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Newsletters > March 2011

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In this issue:
1. Firm and Industry News
2. Captains & Engineers Allowed to Form Bargaining Unit
3. Update on Ship Bunkers and Necessaries
4. Improper and Unsupported Allegations of Fraud Leave Bank Empty Handed
5. Covenants to Insure in Commercial Contracts
6. Wind Farm and Energy Update

1. Firm and Industry News

• April 14th, 2011 Toronto: Canadian International Freight Forwarders Central Region Forwarders Choice Awards Dinner. [Fernandes Hearn LLP is a Gold Sponsor for the event]
  
  
• April 15th, 2011 Ottawa: Canadian Maritime Law Association Seminar on Maritime Law
  
  

• April 20th 2011 Toronto: CBMU Loss Prevention Seminar - Trucking Contracts and Load Brokers
  (8:30 am Royal & SunAlliance Insurance Company (10 Wellington Street East, Toronto))
  

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

• May 11-14 Las Vegas: CTLA and Transportation Lawyers Assoc. Annual Meeting

• May 25-26 2011 Collingwood: CBMU Semi-Annual Dinner

• June 3rd 2011 Quebec City: CMLA Annual Meeting

Gordon Hearn will be speaking in St. Louis, Missouri at the Annual Conference of the Transportation & Logistics Council on April 4, 2011 on "Regulatory and Liability Aspects of the Carriage of Goods into and out of Canada

Gordon Hearn will be moderating a Transportation Lawyers Association Webinar presentation on "Freight Intermediaries" on April 13, 2011.

Rui Fernandes will be speaking in Toronto at the CBMU Loss Prevention Seminar on April 20th on "Trucking Contracts of Carriage, Load Brokers and Cross Border Movements"

2. CAPTAINS AND ENGINEERS OF VESSELS ALLOWED TO FORM A BARGAINING UNIT

In Algoma Central Marine v. Captains and Chiefs Association 2011 FCA 94, Algoma Central Marine applied to the Federal Court of Appeal for a judicial review of the decision of the Canada Industrial Relations Board dated April 9, 2010 (2010 CIRB 531) certifying the Captains and Chiefs Association as the bargaining agent for a unit comprising:

"all regular and reserve Captains/Masters and Chief Engineers employed by Algoma Central Marine, a Division of Algoma Central Corporation, on vessels owned, operated or under bareboat charter, or otherwise effectively controlled by Algoma Central Marine directly or indirectly, excluding Training Captains and Training Chief Engineers".

Algoma argued that the captains and chief engineers were not eligible because they performed management functions and therefore did not meet the definition of "employee" in section 3 of the Canada Labour Code, R.S.C. 1985, c. L-2.

The Federal Court of Appeal was required to review the CIRB's decision on the standard of reasonableness; that is, whether the decision of the Board was intelligible and justifiable, and fell within a range of possible, acceptable outcomes.

Algoma did not suggest that there was any error in the summary of the relevant law set out in the Board's reasons nor did Algoma take issue with any of the Board's findings of fact. Rather, Algoma argued that, given the facts as found by the Board, it was unreasonable for the Board to conclude that the captains and chief engineers employed on Algoma's vessels did not perform management functions.

The Federal Court of Appeal noted that there was room for debate as to whether, in general or theoretical terms, the captain or chief engineer of a vessel performs management functions. However, in the context of applications for the certification of bargaining units, the Board had to deal with that question on a case by case basis, considering all of the relevant evidence, informed by labour relations principles.

The Court of Appeal found that the Board's reasons in this case were detailed, thorough and cogent. The Board explained clearly why it concluded that the captains and chief engineers employed on Algoma's vessels fell within the statutory definition of "employee", notwithstanding their important legal and supervisory obligations and functions.
The application for judicial review was dismissed with costs.

Rui Fernandes

3. UPDATE ON SHIP BUNKERS AND NECESSARIES

In our April 2010 Newsletter we reported on the decision of Justice Harrington of the Federal Court of Canada of World Fuel Services Corporation v. The Ship "Nordems" 2010 FC 332. The fact situation was rather complex.

Parkroad Corporation, a Korean sub-time charter of the vessel "Nordems," contracted (through communications in Korea) with either the plaintiff, an American corporation, or its affiliate World Fuel Services (Singapore) Pte. Ltd., a Singapore corporation, for the purchase of bunkers taken on board in South Africa. The vessel flew the Cypriot flag.

Parkroad Corporation went bankrupt without paying for the bunkers.

Thereafter, the plaintiff arrested the "Nordems" in Baie Comeau, Canada. The ship was released on bail furnished by her German owners. Parkroad was named as a defendant but did not appear.

The plaintiff's claim was that Parkroad contracted not only on its own behalf, but also on behalf of the ship and her owners. The provisions of the contract deemed it to have been made in the United States. It was expressly governed by American law, which created a maritime lien over the ship, even should it be that her owners and managers were not personally liable.

The court was required to decide the proper law governing the relationship. The defendant German owners denied there was a contractual relationship with the plaintiff. Both sides however agreed to allow the Canadian court to decide the issues.

Justice Harrington made two findings which drove his analysis of the legal issues in the case. He summarized these as follows:

"Parkroad had no actual authority from the owners or managers of the Nordems to contract for the supply of bunkers on their behalf, or on the credit of the ship. They were expressly prohibited from so doing. However, World Fuel Services Corporation had no actual knowledge of that fact. The importance of these findings is that, briefly put, the maritime law of the United States, the law selected by World Fuel Services Corporation and Parkroad to govern their contract, is such that a necessaries man is presumed to have contracted on the credit of the ship. That presumption can only be rebutted by establishing that the necessaries man had actual knowledge that the contracting party did not have authority to bind the ship. If that presumption is not rebutted, American law creates a maritime lien on the ship. On the other hand, under Canadian maritime law, apart from a few exceptions which are not relevant here, a necessaries man does not enjoy a maritime lien. Under sections 22 and 43 of the Federal Courts Act, he has a statutory right in rem against the ship, but only if her owners are personally liable. As in American law, there is a presumption that the necessaries were ordered on the credit of the ship. However it is not necessary to establish actual knowledge of lack of authority on the part of the necessaries man to rebut that presumption."

