Newsletter > June 2016
In this issue:
1. News & Upcoming Events
2. Export Control Prosecutions
3. Ship Arrest- Sale Pendente Lite Denied
4. The Gig Economy
5. “Virtual Airline” Needs No Licence
6. Westjet v. Chabot
7. Insurance Broker Personal Liability
8. Inherent Vice Defence
9. Global Law Update
1. News & Upcoming Events
- Lexpert has announced the results of its peer review study of legal talent in Canada in its 2016-2017 Guide. Four firm members have made the Lexpert Guide:
Rui Fernandes is listed as an expert in Shipping and Maritime Law, Transportation (Rail & Road), and Litigation-Commercial Insurance.
Gordon Hearn is listed as an expert in Shipping and Maritime Law, and Transportation (Rail & Road).
Kim Stoll is listed as an expert in Transportation (Rail & Road)
Louis Amato-Gauci is listed as an expert in Transportation (Rail & Road).
- Kim Stoll, Alan Cofman and James Manson represented the firm at the Chartered Institute of Logistics and Transport in North America (CILTNA GTA Region Chapter) Marine Transportation Breakfast on June 1st in Mississauga.
- James Manson, Mark Glynn and Jaclyne Reive spoke on a panel at the 2016 Supply Chain Management Association’s National Conference on “Understanding ‘limits of liability’: key insights into surface, air and ocean transportation contracts” on June 17th in Niagara Falls.
- Gordon Hearn will be representing the Firm at the Transportation Lawyers Association Annual Executive Meeting being held in Chicago on July 16, 2016.
- CIFFA (The Canadian Freight Forwarders Association) has advised:
“CIFFA Membership Approves Update to STCs at AGM in Montreal to Address SOLAS VGM
Although paragraph 7 of the CIFFA Standard Trading Conditions as passed by membership in May 2010 clearly identifies the responsibilities of the Customer with regards to description of a
shipment, the CIFFA national board of directors determined that a slight amendment to those STCs would more specifically address the new regulation.
The following text outlines the changes to paragraph 8 (A) of the CIFFA Standard Trading Conditions as approved by the membership at yesterday’s Annual General Meeting held in Montreal. The change specifically addresses the SOLAS VGM requirement as the responsibility of the shipper.
“Without limiting the foregoing the Customer is responsible for timely communication of and warrants the accuracy of the verified gross mass (VGM) of the package(s) and or the transport unit and the identity of the duly authorized person so verifying. The customer shall maintain documentation evidencing measurement of VGM as required by law.”
CIFFA Members should ensure customers are advised of the revision to paragraph 8 (A).
As a reminder, the CIFFA Standard Trading Conditions may only be used by current CIFFA Regular Freight Forwarding Members of the Association.”
2. Export Control Prosecutions
Canadian companies and individuals should be aware that a Canadian and U.S. authorities are actively pursuing prosecutions for improper export of controlled goods to sanctions countries.
In 2011 Mahmoud Yadegari was sentenced by a Canadian Court to four years in prison for exporting Canadian transducers to Iran (*1)
After a trial by judge alone, the appellant was convicted of the following nine offences (he was acquitted of count 9 (an additional count of forgery):
1) Count 1 – attempting to knowingly sell, supply or transfer restricted goods to a person in Iran or for the benefit of Iran, without first obtaining a certificate of exemption, contrary to the United Nations Act, R.S.C. 1985, c. U-2 (the “UN Act”) and the Regulations Implementing the United Nations Resolutions on Iran, SOR/2007-44 (the “Iran Regulations”)
2) Count 2 – attempting to export or transfer restricted goods without first obtaining an export permit, contrary to the Export and Import Permits Act, R.S.C. 1985, c. E-19 and associated regulations;
3) Counts 3, 4 and 5 – failing to report the restricted nature of the goods in question, or their proper value, and making a false or deceptive statement in writing to customs officials, contrary to the Customs Act, R.S.C. 1985, c. 1 (2nd Supp.);
4) Count 6 – attempting to export controlled nuclear equipment without first obtaining an export licence, contrary to the Nuclear Safety and Control Act, S.C. 1997, c. 9 (the “NSCA”) and associated regulations; and
5) Counts 7, 8 and 10 – knowingly making a false waybill and knowingly using a forged waybill and end-use certificate when attempting to export the pressure transducers from Canada, contrary to the forgery provisions of the Criminal Code, R.S.C. 1985, c. C-46 (the “Code”).
