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> February 2011
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In this issue:
1. Firm and Industry News
2. The Division of Powers Set Out in the Constitution Act, 1987
and the Effect on Transportation in Canada
3. Nullification of Coverage Doctrine
4. Competition Regulators Target Transportation Industry
1. Firm and Industry News
- April 2011 Toronto: Loss
Prevention Seminar - Load Brokers
- May 11-14 Las Vegas: Transportation Lawyers
Assoc. Annual Meeting
- May 25-26 2011 Collingwood: CBMU Semi-Annual
Dinner
- June 3rd 2011 Quebec City: CMLA Annual Meeting
Kimberly Newton spoke at the Institut maritime
du Quebec's conference on Marine Oil Pollution Prevention and
Combating: Where do we stand? held February 2-3, 2011 in Quebec
City.
Rui Fernandes participated on a panel on piracy
at the University of Toronto Law School's International Law Day
on February 5th.
Gordon Hearn will be speaking in St. Louis,
Missouri at the Annual Conference of the Transportation & Logistics
Council on April 4, 2011 on "Regulatory and Liability Aspects
of the Carriage of Goods into and out of Canada
Rui Fernandes will be speaking in Toronto
at the CBMU Loss Prevention Seminar on April 20th on "Trucking
Contracts of Carriage, Load Brokers and Cross Border Movements"
2. The Division
of Powers Set Out in the Constitution Act, 1987 and the Effect on
Transportation in Canada
Two recent Supreme Court of Canada aeronautics cases
highlight the conflict that continues to exist in the division of
powers between the provinces and the federal government. (*1) This
article will review the division of powers for aeronautics, navigation
and shipping, rail carriage and motor vehicle carriage. It will
also explore the current state of the law as it relates to resolving
conflicts where there is apparent overlapping jurisdiction. Finally,
this article will review the two recent Supreme Court of Canada
aeronautics cases.
Under the Canadian Constitution Act, 1867 the
federal government has legislative authority under section 91 to
make laws for the Peace, Order and Good Government of Canada in
relation to all matters not coming within the exclusive jurisdiction
of the legislature of the provinces. In addition, the federal government
is given exclusive legislation in relation to enumerated classes
of subjects, including in sub paragraph 10, navigation and shipping.
As well, under section 132 the federal government is given all powers
necessary or proper for performing the treaty of Canada or of any
Province, towards foreign countries. Under section 92(10) the provincial
legislature is given exclusive legislation relating to local works
and undertakings. The relevant exception to this section is a railway
connecting a province with another province.
Canadian courts have held that the field of aeronautics
belongs to the federal government by virtue of ss. 91(2) [regulation
of trade and commerce], (5) [postal service] and 132 of the Constitution
Act, 1867. The legislation dealing with aeronautics is effectively
federal legislation. Provincial legislation may affect aeronautics
may affect aeronautics indirectly. Such provincial legislation will
be valid provided that it is not a colourable attempt to control
or regulate aeronautics.
In the area of maritime law, the Supreme Court of
Canada in ITO-International Terminal Operators Ltd. v. Miida
Electronics Inc., [1986] 1 S.C.R. 752 made it clear that Canadian
maritime law is uniform throughout Canada. It is the maritime law
of England that has been incorporated into Canadian law and not
the law of any province.
The Parliament of Canada has the exclusive right to
regulate federal railways (connecting one or more provinces). In
addition, it has the power to legislate in relation to a railway
wholly situated within a province if it declares it to be a work
for the general advantage of Canada or of two or more provinces.
(*2).
Trucking is essentially regulated by the provinces.
Since 1954 the federal government has delegated its jurisdiction
over the regulation of extraprovincial motor vehicle transport to
the provinces. The Motor Vehicle Transport Act, 1954 [now,
R.S.C. 1985, (3d Supp.), c. 29] has been, since 1954, and continues
to be administered by the individual provincial transport boards.
The provinces have the power to regulate intraprovincial (within
the province) motor vehicle undertakings. Most provinces have legislation
determining when a licence (operating authority) is required, the
type of licence required, and the procedures for obtaining the appropriate
licence.
The division of powers debate has, at the Supreme
Court of Canada level, centered on aeronautics and on maritime law.
In Air Can. v. British Columbia (1989), 59 D.L.R. (4th) 161
the Supreme Court of Canada held that a provincial tax on the purchase
of gasoline was not ultra vires the province just because the purchasers
(airlines) consumed the majority of the gasoline outside of the
province. The tax was not a colourable attempt to regulate or destroy
a federal undertaking. Similarly, in Air Canada v. Ontario (Liquor
Control Board) (1997), 148 D.L.R. (4th) 193 the Court held that
provincial mark ups on liquor served to air travelers were not an
integral part of aeronautics as a federal undertaking and therefore
valid.
On the maritime side, in Q.N.S. Paper Co. v. Chartwell
Shipping Ltd. (1989), 62 D.L.R. (4th) 36 the Supreme Court of
Canada held that common law principles of agency applied to an issue
arising in a stevedoring contract in Quebec. The court held that
Canadian maritime law was a body of federal law, uniform throughout
Canada and applicable by all courts. The majority found that Canadian
maritime law was derived from English maritime law and included
the common law principles of contract and agency. The minority was
of the view that Canadian maritime law included principles of civil
and international law, as well as common law. L'Heureux-Dube J.
found that Canadian maritime law drew on a variety of sources including
the civil law of Quebec.
