Newsletter > March 2008
In this issue:
1. Firm News
2. Air Carriage and Consequential Damages
3. Court of Appeal Reverses Boutique Jacob -Himalaya Clause Affirmed and Norfolk Southern Railway v. Kirby Referred To
1. Firm News
Fernandes Hearn LLP’s 2008 Trucking and Logistics Seminar will be held on April 17, 2008 in Toronto, Ontario. Details are on our firm’s News and Upcoming Events page at www.fernandeshearn.com/news.
9am – So You Didn’t Issue a Bill of Lading!
930 – Freight Forwarders & Load Brokers
10 – Unwanted and Undeliverable Goods
1045 – Workers Compensation
1115 – Transportation to and from the USA
1145 – Freight Claims: Getting Paid
12 – Lunch
Location: Royal & Sunalliance Lecture Theatre, 10 Wellington St. East. For registration email email@example.com
– Gordon Hearn will be moderating a panel on “Transportation Intermediaries” on May 8, 2008 at the annual Transportation Lawyers Association conference in Fort Lauderdale, Florida, on May 8, 2008. The panel will address recent legal and industry developments concerning Transportation Intermediaries and Logistics providers.
– Rui Fernandes will be presenting a paper on “Road and Rail Carriage” on June 9th, 2008 in Vancouver at the Canadian Maritime Law Association’s Seminar Day on “Carriage of Goods and Passengers in the 21st Century”
2. Air Carriage and Consequential Damages
Ziai v. Maatschappij [KLM Royal Dutch Airlines] 2007 CanLII 21896 (Ont. S.C.): A Simple Lesson on When Courts will Award “Consequential Damages”
This case is a must read. [Or, if I might be so bold, at least this summary might be].
I consider this a wonderful case study example of how the courts will assess, and determine whether to award “consequential damages”. The reference to “consequential damages” is to most only a couple of legal words thrown together. However consider that everyone involved in the carriage industry – shippers, consignees, carriers and insurers [both cargo and carrier liability] – will from time to time encounter a claim that as a result of goods being lost, damaged or delayed in transit that losses were suffered beyond what may have happened to the thing being shipped itself.
Maybe the receiver complains that goods are seasonal and that mere delay has hurt it. Maybe it says that on account of loss or damage to an article while en route that it has lost reputation for not being able to fill inventory for timely sale to its own customers. Just maybe a whole bunch of problems are alleged to have arisen because something was ‘late’.
Just how and should the courts “draw the line”? While ‘victims’ of circumstance should be compensated, just how much should carriers pay in terms of damages – beyond having to replace or repair the thing itself – if we want a sustainable carriage industry?
The answer, in terms of simple policy, is a rather old one. It goes back to 1854, in fact. The decision of Hadley v. Baxendale is still good precedent, in Canadian, British and U.S. legal circles. The rule set down by this old English case is that damages for a breach of contract [which would be the basis for a claim against a carrier] are assessed and awarded based on “what was in the reasonable contemplation of the parties to the contract that it was entered into”. Stated differently, the general rule, to quote from this case is that
“…. the damages that the aggrieved party should receive were those that may be fairly and reasonably considered to arise naturally from the breach or those that may be considered to have reasonably been in the contemplation of both parties at the time of the contract. “
I mentioned the above as a general rule. There might be a “specific exception”. The judge in the Hadley case in fact paved the way for an exception:
“Now, if special circumstances under which the contract was actually made were communicated by the plaintiffs to the defendants, and thus known to both parties, the damages resulting from the breach of such a contract, which they would reasonably contemplate, would be the amount of injury which would ordinarily follow from a breach of contract under those special circumstances so known and communicated. But, on the other hand, if these special circumstances were wholly unknown to the party breaking the contract he at the most could only be supposed to have had in his contemplation the amount of injury, which would arise generally, and in the great multitude of cases not affected by special circumstances, from such breach of contract”.
