court of Canada Denied
The treatment of punitive damages by the courts was canvassed in the Fernandes Hearn LLP April 2013 article (*1). The Supreme Court of Canada’s seminal case of Whiten v Pilot Insurance Corporation (“Pilot v Whiten”)(*2) sets out the parameters for consideration by courts where the actions of insurers vis a vis their insureds were considered to be so outside appropriate conduct so as to attract a punishing monetary award. Pilot v Whiten established the top award of punitive damages against an insurer as $1,000,000. The Saskatchewan Court of Queen’s Bench then weighed in with an even higher amount and, in 2013, we thought that this might be a new high water mark. The case went to appeal and the amounts were reduced. The Supreme Court of Canada has now concluded the issue by dismissing the Application for Leave to Appeal. This article will bring readers up to date on the state of the law in Canada regarding potential awards of punitive damages. (*3)
Punitive Damages Review: Pilot v Whiten Still the High-Water Mark Case
The Supreme Court of Canada in the Pilot v Whiten decreed the standard of appropriate conduct regarding the insurer’s implied obligation of utmost good faith to its insureds.
Binnie J.’s opening and oft-quoted words in his Reasons in the first paragraph of the Pilot v Whiten continue to apply today.
1. This case raises once again the spectre of uncontrolled and uncontrollable awards of punitive damages in civil actions. The jury was clearly outraged by the high-handed tactics employed by the respondent, Pilot Insurance Company, following its unjustified refusal to pay the appellant’s claim under a fire insurance policy (ultimately quantified at approximately $345,000). Pilot forced an eight-week trial on an allegation of arson that the jury obviously considered trumped up. It forced her to put at risk her only remaining asset (the insurance claim) plus approximately $320,000 in legal costs that she did not have. The denial of the claim was designed to force her to make an unfair settlement for less than she was entitled to. The conduct was planned and deliberate and continued for over two years, while the financial situation of the appellant grew increasingly desperate. Evidently concluding that the arson defence from the outset was unsustainable and made in bad faith, the jury added an award of punitive damages of $1 million, in effect providing the appellant with a “windfall” that added something less than treble damages to her actual out-of-pocket loss.”
The Court of Appeal had overturned the jury’s unprecedented punitive damages award of $1,000,000 reducing it to the more traditional and modest amount of $100,000.
Binnie J. and the majority of the Supreme Court of Canada, however, reinstated the jury’s award. Binnie J. noted the trial judge’s statement, when endorsing the jury’s decision, that a very substantial punitive damage award was required to “… punish the defendant and to effectively send the implied reminder to the defendant and to other insurers that they owe their insureds a duty of good faith in responding to claims made under policies of insurance issued by them.” The award, though high, was within “rational limits”. (*4)
The Supreme Court of Canada set out the principles governing punitive damages in a series of points:
(1) Punitive damages are very much the exception rather than the rule
(2) they are imposed only if there has been high-handed, malicious, arbitrary or highly reprehensible misconduct that departs to a marked degree from ordinary standards of decent behaviour.
(3) Where they are awarded, punitive damages should be assessed in an amount reasonably proportionate to such factors as the harm caused, the degree of the misconduct, the relative vulnerability of the plaintiff and any advantage or profit gained by the defendant.
(4) Having regard to any other fines or penalties suffered by the defendant for the misconduct in question.
(5) Punitive damages are generally given only where the misconduct would otherwise be unpunished or where other penalties are or are likely to be inadequate to achieve the objectives of retribution, deterrence and denunciation.
(6) Their purpose is not to compensate the plaintiff, but
(7) to give a defendant his or her just desert (retribution), to deter the defendant and others from similar misconduct in the future (deterrence), and to mark the community’s collective condemnation (denunciation) of what has happened.
(8) Punitive damages are awarded only where compensatory damages, which to some extent are punitive, are insufficient to accomplish these objectives, and
(9) they are given in an amount that is no greater than necessary to rationally accomplish their purpose.
(10) While normally the state would be the recipient of any fine or penalty for misconduct, the plaintiff will keep punitive damages as a “windfall” in addition to compensatory damages.
