Newsletter > June 2014
In this issue:
1. Firm and Industry News
2. Arrest of Offending Vessel and Sister Ship
3. Superior Court Affirms Basic Subrogation Principle
4. Transport Canada News
5. Your Invoice Has Terms and Conditions: But Are they Binding on Your Customer?
1. Firm and Industry News
- Law Business Research Ltd. has just published Rui Fernandes’ article on shipbuilding in Canada in its annual edition of Getting the Deal Through – Shipbuilding 2014.
- Gordon Hearn and Kimberly Newton have successfully defended an insurance company following a one week trial in an action brought by an insured based on the insurer’s ‘off coverage’ position in regards to a stolen tractor unit. A case commentary will be provided in the July edition of this Newsletter.
- Gordon Hearn will be attending the Annual Executive Committee Meetings of the Transportation Lawyers Association being held in Columbus, Ohio on July 18 – 20.
- Canadian Board of Marine Underwriters Annual Golf Tournament, Richmond Hill Golf Club, August 19th, 2014.
- International Civil Aviation Organization Seminar on “Fuelling Aviation With Green Technology” Montreal, September 9-10, 2014.
- Railway Association of Canada’s Canadian Rail Summit 2014, at the Palais des congrès de Montréal (Montréal Convention Center), September 21-23
- International Union of Marine Insurers Annual Meeting Hong Kong on September 21-24.
- Canadian Transportation Lawyers Association Annual Meeting and Conference, Halifax Nova Scotia, September 24-27, 2014.
2. Arrest of Offending Vessel and Sister Ship
In the recent Federal Court of Canada decision in Westshore Terminals Ltd. v. Leo Ocean S.A. 2014 FC 136, the Court grappled with two issues: firstly, whether it would enforce an agreement by a claimant to waive its right to arrest sister ships of the ship “Cape Apricot” and, secondly, whether a sister ship could also be arrested in addition to the arrest of the offending vessel in order to satisfy the claim.
On December 7, 2012 the vessel “Cape Apricot” (the “Vessel”), owned by Leo Ocean S.A. (“Leo Ocean”) hit a marine terminal trestle owned and operated by the claimant at Roberts Bank, British Columbia, leading from the shore to berth #1 (the “incident”). As a result of the incident the berth was rendered unusable pending repairs, allegedly causing a loss to the claimants that was estimated to be in excess of $60 million.
On December 7, 2012, the Plaintiffs commenced an action in the Supreme Court of British Columbia and obtained a warrant for the arrest of the Vessel. On December 8, 2012, counsel for Leo Ocean offered to provide a Letter of Undertaking (”LOU”) in the amount of US$24 million in exchange for the release of the Vessel from arrest.
During the negotiations on the LOU, counsel for the parties discussed the posting of additional security in exchange for a waiver on the arrest of sister ships. During these discussions, counsel for the claimants requested that the ship be moved to another berth, on consent, in order to free up berth #1, to mitigate the damages, as berth #1 was needed to be used for the claimants’ services. Counsel for the arrested ship refused to consent to the move of the arrested vessel until all the issues of security had been dealt with.
The LOU signed on December 11, 2012 contained a provision that the claimants would refrain from arresting any other ships or property under the same ownership as the arrested vessel. The security posted was for $26 million. The original LOU offered security in the amount of US$26 million against the claim, following adjudication of that claim either in the British Columbia Supreme Court or the Federal Court, at the option of the claimants.
The claimants argued, in the Federal Court action, that their “agreement” to accept the original LOU was not binding upon them because it was based upon mistake and coercion. They submitted that there was a common mistake, shared by Leo Ocean, that the amount of available security was capped at the value of the vessel. The claimants argued that this was incorrect. Secondly, they submitted that there was another mistake, either common or unilateral, that the right to arrest sister ships was “weak and of little or no value” to them (which was a comment made by counsel for the vessel during negotiations). Finally, the claimants argued that they were subject to economic duress in “agreeing” to accept the LOU from Leo Ocean because the ship owner refused to consent to the ship being moved from berth #1, while the security was being negotiated.