It will then be clear that in the case where ‘consequential damages’ (damages alleged to have occurred as a consequence of loss, damage or delay in the delivery of goods) are claimed it will be both factual and a policy issue as to whether the general rule would apply, or whether the special circumstances as communicated rule would apply.
The Ziai v. KLM case is a nice example of how these principles are applied.
In late 1998 World of Art Inc. purchased 151 Persian carpets in Iran and it contracted KLM to fly them to Toronto. The carpets were packed in the usual fashion, in bales, and covered with heavy plastic wrapping. KLM carried the goods from Iran, routing them from Tehran to Amsterdam, then to Detroit en route to Toronto. However the United States has for some time had certain trade embargoes with Iran, as a result of which the carpets were seized while in Detroit by the U.S. Customs authorities. As a result, the carpets were detained for over one year, and it was noted upon eventual release and arrival at Toronto that they were damaged. World of Art Inc. (“World of Art”) thereafter sold the carpets by wholesale auction, at a considerable loss.
World of Art brought an action against KLM and obtained an early declaration that KLM was i) liable for breaching the contract of air carriage, as concerns the improper routing ‘deviation’ and ii) that any limits of liability as generally applicable in the governing international convention were not applicable on the particular facts of this case. Thus, the matter proceeded in due course to trial for proof of the damages alleged to have been caused by this breach of contract.
Sometime after the arrival of the carpets at Toronto, but before the trial on the amount of the damages to be awarded, World of Art became bankrupt. It’s right to claim against KLM was purchased by one Mehdi Ziai, the sole shareholder and a secured creditor of World of Art Inc, who continued to prosecute the claim against KLM.
The Various Damages Claimed
Mr. Ziai alleged that KLM’s conduct caused him and his family great personal hardship and damage. While this may have been the case – there may have been a ‘causation’ relationship between what was complained of and KLM’s conduct – the court had to apply the above principles given the broad range of damage claims asserted against KLM:
1. Could damages be recovered for the damaged carpets, and if so, how much?
2. Could World of Art get reimbursement for interest paid on money borrowed by it to purchase the carpets in question?
3. Is World of Art entitled to damages for loss of profit and, if so, what was its loss of profit?
4. Could Mr. Ziai recover damages for the loss of World of Art’s business?
5. Could World of Art recover damages for the duty it paid to obtain the carpets in question?
Analysis and Discussion: Applying the Relevant Principles of Law to Each Damage Claim, One at a Time
World of Art purchased the carpets for a total price of US $355,190.00. It paid a deposit towards this price of US $230,000 in advance of receiving the carpets. The balance was due by the terms of the purchase contract within 45 days of receipt of the carpets.
Issues arose as to the value of the carpets. KLM asserted that the World of Art overpaid for the carpets and in any event that the most that World of Art could recover was the amount of money actually spent [$230,000]. The Court held that World of Art did not ‘overpay’. The important point to register here is that as is often the case, experts are called to testify at trial on valuation issues. Once a value is established, the applicable cost of repair or replacement for transit loss or damage will then as a rule be awarded: the carrier would be taken to reasonably foresee that aspect of damages inherent in the loss of or damage to the article being shipped itself.
However as is often the case, things got tricky. Apparently after it was learned that the carpets were detained in Detroit, World of Art had to obtain replacement carpets and accordingly it approached the seller of the affected carpets in Detroit for the purpose of buying substitutes. World of Art simply had to do this to keep in business. These replacement carpets cost $US 446,850, and World of Art advanced US $200,000 as a deposit. World of Art planned on paying the balance when it received funds from KLM in compensation for the delay of the first shipment of carpets. Ultimately, World of Art did not advance any more monies to the seller, nor did it receive the follow up shipment. The seller ended up applying the $US 200,000 received for the follow up shipment to the balance owing from the first shipment, keeping the remainder on account of damages it alleged to have suffered. The court accordingly found that World of Art did in fact pay the entire purchase price of $355,190 which represented the value of the carpets.
This being a damage claim, how much should the plaintiff then recover?
