Newsletter > July 2012
In this issue:
- Firm and Industry News
- Sub-Contractors Limited When Collecting Freight
- Three Recent Important Cases
A. Limitation of Liability Avoided in Marine Case
B. Bill of Lading Needed to Trigger Hague-Visby Rules
C. Rules Governing Proof of Causation in Negligence Law Clarified.
- Regulatory Developments in Transportation South of the Border: The
“Moving Ahead for Progress in the 21st Century Act”
1. Firm and Industry News
- Aug. 29th Richmond Hill Ontario – Fall Golf Tournament Canadian Board of Marine Underwriters
- Sept. 15-19, San Diego – International Union of Marine Insurers Annual Conference
- Sept. 26-29, Toronto – Canadian Transport Lawyers Association Annual Conference
- Sept. 26-28, Dublin – International Marine Claims Conference
Rui Fernandes will be participating in the TIDA / OTA Cargo Claims Seminar on September 13th, 2010 in Toronto.
Rui Fernandes will be presenting a short report at the IUMI Annual Conference in San Diego on September 18th titled “Update on Canadian Developments Affecting Marine insurance”.
2. Sub-Contractors Limited When Collecting Freight
The Ontario Divisional Court, an appellate level court and second highest court in Ontario, recently reduced the scope of the power granted to carriers under the Bills of Lading Act (*1) (“BLA“) by disallowing sub-contracted carriers from being able to rely on the BLA.
The BLA assists carriers to obtain payment for their transportation services by (potentially) expanding the group of potential payees of its invoices. Specifically, the BLA imposes a responsibility on consignees to pay the freight of the goods they received as if they had been the party who had made the contract with the carrier.
Right of consignee or endorsee
2. Every consignee of goods named in a bill of lading, and every endorsee of a bill of lading to whom the property in the goods therein mentioned passes on or by reason of the consignment or endorsement, has and is vested with all rights of action and is subject to all liabilities in respect of those goods as if the contract contained in the bill of lading had been made with himself.
The right of the carrier to look to the consignee for payment is only triggered where the carriage from shipper to consignee has the effect of transferring ownership of the goods from shipper to consignee. In other words, the power to claim from the consignee is triggered in a classic sale of goods scenario where the shipper-vendor effects a sale by delivering the goods to the consignee-purchaser.
This ability to “follow the sale” may be very powerful. Where a shipper absconds, declares bankruptcy or otherwise defaults on its payment, the subject carrier can always look to the consignee for payment, who will, at a minimum, have the value of the cargo itself to offer as payment. In other words, the BLA provides that carriers’ work is guaranteed up to the value of the goods being moved, even if both shipper and consignee are insolvent, since, at minimum, the cargo will have some value. This provides the carrier some measure of guarantee even if its customers would otherwise be a credit risk.
On the other hand, the power of the BLA is not a “cure-all”. The BLA is not triggered in scenarios where property rights in the goods are not transferred. For instance, a carrier may move goods from a manufacturing facility to a distribution facility that may hold the goods on behalf of the manufacturer. The distributor may, for instance, hold the goods as an agent to facilitate an ultimate sale, but not actually acquire any rights in the goods. In this scenario, the BLA would not be triggered.
There is a second type of scenario where the BLA might be triggered. The consignee, rather than the shipper, may contract for transportation services to bring goods to its facility, but the company hired by the consignee may sub-contract the work to another carrier. Assuming this second carrier issues a bill of lading, the BLA seems to permit the second carrier to look to the consignee directly for payment. Since the BLA makes “every consignee of goods named in a bill of lading subject to all liabilities in respect of those goods as if the contract contained in the bill of lading had been made with himself“, the BLA appears to be triggered as between the consignee and the party who issued the bill of lading regardless of the underlying contract provided.
It was this second scenario that was considered by the Ontario Superior Court. In Liberty Line Linehaul Inc. v. Cangro Foods Inc., 2011 ONSC 7242, the carrier appealed a Small Claims Court decision where the trial judge refused to allow the carrier to rely upon the BLA to claim payment from the consignee.