The decision of Justice Harrington was appealed to the Federal Court of Appeal. Justice Nadon wrote the decision of the Court of Appeal. He agreed the case raised difficult issues, namely, the liability of the owners of the vessel for the supply of the bunkers and whether, irrespective of liability on the part of the owners, the vessel itself is liable in rem for the amount sought by the supplier. Justice Nadon felt compelled, again, to set out the differences between Canadian and American law on the supply of necessaries to a ship, stating:

The differences between our law and that of the United States are of crucial importance in this appeal since Canadian maritime law, contrary to American maritime law, does not create a maritime lien in favour of a supplier of necessaries. Further, under Canadian maritime law, personal liability of the shipowner is required for a successful action in rem by a supplier of necessaries, whereas, under American law, personal liability of the shipowner is not required for such an action to be successful.

[18] Also of relevance is the fact that under American law, a charterer is presumed to have authority from the owner of the ship to subject the ship to a maritime lien for necessaries, in the absence of the supplier's actual knowledge of a prohibition of lien clause in the charter party. In other words, there exists a presumption that a necessaries man has contracted on the credit of the ship, which presumption can only be rebutted by showing that the necessaries man knew that his contracting party was not authorized to bind the ship. Failing rebuttal of the presumption, the supplier of necessaries can enforce his maritime lien on the ship.

[19] Although there is also a presumption under Canadian maritime law that necessaries were ordered on the credit of the ship, our law does not go as far as requiring actual knowledge of lack of authority on the part of the supplier for a successful rebuttal of the presumption. This is why the Judge, in the course of his Reasons, characterized the presumption under Canadian law as a "weaker presumption" (paragraph 40 of Judge's Reasons).

The Federal Court of appeal reviewed Justice Harrington's decision and concluded that the Judge made no reviewable error in finding that the shipowners were not a party to the supply contract, that the presumption had been rebutted and that American law did not govern the transaction at issue.

Rui Fernandes

4. IMPROPER AND UNSUPPORTED ALLEGATIONS OF FRAUDULENT CONDUCT LEAVE RBC EMPTY-HANDED

Stinson J. of the Ontario Superior Court of Justice recently decided Royal Bank of Canada v. Boussoulas, 2010 ONSC 4650 wherein the Royal Bank of Canada ("RBC") brought a motion seeking, amongst other things, appointment of an interim receiver over the business and assets of the defendants and a Mareva injunction. The underlying action was a suit brought by RBC to recover money loaned by it to 4191153 Canada Inc. ("419"). Guarantees of this loan were signed by Peter Boussoulas and his son Theo.

RBC later determined that Chris Boussoulas (Peter's other son) was operating Edgebanding Solutions Inc. ("ESI") in virtually the same business. Both 419 and ESI became insolvent, and RBC believed the business was then being operated by 2200504 Ontario Inc. ("220"). 220 was allegedly controlled by Peter's long time employee Joanne Bradbury, using the same equipment as the two prior businesses. RBC also discovered a new million dollar mortgage placed by Theo and Chris on the family home in favour of their mother, Teresa, for no apparent consideration.

The Mareva Injunction

Based on the above, RBC sought a Mareva injunction and appointment of an interim receiver to oversee these assets. In its notice of motion, RBC alleged that the relief sought was on the ground that, amongst other things, "there is a strong prima facie case that the defendants defrauded RBC" of over $3.8 million, and that "Boussoulas obtained over half of the total amount borrowed on the basis of a fraudulent equipment appraisal. In its factum, RBC made "extensive reference to these allegations of fraud". However, in its amended factum and during oral submissions, there was no mention of any evidence with respect to the allegations of fraud. During reply, counsel for RBC advised the court that RBC still intended to reply on these allegations of fraud, but did not consider that it was necessary to rely on them as a basis for obtaining the release sought given the other evidence available.

The defendants argued that the facts presented did not warrant the remedy of a Mareva injunction or the appointment of a receiver. They also submitted that RBC's unsupported allegations of fraud should provide a basis for the court exercising at its discretion and refusing to grant such equitable relief.

The court summarized RBC's argument by referring to a "series of facts and events" as support for motion for a Mareva injunction and the appointment of an interim receiver, including:

• the financial decline leading to the insolvency of 419, coupled with significant "lifestyle" expenses;
  
  
• the fact that 419 defaulted on its loan from RBC;
  
  
• the drastic difference between the 2008 appraised value for 419's equipment and the 2009 realized sum on liquidation (being a $1.4 million difference), leading RBC to believe that the defendants supplied it with a fraudulent appraisal report;
  
  
• the assignment by 419 to ESI of all its receivables in the fall 2008, despite RBC's security interest in them;
  
  
• the fact that 419 ceased doing business and ESI continued the same business;
  
  
• after ESI's insolvency, the fact that the same business was continued by Joanne under the rubric of 220;
  
  
• the multiple relocations of 419, ESI and 220; and
  
  
• the defendants' non-compliance with the previous court order regarding income expenses reporting, and their refusal to answer questions about their assets.