The United States has been encouraging the Canadian government to more aggressively prosecute such breaches.
Recently a Canadian-Iranian business man has been sentenced in the U.S. to three years in prison for conspiring to violate Iran sanctions. The case highlights that Canadian companies and individuals who purchase American goods and attempt to re route the goods through Canada can find themselves subject to prosecution in the U.S. (*2):
Preet Bharara, the United States Attorney for the Southern District of New York, and John P. Carlin, Assistant Attorney General for National Security, announced that ALI REZA PARSA, a Canadian-Iranian dual citizen and resident of Canada, was sentenced on Friday, May 20, 2016, to three years in prison for his participation in a conspiracy to violate the International Emergency Economic Powers Act (“IEEPA”) and the Iranian Transactions and Sanctions Regulations (“ITSR”). PARSA was arrested in October 2014 following an investigation by the Federal Bureau of Investigation (“FBI”) and United States Department of Commerce, Bureau of Industry and Security (“BIS”). PARSA pled guilty on January 20, 2016, before U.S. District Judge Ronnie Abrams, who imposed Friday’s sentence.
Manhattan U.S. Attorney Preet Bharara said: “As he admitted in court, Ali Reza Parsa conspired to purchase high-tech electronic components – some used in the production of rockets and missiles – from American companies for eventual delivery to Iran through Canada. He has now been sentenced to three years in prison for his violation of federal law.”
Assistant Attorney General John P. Carlin said: “Over the course of six years, Parsa repeatedly violated export control laws and aided Iranian entities in procuring high-tech electronic components that have both commercial and military uses. With this sentence, he will be held accountable for circumventing important U.S. laws designed to protect our national security interests. One of our top national security priorities remains safeguarding our national assets from those who may wish to do us harm.”
According to the Indictment filed against PARSA and other court documents publicly filed in this case and statements made in court proceedings, including Friday’s sentencing:
Between approximately 2009 and 2015, PARSA conspired to obtain high-tech electronic components from American companies for transshipment to Iran and other countries for clients of PARSA’s procurement company in Iran, Tavan Payesh Mad, in violation of U.S. economic sanctions. To accomplish this, PARSA used his Canadian company, Metal PM, to place orders with U.S. suppliers and typically had the parts shipped to him in Canada or to a freight forwarder located in the United Arab Emirates, and then transshipped from these locations to Iran or to the location of his Iranian company’s client. PARSA provided the U.S. companies with false destination and end-user information about the components in order to conceal the illegality of these transactions.
PARSA’s criminal scheme targeted numerous American technology companies. The components that PARSA attempted to procure included cryogenic accelerometers, which are sensitive components that measure acceleration at very low temperatures. Cryogenic accelerators have both commercial and military uses, including in applications related to ballistic missile propellants and in aerospace components such as liquid-fuel rocket engines.
In addition, following his arrest and while incarcerated at the Metropolitan Detention Center, PARSA continued to violate the IEEPA and the ITSR by conducting business for Metal PM and Tavan Payesh Mad, including by ordering parts from German and Brazilian companies for Iranian customers. PARSA subsequently directed a relative to delete email evidence of his ongoing business transactions while in jail, emphasizing the need for secrecy in their dealings.
Neither PARSA nor any other individual or entity involved in transactions that gave rise to his conviction applied for or obtained a license from the U.S. Department of the Treasury’s Office of Foreign Assets Control for the transactions.
Rui M. Fernandes
Follow Rui M. Fernandes on Twitter @RuiMFernandes and on Linkedin. See also his blog at http://transportlaw.blogspot.ca
(*1) R. v. Yadegari 2011 ONCA 287.
(*2) May 23 2016 Press Release Dept. of Justice U.S. Attorney’s Office, Southern District of N.Y.
3. Ship Arrest: Warrant Confirmed and Sale Pendente Lite Denied
In May of 2016, the Superior Court of British Columbia rendered a decision in Avina v The Ship Sea Senor (“Avina”)(*1). This case involved the arrest of a ship pursuant to the British Columbia Supreme Court Civil Rules as opposed to the Federal Court Rules, and an order for sale of the subject ship pendente lite, amongst other things. The Court heard concurrent contested applications and ultimately neither party was successful and all of the relief requested was denied.
