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