The defendants admitted some of these allegations. They did explain that the triggering event for the assignment of 419 receivables to ESI was the erroneous service of a notice of garnishment of 419's account that had the result of freezing 419's account. The court noted that the defendants had no logical explanation for why, despite the fact that this garnishment issue was cleared up within two weeks, ESI's collection and depositing of 419's receivables continued for some six months thereafter. The defendants also alleged that the businesses carried on by 419, ESI and 220 were independent, notwithstanding the familial and personal connections. They also asserted legitimate business reasons for the multiple relocations. The defendants specifically denied that the equipment appraisal report was fraudulent, and noted that RBC dealt directly with the appraiser who supplied it.

The court held that RBC met the preliminary requirement of demonstrating that it had strong prima facie case for a Mareva injunction, an extraordinary remedy freezing the defendants' assets that are situate in Ontario so that they cannot be moved out of the jurisdiction (and therefore away from the power of the Ontario courts). The court took pains to point out that it was not commenting on the allegations of fraud, merely whether RBC had made its case with respect to the Mareva injunction.

The court then held that RBC had also proved the second element of the Mareva injunction test, having shown that there was a real risk that the defendants were dissipating or disposing of their assets in a manner clearly distinct from the usual ordinary course of business so as to render the possibility of future tracing of the assets remote, if not impossible. The court noted that the facts listed above disclosed a history of conduct by the defendants that was inconsistent with the ordinary course of business.

The court then moved on to the final element to consider a Mareva injunction test, being the "balance of convenience". The defendants Joanne and 220 had advised the court that they were prepared to abide by any court order with respect to the equipment used in their business. The other defendants, however, were "living off the goodness of others", but they were unwilling to disclose their assets. Peter had previously claimed in a personal net worth statement given to RBC that he owned a hotel in Greece worth some $5 million, but then refused to answer any questions about it.

The court held that it is "difficult to see why, in these circumstances, a Mareva injunction would be at all harmful and inconvenient to the defendants". In fact, RBC's interest may be "irreparably damaged" if a Mareva injunction was not granted, "since the debt will be uncollectible". RBC was therefore entitled to a Mareva injunction with respect to Peter, Chris and Theo. RBC was not entitled to a Mareva injunction with respect to Joanne and 220 given the lack of evidence of dissipation of their assets, and their willingness to abide by any court order.

The Court's Discretion

The court then considered the defendants' argument that RBC's actions disentitled it to relief of the Mareva injunction, being equitable relief. The court noted that Mareva injunctions are "discretionary, equitable remedies" that are granted only where it is "just and equitable". As such, the court is entitled to weigh the conduct of the parties seeking such relief, and to decline the relief sought if the conduct of the party seeking such relief is wanting.

The court cited I.C.F. Spry in Principles of Equitable Remedies (London: Sweet & Maxwell, 2010) at 414:

An applicant who culpably misleads the court in making his application may be refused equitable relief on this ground.

The court held that RBC's conduct disentitled it to an equitable remedy such as a Mareva injunction or the appointment of a receiver. RBC made "unsupportable allegations in its notices of motion, factums and affidavits" which were "unacceptable in any court at any stage of a proceeding". The court recognized the challenges in current commercial litigation matters, with complicated fact situations and detailed and complex documentation, often requiring resolution on short notice. It is a challenge to master the facts and legal issues while meeting the parties' expectations to provide swift and just determination of the dispute. The court noted that "particularly in cases where the materials are voluminous, the court looks to counsel and counsel's factum as reliable sources of key information. If that information is overstated or unreliable, the court is significantly impeded in performing its function."

The court noted the current practice of commercial litigants to make "raw allegations of fraudulent conduct on the part of their opponents", or to make allegations of fraudulent conduct while lacking the requisite prima facie case to sustain such allegations. The law has long held that making unfounded allegations of fraud is improper, and ground for making punitive cost awards. An allegation of fraud is an accusation of conduct involving "moral turpitude" that is not to be made lightly, unless the lawyer has been presented with the prima facie cases establishing fraud.

Improper and unproven allegations of fraud can result in adverse and punitive costs orders, and misconduct by a party in the course of a proceeding may also warrant the refusal of an equitable relief. The court held in this case that there was no reason why this principle should not extend to "extravagant and unsupported" allegations of fraud.

RBC's materials failed to meet acceptable standards in numerous respects:

• RBC's notice of motion and amended notice of motion both alleged that there was strong prima facie case that the defendants defrauded RBC of approximately $3.8 million;
  
  
• the initial three volume affidavit contained similar allegations, with the word "fraud" or variations of it use no less than four times in the third paragraph, and with the affidavit concluding in its penultimate paragraph that RBC had been a target of a fraudulent scheme to defraud it of assets under its security;
  
  
• RBC did not mention the word "fraud" at all in its amended factum and its submission-in-chief during its motion;
  
  
• RBC's initial factum used the word "fraud", or variations thereof, no less than four times in the second paragraph, including the allegation that its defendants "orchestrated a fraudulent scheme to fraudulently borrow over $4 million from RBC between 2005 and 2008"; and
  
  
• the defendants argued in their responding submissions that RBC had alleged but did not argue let alone prove fraud, and should therefore be denied equitable relief, but in its reply RBC stood by its allegations of fraud, despite having said nothing about them in chief.

The court went on to say that RBC misstated or overstated its case and evidence on numerous points, including:

• alleging that the defendants fraudulently borrowed over $4 million from RBC between 2005 and 2008, despite there being no evidence in this regard;
  
  
• the allegation that the defendants obtained over half of the total amount borrowed on the basis of a fraudulent equipment appraisal was untrue;
  
  
• there was no direct evidence of a fraudulent appraisal, but rather evidence that RBC dealt directly with the appraiser to request the report;
• the affiant stating the facts underlining the fraudulent appraisal allegation did not in fact have personal knowledge, but failed to qualify his evidence as such;
  
  
• the sole basis for the allegation with respect to the fraudulent appraisal was the difference between the two appraised values, with no evidence that the defendants bore any responsibility for the discrepancy;
  
  
• RBC's evidence in another affidavit sworn in a different motion also contained hearsay evidence that was not properly qualified, and was misleading; and
  
  
• RBC's affidavit included irrelevant and inadmissible allegations against the defendants, including reference to pending criminal prosecution against Peter.