(11) Judges and juries in our system have usually found that moderate awards of punitive damages, which inevitably carry a stigma in the broader community, are generally sufficient.
The trial decision of Branco v American Home Assurance, Cameco Corporation, Kumtor Operating Company and Zurich Life Insurance Company (“Branco”) awarded punitive damages in the sum of $4.5 million against the two defending insurers, an amount much higher than Pilot v Whiten but based on its principles and factors noted above. As opposed to a jury, a trial judge had considered all aspects and awarded this unprecedented sum. The insurers appealed.
Branco: A Brief Review of the Facts
Luciano Branco was employed by Kumtor Operating Company as a welder in Kyrgyztan. He was described as an excellent employee with a perfect attendance record. Unfortunately, Mr. Branco suffered a work related injury to his foot which permanently disabled him. American Home provided insurance akin to Workers Compensation benefits (the “WCB insurer”). Zurich Life Insurance Company, located in Switzerland, provided long term disability benefits (the “LTD insurer”).
The WCB insurer, despite confirmation that Branco was permanently disabled, made a cash settlement offer of $22,500 US. A comment was made in file by the handler:
I called the claimant and he did not accept our offer and said that he was going to get an attorney. I hope he re-considers because he lives in Portugal and he will have to go back to Canada to get an attorney and this whole process is going to take years to settle. Here we go CANADA!!!!!
Mr. Branco then had to pay for his own rehabilitation and medical appointments and was subjected to unreasonable requirements such as vocational rehabilitation at a facility over three hours from his home in Portugal. Despite an opinion from the Saskatchewan Workers Compensation Board that Mr. Branco was not an appropriate candidate for retraining given his nearness to retirement of about 10 years, the insurer took this as a refusal to take rehabilitation and ultimately discontinued payment of benefits in 2004. Further, there was payment inconsistency over the years for no apparent reason. Even after agreement that Mr. Branco was entitled to various lifetime payments, these were not made until the day before trial. The WCB insurer was said to have engaged in court delay tactics.
With regard to the LTD Insurer, the trial court found that rather than paying benefits, it brought legal proceedings within the Canadian litigation alleging that Switzerland was the more convenient forum. Even though the LTD insurer agreed that the first 24 months of benefits were payable (“disabled from his own occupation”), it refused to pay benefits The payments were not made up until 9 years after the accident and nearly 6 years after litigation started and 1.5 years after the independent medical, which it eventually accepted. The LTD insurer instead engaged in low offers to settle and engaged in numerous court delay tactics. It failed to pay despite knowing there was an obligation to do so and when it knew that Mr. Branco was severely affected.
Throughout the years in which the case took to get to trial, Mr. Branco suffered financially to the point where he relied on family loans and borrowed clothing. His marriage was damaged and he was depressed. Mr. Branco was ashamed that he was unable to support himself and his family, which went to the root of his personal self-worth and integrity. He was put through many defence medicals and was diagnosed by 7 out of 10 doctors as having a rare disorder, Reflex Sympathetic Dystrophy or complex regional pain syndrome, which has a very poor success rate of rehabilitation.
The Decision on Punitive Damages
The trial judge, Acton J., cited Pilot v Whiten as the accepted law in Canada on punitive damages and quoted extensively from it including the concept of proportionality in the assessment of appropriate quantum of punitive damages; that is, the more reprehensible the nature of the conduct, the higher the potential award as well as the factors involved in the assessment of blameworthiness (including planned and deliberate misconduct, awareness of the wrong, profit from the wrong, persistence in the wrong, intent and motive as well as whether the interest violated was deeply personal to the plaintiff and whether the plaintiff was vulnerable, financially or otherwise.)