Regarding whether the Court would enforce an agreement by a claimant to waive its right to arrest sister ships of the ship “Cape Apricot” and to cap the security at $26 million, the Court stated, at paragraph 41:
In the simplest terms, a contract is a legally recognized agreement between two or more parties giving rise to an obligation that may be judicially enforced; see the decision in 406868 Alberta Ltd. v. Westfair Foods Ltd.,  A.J. No. 790. A contract can be avoided by factors including mistake or duress. A mistake on the part of one or both parties may mean that there was no consensus ad idem; see Colonial Investment Co. v. Bortland (1911), 1 W.W.R. 171. The decision in Stott v. Merit Insurance Corporation (1988), 63 O.R. (2d) 545 reviews the elements necessary to establish economic duress.
The Court found that there was no mistake or error on the terms of the LOU. The parties were represented by experienced maritime lawyers. On the issue of duress, the Court stated, at paragraphs 55-57:
The “pressure” here is the Defendant Leo’s refusal to allow the Vessel to be moved before security was in place. In my opinion, while Leo’s position may have put pressure on the Plaintiffs and their lawyers, including Mr. Desmarais, an in-house lawyer and Corporate Secretary of Westshore Terminals Limited Partnership, I fail to see how this amounted to “coercion of the will”.
It seems to me that Counsel for Leo was entitled to take the position that the Vessel would not be moved until security was posted. It is the usual consequence of an arrest that the ship will not be moved while under arrest, in the absence of consent or of a Court order; see the decision in Whyte v. “Sandpiper IV” (The) (2002), 217 F.T.R. 314. On the basis of the evidence submitted and the general law in Canada regarding movement of the ship while under arrest, I find that there was no “coercion of the will”. Rather, there was bargaining.
I am equally satisfied that the pressure was legitimate. Leo wanted its Vessel released from arrest. The Vessel had been moored at Berth #2 on December 7, 2012. The Plaintiffs chose to arrest the Vessel while so moored. The Plaintiffs are deemed to know the law concerning the consequences of arrest. There was nothing illegitimate in the position adopted by Leo. Commercial realities involving ships are not unique to the Plaintiffs in this case.
The second issue in the action, was whether the Federal Court of Canada Rules allow multiple arrests.
The Court noted that subsection 43(8) of the Federal Court Act does not speak of “arrest” per se but addresses actions in rem. Arrest is a procedural right that is available to an injured party as a means of obtaining security for a future judgment. Section 43(8) provides that “the jurisdiction conferred on the Federal Court by section 22 may be exercised in rem against any ship that, at the time the action is brought, is owned by the beneficial owner of the ship that is the subject of the action.”
The claimants arrested the vessel in the British Columbia proceedings. Did they have the right to arrest multiple ships? The right to arrest sister ships exists pursuant to subsection 43(8) of the Act as quoted above. The scope of that right involves the interpretation of subsection 43(8).
The Court opined, at paragraph 76 that:
The scope of subsection 43(8), in my opinion, turns on the meaning to be given to the words “any ship”. Do those words mean more than one? Can a plaintiff arrest the offending ship, as well as one or more sister ships, that is a ship or ships that are beneficially owned by the same owner as the ship subject to the action?
The Court looked at the wording of the 1952 International Convention For The Unification Of Certain Rules Relating To The Arrest Of Sea-Going Ships, 10 May 1952, 439 U.N.T.S. 193 (the “Convention”) noting that Canada was not a party to the Convention but that it had adopted legislation on arrest of ships in 1952 which included section 43(8).
The Court looked at the U.K. legislation that specifies that only one ship may be arrested.
Finally, the Court looked at the wording used in the English and French versions of section 43(8). The Court concluded that there was no evidence before it that Parliament intended to provide a right to multiple arrests in the domestic domain when the Convention makes it clear that only one ship may be arrested; that is, either the offending ship or another ship that meets the requirements of Article 3 of the Convention.
The Court concluded and found, at paragraphs 91 and 92 that:
Shipping is an international enterprise and ships from the international community frequent Canadian waters. In the absence of evidence to the contrary, I am not prepared to find that the Parliament of Canada intended to introduce a radical change in the matter of multiple arrests of ships, without a clear expression of that intention.