On the basis of the above, the court concluded that RBC's conduct disentitled it to the equitable relief of a Mareva injunction or an appointment of an interim receiver.

Misstatements and overstatements of evidence as described "impair and impede the court in the performance of its function, and are to be strongly discouraged". It is no answer to say that the motion was brought on notice and that the defendant therefore had every opportunity to respond with his or her side of the story. Whether a motion is on notice or not does not affect the moving party's duty to be fair, accurate and candid with the court in its notice of motion, affidavits and factum. Counsel advocates his or her client's case, but at the same time also has a duty to assist the court in arriving at a just and proper result.

RBC's conduct and shortcomings disentitled it to relief that it was otherwise entitled to have granted in its favour (i.e. the Mareva injunction). The court exercised its discretion and dismissed RBC's motion for the Mareva injunction and an appointment of interim receiver.

Conclusion

RBC was otherwise entitled to rather unusual relief in a form of a Mareva injunction, and despite satisfying the court that it was entitled to such extraordinary relief, RBC was not entitled to judgment solely because it made these unfounded allegations of fraud. Allegations of fraud carry a higher burden than allegations of breach of contract or negligence. A lawyer must have some supporting facts and/or documents to show that an allegation of fraud is made out before pleading such allegation. It is not enough to have a feeling or suspicion that a party is acting fraudulently.

These considerations are important in transportation law where there may occasionally be suspicion of connections to organized crime. As above, it is insufficient to have only a suspicion of fraudulent conduct. It is also insufficient to have merely some evidence in the form of witness statements or documents that hint at fraud, or raise your suspicions as to fraud. There must be some concrete evidence, whether the evidence of an individual or contained in documentation, that a fraud has been perpetrated.

This case is a clear warning sign to parties to ensure that the facts and evidence as presented are clear and straightforward, and assist the court in coming to a proper conclusion. The court clearly wanted to discourage parties from making unfounded allegations of fraud in order to gain a procedural or tactical advantage.

Kimberly Newton

5. "Covenants to Insure" in Commercial Contracts: The Case of The Greater Toronto Airports Authority Association Inc. v. Foster Wheeler Limited and others

In the February edition of the Fernandes Hearn newsletter, the undersigned wrote an article concerning recent judicial pronouncements on rules for the interpretation of insurance policies. A predominant theme regarding judges' interpretation of insurance policies is a quest for a reasonable result in light of the intentions of the parties to that contract.

The judicial interpretation of commercial contracts aims for the same goal: to ensure a commercially reasonable outcome of a dispute. The decision in the case of Greater Toronto Airports Authority Association Inc. v. Foster Wheeler Limited and others [2011 ONSC 1442 (CanLII) presents a nice further study in this regard. While the case deals with a construction contract dispute, the judgment can be considered and applied to a general contractual context as a further example of the search for a 'pragmatic' and 'fair' result.

The Facts

Foster Wheeler Limited ("Foster Wheeler") entered into a contract in February of 2000 with the Greater Toronto Airports Authority Association Inc. (the "GTAA") to supply four steam boilers ("Supply Contract"). During the course of installation of one of the boilers, an explosion occurred, damaging the boiler and other GTAA property. GTAA was compensated for the damage by its insurance company, which insurer commenced a subrogation claim against Foster Wheeler, and other defendants (sub-contractors involved in the project) to recover its claim pay out.

The Litigation

Foster Wheeler and the other defendants brought a motion for 'summary judgment' after having been served the insurer's statement of claim, asserting that the Supply Contract in question precluded suit by the insurer against them. Citing the provisions of the Supply Contract, they maintained that, on the basis of the interpretation and application of the contract terms, they should be exonerated from any liability and that a trial was not necessary.

In a nicely set forth and reasoned decision, the judge hearing the motion to 'strike the claim' set forth the key contractual excerpts, and finished with a tight and very helpful summary of guiding contractual interpretation principles and analysis.

The Key Contractual Provisions

The Supply Contract required GTAA to place "All Risks" Course of Construction Insurance naming Foster Wheeler and all its sub-contactors as additional insureds. Foster Wheeler asserted that this "covenant to insure", as a matter of contract law, relieved it from responsibility for damages caused by its own negligence. The GTAA in turn asserted that, while a covenant to insured can have this effect, certain parts of the Supply Contract indicate a contrary intent that the GTAA in fact retained the right to sue Foster Wheeler for any damages caused by its own negligence.

A review of the key contractual terms sets up the rest of the story and analysis:
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• 42.1 Without restricting any other responsibility for the Supplier, under the Contract the GTAA shall provide, maintain and pay for insurance described in paragraph 42.2 below from the date of commencement of the Contract until the date of actual completion. Coverage under these policies extends only to the activities of the insured's in relation to the project. All dividends and refunds payable under the policies are the property of the GTAA. Unless otherwise stated, these policies will:

2. be non-contributing and primary; and
3. include as an additional insured the Supplier, Subcontractors, consultants and such person, firm or corporations that the GTAA may determine at its sole discretion.

• 42.2 The policies to be placed and maintained by the GTAA are:
                         […..]

a) "All Risks" Course of Construction Insurance only when the Equipment is delivered to the Site, including flood and earthquake. To provide coverage against physical loss and/or damage howsoever caused (subject to policy exclusions), including buildings, structures, materials and real property to be incorporated into and forming part of the Equipment…..