In Ordon Estate v. Grail [1998] 3 S.C.R. 437
the Court had to consider when provincial statutes of general application
apply to maritime negligence claims? Specifically the Court had
to consider:
a) Did the provisions of the Ontario Family Law
Act allowing claims for loss of care, guidance and companionship
by dependants (including common law spouses and siblings) apply
to vessel accidents?
b) Did the provisions of the Ontario Trustee Act
allowing the estate of a deceased person to bring an action for
damages apply to vessel accidents?
The Supreme Court of Canada held that a provincial
statute can be applicable to a maritime negligence action where,
through a four part test, the court is satisfied that the provincial
laws do not go to the core of the federal jurisdiction. If they
do, those provincial laws will be read down.
The four part test is as follows:
a) Firstly, it must be determined whether the matter
at issue is within the exclusive federal legislative competence
over navigation and shipping, i.e. is the subject matter under consideration
so integrally connected to maritime matters so as to be legitimate
Canadian Maritime Law;
b) If the answer to the above is 'yes', the second
step is to determine whether Canadian Maritime Law provides a counterpart
to the statutory provision. If it does, Canadian Maritime Law applies;
c) If there is no counterpart provided by Canadian
Maritime Law, the third step is to consider whether the non-statutory
Canadian Maritime Law should be altered in accordance with the principles
of judicial reform established by the court, i.e. to reflect the
changing social, moral and economic fabric of the country. Such
changes should only be incremental. Changes with complex or uncertain
ramifications should be left for the legislature. Additionally,
in making changes to Canadian Maritime Law, the courts should consider
the fabric of the broader international community of maritime states
and the desirability of maintaining uniformity in maritime law;
d) Finally, and only if the matter cannot be resolved
through the application of steps 1 through 3, the court must determine
whether the provincial statute is constitutionally applicable to
a maritime claim. The Supreme Court noted that matters within exclusive
federal jurisdiction are subject to provincial statutes of general
application provided the provincial laws do not go to the core of
the federal jurisdiction. If they do, the provincial laws will be
read down.
The Supreme Court of Canada in 2007 refined the division
of power test in a non-transportation case (although it made comments
regarding other cases including transportation cases). In Canadian
Western Bank v. Alberta, [2007] 2 S.C.R. 3, 2007 at issue was
the application of certain licensing provisions of the Alberta
Insurance Act to federally regulated banks selling insurance
products as authorized by the federal Bank Act. The Supreme
Court detailed the proper approach to and analysis to be applied
to division of powers disputes.
The Court began with a brief discussion of the principles
of federalism noting that the division of powers in the Constitution
was designed to uphold diversity within a single nation. The reconciliation
of unity with diversity was said to be the fundamental objective
of federalism. This was achieved through the division of powers
in the Constitution; however, the Court noted that, as with any
constitution, the interpretation of those powers must continually
evolve and be tailored "to the changing political and cultural
realities of Canadian society." The various constitutional
doctrines that have been developed by the courts must be designed
to further the "guiding principles of our constitutional order,"
to reconcile diversity with unity and to facilitate "co-operative
federalism."
The Court examined the constitutional doctrines and
the interplay between them. These doctrines are pith and substance,
inter-jurisdictional immunity and paramountcy.
Pith and Substance
The Court noted that every "division of powers"
case must begin with an analysis of the pith and substance of the
impugned legislation. It involves "an inquiry into the true
nature of the law in question for the purpose of identifying the
matter to which it essentially relates". If the pith and substance
can be related to a subject matter within the legislative competence
of the enacting legislature then the law is constitutional and valid.
However, if the statute relates to a matter over which the other
level of government has exclusive jurisdiction, then the statute
is unconstitutional and invalid or void in its entirety.
A determination of the pith and substance of a law
involves a consideration of both "the purpose of the enacting
body and the legal effect of the law." The pith and substance
doctrine recognizes and accepts that there may be incidental intrusions
into areas within the constitutional jurisdiction of the other legislature.
These are acceptable and do not render a law ultra vires provided
its dominant purpose is valid. Incidental effects are effects that
are collateral and secondary to the mandate of the enacting legislature.
The pith and substance doctrine also recognizes that it is almost
impossible to avoid incidentally affecting matters within the jurisdiction
of the other legislature. The doctrine accepts that some matters
have both provincial and federal aspects, are impossible to categorize
under a single head of power, and that both levels of government
can legislate in relation to such matters. This is known as the
"double" or "dual aspect" doctrine. The double
aspect doctrine ensures that the policies of elected legislators
of both Parliament and the provincial legislatures can be adopted
as valid legislation on a single subject, depending upon the perspective
from which the legislation is considered or the the various aspects
of the matter in question. However, the Court also recognized that
the scale of incidental effects could "put a law in a different
light so as to put it in another constitutional head of power."
In such a case, the statute could be read down. The Court acknowledged
that there were circumstances where it was necessary to protect
the powers of one level of government from intrusions by the other.
For this purpose, the courts have developed the doctrines of "inter-jurisdictional
immunity" and "paramountcy".
Inter-jurisdictional Immunity
This doctrine recognizes that the Canadian Constitution
is based on an allocation of exclusive powers to both levels of
government, not concurrent powers, although these powers are bound
to interact. The Court held that it is a doctrine of limited application
that should be restricted to its proper limit. This means, in practice,
the doctrine will be largely reserved for those heads of power that
deal with federal things, persons or undertakings, or where in the
past its application has been considered absolutely indispensable
or necessary to enable Parliament or a provincial legislature to
achieve the purpose for which the exclusive legislative jurisdiction
was conferred. The Court referred to the case of Bell Canada
v Quebec, [1988] 1 S.C.R. 749, the leading case on inter-jurisdictional
immunity, and noted that the doctrine is based upon the premise
that each of the classes of subjects in sections 91 and 92 of the
Constitution Act, 1867 have a "basic, minimum and unassailable
content" that is immune from intrusion by the other level of
government.