The Avina decision, examined below, is instructive regarding: (1) the available grounds for ship arrests; (2) the associated jurisdiction of the Federal Court and British Columbia Supreme Court; and (3) regarding the factors to consider and the sufficiency of evidence required for orders for sale pendente lite (or “pending the litigation”).
Ship Arrest: A Brief Review
Where parties have a dispute involving a maritime claim, it is possible to arrest the ship involved.(*2). Claims involving in rem jurisdiction may use ship arrest to advantage as bail or security is posted for the arrested ship’s release allowing for immediate satisfaction of any judgment.
The Federal Court has concurrent original jurisdiction in all cases “in which a claim for relief is made or a remedy is sought under or by virtue of Canadian maritime law or any other law of Canada relating to any matter coming within the class of subject of navigation and shipping, except to the extent that jurisdiction has been otherwise specially assigned.” (*3)
The Federal Court Act in S. 22(2) lists the court’s jurisdiction regarding claims involving questions of:
(a) title, possession or ownership or proceeds of sale of a ship or any part interest therein;
(b) possession, employment or earnings of a ship between co-owners of a ship;
(c) mortgages, bottomry or respondentia, or other charges
(d) any claim for damage or for loss of life or personal injury caused by a ship either in collision or otherwise;
(e) damage sustained by, or for loss of, a ship including damage to or loss of the cargo or equipment of, or any property in or on or being loaded on or off, a ship;
(f) any claim arising out of an agreement relating to the carriage of goods on a ship under a through bill of lading for loss or damage to goods occurring at any time or place during transit;
(g) death or personal injury occurring in connection with the operation of a ship including any claim for death or personal injury arising out of any defect in a ship or in her apparel or equipment, or of the wrongful act, neglect or default of the owners, charterers or persons in possession or control of a ship or of the master or crew thereof or of any other person for whose wrongful acts, neglects or defaults the owners, charterers or persons in possession or control of the ship are responsible, being an act, neglect or default in the management of the ship, in the loading, carriage or discharge of goods on, in or from the ship or in the embarkation, carriage or disembarkation of persons on, in or from the ship;
(h) loss of or damage to goods carried in or on a ship including loss of or damage to passengers’ baggage or personal effects;
(i) agreement relating to the carriage of goods in or on a ship or to the use or hire of a ship whether by charter party or otherwise;
(j) salvage including, without restricting the generality of the foregoing, claims for salvage of life, cargo, equipment or other property of, from or by an aircraft to the same extent and in the same manner as if the aircraft were a ship;
(k) towage in respect of a ship or of an aircraft while the aircraft is water-borne;
(l) for pilotage in respect of a ship or of an aircraft while the aircraft is water-borne;
(m) goods, materials or services supplied to a ship for the operation or maintenance of the ship, including claims regarding stevedoring and lighterage;
(n) contract claims relating to the construction, repair or equipping of a ship;
(o) any claim by a master, officer or member of the crew of a ship for wages, money, property or other remuneration or benefits arising out of employment;
(p) any claim by a master, charterer or agent of a ship or shipowner in respect of disbursements, or by a shipper in respect of advances, made on account of a ship;
(q) general average contribution;
(r) marine insurance; and
(s) dock charges, harbour dues or canal tolls and charges for the use of the associated facilities.
A ship arrest order is made based upon a solicitor’s sworn Affidavit to Lead Warrant, supported by written or oral evidence establishing the debt or claim. The ship can be released by (1) the consent of the arresting party; (2) discontinuance or dismissal of the associated action; (3) payment into court of the amount claimed; or the amount of freight (where cargo is arrested for freight only); or the appraised value of the arrested ship. The ship may also be “bailed out” by the posting of an agreed upon amount (including interest and costs but not more than the ship’s value). The ship is then released by service of a court-issued release from arrest document plus any costs or Sheriff’s fees. Upon agreement, these amounts may be provided by a P&I Letter of Undertaking as security. (*4) Otherwise, payment can be made by surety bond, bank guarantee or a court approved for of bail bond or by cash paid in to court.
Arrest can be contested by motion or application to the court on the basis of jurisdiction or grounds or where the arrest was otherwise wrongful. Damages for wrongful arrest will be awarded only if the owner of the ship can prove that the action was instituted with malice or gross negligence as per the Supreme Court of Canada’s seminal case, Armada Line Ltd. v.Chaleur Fertilizers Ltd.(*5) The release of the arrested ship can also be contested on motion by an interested party.