Unfortunately for the WCB insurer, Acton J. also noted a previous decision which awarded punitive damages against the WCB insurer, which case involved the same adjuster using the same tactics on another claimant worker in similar circumstances to Mr. Branco that the award of $60,000 in that case was “not sufficient to prevent an immediate recurrence of the unacceptable technique.” (*6)
Acton J. considered that the actions of both insurers had continued for over 8-13 years and that they were very aware of the hardship it was inflicting both through withholding funds and also that they engaged in litigation tactics such as numerous and expensive court applications. The actions of the insurers were considered planned and deliberate and meant to force Mr. Branco into an unreasonably low cash settlement. The insurers’ adjusters knew their actions were wrong and also took steps to ensure failure by Mr. Branco.
The award for punitive damages in Pilot v Whiten was $1,000,000 for misconduct over two years. The misconduct in Branco was over 8 to 13 years. Acton J. was not convinced that the $1,000,000 as awarded was sufficient to stop such misconduct as the Pilot v. Whiten decision was rendered during the time period that Mr. Branco’s case was being handled.
Acton J. awarded $3,000,000 in punitive damages against the LTD insurer for bad faith; specifically, behaviour that was “protracted and reprehensible” and “nothing short of torturous on Branco.” His Honour awarded $1,500,000 in punitive damages against the WCB insurer for behaviour that was outrageous and similar in nature to previous conduct. Acton J. stated:
216. The court is cognizant of the fact that a punitive damages award of $3 million may not be particularly significant to the financial bottom line of a successful worldwide insurance company. It is hoped that this award will gain the attention of the insurance industry. The industry must recognize the destruction and devastation that their actions cause in failing to honour their contractual policy commitments to the individuals insured.
217. Both AIG and Zurich failed to deal with Branco’s claim in good faith. Each tried to take advantage of Branco’s economic vulnerability to gain leverage in negotiating a settlement. The fact that Branco was able to continue to withstand this pressure for so many years from two different fronts is truly remarkable and almost superhuman, even though his resistance may have resulted in irreparable mental distress which may last for the remainder of his lifetime.
218. The court has grave concerns as to how often this type of action occurs in dealing with insurance claims. The court is only cognizant of the cases such as Sarchuk, Whiten and Branco which come before them. If Whiten (in the Whiten case) and Branco, in this case, had not been able to withstand the unbelievable pressure to settle on the terms and conditions originally offered these cases would not have received the attention of the courts either. The question remains: how many individuals have been unable to withstand the financial and psychological pressure of these tactics?
The trial judge in Branco made it known that his decision sought to punish with greater severity than the court in Pilot v Whiten.
The Appeal Decision
The Saskatchewan Court of Appeal did not agree with the trial judge’s attempt to more rigorously punish the insurers’ bad faith actions and greatly reduced the punitive damages following the Pilot v Whiten lead regarding quantum. (*7)
The appeal court, in fact, agreed with the trial judge that the WCB insurer had acted improperly by suspending Branco’s benefits under the associated policy for some 24 months when they knew he was incapable of performing his original job. The WCB’s “low ball” offer to settle was intended to force Branco to accept an unfair settlement of all of his claims. The Court of Appeal agreed with the trial judge that such acts were very serious violations of the duty of good faith and that significant damages were appropriate. Despite the egregious conduct of the WCB insurer, the court reduced the punitive damages to be more “in line” with the Pilot v Whiten range of damages and it principles.
The court found that the trial judge’s decision regarding the assessment of the WCB insurer’s liability including that his conclusions failed to relate the terms of the policy to the facts. The court found that the WCB insurer had been entitled to suspend Branco’s benefits given Branco’s lack of cooperation and the many warnings he had received from the WCB insurer. The trial court had awarded $1.5 million against the WCB insurer and, referring to the Pilot v Whiten principles, the Court of Appeal at para. 95 stated:
As to the appropriate quantum of punitive damages, the Court indicated in Whiten that, in determining the amount of an award, a court should relate the facts of the particular case to the underlying purposes of punitive damages and “ask itself how, in particular, an award would further one or other of the objectives of the law, and what is the lowest award that would serve the purpose, i.e., because any higher award would be irrational.” (at para. 71).
The Court of Appeal concluded at para 133, “AIG knew or ought to have known that its actions were a significant breach of its duty of good faith. As a result, its conduct warrants a punitive damages award of some significance.”