The trial judge determined that the BLA was not meant to apply to this second scenario because the sub-contracting in this case was unauthorized. The Ontario Divisional Court, the appellate court, agreed that the BLA does not apply to sub-contracted carriers.
The basic facts:
- The defendant/respondent arranged for the transportation of canned fruit from its supplier in the United States to its facility in Canada;
- It hired a large load broker, C.H. Robinson, to arrange the logistics of the move;
- C.H. Robinson retained a motor carrier on its list of approved carriers, but that carrier, in contravention of its agreement with C.H. Robinson, double-brokered the load to a second carrier, who in turn triple-brokered the load to the plaintiff/appellant, the performing carrier;
- The plaintiff/appellant completed the transportation of the goods;
- The transportation effected the sale of the goods from the supplier to the defendant/respondent (thus, ostensibly triggering the BLA); and
- The defendant/respondent paid C.H. Robinson who, in turn, paid the first carrier, the first carrier paid the second carrier, the second carrier failed to pay the plaintiff/appellant.
The appellate judge reasoned that the plaintiff/appellant lost its ability to rely on the BLA because it participated in unauthorized and misleading sub-contracting to get the work.
In my view, the appellant has, by participating as it did in the unauthorized subcontracting, disentitled itself from relying on section 2 of the Act. It looked only to Nortown for payment. (*2)
The BLA does not provide an exception for sub-contracting, whether authorized or not. It simply allows carriers the right to collect from consignees named on their bills of lading so long as the carriage involved the transfer of property rights to the consignee; however, in this case, the appellate court focused on what it perceived to be the blameworthiness of the plaintiff.
On one hand, the court noted that the defendant/respondent was blameless in causing the plaintiff/appellant not to be paid. After all, the defendant/respondent had paid its original bill to C.H. Robinson:
The respondent, whose conduct was beyond reproach, was entitled to pay Robinson the amount that it owed, including what was to be paid by Robinson to Three Star. There was no good reason why the respondent should not have paid Robinson. Nor was there any reason for the respondent to think that it might have to pay someone else. (*3)
On the other hand, the court found the plaintiff/appellant blameworthy:
Throughout all of these related transactions, Three Star, Nortown and the appellant, by their conduct, including the preparation and use of misleading documentation, concealed the unauthorized subcontracting from Robinson and the respondent. (*4)
Once framed in terms of “rightness” and “wrongness”, the court had no difficulty in laying the loss at the feet of the plaintiff/appellant, whom it perceived to be in the “wrong”:
The appellant must now accept the consequences that flow from the subcontracting. Its failure to obtain payment from Nortown cannot be attributed in any way to any fault on the part of the respondent or of Robinson and it would be manifestly unjust to require the respondent to make any further payment to the appellant. (*5)
While the court’s logic does appeal to its perception of fairness, there are reasons to doubt the correctness of the decision.
The appellate court did not specify what the plaintiff did that misled the defendant/respondent and concealed the unauthorized sub-contracting. The bill of lading would have listed the plaintiff/appellant as the carrier when it delivered the goods into the defendants’ hands. Since the defendant/respondent would have provided the plaintiff/appellant permission to deliver the goods to it, the plaintiff/appellant would not have been a complete stranger to the defendant/respondent. The court does not mention whether the defendant/respondent objected to the plaintiff/ appellant’s presence at the time of delivery.
In fact, even in the planning stages, the defendant knew that C.H. Robinson intended to hire another carrier to make the delivery. Therefore, it was always in the defendants’ contemplation that a carrier other than the party with whom it dealt with directly would make the delivery.
Why the appellate court felt that the outcome was changed by the fact that the ultimate performing carrier was retained through multiple levels of sub-contracting, rather than only one level, is unclear. At the end of the day, the defendant knew that a sub-contractor of one sort or another would be completing the work. If the sub-contracting had occurred only once, there appears to be no question that the BLA would have been triggered and the defendant would have been liable for freight charges. If the defendant had no involvement in finding or selecting the sub-contractor, why would the defendant escape liability where the sub-contracting happened to be done twice? If the sub-contracting of the work was always an unknown to the defendant, would it not receive a windfall if it happened to learn that the sub-contracting was done twice?