Orders for Sale Pendente Lite
Where an arrested ship is, for example, deteriorating because the involved parties are not maintaining it, the court will consider a sale order pendente lite.If the ship has significantly depreciated in value since its arrest or where it is reaching obsolescence, the court may order a sale where a fair price might be achieved to avoid a reduced price later on. Other factors are also considered as discussed below. (*6)
However, such orders for sale pendente lite are not always granted even though the ship remains in the jurisdiction of the court, where no bail or security is posted for its release.
Jurisdiction of Provincial Courts
British Columbia has made such arrest procedures available for access by parties in its British Columbia Supreme Court Civil Rules. It is the only province to do so. In other provinces, including Ontario, applications are made to the Federal Court for arrest warrants in respect of in rem claims pursuant to the provisions of the Federal Court Act and Rules thereunder. The Avina case, reviewed below, considered and affirmed the British Columbia Supreme Court’s jurisdiction in this regard.
Case Comment: Avina v The Ship Sea Senor
The Avina decision is instructive regarding ship arrests pursuant to the British Columbia Supreme Court Civil Rules and also regarding the evidence required when applying for an order for a ship sale pendente lite.
The parties agreed to purchase the ship Sea Senor (the “Vessel”) as the sole asset of an incorporated entity, Sea Chariot Holdings Inc.. The Vessel was purchased for $225,500.00 in March of 2012. The parties eventually had various disagreements and a claim was commenced seeking damages and an order for the sale of the Vessel amongst other relief.
The plaintiff caused the Vessel to be arrested pursuant to an order of the British Columbia Supreme Court. The defendants, however, failed to post the usual security or bail for the Vessel’s release and so the Vessel remained under arrest and in the jurisdiction of the court, until such a time as the dispute resolved by trial or settlement.
The parties disagreed on just about everything including the amounts paid or not paid by the plaintiff in respect of the Vessel to the percentage owned by each of the parties to whether there was a conditional sales agreement in that regard.
The plaintiff claimed that, since the fall of 2013, the defendants were unwilling or unable to make necessary payments relating to the Vessel, failed to ensure that the Vessel was properly maintained to a point where the Vessel was deteriorating and should be sold before its value was affected. The defendants denied all such allegations.
The plaintiff sought an order for the sale of the Vessel pendente lite and an order for any proceeds to be held in trust by his counsel.
The defendants resisted the application for sale and brought their own application for an order setting aside the arrest warrant “for want of jurisdiction”, on the basis that the action was really a shareholders’ dispute and so there was no basis for the exercise of the Court’s maritime law jurisdiction. Instead, the defendants sought a declaration that they could seize and sell the Vessel pursuant to the provisions of the Personal Property Security Act of British Columbia. (*7). The defendants stated in their factum:
a. there is no basis in law for an exercise of maritime law jurisdiction as the matter is a shareholder’s dispute; and
b. further, and in the alternative, the agreement between the parties is, in substance, a secured transaction and the debtor has exercised its right of voluntary foreclosure.
As a result, the Court heard two contested applications at the same time.
Jurisdiction and Warrant Confirmed: The Defendants’ Application Dismissed
The arrest warrant was issued pursuant Rule 21-1 of the British Columbia Supreme Court Civil Rules. Rule 21-1(1) stipulates that the said rule applies if an action may be brought in rem against a ship or other property. The in rem jurisdiction of the court is explained in Rule 21-1(2):
21-1(2) Except to the extent that jurisdiction has been otherwise specially assigned, an action may be brought in rem against a ship or other property that may be brought in rem in the Federal Court of Canada in all cases in which a claim for relief is made under or by virtue of Canadian maritime law or any other law of Canada relating to navigation and shipping. The action, therefore, must be one that could have been brought in rem in the Federal Court of Canada and must be a claim for relief under or by virtue of Canadian maritime law or any other law of Canada relating to navigation and shipping.
The jurisdiction of the Federal Court had to be established for the case at bar.
As per the listing of types of claims noted above from the Federal Courts Act, the affidavit in support of the arrest warrant indicated that the claim was:
“…a claim with respect to title, possession or ownership of a ship or any part interest therein pursuant to the Federal Courts Act, section 22(2)(a), a claim relating to any question arising between co-owners of a ship with respect to possession, employment or earnings of a ship pursuant to the Federal Courts Act, section 22(2)(b) and a claim in respect of goods, materials or services supplied to the Defendant ship for its operation or maintenance pursuant to the Federal Courts Act, section 22(2)(m) on the basis of which basis the Plaintiff invokes the in rem jurisdiction of this court.”