I am satisfied that subsection 43(8) of the Act does not give the right to multiple arrests. It follows that the Plaintiffs are not entitled, as a matter of law, to arrest a sister ship to the Vessel, once they had exercised their right to arrest the offending ship.
Rui M. Fernandes
3. Superior Court Affirms Basic Subrogation Principle
Grenville paid out the property damage loss to the parents and sought to recover from Economical its subrogated for the sums it paid out, alleging that the fire was as a result of the Francois’ negligent use and operation of a motor vehicle.
The Court found that Francois was negligent. It then had to determine if Grenville was entitled to subrogate its claim against Francois (Economical).
The Court found that in the Grenville policy of insurance, there was no definition of who is an “Insured”. Rather the policy defined “You” and “Your”. Importantly, this definition applied to all four sections of the Grenville policy. As Francois was an unnamed insured on the policy, by the definition of “You” and “Your” in the policy, his rights were the equivalent of his parents throughout the policy. As such, the court concluded that Grenville’s action could not be maintained. An insurer cannot subrogate against its own insured.
The Court distinguished an earlier decision, Morawietz v. Morawietz (1986), 18 C.C.L.I. 108, of the Ontario Court of Appeal where subrogation was allowed. In Morawietz, the insurer brought a subrogated claim by the parents, as named insured, against their son, whose negligence caused the loss. The Court of Appeal allowed the subrogated claim against the son, given the unique factual situation of that case. Essential to the Court of Appeal’s decision was the fact that the son was not an insured under all parts of the policy; specifically, the son was not an insured under the part of the policy under which the parents had claimed and been paid coverage for the loss caused by the son’s negligence. The son had no insurable interest in the loss. In that policy, there were three distinct sections: fire, multi-peril and liability, and the definition of “insured” varied between the sections. The loss was paid out under the fire section, in which the definition of “insured” included only those who owned the property. As only the plaintiff parents, and not the son, had an ownership interest in the property, the son was not an “insured” for the purposes of the section under which the loss was paid out. Therefore, the subrogated claim was allowed against the son.
In distinguishing the Morawietz case, the Court noted, at paragraph 54:
Morawietz, supra, stands for the principle that if you are not a named insured, and do not fall under any extended definition of insured, in the section of the policy that paid out the loss, and you had no insurable interest in the loss, then the insurer can sue to recover the loss against you. Its application is very limited, given that it requires a fact situation where the definition of “insured” varied as between the different sections of the insurance policy, and that the loss was specifically claimed and paid out under a section in which the individual who caused the loss is not an “insured”, despite being an “insured” as per the definition under and pertaining to a different section. This is not the case here.
This case illustrates that a careful coverage analysis is required when trying to determine if subrogation will ultimately be allowed.
Rui M. Fernandes
4. Transport Canada News
On June 25th, the Honourable Lisa Raitt, Minister of Transport, launched a statutory review of Canada’s transportation legislation a year ahead of schedule, fulfilling the government’s promise made this past spring to accelerate the review.
The announcement indicated that “review is being done a year earlier than required to address a range of changing conditions and challenges, including those related to the transportation of grain on the Prairies. It will also examine what improvements could be made in a number of areas, including: our strategic transportation gateways and corridors; Canada’s transportation safety and environmental regimes; the role of technological innovation in improving transportation services and infrastructure; the safe movement of goods through communities; support for the northern transportation system; federally regulated passenger rail services; the vitality of our aviation sector and air connectivity; and governance and service delivery for key federal operations, assets, and agencies.”
The following quick facts were set out in the announcement:
1. Canada’s transportation system has more kilometres of roads per person than almost any other nation. It also includes: over 300 airports, 18 of which offer international service; 45,742 km of operating railroad tracks; and more than 240 marine ports and harbours, which provide access to three oceans and the Great Lakes—St. Lawrence Seaway System (2012 data).
2. Approximately 2.2 billion people used commercial transportation in Canada in 2012.
3. Canada’s transportation system supported the export of approximately $471.4 billion in Canadian merchandise in 2013.
On June 27th, the Honourable Lisa Raitt, Minister of Transport, announced new rules aimed at further safeguarding communities along Canada’s railway lines.