On eventual receipt of the damaged carpets, World of Art took steps to have then sold by public auction. No bids were received and as such World of Art proceeded with a wholesale liquidation sale. Ultimately, 5 bids were accepted, with the highest one for the lost being CDN $148,500.00, which was accepted.
Could Mr. Ziai therefore recover the difference between the purchase price of US $355,190 and this salvage recovery? While through an expert KLM took the position that the carpets could have been repaired for a much lower amount, the court held that the damage complained of was permanent. The plaintiff was entitled to the difference, however as indicated below, we get into the difficult ‘consequential’ loss areas of loss of profit and other types of claims.
In order to purchase the subject carpets, World of Art borrowed money. This financing was at the rate of 48% p.a., through Iranian based financing. Apparently financing was not available through Canadian based lenders. Mr. Ziai testified that the high interest rate was acceptable to him as a cost of doing business given the margin he expected World of Art to receive on the resale of the carpets and the fact that he expected to resell the carpets within 45 days of receiving them.
World of Art also borrowed money to purchase the second shipment of replacement carpets, at the same high interest rate.
The plaintiff claimed as damages against KLM the amount paid as interest to the aforementioned lender up until the date of the bankruptcy of World of Art.
The Court ruled that the interest claims were exaggerated as the loans in question pertained to more than the shipment in question – they related to World of Art generally as a going concern. Further, even if the interest claim pertained to the subject shipment only, the Court applied Hadley v. Baxendale in ruling that the ‘special circumstance’ of the loan was not within the knowledge of KLM. To recover such interest payments as damages, the plaintiff would have to establish that it communicated to KLM in advance of the contract that the loan and the high interest rate were tied into the very reason for KLM being contracted in the first place. The plaintiff could not discharge this evidentiary burden and therefore could not recover for this claim.
Loss of Profit Claim
The plaintiff claimed that it would have made a profit on the local resale of the carpets. KLM argued the application of Hadley v. Baxendale, that this would be too ‘remote’ from its ‘reasonable contemplation’ when the carriage contract was made. KLM based this argument on the fact that the air waybill, which evidenced the contract of carriage, did not reveal the existence of any interest in the carpets beyond World of Art: there was no indication that World of Art would resell the carpets or be expected to make a profit. To this assertion the Court ruled that it would ‘not [be] unreasonable to assume, given the type of goods being shipped, the quantity involved, their country of origin and destination, and the consignee that they were destined to be resold at a profit. As such, the loss of profit was not a ‘remote’ possibility and it could be said to have been within the ‘reasonable contemplation of the parties at the time of the contract.’
[I should digress at this point and note how this finding illustrates that the application of the ‘reasonable contemplation’ rule of assessing and awarding damages is an objective test as opposed to a subjective test – the Court ruling that ‘the carrier should have known, or that ‘most carriers would have known’, or thinking along such lines].
In the result the Court found on the evidence that the Plaintiff had a realistic chance of turning a gross profit of 10% on the purchase price for the carpets and it was awarded this amount.
Loss of Business Claim
Another tricky factual issue: The plaintiff alleged that as a result of the failure to timely deliver the carpets, that World of Art was forced to declare bankruptcy and was put out of business. The plaintiff accordingly claimed $200,000, which it says was the value of World of Art before the carriage contract with KLM.
The Court ruled that the plaintiff could not recover for this claim. The Court ruled that in a breach of contract case, “a claim for the loss of business, assuming it existed, would clearly constitute “special circumstances” within the meaning of Hadley v. Baxendale. In order to succeed, the plaintiff must establish that at the time of the contract that KLM was made aware that World of Art was in such precarious financial shape that if it failed to deliver the carpets, that World of Art would be put out of business.” The Court found no such evidence in this case and as such the plaintiff could not recover on this claim.
Payment of Duty Claim
In order to ultimately obtain the carpets, World of Art was required to pay duty to the Canada Customs and Revenue Agency. The plaintiff alleged that on account of the problems caused by KLM that it was unable to produce the prescribed Certificate of Origin as a result of which it would have avoided having to pay duty. The Court however found that the breach by KLM did not play a factual role in the requirement of World of Art having to pay duty.
