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Newsletter > Fall 1997


Damages for “Wrongful” Ship Arrest

The Supreme Court of Canada recently considered the issue as to when a party can recover damages flowing from the arrest of a ship or cargo under the provisions of the Federal Court Rules permitting the arrest of same, as security, in an in rem action against a ship or cargo.

A carrier agreed to carry a cargo for a shipper. A term of the contract prescribed a loading date by which the cargo would be ready for carriage. The shipper breached this term, the cargo being delayed in delivery to the port of loading. The carrier filed a claim against the shipper and an in rem action against the cargo. After filing the claim, the carrier proceeded to have the cargo arrested. The shipper subsequently secured the release of the cargo from arrest by posting bail in accordance with the Federal Court Rules.

Months later the shipper brought an application to strike the carrier’s claim. This motion succeeded, as a result of which the arrest of the cargo was set aside. The shipper then claimed damages for loss of interest and of working capital on the security posted as bail in court. The shipper’s claim was dismissed at trial.

On appeal, the shipper was successful and was awarded damages for ‘wrongful arrest’. The Court of Appeal, in a rather dramatic ruling, held that the courts could imply or read into the Federal Court Rules an undertaking on the part of an arresting party to pay damages. In effect, there is little difference between a Mareva injunction and the arrest remedy, where in the latter case the arresting party should ultimately be able to demonstrate that the arrest was necessary to protect its rights. Thus, if an arrest is ultimately determined to be “illegal”, then the plaintiff must suffer the consequences of that illegality. The Court of Appeal found that the carrier had arrested the cargo without legal justification.

On appeal by the carrier to the Supreme Court of Canada, it was held that the Court of Appeal did not err in ruling that the shipper should be paid interest on the security paid into court, the arrest having ultimately been set aside. This Court however held that the Court of Appeal erred in awarding damages for wrongful arrest. The Court confirmed long standing case law that a court may only award damages for wrongful arrest where the arresting party acts in bad faith or is grossly negligent. In upholding this approach, the Supreme Court effectively distinguished the arrest remedy from a Mareva injunction, recognizing the exceptional nature of the admiralty in rem claim and arrest procedures from the general application of Mareva injunctions generally employed by plaintiffs in non-admiralty claims. As there was no finding in the lower courts that there was bad faith or gross negligence on the part of the carrier, the claim for wrongful arrest damages by the shipper was dismissed.

Armada Lines Ltd. v. Chaleur Fertlizers Ltd. (1997) 143 D.L.R. (4th) 217 (S.C.C.) 

Exclusion Clauses

Appellate court enforces Alarm Company’s exclusion clause and refutes ‘Fundamental Breach’ argument

The plaintiff, a retail jeweller, contracted the defendant to provide a protective signalling system whereby a burglar alarm would be set off on the plaintiff’s premises which would be transmitted by the defendant to the local police station. This contract contained a clause limiting the defendant’s liability for any loss, damage or injury caused by a failure of service or equipment. The clause was set forth in block letters in the contract document. The plaintiff’s premises were robbed during business hours. A holdup alarm button was activated by an employee during the course of the robbery which sent a signal to the prescribed monitoring station for that purpose. The person in charge of contacting the police however failed to do so for some ten minutes. By the time that the police responded the burglars had left the plaintiff’s premises.

The plaintiff sued to recover the $50,000 lost in the burglary. At trial, the owner of the plaintiff company testified that he was unaware of the limitation of liability clause in the contract with the defendant, who was trying to limit its liability. The trial judge ruled that the defendant could not invoke the limitation of liability clause, holding that the failure to promptly respond to a hold-up signal constituted a fundamental breach of the contract and that the clause was in any event ‘unconscionable’.

The defendant successfully appealed this decision. The appellate court ruled that there was no fundamental breach by the defendant. Save for the single incident in question, occurring some two years after the contract was formed, the defendant was seen to have performed the same properly and without complaint. The plaintiff was therefore not deprived of the benefit of the bargain it had entered into with the defendant. Further, the plaintiff had continued to use the defendant’s services, treating the contract as ongoing between the date of the burglary and the date of trial. This was inconsistent with its position that the contract was fundamentally breached by the defendant.