Other relevant contract provisions cited by the judge are as follows:

• 19 Foster Wheeler… "warrants that the Equipment will be in accordance with the Contract and free from defects for 12 months following Provisional Acceptance. Foster Wheeler is obligated to repair or replace the Equipment if it does not meet the contractual requirements".
.
.
• 42.3 - this provided Foster Wheeler with the "right to require the GTAA to deliver certificates of insurance."

• 42.4 "The policies described in paragraph 42.2 will be placed and maintained with insurers acceptable to the GTAA and will contain terms and conditions determined by the GTAA at its sole discretion. The GTAA is not liable to the Supplier for any deficiency or alleged deficiency in coverage, provided that the policies comply with the description set out in paragraph 42.2. The Supplier shall place and maintain such other insurance as the Supplier considers necessary or desirable for its own protection, but in each case at the sole cost of the Supplier."

It should be noted that the contract also required Foster Wheeler to place "All Risks" insurance on machinery owned or used by it or its subcontractors. This coverage was specifically required by the terms of the contract to contain a 'waiver of subrogation' against the GTAA. (Note: The subject supply contract did not expressly contain 'waiver of subrogation language in favour of Foster Wheeler and the sub-contractors, as concerns suit taken by the GTAA, which was the subject of debate and is addressed below).
.
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• 42.13 Suppliers' Liability Preserved: The provisions of paragraph 42.7 do not diminish, limit or otherwise affect the liability of the Supplier to the GTAA under or in relation to any other provisions of the Contract.

• 42.14 Protection of GTAA's Property: The Supplier shall protect the project, the GTAA's property and property adjacent to the Site from damage. The Supplier is responsible for damage that occurs as the result of the Supplier's operations under the Contract, except damage that occurs as the result of acts or omissions by the GTAA, the Consultant, other Contractors or their employees, agents, or representatives. If the Supplier, in the performance of the Contract, damages the work, the GTAA's property or property adjacent to the Site, the Supplier is responsible for making good that damage at its expense. This does not apply to injury, loss or damage to the extent that GTAA receives proceeds of insurance described in paragraph 42.2, but the Supplier is responsible for any deductible and any uninsured portion of the GTAA's loss.

[Note: Emphasis added: this will 'loom large' in the analysis, below].

• 42.15 GTAA Furnished Insurance: The principal cause of the stipulations for insurance in this Contract is the protection the interests of the GTAA. This Contract stipulates that the GTAA, rather than the Supplier, shall provide and maintain insurance as set out herein in order to achieve efficiencies in the cost of the insurance and so that the GTAA can be assured that such insurance is in fact in place for the GTAA's benefit. The Supplier agrees that its claims under the insurance provided by GTAA are subordinated to the full recovery by the GTAA of its claims under such insurance.

[Note: Emphasis added: this will likewise 'loom large', in the discussion below on the importance of 'commerical practicality' in the resolution of this dispute]

and finally …

• 42.16 - this provides that Foster Wheeler and the sub-contractors have no obligation to pay premiums for the insurance provided by GTAA.

Analysis - Relevant Principles of Contractual Interpretation

The judge cited the following key precedent, in Salah v. Timothy's Coffees of the World, Inc. [2010] O.J. No. 4366, at para. 16:

The basic principles of commercial contractual interpretation may be summarized as follows. When interpreting a contract, the court aims to determine the intentions of the parties in accordance with the language used in the written document and presumes that the parties have intended what they have said. The court construes the contract as a whole, in a manner that gives meaning to all of its terms, and avoids an interpretation that would render one or more of its terms ineffective. In interpreting the contract, the court must have regard to the objective evidence of the "factual matrix" or context underlying the negotiation of the contract, but not the subjective evidence of the intention of the parties. The court should interpret the contract so as to accord with sound commercial principles and good business sense, and avoid commercial absurdity. If the court finds that the contract is ambiguous, it may then resort to extrinsic evidence to clear up the ambiguity.

On the question of the interpretation, and application, of 'covenants to insure', the court cited the following key excerpt from Canadian Contractual Interpretation Law, First Edition, by Geoff Hall (at p. 225):

Covenants to insure have been given a specific interpretation in the case law. They not only obligate one party to obtain insurance (the meaning apparent from the wording of the covenant) but also relieve the other party of liability for losses, subject to the covenant, even if such losses are caused by its own negligence. This is a meaning which does not flow directly from the words of a covenant to insure, but it is a meaning which inexorably flows from the context of such a covenant. As such, it is a good example of contextual contractual interpretation, in which meaning is derived not only from the text but also from all relevant circumstances, which are drawn upon to give a provision a meaning that makes good commercial sense.

The judge cited case law precedent applying these principles to a general commercial context (e.g. losses arising during the tow of a barge in the case of St. Lawrence Cement Inc. v. Wakeham & Sons Ltd. 1995 CanLII 2482 (ON C.A.)) and then addressed 'covenants to insured' in the immediate 'construction project' context. Reviewing the case law and authorities on point, the judge listed key principles and factors as follows:

• the Supply Contract was entered into at a time when the 'typical attributes and benefits in the course of construction insurance had long been recognized':

• on a construction site, the possibility of damage by one contractor to the property of another and the construction as a whole is ever present;

• there is a common interest in avoiding the necessity to debate issues of negligence and responsibility in court;

• parties can focus on the common goal of completing construction instead of fighting amongst themselves;

• given the obligation of the owner or general contractor to obtain comprehensive insurance it makes 'no business sense for sub-contractors to pay premiums to duplicate that coverage';

• the insurer sets the premium recognizing that there is no right of subrogation; and

• the owner purchasing comprehensive insurance on behalf of contractors and sub-contractors is less expensive than each party obtaining its own insurance.