The Court next proceeded to criticize the inter-jurisdictional
immunity doctrine. The Court then developed a more restricted approach
to inter-jurisdictional immunity.
"For all these reasons, although the
doctrine of inter-jurisdictional immunity has a proper part to
play in appropriate circumstances, we intend now to make it clear
that the Court does not favour an intensive reliance on the doctrine,
nor should we accept the invitation of the appellants to turn
it into a doctrine of first recourse in a division of powers dispute."
[paragraph 47]
The limitations imposed by the Court on the doctrine
of inter-jurisdictional immunity are:
(1) There must be actual "impairment" (without
necessarily "sterilizing" or "paralyzing") of
the "core" competence of the other level of government
before the doctrine can be applied. The difference between "affects"
and "impairs" is that "impairs" implies adverse
consequences. Merely "affecting" the core is not sufficient;
and
(2) The "core" of a legislative power should
not be given too wide a scope. The "core" is what is "vital
or essential", something "absolutely indispensable or
necessary". It is not co-extensive with every element of an
undertaking. The Court then reviewed the jurisprudence to facilitate
an understanding of the limited scope of the inter-jurisdictional
immunity doctrine. The court then proceeded to review a number of
cases including transportation cases.
Paramountcy
The Court then turned to the doctrine of paramountcy,
which comes into play when the operational effects of provincial
legislation are incompatible with federal legislation. Where the
paramountcy doctrine applies, the federal law prevails and the provincial
law is inoperative to the extent of the incompatibility. This doctrine
was said to be "much better suited to contemporary Canadian
federalism."
The Court recognized that the degree of incompatibility
required to invoke the doctrine of paramountcy has been a source
of difficulty. Before this doctrine can be applied, there must be
"actual conflict" or "operational conflict"
between the provincial and federal law in the sense that one says
"yes" and the other "no". This requires more
than a "duplication of norms" and recognizes that a provincial
law may supplement federal law. In addition, the doctrine will apply
where the provincial law frustrates the purpose of a federal law
even though there is no direct violation of the federal law. This
requires more than that the field be "occupied." There
must be an incompatible federal legislative intent and, when looking
for this intent,
"the courts must never lose sight of
the fundamental rule of constitutional interpretation that, 'when
a federal statute can be properly interpreted so as not to interfere
with a provincial statute, such an interpretation is to be applied
in preference to another applicable construction which would bring
about a conflict between the two statutes' " [paragraph 75]
Order of Application of the Doctrines
The Court discussed the proper order of the application
of the doctrines. Specifically, the order begins with the "pith
and substance" analysis and then proceeds to the "paramountcy"
analysis. The inter-jurisdictional immunity analysis is, in general,
reserved for situations already covered by precedent.
"Although our colleague Bastarache J.
takes a different view on this point, we do not think it appropriate
to always begin by considering the doctrine of inter-jurisdictional
immunity. To do so could mire the Court in a rather abstract discussion
of "cores" and "vital and essential" parts
to little practical effect. As we have already noted, inter-jurisdictional
immunity is of limited application and should in general be reserved
for situations already covered by precedent. This means, in practice,
that it will be largely reserved for those heads of power that
deal with federal things, persons or undertakings, or where in
the past its application has been considered absolutely indispensable
or necessary to enable Parliament or a provincial legislature
to achieve the purpose for which exclusive legislative jurisdiction
was conferred, as discerned from the constitutional division of
powers as a whole, or what is absolutely indispensable or necessary
to enable an undertaking to carry out its mandate in what makes
it specifically of federal (or provincial) jurisdiction. If a
case can be resolved by the application of a pith and substance
analysis, and federal paramountcy where necessary, it would be
preferable to take that approach, as this Court did in Mangat.
In the result, while in theory a consideration of inter-jurisdictional
immunity is apt for consideration after the pith and substance
analysis, in practice the absence of prior case law favouring
its application to the subject matter at hand will generally justify
a court proceeding directly to the consideration of federal paramountcy."
[paragraphs 77 and 78]
The Supreme Court of Canada released a concurrent
decision with the Canadian Western Bank case. In British
Columbia (Attorney General) v. Lafarge Canada Inc. [2007] SCC
23 Lafarge Canada Inc. wished to build an integrated ship offloading/concrete
batching facility on waterfront lands owned by the Vancouver Port
Authority, a federal undertaking constituted pursuant to the 1998
Canada Marine Act. The Court of Appeal found that the Vancouver
Port Authority lands were "public property" within the
meaning of s. 91(1A) of the Constitution Act, 1867 and declared
the City's zoning and development by-law to be inapplicable to the
proposed development. The Supreme Court of Canada issued this decision
at the same time as it issued the Canada Western Bank v. Alberta
decision above, referring to its analysis in Canada Western Bank
for its result in Lafarge. The Court noted that the development
of waterfront lands could come under either federal or provincial
jurisdiction, but applied the doctrine of paramountcy and held that
the City by-law was not applicable. In reaching this conclusion,
the Court considered and rejected the doctrine of inter-jurisdictional
immunity. The Court repeated that the doctrine of inter-jurisdictional
immunity should generally not be applied where the subject matter
has a double aspect and both the federal and provincial governments
have a compelling interest. Further, the Court repeated that the
inter-jurisdictional immunity doctrine does not apply to every element
of a federal undertaking but is restricted to the "essential
and vital elements" of the undertaking. The land use controls
in the Canada Marine Act were not a core or vital element
of the federal power over navigation and shipping and therefore
the inter-jurisdictional immunity doctrine did not prevent the province
and City from legislating. However, the Court went on to find that
the preconditions for the application of the paramountcy doctrine
were met.