The new measures, which the Minister highlighted as part of her call with the Federation of Canadian Municipalities held on the 27th, introduce amendments under the Transportation of Dangerous Goods Act; the Railway Safety Management System Regulations; and the Transportation Information Regulations. Key changes include:
1. Requiring 35 provincially regulated railway and light-rail companies operating on federal track to develop and implement Safety Management Systems;
2. Formalizing new DOT-111 tank car standards that will require thicker steel walls and other reinforcements to reduce the risk of spills on impact; and
3. Improving data reporting requirements for railways, requiring them to proactively identify and address safety risks before accidents happen.
Rui M. Fernandes
5. Your Invoice Has Terms and Conditions: But Are they Binding on Your Customer?
The recently published decision of the Ontario Superior Court of Justice in Jet Wave Corp. v. IPsmarx Technology Inc. (*1) illustrates the premium on the use of precise contract language and the timely and effective incorporation of contract terms in dealings with a customer.
The plaintiff, Jet Wave Corporation, purchased a communications system from the defendant, IPsmarx Technology Inc., in 2009. This arrangement was the subject of a written Product Purchase and Services Agreement dated December 21, 2009 (the “Agreement”). The plaintiff thereafter purchased certain “modules” from the defendant during 2010 and 2011 (the “Supplementary Purchases”).
Alleging that the plaintiff had failed to timely pay for the Supplementary Purchases, the defendant temporarily suspended the operation of the modules (in effect, shutting down the plaintiff’s access to the communications system) according to a “Terms of Payment” clause contained in the Agreement:
In the event Customer fails to pay any amounts when due under the terms of this Agreement, IPsmarx may at its option suspend the provision of any Services, suspend Customer’s use of the IPsmarx Software and/or suspend the fulfillment of any pending orders or deliveries for Products or Services without liability. Exercise of such right by IPsmarx will not preclude IPsmarx’s exercise or enforcement of any other right or remedy hereunder.
The defendant reconnected the system upon the plaintiff then committing to make good the balance then outstanding to the plaintiff.
The plaintiff eventually brought an action against the defendant seeking damages of $2,000,000 on the basis that the communications system was allegedly faulty. The decision is not clear on point; however, it appears that it was the Supplementary Purchases that were alleged to have been faulty. At any rate, the apparent “last straw” for the plaintiff motivating it to commence the lawsuit was the defendant’s suspension of the services to the plaintiff. Following the commencement of the lawsuit, the defendant brought a motion for summary judgment to address the issue of whether the plaintiff’s claim was limited to the amount that the plaintiff had paid for the defendant’s good and services. In this regard, the defendant relied on a limitation of liability clause contained in the Agreement, the relevant portion (purporting to limit the total liability and obligation of the defendant for any and all claims) provided as follows:
… ARISING OUT OF OR IN ANY CONNECTION WITH THIS AGREEMENT…” to “THE ACTUAL AMOUNTS PAID BY CUSTOMER TO IPSMARX UNDER THE AGREEMENT IN RESPECT OF THE PRODUCTS OR SERVICES SUBJECT TO THE CLAIM”.
(capitalization used in the original agreement, underlining emphasis by judge)
The limitation of liability clause goes on to provide that all disclaimers and limitations:
… apply regardless of the nature of any cause of action or demand (including, but not limited to breach of contract, breach of warranty, negligence, strict liability, tort or any other cause of action) and shall survive a fundamental breach or breaches and/or failure of the essential purpose of this Agreement or any remedy contained herein.
If the defendant was correct about the application of the limitation of liability provision, the total amount recoverable would be $52,195, being the amount charged by the defendant for goods and services for 2009 through 2011 pertaining to both the Agreement and to the Supplementary Purchases.
The plaintiff argued that the limitation of liability provision did not apply on account of the following:
1. The defendant shut down the entire communications system due to the alleged failure of payment and in reliance on the limitation of liability clause in the Agreement. However, the Supplementary Purchases were not subject to the Agreement which was made in connection with the original 2009 purchase.