The following general observations can be taken from this case:
1. Plaintiffs have to prove that any damages claimed were caused by the alleged breach of contract by a defendant carrier;
2. A ‘causal connection’ by itself is insufficient as a ground for recovery. The damages caused by the breach must also not have been ‘remote’ from the contemplation of the carrier, from it’s mindset as at the time that the contract was made. Just what is a ‘reasonable and foreseeable’ result, in terms of damages, that might be suffered by a plaintiff shipper, may be enhanced or broadened, [thus invoking greater exposure on the part of the carrier in the event of a breach of contract], if ‘special circumstances’ are communicated by the shipper.
3. In the carriage of goods industry, one rarely finds written communication of ‘special circumstances’ by a shipper to a carrier. Bills of lading or carriage documents rarely ‘spell such things out’. Perhaps there are master contracts between the parties addressing such matters, or there may have been discussions between shipper and carrier at the time of the initial freight quotation. There are critical questions of proof if the shipper wishes to allege that the carrier was somehow provided notice of ‘special circumstances’ so as to broaden its exposure to liability, if the contract of carriage or carriage document is otherwise silent beyond the usual items contained therein in terms of points of origin, destination and the like. However, as will be seen with the ‘loss of profit’ claim above, sometimes in a particular case the Court might be able to imply knowledge on the part of a carrier that particular damages will be suffered in the event of a breach.
3. Court of Appeal Reverses Boutique Jacob – Himalaya Clause Affirmed and Norfolk Southern Railway v. Kirby Referred To
The Federal Court of Appeal issued its much anticipated decision in Canadian Pacific Railway Company v. Boutique Jacob Inc. 2008 FCA 85 on March 6th, 2008. The decision was written by Mr. Justice Nadon, a former respected maritime practitioner in Canada.
The main issue raised in the appeal was the interpretation of section 137 of the Canada Transportation Act, S.C. 1996, c. 10 and specifically the interpretation of the word “shipper” found in the section. At issue was CPR’s entitlement to limit its liability in respect of the loss suffered by Boutique Jacob.
Boutique Jacob carries on business in Montreal as a retailer of clothing. It was the owner of a shipment of assorted garments which it purchased from suppliers in Hong Kong. It retained a freight forwarder in Canada, Panalpina Canada, to make arrangements for the carriage of its cargo from Hong Kong to Montreal. Through this freight forwarder it entered into a contract of carriage with Pantainer Ltd. an NVOCC (non-vessel operating carrier). Pantainer issued an express bill of lading. Boutique Jacob did not declare any value for its cargo.
Pantainer in turn entered into a contract with OOCL, an ocean carrier who issued a bill of lading for carriage from Hong Kong to Montreal. In turn OOCL retained the services of CPR pursuant to a confidential contract wherein CPR agreed to carry the cargo from Vancouver to Montreal. CPR did not issue a waybill but did record the reception of the shipment on its online system relied upon by Pantainer and OOCL.
During the transit from Vancouver to Montreal the cargo was damaged by reason of a train derailment which occurred near Sudbury Ontario.
Trial Judge’s Decision
The trial judge had dismissed the action against all the defendants (Pantainer and OOCL) except CPR. The judge held that Pantainer could exclude its liability pursuant to clause 6.5(h) of its bill of lading which excluded losses arising from “any cause or event which the Carrier could not avoid and the consequences of which the Carrier could not prevent by the exercise of due diligence.” The judge concluded that Pantainer was not liable for the loss which occurred when CPR’s train derailed.