The Submissions of the Parties

The GTAA raised case law wherein such covenants to insure existed in a contract, but it was held regardless that a subrogated claim could still be pursued by the affected insurer at interest. The judge however distinguished these cases as a matter of the specific language (as they say, the "devil is always in the detail") in those other cases, whereby the net effect, in considering the contract in those cases as a whole, was that there was in fact an intention to allow the 'customer' or its insurer to still sue for damages at the end of the day.

Foster Wheeler and the others asserted that the claim should be dismissed against them - it not being necessary to go to trial or for it to be determined whether or not they were negligent - because the Supply Contract was clear that they were to be released from liability by virtue of the covenant to insure contained in the policy language summarized above.

The Court Rules…..

Starting with a citation from Canadian Contractual Interpretation Law, the judge noted that:

'Covenants to insure have been given a specific interpretation in the case law. They not only obligate one party to obtain insurance…. But also relieve the other party for losses subject to the covenant, even if such losses are caused by its own negligence.' [Emphasis added].

Starting with this backdrop - clearly favouring the defendants, the judge noted that if GTAA wanted to depart from this 'well understood interpretation of a covenant to insure' and to maintain rights of subrogation, that 'clearer language' should have been used in the Supply Contract.

The judge noted that it was 'crystal clear' that GTAA had to place insurance naming Foster Wheeler as an additional insured. The insruance in fact placed did cover the damages for which it is being asserted that Foster Wheeler and the other defendants were negligent.

The judge noted the policy language above, and took the following factors and submissions into account in coming to his ruling:

• Foster Wheeler was given, by the terms of the contract, the right to 'enforce' the requirement against GTAA that the insurance coverage in question actually be placed;

• clause 42.14 cited above makes it clear that Foster Wheeler was to be relieved from liability. Recall the emphasized wording above: while the term stated that, as a supplier, Foster Wheeler was responsible to 'make good any damages that occur as the result of its operations', the last sentence provided an important exception to this rule:

"This does not apply to the injury, loss or damage to the extent that GTAA receives proceeds of insurance…."

• the judge noted that this sentence would be rendered meaningless [or, per the aforementioned February newsletter article, 'nugatory'] if, by means of subrogation, Foster Wheeler was held responsible for damages compensated for by the insurance proceeds.

• further, clauses 42.15 and 42.17 above indicate that the parties intended to avoid duplicative insurance costs.

• while the GTAA argued that the opening words to 42.1 above (e.g. "Without restricting any other responsibility of the Supplier…" ) should be interpreted to allow the subrogation claim, the judge refused to allow this 'general phrase' to alter the interpretation of the thrust of the rest of the contract whereby the covenant to insure should apply as stated above

• as to the argument by the GTAA that the application of the 'covenant to insure' in this fashion would 'negate the suppliers warranty obligations' the judge ruled that he was still 'caught' by the 'specific interpretation' given to covenants to insure cited above. The judge also noted that Foster Wheeler was only in effect being relieved from warranty obligations that relate to the damage caused by the insured event and there might still be other items coming within the suppliers warranty obligations, and as such, this approach being taken would not in and of itself render the supply warranty 'meaningless';

• the GTAA argued that there was an express 'waiver of subrogation' in 42.7, relating to the insurance that had to be placed by Foster Wheeler. Why was this language not included in the contractual obligations whereby GTAA had to place insurance for Foster Wheeler? The judge however ruled that the Foster Wheeler obligation to place insurance was very limited in scope relative to the project. The GTAA had no interest in being named as an additional insured in such incidental coverage. Accordingly, it would follow that the 'waiver of subrogation' against the GTAA was provided in 42.7 whereas in the operative contract section (42, for our purposes) the GTAA provided a covenant to insure Foster Wheeler against the much more extensive risk it faced as the one contractor working on a project. (Note: In effect, while it might have made things easier for Foster Wheeler in the context of the present dispute for there to have been an express 'waiver of subrogation' in its favour, the lack of this language was not fatal against it, given all the other arguments cited herein applied in its favour that the claim should not continue against it).

The Disposition of the Case

On the basis of the foregoing, the judge ruled that "considering the totality of the Contract, in my opinion, the proper and only reasonable interpretation is that the GTAA, by reason of the covenant to insure, agreed to relieve Foster Wheeler of liability for damages caused by its own negligence. As the GTAA has no right claim against Foster Wheeler, its insurer can have no subrogated right to do so."

Accordingly, GTAA's insurers subrogated claim was dismissed against Foster Wheeler and the other defendants.

Conclusion

This decision is a tight illustration of commercial reason being applied in the interpretation of a contract. While in a narrow sense one might limit it to the construction contract context (where, certainly, the 'covenant to insure' has a well established meaning), one should note the reference to general contract interpretation principles. Applied more broadly, this case is simply an example of the general approach taken by the courts in the interpretation of commercial contracts; that is, consideration of what is reasonable, commercial, and fair, in the context the parties dealings.

Gordon Hearn

6. Wind Farm and Energy Update

This past January, the undersigned presented a paper at the Fernandes Hearn LLP Annual Transportation Seminar on the topic of Arising Issues in Energy Claims. One of the arising issues was that concerning the ecological, environment and potential health effects for humans and animals associated with the promotion and use of wind energy including the building and development of wind farms.

At the time of the seminar, we were just days away from the commencement of a lawsuit relating to the set back intended by the Ministry of the Environment of 550 metres. The following is a report of the status of this litigation.

Wind Energy Issues Revisited

The primary complaint regarding the use of wind turbines is noise. Wind turbine blades can be 125 feet long and the towers, themselves, can measure over 400 feet (120 metres). The World Health Organization recommends the noise level in a bedroom be a maximum of 30 decibels (dBA) to avoid sleep disturbance. Ontario sets the limit for wind turbine noise at 40dBA, with a setback of 550 metres, depending on the size of the industrial wind farm.