2. In addition to other basis of claims for damages, the plaintiff was asserting a claim against the defendant for the tort of “trespass”, the damages in respect of which cannot be limited as asserted by the defendant.
3. The defendant grossly misrepresented the precise products being delivered and accordingly cannot rely upon the limitation of liability clause in issue.
The Motion for Summary Judgment
In determining whether summary judgment is available, the threshold question is whether or not there is a genuine issue requiring a trial. No genuine issue for trial will exist:
When the judge is able to reach a fair and just determination on the merits on a motion for summary judgment. This will be the case when the process (1) allows the judge to make the necessary findings of fact, (2) allows the judge to apply the law to the facts, and (3) is a proportionate, more expeditious and less expensive means to achieve a just result. (*2)
To reach a fair and just determination, the summary judgment process must give “the judge confidence that he or she can find the necessary facts and apply the relevant legal principles so as to resolve the dispute”. (*3)
The Court noted that there was a factual dispute as to whether or not the defendant shut down the plaintiff’s entire communications system. There was, however, no dispute that, for a period of approximately 45 minutes and 2 hour and 50 minutes, the defendant had shut down the two modules it had supplied to the plaintiff in 2010 and 2011, and for which payment was outstanding.
The essential issue to be resolved concerned whether the supply of the two modules in 2010 and 2011 (the alleged non-payment of which gave rise to the shut down) would form part of the Agreement so as to import into the contract for the supply of those two modules the limitation of liability provision cited above.
The plaintiff argued that the Agreement would not extend to the subsequent supply of the modules. It asserted that, on a reading of the “Terms of Payment” language in the Agreement (produced above) and of the “Entire Agreement” language in the Agreement, it was clear that the Agreement itself (including the limitation of liability) applied only to the goods and services being the subject of the Agreement itself and not to further goods or services supplied at a later date. The “Entire Agreement” clause in the Agreement provided as follows:
Entire Agreement and Amendment: The Agreement constitutes the entire agreement between the parties as it relates to the subject matter of this Agreement and supersedes all prior or contemporaneous agreements, quotations, negotiations, representations and proposals, written or oral between IPsmarx and Customer. The Agreement may only be amended or supplemented by written agreement executed by each of the parties. No terms or conditions which may be contained in Customer’s order forms, purchase orders or any other document not agreed to in writing by IPsmarx shall bind IPsmarx. This Agreement will enure to the benefit of and be binding upon the parties and their respective successors, heirs and permitted assigns.
According to the plaintiff, there was no evidence of any written agreement executed by each of the parties supplementing the Agreement.
The defendant asserted that the invoices for the two modules supplied in 2010 and 2011 incorporated the limitation of liability clause in the Agreement. Both the invoices for the Supplementary Purchases contained the following language:
This Quotation or Invoice (“Quote”) is issued pursuant to and is deemed a part of, and the Products and Services described in this Quotation are supplied by IPsmarx subject to, the terms and conditions of the IPsmarx Product Purchase Agreement (“Purchase Agreement”) between the parties and govern the purchase and supply of such Products and Services. If Customer has not signed this Quote, by making payment Customer is deemed to have agreed to the terms thereof.
The undisputed evidence was that each of the invoices was preceded by a quotation. Neither of the quotations contained the foregoing language. Accordingly, the clause purporting to apply the terms and conditions of the Agreement to the supply of the modules was only notified to the plaintiff, as purchaser, after the order had been placed.
The Court noted that, in cases where a buyer orders goods using a form of purchase order, including its terms of business, and the seller then sends an acknowledgement accompanied by different terms of sale, it would be reasonable to find that the applicable terms are those put forward by the party that has performed its obligations under the contract and where the other party has accepted that performance. However, in this case, the performance by the defendant was disputed: although it supplied the modules, the plaintiff claims that they did not work properly. In this regard, the defendant asserted that the plaintiff’s claims that the parts did not work were strategic for the purposes of the litigation, and the court noted that there was little evidence in the history of the correspondence between the parties of the plaintiff’s dissatisfaction with the performance of the system.