Regarding the LTD insurer, the appeal court found that the trial judge had misunderstood the insurer’s policy and made several palpable and overriding errors of fact that may have impacted on the application of a punitive damages award; however, bad faith conduct was still found in respect of its handling of “own occupation” benefits under the associated policy. The court, citing the unconscionably low offer to settle along with other actions, stated at paragraph 196 of the Appeal decision,
However, even setting aside the trial judge’s errors, Zurich’s administration of “own occupation” benefits was a dramatic transgression of the bounds of good faith and it should and must attract punitive damages. By way of review, the key features of Zurich’s actions in this regard were as follows:
(a) Zurich approved Mr. Branco’s claim for “own occupation” benefits in March of 2002.
(b) Zurich did not pay out Mr. Branco’s claim and did not tell him that his claim had been approved. Rather, it made an unconscionable effort to settle his claim for $62,688 in exchange for a release from all future liability of any kind under the policy.
(c) The amount of the settlement offer made to Mr. Branco was calculated by deducting Zurich’s legal costs from the amount of benefits owing to Mr. Branco. Zurich had a practice of deducting legal fees in this way, notwithstanding that there were no provisions in its policies of insurance to permit such deductions.
(d) Zurich’s legal department withheld medical reports from its own claims department for years.
(e) After having accepted Mr. Branco’s claim, Zurich filed a statement of defence denying that he was disabled and disputing that he even had a claim against it.
(f) Zurich did not advise Mr. Branco that his claim for “own occupation” benefits had been approved until 2007, and only then during answers given at an examination for discovery.
(g) Zurich did not pay Mr. Branco’s “own occupation” benefits until 2009, when it finally acknowledged its liability to him.
Despite these the nature of such “transgressions”, the Court of Appeal found at para 197, that the trial judge’s award of $3,000,000 regarding the LTD insurer was “so dramatically high as to be irrational” and was set aside as being “very much out of line with the range of damages” per the Pilot v Whiten case, amongst others.
Regarding both insurers, the appeal court weighed the awards of punitive damages proportionate to the blameworthiness of the insurers’ conduct, the degree of Branco’s vulnerability, the degree of harm directed specifically at Branco, the need for the deterrence, any other penalties levied as well as any advantage wrongfully gained by the insurers. The court found that the depth of financial resources was only of “limited importance” in determining the size of the punitive damages award.
The appeal court concluded that, after taking all of these factors into account and comparing other awards of punitive damages, the appropriate award in this case against the LTD insurer was $175,000 and, as against the WCB insurer, $500,000. The award against the LTD insurer was greater than the award against the WCB insurer because the LTD insurer had refused to pay a claim that had actually been approved and for a much longer period of time. Regarding the damages for mental distress against the insurers, the appeal court reduced those damages from $450,000, which was described as “too extravagant to be sustained” (at para 139), to the global amount of $45,000 ($30,000 to the LTD insurer and $15,000 to the WCB insurer).
Application for Leave to Appeal to the Supreme Court of Canada
On April 14, 2016, the Application for Leave to Appeal (*8) was denied, without reasons. Simply put, this means that Canada’s top court agrees with the Saskatchewan Court of Appeal on all counts including that the quantum of punitive damages awarded for bad faith for egregious and inappropriate behaviour on the part of insurers towards their insureds would not be permitted to become “uncontrolled” whether decided by a jury or a judge alone.
Kim E. Stoll
(*1) See the article on the trial decision by Kim Stoll in the Fernandes Hearn LLP April 2013 Newsletter, regarding the Trial decision Branco v American Home Assurance, Cameco Corporation, Kumtor Operating Company and Zurich Life Insurance Company, 2013 SKQB 98 (Saskatchewan Court of Queen’s Bench) March 21, 2013.
(*2) Whiten v Pilot Insurance Corporation  1 S.C.R.595. Note: The parties’ names reverse upon appeal. The familiar name of “Pilot v Whiten” is used here.
(*3) What was a Saskatchewan case when decided at the trial level has now become an important case for all Canadian courts with the dismissal of the Application for Leave to Appeal by the Supreme Court of Canada.