To add to the confusion, while the appellate judge focused on the unauthorized nature of the sub-contracting, the trial judge would have gone farther and stated that BLA is never meant to apply to anyone except the contracting carrier.
The purpose of the BLA is not to extend liability to a subcontractor of the original contracted carrier. Such an extension would be contrary to general contractual principles.
However, one must not lose sight of the fact that the purpose of section 2 of the Act was to create liability akin to contractual liability even in the absence of privity of contract. (*6)
In other words, the “rightness” and “wrongness” of the involved parties was irrelevant in the mind of the trial judge because the BLA was limited in its application to contracting carriers. The appellate judge did not comment on the trial judge’s statement.
Aside from the fact that the BLA contains no limitation or exception for sub-contractors, there is a practical reason to doubt the correctness of the reasons of both the trial judge and the appellate judge. In this case, both courts seemed to be impressed by the fact that, had the plaintiff been successful, the defendant would have (1) paid the freight twice for the same goods; and (2) been forced to pay an invoice of a party with whom it had no knowledge or expectation of working. However, the courts did not consider that consignees will always face these two apparently unfair situations when a shipper makes the transportation arrangements and then fails to pay. In that scenario, it is clear that the consignee would be surprised to receive a bill from the carrier, when it had already paid the freight as part of the sale price. If “surprise” and “double-payment” are irrelevant to the operation of the BLA in a situation where the shipper makes the initial arrangements, why is it relevant when the consignee makes the initial arrangements?
Therefore, this recent Ontario decision appears to have been persuaded by unfairness, “double payment” and “surprise” that arises in all scenarios where the carrier is unpaid and the BLA might apply.
It will be interesting to see whether this case passes further scrutiny; however, in the meantime, carriers ought to be particularly cautious as it will take a ruling of the next level appeal court, the Ontario Court of Appeal, to set aside this decision. Until then, the law of Ontario is that the BLA is inapplicable to sub-contracted carriers.
*1 R.S.C. 1985, c. B-5
*2 para. 10
*3 para. 10
*4 para. 7
*5 para. 11
*6 para. 13
3. Three Recent Important Cases
A. Limitation of Liability Avoided in Marine Case
Peracomo Inc. v. Societe Telus Communications  FCA 199: This is an appeal from the judgment of Justice Harrington who found liability upon the operator of a vessel that snagged one of the submarine cables belonging to the Telus company while fishing. The operator had cut the cable with a saw believing that it was not in use. A few days later, he snagged the cable a second time and did the same thing. Justice Harrington held that the sole cause of the loss was the intentional and deliberate act of the operator of the vessel. To avoid the limitation of liability, the plaintiff was required to prove a personal act or omission of the defendant was committed either “with intent to cause such loss” or “recklessly and with knowledge that such loss would probably result”. The trial Judge held, for the first time in Canada, that this test had been met and the defendants were not entitled to limit liability.
On Appeal, the Federal of Appeal agreed with the trial Judge on the issue of liability finding, amongst other things, that the defendants ought to have used up-to-date charts that disclosed the existence of the cable. The Court also looked at a liability issue raised on appeal that does not appear to have been raised at trial. This issue was whether the individual defendant could be jointly and severally liable with the corporate defendant. The individual defendant argued that he should not be liable as his acts were those of the corporation. However, the Federal Court of Appeal held that employees, officers and directors will be held personally liable for tortious conduct causing property damage even when their actions are pursuant to their duties to the corporation. Concerning the limitation issue, the Appeal Court also agreed with the trial Judge finding that the defendants intended to physically damage the cable and that it did not matter whether the defendants were aware of the actual loss that would result.
The appeal also dealt with the insurance issue. Royal and SunAlliance Insurance Company of Canada insured the vessel and the operator for liability. Royal denied coverage on the basis of section 53(2) of the Marine Insurance Act, S.C. 1993, which provides that an insurer is not liable for any loss attributable to willful misconduct. The trial Judge had found that the operator’s conduct was a “marked departure from the norm and thus misconduct”. The owner and operator lost their insurance coverage. The Federal Court of Appeal was not persuaded that the trial Judge had made an error and agreed that this misconduct was the proximate cause of the loss.
The appeal was dismissed in total.