It is noteworthy that when determining whether the
land use controls under the Canada Marine Act were in "pith
and substance" in relation to the navigation and shipping power,
the Supreme Court said that this power included maritime law.
"The methodology for reconciling the
exercise of federal power and provincial power is canvassed at
length in Canadian Western Bank and will not be repeated
here. The initial step, as always in cases involving the division
of legislative powers, is to identify the "pith and substance"
of the respective enactments. As mentioned earlier, the CMA in
relation to non-Crown lands is supported by the federal legislative
power relating to navigation and shipping under s. 91(10), which
is complemented by such provisions as s. 91(9) (beacons, buoys,
etc.), and s. 91(11) (quarantine and marine hospitals). The scope
of the s. 91(10) power includes maritime law which establishes
the framework of legal relationships arising out of navigation
and shipping activities. The federal power also includes the infrastructure
of navigation and shipping activities." [paragraph 62]
Importantly, the Court also applied the "integrally
connected" test from I.T.O Terminals to determine the
pith and substance of the legislation.
In December 2010 the Supreme Court of Canada rendered
two decisions involving aeronautics and provincial federal division
of powers.
In Quebec (Attorney General) v. Canadian Owners
and Pilots Association, [2010] 2 S.C.R. 536 the Supreme Court
decision commences with the statement:
"Air transportation is an indispensable
part of modern life. Yet as our dependence on aircraft has grown,
the demands of aviation have increasingly collided with other
interests. Aircraft must take off and land. For this they need
soil or water. The soil or water they use is not available for
other purposes. The question posed in this and the companion appeal,
Quebec (Attorney General) v. Lacombe, 2010 SCC 38 (CanLII),
2010 SCC 38, is which level of government has the final say on
where airfields and aerodromes may be located." [paragraph
1]
The case concerns an aerodrome that was built by two
private citizens on land zoned as agricultural and was registered
under the federal Aeronautics Act. The province took the
position that this violated its law and the aerodrome had to be
removed. The Canadian Owners and Pilots Association ("COPA")
and the Attorney General of Canada argued that the province should
not be able to shut down the aerodrome, for a variety of reasons.
Firstly, they stated that the provincial legislation, insofar as
it affects the location of aerodromes, is ultra vires, and hence
invalid. Secondly, they argued that the location of aeronautical
facilities lies at the protected core of the federal aeronautics
power, which the doctrine of inter-jurisdictional immunity protects
from any adverse provincial effect. Thirdly, they said that, in
any event, if the provincial legislation were valid and applicable,
it would be inoperative under the doctrine of federal paramountcy.
Like the Quebec Court of Appeal, the Court concluded that the provincial
legislation limiting non-agricultural land uses in designated agricultural
regions was valid.
However, it found that the provincial law impaired
the protected core of the federal jurisdiction over aeronautics,
and was inapplicable to the extent that it prohibited aerodromes
in agricultural zones. The Court applied the doctrine of inter-jurisdictional
immunity. It added that, as set out in Canadian Western Bank
v. Alberta, the application of inter-jurisdictional immunity
is generally limited to the cores of every legislative head of power
already identified in the jurisprudence. There was ample jurisprudence
to establish that the location of an aerodrome was a protected core
of federal power. The Court added that this conclusion rendered
it unnecessary to consider federal paramountcy, but, in any event,
it found that this doctrine had no application on the facts of this
case. Consequently, the Court dismissed the appeal on the basis
of inter-jurisdictional immunity.
In Quebec (Attorney General) v. Lacombe, [2010]
2 S.C.R. 453, a company carried on a business of air excursions
on Gobeil Lake in the municipality of Sacré?Coeur. The company
obtained a licence from the federal Department of Transport, issued
pursuant to regulations under the federal Aeronautics Act
authorizing it to provide the services. It registered its aerodrome
pursuant to the Canadian Aviation Regulations. Gobeil Lake
is used by vacationers for fishing, swimming and other outdoor activities.
In 1995, municipal zoning by-law 210, adopted pursuant to the Quebec
Act respecting land use planning and development, was amended
by by-law 260. Under by-law 210, Gobeil Lake was situated in zone
33-RF. Schedule B of that by-law contains zoning charts for the
municipality that authorize uses in each zone. Initially, the zoning
chart did not contain a box for "water aerodromes" or
"aeronautics". by-law 260 split zone 33-RF in two, assigning
part of it to a new zone 61-RF. Gobeil Lake remained in zone 33-RF.
by-law 260 went on to add Note N-10 to the zoning chart for zone
61-RF, specifically authorizing the construction of rafts, wharves,
or other structures for the landing of float planes and the deplaning
of passengers. The municipality applied for an injunction ordering
the company to cease its aviation activities on Gobeil Lake on the
ground that operation of the aerodrome and the associated business
in zone 33-RF violated the by-law. The Superior Court found that
the legislation at issue was a valid municipal zoning by-law, with
only incidental effects on the federal subject of aeronautics. The
Court of Appeal set aside that decision, concluding that the by-law,
though valid, could not apply to the aerodrome because of the doctrine
of inter-jurisdictional immunity. The Supreme Court of Canada dismissed
the appeal.