The majority of the energy of wind turbine noise is said to be in the low frequency spectrum, which travels greater distances than high frequency noise waves. Low frequency noise waves are said to travel through building materials into living space and are not filtered out or masked in any way and penetrate deep into the body. The noise of wind turbines is alleged to create greater problems than the white noise people are accustomed to, such as traffic, and such noise as been described as more annoying than traffic, aircraft and almost every industrial sound.

On the other side of the equation, supporters of wind energy argue that the noise level of industrial grade wind turbines is no different than that of a refrigerator (45 dBA) and that normal conversations are 50 to 60 dBA. The noise or "swooshing" of the wind blades passing the wind tower are different, however, due to amplitude and can exceed the regulatory limit allegedly because the turbines' configuration is based on computer models and not live measurements. The swooshing, which is never ceasing, is said to cause stress.

Recently, a phenomenon called "wind turbine syndrome" has been coined to define the syndrome as the effect of infrasound (low frequency sounds - below 20 dBA) not readily perceptible to the human ear. Apparently, the cochlea and inner hairs of the inner ear detect audible sounds while the outer ear hairs are stimulated by the lower frequency but inaudible spectrum. The outer ear hairs pass on infrasounds to the brain.

While not necessarily perceived as sound, infrasound can apparently cause sleep disturbance, headaches, balance difficulties, tinnitus (ringing in the ears), concentration and short term memory deficits, vertigo and, possibly panic attacks. Sleep disturbance is said to lead to fatigue, headache and nausea. Regular intrusive noise is said to affect children's cardiovascular system, memory, language development, and learning acquisition and causes an adverse effect on school grades. Those working and living near wind turbine facilities experience similar effects.*1

Sound energy from wind turbines has apparently a more disruptive sleep effect than any known industrial noise of the same sound pressure likely caused by the complex tones generated by the turbine blades as they pass by the tower.

Low frequency noise allegedly impacts the emotion centres of the brain, which release stress hormones that trigger fear, anxiety, suspense, flight and arousal. Further, this exposure may also cause the rare vibro-acoustic disorder, which causes changes to the structure of certain organs such as the heart and lungs and may be caused by vibrations from turbines. Another powerful side effect is allegedly the light reflected from the blades or "flicker" which can lead to migraines and impact those with epilepsy.*2

The above health issues allegedly arise from the audible and sub-audible sounds of wind turbines and are said to have caused people to move from wind farms areas thereby causing a reduction in the value of land and homes.

Such concerns warranted the Council of Ontario Universities to appoint a new Ontario Research Chair in Renewable Energy and Health to study heath effects of renewable energy including wind and effects of wind turbines. Ontario's Chief Medical Officer further provided a report in May 2010, which concluded that there are no direct adverse health consequences from wind turbine noise.

The setback proposed, as indicated, is 550 metres; however, citizens groups and medical sources argue that the residential setback in Ontario should be a minimum of 1.5 to 2 km. Various health organizations around the world contend that the setback should be a minimum of 1.5 kilometres from residences for wind turbines on land.

Update - Onshore Wind Farms

Litigation thus far regarding litigation turbines has been focused upon attempts to stop the development of wind farms. The Ontario case of Hannah v. Ministry of the Environment, 2010 ONSC 4058 has now faced the its judgment regarding wind turbine farm safety and development.

The Hanna case is a class action challenge launched in the Belleville-Trenton area on behalf of the citizens in the area who have a concern for the adverse health affects described above. The suit focuses on the 550 metre set back as regulated by the Green Energy Act, 2009 S.O. 2009, c. 12. and which setback is alleged to be insufficient to avoid the associated health issues. Under the Green Energy Act, renewable energy developers are to consult with municipalities in advance of planning including the planning of wind farms. This suit alleges that, as a result, the Ministry of the Environment failed to adhere to the "precautionary principle" in its decision-making required under the Environmental Bill of Rights where an action or policy has a potential for harm to the public or environment; that is, in the absence of scientific consensus that the policy/action is not harmful, the burden of proof that the policy or action is not harmful falls to those taking the action. It is submitted in the action that the industrial wind turbine company on the project in question must prove that there are no adverse effects to human, or animal health or the local environment due to the wind turbine farm and produce the associated certificates to be issued by Health Canada and other agencies. Further, all construction on the wind farm is sought to be stayed until all appeals regarding any approved wind farm are heard by the Environmental Appeal Tribunal.

If such challenge were ultimately successful, continued growth in the wind turbine industry would be significantly affected and would require further inquiries and studies regarding the health effects of wind generation on the environment.

The application for judicial review of the setback proposal was heard by the Ontario Divisional Court on January 24 and 25, 2011.

The road in this lawsuit was not easy however. Counsel for the Ministry of the Environment previously had brought a motion within the litigation to exclude portions of evidence, that of Dr. Robert McMurtry, who had been the acting Dean of Medicine at University of Western Ontario. He is also the brother of former Chief Justice and Attorney General, Roy McMurtry's brother. Dr. McMurtry more importantly though is a founding member of an anti-wind group. The court regarding this motion found that any references in his affidavit to studies post-dating the September 30, 2009, the day the regulations were in effect, should be struck. Given Dr. McMurtry's activism in the anti-wind turbine movement, counsel had also raised objection to Dr. McMurtry's role as an expert witness given possible issues with impartiality and potential advocacy. An expert must be impartial and neutral as to the outcome of a particular case to be appropriate and of assistance to the court.