(*4) at para 30.
(*5) 2013 SKQB 98 (Saskatchewan Court of Queen’s Bench) March 21, 2013.
(*6) at para 176 quoting from Sarchuk v Alto Construction Ltd. 2003 SKQB 237
(*7) Zurich Life Insurance Company Limited v. Branco 2015 SKCA 71
(*8) Luciano Branco, et al. v. Zurich Life Insurance Company Limited, et al., 2016 CanLII 21787 (SCC)
7. “Discoverability”: Flexibility in Determining Limitation Periods
The primary purpose of legislative limitation periods is to provide certainty.
The trend in recent years has been to strictly enforce them. For example, in the leading case of Joseph v. Paramount Canada’s Wonderland, the Ontario Court of Appeal found that judges lacked discretion to extend the period, even for “special circumstances” (*1). The Canada’s Wonderland decision was a reversal of the common law, which had hitherto permitted extensions in cases of “special circumstances”, at least with respect to the general two-year limitation period that is now codified in Ontario’s Limitations Act, 2002 (*2) (*3). In Canada’s Wonderland, the plaintiff’s lawyer had inadvertently failed to have the claim issued in time. Accordingly, Canada’s Wonderland was off the hook.
In all cases, the clock begins ticking when the cause of action was committed or when it ought to have been “discovered”. In some cases, the date of “discoverability” is simple. For example, it may be the date that a debt became due under a contract, or the day when cargo is delivered and found to be damaged. In other cases, it is more complicated.
Recent case law has begun to provide the courts with some flexibility to push the pendulum back in favour of plaintiffs. Where they cannot alter the limitation period, per se, they can alter the starting point – the point of “discoverability” – when time begins to toll.
Two recent cases on point are Galota v. Festival Hall Developments Ltd. (*4) and Pickering Square v. Trillium College (*5). In the former, a slip-and-fall plaintiff was allowed to sue a landlord under the Occupier’s Liability Act five years after suffering her fall (despite a two-year limitation period). In the latter, a shopping plaza was able to maintain an action for breach of contract against a tenant who had breached a lease on a theory that a fresh limitation period began to run each day that the breach continued.
Galota v. Festival Hall Developments
Thiswas a personal injury matter. The plaintiff had slipped and fallen from an elevated dance floor at Republik nightclub in May 2006, where she seriously broke her arm. Ms. Galota sued the club in time and litigation unfolded. By late 2009, the parties had conducted oral Examinations for Discovery, during which time testimony was given about the construction of the elevated feature.
By 2011, the bar had closed and its insurer had become insolvent. Ms. Galota then turned to Republik’s former landlord, Festival Hall Developments, and sued it pursuant to the Occupier’s Liability Act. Since Republik had never made a claim over against Festival Hall Developments for contribution and indemnity, the latter never had notice of the claim.
Ms. Galota could easily have determined that Festival Hall Developments was the landlord at any time with a simple land titles search. However, she argued that it was only at the Examinations for Discovery where she and her lawyers learned that the dance floor may not have complied with the Building Code. Although the floor was clearly hazardous, its potential non-compliance with the Building Code was relevant to the negligence analysis.
Predictably, Festival Hall Developments made a summary judgment motion to have the action dismissed.
Subsection 5(1)(a) of Ontario’s Limitations Act, 2002 provides that a claim is generally “discovered” on the day on which the plaintiff first knew (i) that there was a loss or damage, (ii) that it was caused by an act or omission, (iii) that the act or omission belonged to the defendant, and (iv) that a court proceeding would be an appropriate means to seek to remedy it.
Subsection 5(1)(b) provides that the limitation runs from the earlier of the foregoing date, or “the day on which a reasonable person … first ought to have known of the matters referred to [above]”. In effect, time begins to run from the date a reasonable person would have “discovered” it. This is a codification of the old common law.
Subsection 5(2) provides that a plaintiff is presumed to have known of the matters referred to above on the day the act or omission took place, unless the contrary is proved. In other words, a plaintiff has the burden to show that a later date should be taken as the starting point.