As to OOCL’s liability the trial judge found that pursuant to clause 3.1 of the Painterner bill of lading Pantainer could sub-contract its carriage obligations. This led the trial judge to say that if OOCL owed any liability to Boutique Jacob it was in its capacity as bailee for reward. The trial judge found that bailment on terms has been accepted in Canadian maritime law. The judge found that Boutique Jacob could sue OOCL as a bailee but it was bound by OOCL’s terms and conditions (the terms of the bailment). Although neither Boutique Jacob nor Pantainer had actual knowledge of OOCL’s terms and conditions this was not a bar to finding that they had consented (indirectly) to these terms and conditions. The trial judge found that Pantainer had a history of prior dealings with OOCL and Pantainer admitted using OOCL’s web site for the purposes of booking and tracking cargo. The OOCL terms and conditions were on the web site. The trial judge therefore found that Pantainer and Boutique Jacob were bound by the terms and conditions in the Pantainer bill of lading (to which Boutique Jacob was bound) and in OOCL’s bill of lading (to which Pantainer was bound) which provided that each carrier could sub-contract “on any terms.” The trial judge exonerated OOCL on the basis of clause 4(B)(1)(a)(viii) of its bill of lading which excluded liability where the loss occurred as by reason “of any cause or event which the Carrier could not avoid …” The derailment was such an event.
The trial judge then turned his mind to CPR and section 137 of the Canada Transportation Act. Section 137 provides:
A railway company shall not limit or restrict its liability to a shipper for the movement of traffic except by means of a written agreement signed by the shipper or by an association or other body representing shippers.
The trial judge held that there was no written agreement with Boutique Jacob, the shipper, and therefore CPR could not limit liability.
Federal Court of Appeal
The Federal Court of Appeal had occasion to refer to the Quebec Court of Appeal decision in Canadian National Railway Company v. Sumitomo Marine and Fire Insurance Company Ltd.,  J.Q. 7207,  Q.C.C.A. 985 (dated July 10, 2007) and that of the Supreme Court of the United States in Norfolk Southern Railway Co. v. Kirby, 125 S. Ct. 385 (2004).
The Federal Court of Appeal concluded that the trial judge erred in concluding that Boutique Jacob was a “shipper” within the meaning of section 137 of the Canada Transportation Act. The shipper was in fact OOCL. The Federal Court quoted from the Quebec Court of Appeal in the CN v. Sumitomo case, stating that Court of Appeal in Quebec addressed the issue of who is a shipper squarely at paragraph 49 of the reasons:
49. …The shipper is therefore the one that, given the possibilities available, made a concrete decision to call on a rail carrier rather than another carrier. In other words, the shipper has a direct connection and, especially, effective and real control over the negotiation of an agreement or contract made with the carrier.
The Federal Court of Appeal held that the shipper was OOCL. “In effect, not only was OOCL the entity which contracted directly with CPR by way of a confidential rate contract, it was OOCL which handed over the container to CPR in Vancouver.”
The Federal Court of Appeal then turned to the issue of whether CPR could limit its liability based on the OOCL bill of lading. The Federal Court of Appeal found that the OOCL bill of lading had a Himalaya clause which allowed CPR to “have the benefit of all the rights and defences provided for in this Bill of Lading or by law.” The OOCL bill of lading also allowed the Carrier to sub-contract its duties of carriage. The Court held that the OOCL bill of lading could be used by CPR to its benefit.
The Federal Court of Appeal examined the confidential rate contract and found that it was subject to Tariff CPRS 7589. The confidential rate contract stated that in no event shall CPR’s liability exceed the sum of $250,000 for any container. Tariff CPRS 7589 limited CPR’s liability to the lesser of the value of the contents, $10,000 for a 20 foot container, $20,000 for a 40 foot container or an amount equal to the liability of the steamship company pursuant to the ocean bill of lading.
The appeal court held that CPR could limit its liability to the OOCL liability which amounted to $1,432.89. The court found that the Tariff and the confidential rate contract limitation provisions were not inconsistent.
It should be noted that the application for leave to the Supreme Court of Canada in Canadian National Railway Company v. Sumitomo Marine and Fire Insurance Company Ltd.from the Quebec Court of Appeal was dismissed with costs on February 28th, 2008. So it appears the chances of an appeal to the Supreme Court of Canada in Boutique Jacob is unlikely. The law now appears to be settled in Canada. For the time being.
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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