In any event, whether or not the breach can be considered fundamental or not, an exclusionary clause should be enforced according to its true meaning unless in the circumstances, in light of the contract the same is seen to be unconscionable, unfair or unreasonable. In the absence of fraud or misrepresentation, a person is bound by an agreement to which he has put his signature whether or not he has read its contents. The failure to read a contract is not a legally acceptable basis for refusing to abide by it. The fact that the clause was of the standard ‘pre-printed’ variety and was not the subject of negotiation has no effect where such a clause is not obscured, and is clear and unambiguous, and was simply not read by the plaintiff.

The court also found that the terms of the clause in question were not unusual or unfair to constitute an unacceptable business practice on the part of the defendant.

Fraser Jewellers (1982) Ltd. v. Dominion Electric Protection Co. et al. (1997) 34 O.R. (3d) 1 (Ont. C.A.) 

Property Insurance

Are Insureds Getting a Free-Ride When it Comes to Replacement Cost Insurance?

Can an insured recover replacement costs under an insurance policy without having to spend any money replacing the lost property? The Supreme Court of Canada rendered its decision on this issue in Brkich & Brkich Enterprise Ltd. v. American Home Assurance Co., [1997] S.C.J. No. 46, on April 28, 1997.

Brkich dealt with a fire insurance claim brought by the owners of a hotel that burned to the ground. The policy limit was $1,450,000, and the property was insured for its replacement value only. The policy stated that, “the Insurer(s) SHALL NOT be liable for more than the interest of the Insured in any property. … until repair, replacement, construction or reconstruction has been effected by the Insured, liability shall be that which would have existed had this clause not been in effect”. The insurance company paid the claim on an actual cash value basis, and the owners represented that they intended to rebuild. The same day that they hired architects and engineers and signed a contract for the reconstruction of the hotel, the owners sold the property to a third party. The sale was made on the condition that the third party would rebuild according to the terms of the construction contract. The cost of rebuilding was deducted from the sale price. The third party then rebuilt the hotel at its own expense. The original owners filed a proof of loss with the insurer, claiming $509,504.66, which represented the unpaid balance of the policy limit.

The British Columbia Supreme Court dismissed the insured’s claim for this extra amount at trial. The Court ruled that a contract of fire insurance was a contract of indemnity. The issue at the heart of the matter was whether the plaintiffs had suffered any loss by virtue of the reconstruction. The existence of an insurable interest alone was said not to provide a basis for recovery under a contract of indemnity. Since all of the replacement costs were borne by the third party purchaser, the plaintiffs were found not to have suffered a loss for which they could be indemnified under the policy. The “effecting” of the rebuilding required more than just signing a contract for rebuilding. To allow the plaintiffs to recover anything beyond the money already paid and the price of sale on the property would give the plaintiffs a windfall for a loss they did not incur. The Court ruled that it was a necessary precondition that replacement costs actually be expended before an insured could recover for replacement under an indemnity policy.

The trial decision was revered on appeal, it being held that the policy language was sufficiently broad to cover the events which occurred in this case.1 Citing the principle of contra proferentum, the Court of Appeal found that the policy did not expressly require the plaintiffs to pay the replacement costs themselves. There would be no windfall to the insured, as the replacement costs and the insurance proceeds were taken into account by both the insured and the third party purchaser in fixing the sale price for the property. The Court ruled that if the insurer were not required to pay the full amount of the replacement costs, the insurer would be the one to receive a windfall in the form of the higher premiums it received for providing for full replacement value. Additionally, even though the policy required the insured to retain legal title to the property while replacements were being effected, the terms of the policy were met when the insured contracted for reconstruction, assigned the building contract, and contracted for both the completion of the building and the payment of the builder.

The Supreme Court of Canada, in a briefly worded decision, upheld the appellate court’s findings on an appeal brought by the insurer.

Brkich & Brkich Enterprise Ltd. v. American Home Assurance Co., [1997] S.C.J. No. 46.


Air Carrier Liable For Failing to Take Reasonable Care of Cargo

155501 Canada Inc., shipped cargo with Air Canada from Milan, Italy to Mirabel Airport at Montreal.

The cargo, a steel bending press weighing approximately 3,200 kgs was alleged to have been damaged while in the Air Carrier’s possession. Air Canada alleged that the damage occurred as a result of the cargo not having been properly packaged for carriage by the plaintiffs or their agents. At the point of unloading at destination Mirabel, the crate containing the press showed no visible damage and is understood to have been in good order at that point. Thereafter, the pallet upon which the crate was carried containing the cargo was transferred to a warehouse at which point the crate was to be removed from the pallet. During this process, the crate fell to the floor, causing damage to the press.