The Chief Justice of the Court introduced
the case as follows:
The waters of Gobeil Lake have of late been
clouded by conflict. Seeking to preserve the tranquility of their
rustic setting, owners of summer homes spurred their municipal
government to outlaw an aerodrome on the lake. Anabelle Lacombe
and Jacques Picard, the operators of this aerodrome, challenged
the validity of the municipal prohibition on the ground that the
federal Parliament has exclusive jurisdiction to determine the
location of aerodromes. Thus, the future of aeronautics on Gobeil
Lake comes before this Court as a question of federalism, pitting
the local interest in land use planning against the national interest
in a unified system of aviation regulation. [paragraph 1]
The Chief Justice, together with Justices Binnie,
Fish, Abella, Charron, Rothstein and Cromwell, held that while the
preamble of by-law 260 states that its purpose is to find a balance
between the activities of summer home owners and more commercial
land uses, the evidence revealed that the real object of the by-law
was not related to zoning and did not fall under any provincial
head of power. Rather, its essence was to regulate the location
of water aerodromes in the municipality, a matter within the exclusive
federal jurisdiction over aeronautics. Since by-law 260 was, in
pith and substance, about the regulation of aeronautics, it fell
outside provincial jurisdiction. The Supreme Court applied the pith
and substance doctrine. The Court went on to find that it did not
accept the province's contention that the federal and provincial
governments enjoy concurrent jurisdiction with respect to the placement
of aerodromes. The by-law was in pith and substance aeronautics
and did not fall within a provincial head of power. Unlike the decision
it released concurrently in Quebec (Attorney General) v. Canadian
Owners and Pilots Association the by law was not valid provincial
legislation. Justice Lebel arrived at the same result but on a different
basis. Justice Lebel found that the by-law did not apply to the
respondents on the basis of paramountcy. Justice Deschamps (in dissent)
would have found the by-law valid. Justice Deschamps criticizes
the decision of the Chief Justice, stating:
My conclusion is therefore diametrically opposed
to that of the Chief Justice. There are two main reasons for our
difference of opinion.
The first flows from my reading of the municipal
by-law. My understanding of it is that aviation activities are
validly authorized in certain zones and that the adoption of by-law
No. 260 did not change the rules applicable outside the new zone
it created. The fact that aviation activities may have been engaged
in on Gobeil Lake prior to 1995 confers no right on the respondents.
Indeed, those activities are what triggered the process that led
to the adoption of by-law No. 260 to ensure, inter alia, that
the interests of vacationers on Gobeil Lake could be protected.
The 1995 amendment also provided special accommodation for aviation
activities on Long Lake, which I consider to constitute a minor
functional overflow of jurisdiction, and therefore to be valid.
Since I found the by-law in issue to be valid, I then had to determine
whether it was applicable, and since I found that it was also
applicable, I then had, finally, to determine whether it was operative.
I identified no problem whatsoever in this last enquiry, either.
The second reason for our difference of opinion
is more fundamental and is not strictly limited to the facts of
this case. I see in the Chief Justice's reasons both in this case
and in COPA a modification of the doctrine of inter-jurisdictional
immunity, a questioning of the double aspect and ancillary powers
doctrines and an invitation to apply the doctrine of paramountcy
in cases that do not involve conflict, despite the fact that all
these doctrines were reviewed only a few years ago. This has an
impact on legal certainty. All these changes point in the same
direction, that of a more dualistic or even a more centralized
form of federalism. This approach opens the door to predation
upon provincial jurisdiction. [paragraphs 182-184]
It appears that even Supreme Court of Canada justices
differ in their views of how the division of powers and federalism
works or should work in Canada.
Rui M. Fernandes
Endnotes
*1 See Quebec (Attorney General) v.
Lacombe, [2010] 2 S.C.R. 536 and Quebec (Attorney General)
v. Canadian Owners and Pilots Association, [2010] 2 S.C.R. 453.
*2 See section 92(10)(c) Constitution Act, 1867 and section
89 Canada Transportation Act, S.C. 1996, c. 10.
3. THE "NULLIFICATION OF COVERAGE" DOCTRINE
IN ONTARIO: CABELL v. THE PERSONAL INSURANCE COMPANY
A recent decision of the Ontario Court of Appeal nicely
illustrates principles involved in the interpretation of policies
of insurance. This decision - Cabell v. The Personal Insurance
Company, just released - also indicates that the "Nullification
of Coverage" doctrine is here to stay.
The Facts
The Cabell Family had an insurance policy with The
Personal Insurance Company for a residence which had an in-ground
swimming pool. The swimming pool was damaged as a result of what
is known as "hydrostatic uplift pressure". This was a
phenomenon whereby due to the build-up of ground water, the pool
was forced to lift out of the ground. This displacement, amongst
other things, caused the pool structure to crack, resulting in significant
damage.
The property insurance policy in question included
coverage over "Permanently installed outdoor equipment on the
premises, including outdoor antennae, fences, retaining walls and
driveways".
Part 3 of the policy contained "Common Exclusions"
which provided as follows:
We do not insure:
(11) settling, expansion, contraction, moving, bulging, buckling
or crackling of any insured property, except resulting damage
to building glass.
. . .
(18) loss or damage:
- to outdoor radio, TV and communication antennae
(including satellite receivers) and their attachments caused by
windstorm, hail or collapse;
- to outdoor swimming pools, hot tubs, spas,
saunas and their equipment, their specific fittings and decks
or patios attached to the swimming pools, hot tubs, spas or saunas
but detached from the building;
- caused by vermin, insects, rodents, raccoons
or birds except loss or damage to building glass.
The Cabells had, however, also purchased with the
policy Endorsement "33b" which amended or supplemented
the policy as follows:
Outdoor In-ground Swimming Pool, Hot
Tub, Spa and Sauna Coverage
We insure your outdoor in-ground swimming
pool… their equipment and specific fittings and decks or
patios attached to the swimming pool... against all risks of direct
physical loss or damage, including damage caused by freezing or
the weight or ice, snow or wet snow. We will also pay for the
cost incurred to repair or replace the damage property.