B. Bill of Lading Needed to Trigger Hague-Visby Rules
Cami Automotive, Inc. v. Westwood Shipping Lines Inc., 2012 FCA 16: This is an appeal from the decision of Justice Blanchard of the Federal Court of Canada. At trial, the claimant sued the defendants for damage to cargo carried under a through bill of lading. The cargo was damaged as a result of a train derailment. The defendants were the charterer of the carrying vessel, the owner of the carrying vessel and the rail carrier. The claimant and the charterer of the vessel, Westwood Shipping Lines Inc., conducted business under annual service contracts for the carriage of containers from Japan to Toronto, pursuant to which a “Shipping Document” was issued when containers were loaded for carriage.
The trial judge held that the “Shipping Document”, which was entitled “Waybill” was a waybill and not a bill of lading. As such, the trial judge held that the Hague-Visby Rules were not compulsorily applicable since a “bill of lading” had not been issued.
On appeal, the Federal Court of Appeal dismissed the appeal and very short reasons were given. The Court stated:
Turning now to the appeal, despite the numerous arguments made by counsel for the appellants, we are all of the view that this appeal cannot succeed… Given these arguments, we need say no more than we have not been persuaded that the Federal Court Judge committed errors of law or principle that warrant our intervention. Nor have we been persuaded that the Federal Court Judge committed palpable and overriding errors while making his findings of fact.
C. Rules Governing Proof of Causation in Negligence Law Clarified.
Clements v. Clements, 2012 SCC 32: In this June 2012 decision, the Supreme Court of Canada clarified the rules governing proof of causation in the law of negligence and endorsed a vigorous approach to establishing causation in Canada.
The Court affirmed the “but for” test. It confirmed that the law requires a plaintiff to prove on a balance of probabilities that the injury or loss would not have occurred “but for”the defendant’s negligent act. The trial judge is to take a robust and common sense approach in determining whether a plaintiff has proved, as a matter of fact, that the defendant’s negligence caused the loss. Only in exceptional circumstances can proof of factual causation be replaced by proof of a material contribution to the risk that gave rise to the injury.
In Clements v. Clements, the plaintiff was a passenger on her defendant husband’s motorcycle. The motorcycle was overloaded by approximately 100 pounds, and the defendant accelerated in order to pass a car. The weather was wet. Mr. Clements was driving the bike. A nail that had previously punctured the bike’s rear tire fell out, causing the rear tire to deflate suddenly during the passing manoeuvre at 120 km/h in a 100 km/h zone. Mr. Clements was unable to bring the bike under control and it crashed, ejecting Mrs. Clements. Mrs. Clements suffered a severe traumatic brain injury. She sued her husband, claiming that her injuries were caused by his negligence.
The defendant did not dispute his negligence in operating the motorcycle too fast and overloaded; however, he took the position that his negligence did not cause Mrs. Clements’ injury. He called expert evidence that the probable cause of the accident was the tire puncture and deflation, such that a crash would have occurred even without his negligent acts.
The Trial Decision
The trial judge found that the plaintiff was unable to prove that she would not have been injured “but for” the defendant’s breaches, due to the limitations of the scientific expert evidence in the case. The trial judge instead applied a “material contribution” test and found the defendant liable on this basis.
The British Columbia Court of Appeal
On appeal, the Court of Appeal set aside the judgment against Mr. Clements on the basis that the “but for” causation had not been proved and the material contribution test did not apply.
The Supreme Court of Canada
The Supreme Court concluded that the trial judge erred by:
(i) requiring scientific proof as a necessary condition for finding “but for” causation; and
(ii) applying the “material contribution to risk” test.
The majority of the Supreme Court ordered a new trial, since the trial judge’s errors of law were such that the Court could not be certain what the trial judge would have decided had he applied the law correctly.
The Supreme Court clarified that the law of negligence by holding that the “but for” causation test must be applied in a “robust common sense” fashion. There was no need for scientific evidence of the precise contribution that the defendant’s negligence made to the injury.
Where “but for” causation is established by inference only, it is open to the defendant to argue or call evidence that the accident would have happened without the defendant’s negligence, i.e. that the negligence was not a necessary cause of the injury, which was, in any event, inevitable.