The Court noted that, while there were reasons for the defendant to be skeptical about complaints now made by the plaintiff, these concerns did not “repair the shortcomings of the paperwork”: if the defendant wanted to make the limitation of liability applicable to not only its initial contract for the supply of goods and services, but to all subsequent orders, it could have so provided in clear, unequivocal and timely language. It did not. In this case, the application of the limitation of liability terms were dependent on conditions which were printed on invoices that were sent to the plaintiff after the modules had been supplied by the defendant, and for which full payment had yet to be made. While “the defendant may well have strong arguments of the merits of its defences to the plaintiff’s claim” the Court “was not persuaded that the terms on the invoices for the modules were sufficient to import the terms of the Agreement to the supply of those modules”.
The Court cited, as reinforcement for this view, the lack of clarity as to the extent of the limitation of liability if the Agreement did apply. Was it the amount paid for the original supply of the goods under the Agreement (being US $40,695?). Or that sum plus the additional sums payable for the 2010 and 2011 purchases (e.g. US $52,194?)? Or the amounts actually paid by the plaintiff?
The Court declined to grant summary judgment in favour of the defendant that the limitation of liability provision applied.
The (perhaps) Unintended “Boomerang” Effect of the Motion for Summary Judgment
It remained for the Court to consider whether there was a genuine issue for trial concerning the ability of the defendant to assert a contractual limitation of its liability to the plaintiff. Not being prepared to render the finding that the defendant was looking for at this point in time, should this issue then ‘survive’ until trial?
The Court noted:
In (this) regard, it is hard to imagine what evidence might be available to rescue the limitation provisions, such that they could be relied upon by the defendant at trial in connection with the alleged non-performance of the modules.
It is the responsibility of the parties to put their best foot forward on this motion (for summary judgment). On the presumption that the defendant has done so, I see no basis for not determining the issue now – but in favour of the plaintiff rather than against it.
I would dismiss the defendant’s motion for summary judgment and in doing so conclude (and so order) that the limitation (in the Agreement) does not apply to the supply of the modules by the defendant to the plaintiff.
For the sake of clarity, by so deciding I make no finding regarding the effectiveness of the limitations contained in the Agreement concerning the goods and services supplied pursuant to that agreement (as opposed to any subsequent goods and services supplied by the defendant to the plaintiff). (*4)
Having concluded the matter on these terms, the Court did not have to consider the other defences to the motion for summary judgment raised by the defendant.
Two principles emerge from this interesting case:
1. In protecting one’s interests by contract, consider the need for perpetual and dynamic contract protection. Does the contract frame the parties relationship as at the time of the contract, without future effect? Or it is intended to “be alive” for all future intents and purposes? This case illustrates how the deliberate use of language in the original ‘foundation’ contract, and the timely and proper incorporation of terms in future quotations, purchase order and/or invoice documents would go a long way to cementing the intention of the supplier. In short, any party intending to rely on contract terms contained only in invoice documents (as opposed to documents provided to the buyer before any deal is ‘consummated’) needs to be wary and careful. Can it show that such terms were in fact imported into the contract? (Of course, should a custom come to develop whereby invoices for past purchases consistently invoked certain terms then an argument of “effective incorporation” might be made out in the event of a dispute for the subsequent supply of products or services). Interestingly, in this case, there was no reference to whether there was any earlier purchase whereby incorporation of contract terms by an earlier invoice might have “done the trick”. One can presume – this being a motion for summary judgment – that such evidence would have been led by the plaintiff seller, had there been, in fact, any such evidence.
2. The Courts appear increasingly motivated to assess whether genuine issues exist for trial on motions for summary judgment. Parties moving for summary judgment must, of course, be mindful that they may not live in a “binary” world, whereby only one of two results may come to pass – the moving party either winning on its argument or, if it “loses”, the issue will be dealt with at trial. As was the outcome in these case, there is, of course, a third possible scenario: the Court might resolve the issue, once and for all, in favour of the other party on the motion for summary judgment.
(*1) 2014 ONSC 3370 (CanLII)
(*2) Hyrniak v. Mauldin 2014 SCC 7 at para. 49
(*3) Hryniak, supra, at para. 50
(*4) at para. 28 -32
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