On March 3, 2011, the Divisional Court dismissed the application for judicial review of the provincial regulations that established the minimum setback of 550 metres. Justice David Ashton writing on behalf of the panel found that the Minister had complied with the process mandated by the Environmental Bill of Rights/ Environmental Statement of Values and went on to says as follows at paragraph 29,

"The health concerns for persons living in proximity to wind turbines cannot be denigrated, but they do not trump all other considerations. This is particularly so because those persons do have a remedy. Any person resident in Ontario, whether or not the person lives in proximity to a proposed wind turbine, can challenge the approval of an industrial wind turbine under the EPA amendments that came into force with the GEA. This challenge takes the form of an appeal to the Environmental Review Tribunal (the "Tribunal") which has the mandate to determine, on a case by case basis, whether a renewable energy approval would cause serious harm to human health."

The court then explained that if the Tribunal is persuaded by evidence that the 550 metre minimum setback is inadequate to protect human health from serious harm it can revoke the decisions made regarding the setback or increase the minimum setback prescribed for the proposed wind turbines. The Tribunal during the process would hear relevant expert evidence and would be able to consider topography, wind patterns, make, model, size and dBA specifications of the wind turbine, its exact location, and the location of any other proximate turbines or noise receptors (i.e. residences). Further the Tribunal can conduct site inspections. It has authority to appoint its own scientific experts to assist it in its endeavours.

The court further reminded us that it was not the court's place to question the wisdom of the Minister's decision or whether it was reasonable but rather simply whether the mandated process was followed. The court found that this process as taken by the Minister included public consultation and review of science based evidence, expert acoustical engineering evidence and reports from the World Health Organization. The court found that the "precautionary principle" did not preclude the decision taken by the Minister.

But the Hanna challenge is not over yet. Counsel for Hanna advised in a prepared statement (as reported to the Law Times March 29,2011) that they are considering their appeal options including the issues of standard of proof and adequacy of evidence. There is also the potential to use the appeal route to the Environmental Review Tribunal. On April 1, it was announced that the decision of the Divisional Court would be appealed. No date has been set for the appeal.

Counsel for Hanna further indicated that it is significant in the March 3, 2011 decision that the Environmental Statement of Values is legally binding and reviewable by the courts though no environmental regulation has ever been struck down on the basis of the "precautionary principle".

There is also another appeal to the Environmental Review Tribunal regarding a Township of Camden wind facility that is also to be heard in early April with a decision to be made no later than May 29, 2011.

The first round appears to have been won by the wind turbine interests and development of wind energy farms appears to now be stronger ground. The development of offshore wind farms appears to have recently faced a different challenge.

Off Shore Wind Farms

Regarding off shore wind turbine farms, the Ministry of the Environment had made a policy proposal in 2010 for renewable energy approval requirements (REA) for offshore wind facilities. Specifically, input was sought on proposed rules for offshore wind turbines, including a five (5)-kilometre distance limit from the shoreline. The exclusion zone was apparently intended to ensure that potential noise levels from an off-shore wind facility are within "acceptable" levels (40 decibels at an on-shore noise receptor), taking into consideration the combined contributions from all wind facilities located in the area, both on and off-shore.

Local opposition to offshore wind farms has been increasing amongst lakefront communities.

Update

On February 11, 2011, the Ontario Government announced (to much surprise) that it was not proceeding with proposed offshore wind projects on the Canadian side of the Great Lakes until further scientific research is conducted and more data accumulated. This includes cancellation of all existing Crown Land lease applications (without Ontario Feed-in Contracts). Mr. John Wilkinson, Minister of the Environment stated that, "Offshore wind on freshwater lakes is a recent concept that requires a cautious approach until the science of environmental impact is clear. In contrast, the science concerning land based wind is extensive."

The decision to halt the offshore projects has met with criticism from opposition parties in the provincial parliament who criticize the failure to move forward on stated green principles. Wind energy proponents also criticize the McGuinty government for failing to take the lead and provide certainty in the area of green energy. Further, Ontario's reticence to move forward occurs at the same time as other jurisdictions in Canada (such as British Columbia, Quebec) as well as numerous American states move boldly forward. The US Government even recently proposed a 50.5 million dollar project in the mid-Atlantic. Bold decisions can be expensive whether moving forward or deciding to delay.

Needless to say, there may also be further litigation over the cancelled applications and associated rights given the previously stated position of the Ontario government in this area and all of the money spent developing such activities in this regard.

The first round in the battle regarding offshore wind turbines goes then to the anti-wind energy proponents and their hope that further research will bear not only on the proposed use on freshwater lakes but will also have bearing regarding onshore use.

Finally

The litigation and challenges continue to be fought primarily in the area of development of wind farms given the area's infancy. There may also be spillover into other green energy areas regarding the government's reticence to move "too quickly" forward. The US and Europe are further down the road regarding litigation concerning adverse effects or personal injury resulting from wind turbine use. We will continue to watch for developments in this regard, if any.

Kim E. Stoll

Endnotes:
*1 First International Symposium on the Global Wind Industry and Adverse Health Effects, held Oct. 29 to 31, 2010 including papers by Dr. Nina Pierpont leading NY paediatrician, Prof. Arline Bronzaft, City University of New York, Dr. Christopher Hanning, U.K. Honorary Consultant (Sleep disorder medicine) and his study, The Torment of Sleep Disturbance. Dr. Michael Nissenbaum, a radiologist at Northern Maine Medical Centre and certified by the Royal College of Physicians of Canada

*2 First International Symposium on the Global Wind Industry and Adverse Health Effects, held Oct. 29 to 31, 2010 - Dr. Nina Pierpont leading NY paediatrician, Dr. Michael Nissenbaum, a radiologist at Northern Maine Medical Centre and certified by the Royal College of Physicians of Canada

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