The plaintiffs allege that the facts that occurred during air carriage, invoking the provisions of the Warsaw Convention. The defendant argued in his defence the press had been improperly anchored within the crate. Both parties called opinion evidence as to the cause of the accident. The court found that the defendant had failed to establish that the damages were attributable to negligence on the part of the persons who crated the shipment, holding their carrier liable. Pursuant to the provisions of the Warsaw Convention, which was held applicable, the air carrier was liable for the damage as the same was seen to have taken place during the course of its performance of the contract of carriage by air and the carrier failed in its legal onus of demonstrating that it took all “reasonable measures” to afford care over the cargo.

155501Canada Inc. v. Air Canada [1997] F. C. J. No. 373 Federal Court of Canada-Trial Division, April 4, 1997

Road Carriage

Load Broker Not Liable For Freight Invoices

The courts have once again considered the often confusing relationship between shippers and carriers of goods and ‘load brokers’. For a period of time the plaintiff, a trucking firm, carried goods for a shipper. The arrangements for these shipments were made through a ‘load broker’. The trucking firm invoiced the load broker for the shipments who in turn invoiced the shipper. The load broker paid the trucking company for some but not all of the shipments, being an amount less than received for that purpose from the shipper. The shipper in turn has not paid all of the load broker’s invoices.

The trucking firm brought an action against both the load broker and the shipper for the unpaid freight bills. The load broker failed to defend the action. The plaintiff obtained a default judgment against the load broker and proceeded to trial on its claim against the shipper. The trial judge made a finding of fact that the load broker acted throughout as the shipper’s agent in arranging the shipments. The judge cited the common law rule of ‘alternative liability’, which rule provides that either the principal or the agent may be liable to the third contracting party, which ‘alternative liability’ continues until an election is made by the creditor as to which party must pay. Such an election is made when a judgment is obtained against one of the principal or agent.

The trial judge ruled that by electing to obtain judgment against the load broker the plaintiff could not pursue the shipper for payment. This ruling was appealed.

A majority of the appellate court overturned the trial decision, holding that the shipper could be held liable, ruling that the ‘alternative liability’ rule did not apply to the facts of the case. The origin of the rule arose in a case where a party contracted with an agent acting for an ‘undisclosed principal’ – the fact that the agent was acting for someone else not being disclosed to the third party. This precedent setting case held that once the third party discovered the identity of the principal, he then had a choice to sue either the agent or the principal, the agent being liable at the suit of the third party because at the time that the contract was made the third party did not know the agent was acting on behalf of a principal. This rule however does not apply where the agent is not personally liable on the contract. For example, where the agent discloses to the third party at the outset that it represents a principal, or where the agent exceeded the scope of its agency authority in dealing with the third party as conveyed to it by its principal. The plaintiff must have a basis to choose between suing the principal or agent on the contract before the rule applies and an election is deemed to have been made. Thus, where the agent is not liable on the contract, there is no choice for the plaintiff as to whom to sue and as such there can be no ‘election’.

The Court of Appeal distinguished the facts of this case from those where the rule was to be applied. The shipper (being the principal) was known to the trucking firm throughout the course of dealings. The trucking company had been led to believe by the shipper that the load broker (agent) was in fact an ‘arm’ of the shipper. The trucking firm was not aware that the load broker was acting as an agent until after the contracts were made. Accordingly the trucking company had always intended to be paid by the shipper. There was no basis in law to hold the load broker liable. The default judgment was accordingly set aside as against the load broker and judgment was entered against the corporate shipper.

The above case is of tremendous importance as a creditor suing for payment may unwittingly restrict its recovery options if it has an option to pursue two partiesit obtains a judgment against one but cannot ultimately enforce same.

Lang Transport Ltd. v. Plus Factor International Trucking Ltd. (1997) 143 D.L.R. 672 (4th) (Ont. C.A.)

This newsletter is published to keep our clients and friends informed of new and important legal developments. It is intended for information purposes only and does not constitute legal advice. You should not act or fail to act on anything based on any of the material contained herein without first consulting with a lawyer. The reading, sending or receiving of information from or via the newsletter does not create a lawyer-client relationship. Unless otherwise noted, all content on this newsletter (the “Content”) including images, illustrations, designs, icons, photographs, and written and other materials are copyrights, trade-marks and/or other intellectual properties owned, controlled or licensed by Fernandes Hearn LLP. The Content may not be otherwise used, reproduced, broadcast, published,or retransmitted without the prior written permission of Fernandes Hearn LLP.

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