All other terms, conditions and exclusions
of this policy remain unchanged, including the exclusions regarding:
. . .
- loss or damage caused by wear and tear,
deterioration, defect or mechanical, electrical or electronic
breakdown or disturbance, rust or corrosion, dampness of atmosphere,
extremes of temperature, wet or dry rot, fungi or spores, but
resulting damage to other property caused by a peril not otherwise
excluded its insured.
. . .
The above excerpt, being an exclusion to the coverage
extended in Endorsement 33b, was one of a number of exclusions listed.
Before addressing the analysis and outcome of this
case, it is to be noted that there was also one other part of the
policy considered to be of importance. This concerned a separate
endorsement (22b), also purchased by the Cabells, providing as follows:
Fire, Explosion and Smoke Damage Resulting
from an Earthquake
Property coverages
Perils insured
You are insured against direct physical loss
or damage to the property caused by fire, explosion or smoke which
results from earthquake shock, subject to the exclusions and conditions
of your policy.
Loss or damage not insured:
The following exclusions are additional to those contained in
the Property Coverages section of your policy.
We do not insure loss or damage caused:
- Directly or indirectly by floods, surface
waters, ice, water borne objects, waves or tides, whether or not
attributable to an earthquake shock;
- by your failure to use all reasonable means
to save and preserve the property;
- by earthquake shocks occurring before this
endorsement is effective or after its expiration period…
The Dispute
The Cabells filed a claim on the insurer for the loss
to their swimming pool. The insurer denied coverage on the basis
of the policy exclusions - in particular, #11 cited above ("settling,
expansion", etc.). The Cabells commenced litigation for a declaration
that there was coverage under the policy in question for the loss
of the swimming pool. The judge initially hearing the matter held
that the exclusion applied and therefore the loss was not covered.
The judge ruled that the endorsement (33b) is not independent from
the policy itself. Accordingly, the Common Exclusions in the policy
(i.e. #11) cited above apply to the endorsement coverage as well,
except to the extent that any policy exclusions were amended by
that endorsement. In particular, exclusion 11 cited above was seen
to apply, (excluding coverage for the damage to the swimming pool)
since the damage fell within the words "settling, expansion,
contraction, moving, bulging, buckling or cracking of any insured
property". The judge rejected the insured's submission that
only the exclusions expressly referred to in endorsement 33b applied,
as being separate or stand alone coverage and that the policy Common
Exclusions did not apply.
It is interesting to note that the judge rejected
the Cabell's other argument, that the application of the exclusion
would in effect nullify or render the coverage meaningless as was
purchased with endorsement 33b by noting that there was no evidence
as to how much outdoor pools are in fact exposed to settling, expansion,
contraction or other like incidents for it to be concluded that
coverage would be effectively "nullified". The judge considered
the question of the nullification of coverage as involving a question
of "reasonable expectations", which assessment required
objective evidence - not just legal argument or supposition.
For example, the type of evidence that would be helpful "could
include objective evidence of surrounding circumstances that might
inform the expectations of reasonable outdoor pool owners regarding
the risks of outdoor pool ownership and where hydrostatic lift and,
more generally, severing, expansion, contraction, moving, bulging
or cracking fit into the hierarch of those risks". Only if
there were such evidence could a court assess whether Common Exclusion
11 was inconsistent with the main purpose of the insurance coverage,
such that the enforcement of the exclusion could be said to virtually
nullify coverage (in which case the court would in effect "read
down" or ignore the exclusion and "find coverage").
The Cabells appealed this ruling that resulted in their loss not
being covered.
At the Court of Appeal
In its analysis, the Court of Appeal reviewed general
principles of insurance policy interpretation. This decision provides
a very handy review of these key concepts: (1) A clause in an insurance
policy providing coverage would be broadly interpreted in favour
of the insured; (2) An exclusion clause limiting coverage will be
strictly interpreted; (3) Since insurance contracts are contracts
of "adhesion", any ambiguity in the policy will be construed
against the insurer, applying the contra proferentem doctrine, and
(4) These principles of interpretation cannot be used to create
ambiguities. If an exclusion clause is clear as to its meaning,
it is to be applied according to its terms, subject to the "nullification
of coverage doctrine" (discussed below).
The Court of Appeal cited another principle of interpretation:
(5) As a general rule, endorsements are not read or considered independently
of the policy. As Justice Lang cited in the Pilot Insurance Company
v. Sutherland (2007), 86 O.R. 3d (789) C.A. at paragraph 21:
An endorsement changes or varies or amends
the underlying policy. While it may be comprehensive on the subject
of the particular coverage provided in the endorsement, it is
built on the foundation of the policy and does not have an independent
existence.
However, the Court of Appeal in its analysis went
on to note that if a limitation of apparent coverage in an endorsement
is ambiguous, the limitation should be set out in the endorsement
itself.
The Court addressed the "doctrine of nullification
of coverage". This doctrine is understood to have originated
in the Supreme Court of Canada case of Indemnity Insurance Company
of North America v. Excel Cleaning Service, [1954] 1 S.C.R.
169 at pp. 177-80:
Such a construction would largely, if not
completely, nullify the purpose for which the insurance was sold
- a circumstance to be avoided, so far as the language used will
permit.
. . .
It is… a general rule to construe that
language used in a manner favourable to the insured.