In Galota, the summary judgment motions judge, Corbett J., found that a person must investigate, on a “reasonable” basis, with a view to determining the proper defendants to a claim, but that such an investigation does not require an “overly muscular” “pre-discovery discovery”. In other words, his Honour found that a person is entitled to wait until Examinations for Discovery to determine the full list of proper defendants if their identity is in the knowledge of other, more obvious, defendants:
I agree with the plaintiff that it would be inappropriate to name landlords as defendants in every case of an occupier's liability claim against a tenant. On the other hand, to satisfy the third branch of the test under s.5(1)(a), for the purposes of s.5(1)(b) of the Limitations Act, the plaintiff must investigate on a reasonable basis with a view to determining the proper defendants to the claim. In this case, this would mean identifying the condition of the elevated dance floor as a basis for alleged liability and the persons apparently responsible for it. This requires a plaintiff to make reasonable investigation of her claim. It does not, however, require a pre-discovery discovery of an adverse party.
These circumstances place this case within the principles articulated by Lauwers J. (as he then was) in Madrid, and M.L. Edwards J. in Bailey. I agree with my colleagues that "[i]t would not be in the interests of justice to encourage an overly muscular development of the concept of pre-discovery due diligence." I adopt the reasoning of Lauwers and Edwards JJ. in these cases: the plaintiff does not have to seek information from adverse parties prior to documentary and oral discovery, in circumstances where those adverse parties have no legal obligation to provide the information (*6).
In the circumstances, the motion was dismissed and the claim was allowed to continue.
Interestingly, the court proposed an extension to the ordinary appeal period, so that the matter could go to trial with this issue hanging over it. That way, all issues could be appealed at once. Nonetheless, we anticipate a pre-trial appeal.
Pickering Square v. Trillium College
The Pickering Square matter was about a tenancy dispute with Trillium College. The latter leased space from the former for a five-year period, starting June 1, 2006. The lease specifically required Trillium to operate its vocational college business continuously, to maintain the premises throughout the term of the lease, and to restore the premises following the expiry of the lease.
In December 2007 – only one-and-a-half years in to the five-year lease – Trillium gave notice to Pickering Square that would vacate the premises. A lawsuit was begun in 2008, and settled, such that Trillium would complete the lease, from October 2008 to May 2011. Trillium did pay rent for balance of the term, but it failed to operate continuously from October 2008 to May 2011.
In February 2012, Pickering Square commenced an action for damages. Trillium made a summary judgment motion, arguing that the breach began immediately when it first gave notice, four years earlier in 2007. The summary judgment motions judge and the Court of Appeal both disagreed. Upholding the motions judge’s finding, a panel of three appeals judges concluded that a fresh limitation period began each day. Since Pickering Square knew that it had a cause of action against Trillium as soon as it failed to resume operations in October 2008, it was time-barred from suing for the period from October 1, 2008 to February 16, 2010. However, it was entitled to maintain its action for the period thereafter, up to the end of the lease term, May 31, 2011.
The Court held that, since Pickering Square did not elect to accept Trillium’s repudiation of the contract, it retained its right to sue for past and future breaches. Had Trillium resumed its operations, Pickering Square would have had to accept it. Accordingly, the Court found that the limitation period applied on a “rolling basis”.
From a plaintiff’s point-of-view, there is less certainty in the law than there might be. From a defendant’s point-of-view, relying on limitations defences is becoming more difficult. It remains best practice to consider limitations issues early, and often, with legal advice.
Alan S. Cofman
(1) 2000 ONCA 469 [Canada’s Wonderland].
(2) S.O. 2002, c. 24, Sched. B.
(3) The doctrine of “special circumstances” likely continues to apply in cases outside of the ambit of that Act.
(4) 2015 ONSC 6177 [Galota].
(5) 2016 ONCA 179 [Pickering Square].
(6) Galota, supra note 4 at paras. 17-22, citing Madrid v. Ivanhoe Cambridge, 2010 ONSC 2235 and Bailey v. Canadian Athletes Now and Wow Group, 2012 ONSC 4955.
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