As a general rule, the plaintiff must show that he or she would not have suffered the loss “but for” the negligent acts of the defendant.
Exceptionally, a plaintiff may succeed by showing that the defendant’s conduct materially contributed to risk of the plaintiff’s injury, where:
(a) the plaintiff has established that her loss would not have occurred “but for” the negligence of two or more tortfeasors, each possibly in fact responsible for the loss; and
(b) the plaintiff, through no fault of her own, is unable to show that any one of the possible tortfeasors in fact was the necessary or “but for” cause of her injury, because each can point to one another as the possible “but for” cause of the injury, defeating a finding of causation on a balance of probabilities against any one.
The special conditions required to apply the “material contribution” test were simply not present in the Clements case.
In the exceptional case described above, fairness demands that the defendants cannot be permitted to escape liability by pointing fingers at one another. The “material contribution” approach is a policy-driven rule of law that meets the underlying goals of the law of negligence. It applies if the plaintiff has established the “but for” test globally, but cannot show which of several negligent defendants actually launched the event that led to the injury. In such cases, each defendant who contributed to the risk of the injury can be faulted. The special conditions required to apply the “material contribution” test were simply not present in the Clements case.
The Court explicitly left open situations such as a mass toxic tort involving multiple plaintiffs where statistical evidence can establish that a defendant’s acts induced an injury to some members of the group, but it is impossible to know which ones.
4. Regulatory Developments in Transportation South of the Border: The “Moving Ahead for Progress in the 21st Century Act“
Our newsletter does not usually feature reports or comments on legislation enacted beyond our borders; however, the above legislation (signed into law on July 6, 2012 by President Obama) is worthy of note “north of the border”. Some of these initiatives will affect Canadian motor carriers, freight forwarders and freight or load brokers who operate in the United States. Elements of the new legislation, highlighted below, illustrate further attempts to “harmonize” the regulation of motor carrier highway safety in both countries while at the same time certain provisions reflect a growing disparity in how the two countries regulate certain practices – in particular, for the purposes of this article, freight intermediary operations. In the United States, the ‘noose’ is tightened; in Canada, there is no ‘noose’.
First, a caveat: this article is only intended as a notice of some of the significant initiatives soon to be implemented south of the border. It is not purported to be legal advice or a detailed analysis of the U.S. law.
The actual title of the legislation is descriptive as to its wide reaching scope: “An act to provide an extension of Federal – Aid highway, highway safety, motor carrier safety, transit, and other programs funded out of the Highway Trust Fund pending enactment of a multi-year law authorizing such programs, and for other purposes“. Commentators south of the border describe the legislation as “wide sweeping” as the new law calls for the creation of a national freight transportation policy with an aim to speed up the construction of highway projects and to increase financing leverage for private infrastructure work by the funding of transportation programs through to September of 2014. The legislation goes far beyond infrastructure initiatives. It adds “teeth” to the regulation of those involved in the commercial surface transport of goods. Canadian motor carriers, freight forwarders and freight brokers that carry on operations in the United States need to take immediate note regarding what will be required of them.
The Growing Disparity
1. The new legislation further refines the requirements for the registration and licensing of motor carriers (when acting as a broker or an intermediary), freight forwarders and freight brokers.
In contrast, Canada does not, generally speaking, regulate motor carriers (when acting as intermediaries), freight forwarders or freight brokers. While motor carriers are regulated in terms of highway safety and accountability for their equipment and their drivers employed and the like, in some provinces (Ontario, for example) motor carrier operating authorities are not required. Freight forwarders and freight brokers are not regulated in Canada with one exception, it being understood that freight brokers are required to be registered in the province of Quebec.
2. Effective October 1, 2012, motor carriers in the United States will be prohibited from “brokering” shipments to third parties unless they have registered as a freight forwarder or a broker under the new law. The new legislation contemplates that the United States Department of Transportation will issue a distinctive registration number for each authority issued which will include an indicator of the type of activity or service for which the registration number is issued. Motor carriers may continue to operate without this authority where they carry the cargo or operate under a conventional “interline” arrangement (i.e. where the carrier physically transports the cargo at some point or for some leg of transit under the carriage mandate with the shipper, and where that carrier retains liability for the cargo for the whole duration of transport and for payment of the “interchanged” carriers).