The Court of Appeal also cited an often quoted excerpt
from another leading Supreme Court of Canada case in insurance policy
interpretation of Consolidated Bathurst Export Lt. v. Mutual
Boiler Machinery Insurance Company, [1980] 1 S.C.R. 888 (at
pp. 901-902):
Even apart from the doctrine of contra preferentem
as it may be applied in the construction of contracts, the normal
rules of construction lead a court to search for an interpretation
which, from a whole of the contract, would appear to promote or
advance the true intent of the parties at the of entry into the
contract. Consequently, literal meaning should not be applied
where to do so would bring about an unrealistic result or a result
which would not be contemplated in a commercial atmosphere in
which the insurance was contracted. Where words may bear two constructions,
the more reasonable one, that would produce a fair result, must
certainly be taken as the interpretation which would promote the
intention of the parties. Similarly, an interpretation which defeats
the intentions of the parties and their objective in entering
into the commercial transaction in the first place should be discarded
in favour of an interpretation of the policy which promotes a
sensible commercial result. It is trite to observe that an interpretation
of an ambiguous contractual provision which would render the endeavour
on the part of the insured to obtain insurance protection nugatory,
should be avoided. Said another way, the courts should be loath
to support a construction which would either enable the insurer
to pocket the premium without risk or the insured to achieve a
recovery which could neither be sensibly sought nor anticipated
at the time of the contract.
Following this decision, the Court of Appeal of Ontario
has adopted the "nullification of coverage doctrine" in
a number of cases, even in the absence of an ambiguity culminating
in the decision of Zurich Insurance Company v. 686234 Ontario
Limited (2002), 62 O.R. (3d) 447 (C.A.) at para. 28:
. . . it is clear that this court has concluded
that even though an exclusion clause may be clear and unambiguous,
it will not be applied where (1) it is inconsistent with the main
purpose of the insurance coverage and where the result would be
to virtually nullify the coverage provided by the policy; and
(2) where to apply would be contrary to the reasonable expectations
of the ordinary provision as to the coverage purchased.
The Court of Appeal noted in this case that the damage
to the pool in question was clearly excluded by Common Exclusion
18, cited above. The Court went on to note that the only reasonable
interpretation of Endorsement 33b is that it at least amends the
policy so that Common Exclusion 18 (referring to outdoor swimming
pools) would no longer apply. The appellants submitted that Endorsement
33b is ambiguous as to whether any of the other Common Exclusions
in the policy itself continued to apply (such as #11), pointing
to the specific listing to some of the Common Exclusions
in the Endorsement itself. Notwithstanding that Endorsement 33b
contained the prefatory language of "all other terms, conditions
and exclusions of this policy remain unchanged…" the Cabells
argued on the appeal that if the policy was intended to incorporate
all of the Common Exclusions into the Endorsement then there would
have been no need for it to list certain of those Common Exclusions
from the larger set of exclusions that already appeared in the policy
language itself.
The issue, of course, falls on exclusion 11 ("settling,
expansion, contraction, moving, bulging, buckling or cracking or
any insured property…"). Would exclusion 11 in effect
"survive" or "remain", despite the purchase
of Endorsement 33b, it now being clear that exclusion 18 (whereby
the policy itself does not insure swimming pools) was removed by
virtue of the endorsement? Or, does exclusion 11 get ignored, in
favour of the Cabells, because the insurer saw fit to "reintroduce"
only certain Common Exclusions (and not #11) into Endorsement
33b?
Accordingly, counsel for the insureds argued on the
appeal that as the Endorsement featured specific reference to various
Common Exclusions as otherwise contained in the policy, and the
fact that it did not contain exclusion 11 - the problematic
exclusion cited above - that the Endorsement should be read independent
of the policy without Common Exclusion 11 applying to remove this
claim from coverage. In effect, Endorsement 33b was described as
a "trap" for the unwary, given that the homeowners would
read the Endorsement and understand that it covers all risks of
direct physical loss or damage to their pool, save and except the
express exclusions contained therein…
The Court of Appeal found that Endorsement 33b was
ambiguous in this regard, and that the ambiguity should be interpreted
against the insurer.
Reference was made earlier to Endorsement 22b. The
Court noted that, in contrast to Endorsement 33b, Endorsement 22b
was clear in terms of the exclusions that were meant to apply by
specifically employing the following language: "the following
exclusions are additional to those contained in the Property Coverages
section of your policy". Accordingly, the homeowners, when
reading Endorsement 22b, would reasonably be expected to note that
they must also look to the Common Exclusions in the policy,
and at the other "additional" exclusions in that
Endorsement, to determine what scope of coverage they would enjoy.
There was no trap for the unwary in endorsement 22b, unlike endorsement
33b.
While the Court of Appeal accordingly acknowledged
the legitimacy of the argument that Endorsement 33b was ambiguous,
the court actually resolved the case in favour of the insureds by
resorting to the "nullification of coverage doctrine"
referred to above.
The Nullification of Coverage Doctrine
Recall that the judge hearing the matter in first
instance found against the Cabells on the nullification of coverage
issue on the basis that there was no evidence that the effect of
Common Exclusion 11 was to nullify coverage, there being no objective
evidence as to the reasonable expectations of the parties on the
coverage that was purchased. The Court of Appeal noted that it may
well be that there was some evidence in prior cases, from which
a determination could be made about nullification of coverage in
light of the reasonable expectations of the parties, but that there
is no hard requirement that there exist evidence, or proof in this
regard. Accordingly, it may not necessarily be the case that the
court will have evidence before it to be able to determine the reasonable
expectations of the parties. There is accordingly no clear case
law precedent placing a burden of proof on an insured to lead evidence
that an insurer's interpretation or the application of a policy
exclusion would nullify coverage. Rather, such a deduction could
perhaps be made in appropriate cases on the basis of patent or notorious
knowledge, or on simple logic having regard to the general circumstances.