Non-Vessel Operating Common Carriers (“NVOCC’s”), customs brokers and certain “indirect” air-carriers will be exempt from the foregoing broker registration and licensing requirements to the extent that they are already compliant with and specifically licensed under U.S. law.
In contrast to the foregoing, Canada does not regulate motor carriers in the brokering of shipments to third parties nor does it regulate freight forwarders and load brokers either generally on or their ‘double-brokering’ of shipments.
3. Also effective October 1, 2012 the surety bond requirement for freight brokers in the United States will be dramatically increased from $10,000 to $75,000. This surety may also be by way of proof of trust fund or other financial security, or a combination thereof. Freight forwarders will have to have the same surety bond protection. The new $75,000 surety bond requirement will also be imposed on motor carriers who broker out freight, who as indicated above will have to be licensed as brokers.
Remarkably, by way of comparison, freight intermediaries in Canada do not have to have surety bonds in place. By extension, motor carriers who broker freight in Canada do not have to have a surety bond.
The intention behind this increase in the U.S. surety bond requirement is an attempt to eliminate fraudulent transactions involving intermediaries in the United States. Motor carriers will benefit to the extent that there will now be greater security behind brokers who are responsible for the payment of their freight charges. This initiative might also reduce the increasing spate of the “identity theft” of cargo: a more rigid “profiling” of all parties involved in the chain of transportation should make for more accountability as to exactly who is being engaged each step of the way. With this accountability, the unauthorized brokering of freight should be reduced, with a more limited publication or broadcast of cargo-related information that might otherwise bet transmitted into the “wrong hands”. The new regime may also reduce the problem of the “phantom carrier” or the practice of “rogue” entities posing as carriers and who broker loads to legitimate third party carriers. The rogue sells the account receivable owing from the initial shipper to a factoring company, gets paid who then disappears…
There might also be the most important benefit in terms of increased highway safety; that is, with the reduced (or at least more “deliberate”) brokering out of shipments, a party tendering freight to the actual performing carrier may now have increased confidence that they actually know who will be carrying the freight. Greater transparency as to which carrier is actually involved may provide for more carrier accountability.
A Few Steps Towards Harmonization
As mentioned there are some elements in the new law that brings uniformity between Canada and the United States. The new legislation features a provision concerning “Canadian Safety Rating Reciprocity“. If an authorized agency of the Canadian federal government or a Canadian territorial or provincial government determines in accordance with United States standards that a Canadian carriage operation is unfit and prohibits the same from operating a commercial motor vehicle in Canada or any Canadian province, then the U.S. authorities may prohibit the same from operating such vehicle in interstate commerce until the authorized Canadian agency deems the carriage operator to be fit. The new legislation will also require commercial motor vehicles to be equipped with electronic logging devices so as to improve compliance by an operator of a vehicle with hours of service regulations. Canadian based motor carriers who will be operating in the United States will have to take note regarding compliance in this regard. In Canada, provinces such as Ontario, provide that a driver may make the required daily log either in handwriting, by computer or by way of an electronic or other type of recording device installed in the vehicle. This latter option will enable compliance in both jurisdictions with the use of the same technology.
The harmonization of laws makes things simpler in terms of compliance for the motor carrier, forwarder or broker. It is the disparity in the law that makes things more challenging. This article has touched on only a few of the significant developments reported from south of the border. Each carrier, forwarder and broker involved in cross-border, inter-state or intra-state trade will have to be proactive and careful in determining which regulatory regime(s) their operations fall under. Consideration must be given to questions such as: where is the brokering taking place? Which law and, in turn, which regulations will govern? If the brokering entity carries on business from a location in the United States, the answer is perhaps not so difficult. But what, for example, of an Ontario based entity that brokers out a load with a U.S. carrier for carriage over a routing located in whole or in part in the United States? This is an issue that must be taken into consideration in the particular circumstances of each case, perhaps to be referred to a qualified U.S. attorney to opine as to the “reach” of the U.S. law.
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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