While in some cases such evidence may be necessary (especially,
as the Court of Appeal put it, "if the case concerns some particularly
arcane set of circumstances"), as a general rule in cases such
as this the "court is in a good position to determine what
are the most obvious risks for which an ordinary homeowner's policy
was issued". If the court is able to determine on an objective
basis that the insurer's interpretation would render nugatory coverage
for the most obvious risks for which the policy was issued, this
would then present a tactical burden for the insurer. It will be
for the insurer to then show that the effect of its interpretation
would not virtually nullify the coverage, and would not be contrary
to the reasonable expectations of the ordinary person as to the
coverage purchased.
This is a reasonable approach given that the insurer
is in an ideal position to show that, contrary to what might appear
to be the case, that the policy or endorsement does in fact provide
meaningful coverage even in light of how it interprets the policy
in the case in question. For example, the insurer would have access
to its records and the experience in the industry and would be able
to show that claims have been paid for loss or damage not falling
within the exclusion.
The Result at the Court of Appeal
The Court of Appeal found that the Common Exclusion
#11 would "render nugatory the coverage that the most obvious
of risks" for which the coverage was issued. While Common Exclusion
11 excluded coverage, as noted above, for "settling, expansion,
contraction" and the like, the Court of Appeal noted "it
is difficult to conceive of any damage or loss to an in-ground swimming
pool that would not come within that exclusion (i.e., exclusion
11), especially the word "cracking". In what I consider
to be a brilliant analysis, the Court of Appeal, as a matter of
considering the insurer's position on the matter, tried to conceive
of a scenario whereby an incident might still be covered by Endorsement
33b, not otherwise excluded by the Common Exclusions and, in particular,
exclusion 11, thereby showing a meaningful "net" value
or protection for the insured. The court considered the only loss
that might be covered by Endorsement 33b, when read together with
and not excluded by the Common Exclusions was that covered by Common
Exclusion 12 which reads as follows:
We do not insure:
(12) marring or scratch of any property unless
caused by impact by land vehicle, aircraft, satellite or spacecraft,
riot, vandalism, hail, windstorm, theft or attempted theft or
transportation as defined in exclusion (7) above.
As noted by the Court of Appeal, it hardly seems likely
that the Cabells would have purchased Endorsement 33b if they knew
it would only cover marring or scratching given the $500 deductible;
or that it was limited to marring and scratching from the impact
of a land vehicle, aircraft, satellite or spacecraft… None
of these seem to be very likely candidates for damage to an in-ground
outdoor pool.
Accordingly, the court found that the application
of Common Exclusion 11 to Endorsement 33b would virtually nullify
coverage. Such a result could not have been within the reasonable
expectation of the parties to the insurance contract.
Accordingly, without having regard to or having to
determine whether or not there were ambiguities in the policy, on
the basis of the "nullification of coverage doctrine"
in and of itself the Court of Appeal was able to find coverage for
this loss. Endorsement 33b was in effect to be read on its own as
Common Exclusion 11 would essentially destroy any meaning behind
its purchase.
Conclusion
This case is of importance as a further attempt by
the courts to apply commercial reason and practicality in the interpretation
of insurance contracts, which from many perspectives is a positive
development. However, we are seeing an increasing departure from
the conventional judicial approach that policies are to be interpreted
only by the interpretation of the language in the policies. That
is, even without an ambiguity in the policy, there is now a certain
degree of "judicial activism" to resort to the judicial
concept of "nugatory" or meaningless coverage, or what
"reasonable expectations" were in buying a policy. As
to exactly where this degree of judicial activism will go in the
future remains to be seen, but in the meantime, this puts an obvious
premium on insurers being precise in terms of identifying their
underwriting intent in the insurance products that they sell.
M. Gordon Hearn
4. Competition Regulators Target Transportation
Industry
In the wake of recent guilty pleas (accompanied by
the payment of multi-million dollar fines) by participants in the
air cargo, container/intermodal shipping industries in Canada, the
US and Europe, it is clear that Canadian and international competition
law regulators are targeting the transportation industry. This is
compounded by the existence of leniency programs that reward individuals
and companies for alerting competition authorities to illegal behaviour
that they were not aware of - thereby increasing the likelihood
that the current investigations may expand into new areas within
the industry.
For Canadian transportation industry firms, this increased
scrutiny comes closely on the heels of major changes to the criminal
conspiracy provisions of the Competition Act. Previously, Canadian
law required the prosecution to prove that the conduct at issue
resulted in an "undue" lessening of competition. The new
conspiracy law does away with this element - with the result that,
simply entering into a prohibited agreement (agreements to fix prices,
allocate customers/ markets or reduce output) regardless of its
effect on competition, can result in a conviction. At the same time
the law was changed to make it easier to obtain convictions, the
penalties were increased to include fines of up to $25 million and/or
jail terms of up to 14 years. As a result of these changes, there
has been a considerable increase in enforcement by the Competition
Bureau. In addition to criminal liability, these types of agreements
also give rise to civil liability - typically pursued by way of
class action lawsuits.
In addition the changes to the criminal provisions
of the Competition Act, additional changes were made to allow the
Competition Bureau to challenge legitimate agreements between competitors
(for example joint ventures or shared service agreements) where
they result in a substantial lessening or prevention of competition.
While the remedy in these cases is an order modifying or ending
the relationship, this can have significant business implications
for the companies involved.
In many ways, the combination of the changes to Canadian
competition law and the recent criminal investigations are something
of a perfect storm for transportation industry participants. That
being said, there are many things that companies can do to proactively
manage their competition law risk. Prime examples of this include
implementing or updating practical compliance policies and employee
education programs, both of which are cost-effective ways for companies
to identify and hopefully avoid the potential rocks and shoals in
this area.
[Reprinted with permission by Chris Hersh]
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