The Court referred to Sections 22(1), 22(2)(a), (b) and (m) (as noted above), of the Federal Court Act and also to 22(3)(a), which states:
(3) For greater certainty, the jurisdiction conferred on the Federal Court by this section applies
(a) in relation to all ships, whether Canadian or not and wherever the residence or domicile of the owners may be;
Referring to two Supreme Court of Canada cases, the Court further noted that the essential requirements to support a finding of jurisdiction in the Federal Court were established (*8):
1. There must be a statutory grant of jurisdiction by the federal Parliament.
2. There must be an existing body of federal law which is essential to the disposition of the case and which nourishes the statutory grant of jurisdiction.
3. The law on which the case is based must be “a law of Canada” as the phrase is used in s. 101 of the Constitution Act, 1867.
At paragraph 30, the Court quoted McIntyre J. in ITO-Int’l Terminal Operators v. Miida Electronics (*9), “It is important therefore that the subject-matter under consideration in any case is so integrally connected to maritime matters as to be legitimate Canadian maritime law within federal legislative competence.”
The Court stated at paragraph 92, referring to Siemens Canada Ltd. v. J.D. Irving Ltd., “There can be no doubt whatsoever that once a claim is held to fall within one of the heads found in subsection 22(2) of the Act, there is necessarily substantive maritime law to support the claim.” (*10)
Therefore, the plaintiff’s claim was “with respect to title, possession or ownership of a ship or any part interest therein” within the meaning of s. 22(2)(a) of the Federal Courts Act” and, as a result, rooted in maritime law. The defendants’ application was dismissed.
Orders for Sale Pendente Lite: The Plaintiff’s Application Dismissed
With regard to the order for sale pendente lite, the Court noted that,under the British Columbia Supreme Court Civil Rules, Rule 13-5(1) (*11) provides:
13-5 (1) If in a proceeding it appears necessary or expedient that property be sold, the court may order the sale and may order a person in possession of the property or in receipt of the rents, profits or income from it to join in the sale and transfer of the property and deliver up the possession or receipt to the purchaser or person designated by the court.
The Court, in deciding whether the Vessel should be sold, noted the Federal Court’s decision in Franklin Lumber Ltd. v. The Essington II, (Ship), (*12) at para. 53, suggested consideration of the following factors on an application for sale before trial:
- The value of the vessel compared with the amount of the claim;
- Whether there is an arguable defence;
- Can the owner carry on: is it reasonable to assume that there must be a sale of the vessel at some point;
- Whether there will be any diminution in the value of the vessel or of the sale price by the delay, including the cost of keeping a man or a crew aboard the vessel the cost of maintaining the vessel and the cost of insuring the vessel;
- Whether the vessel will depreciate by further delay;
- Whether there is any good reason for a sale before trial.
The Court considered, at para 40, the evidence before it and was to exercise broad discretion when determining whether a sale was necessary or expedient and, if possible, advantageous to both parties. (*13)
The plaintiff produced affidavits and photographs as proof that: (1) the Vessel was untidy, dirty, and moldy; (2) there were dents and scratches on the hull; (3) the dinghy was partially deflated, and (4) there was maritime growth below the waterline. The defendants, in turn, relied upon opposing affidavits, which testified that there was no serious deterioration and that the plaintiffs’ complaints were: (1) largely about cosmetic matters; (2) were minor; and (3) could be remedied at a modest cost.
The Court also found that there had been no appraisal of the Vessel and, although an appraisal may not be an absolute requirement on an application for sale, the lack of an appraisal made it more difficult for the applicant plaintiff to establish: (1) that the value of his claim was close to the value of the Vessel; and (2) that there had been serious deterioration and diminution of value since the Vessel was arrested. The Court accepted the defendants’ submission that the Vessel’s condition was not seriously deteriorating and that the deficiencies noted were minor and merely cosmetic.
The Court further found that the defendants had an arguable defence to the claim, although the relative strength of the two positions could only be determined following a trial.
Ultimately, in all the circumstances, the Court was not satisfied that an order for sale of the Vessel pendente lite was necessary or expedient at that time and denied the plaintiff’s request.
The Court dismissed both applications, awarding no costs to either party.
Kim E. Stoll
(*1) Oscar Avina v The Owners and All Others interested in the Ship “Sea Senor” et al 2016 BCSC 749
(*2) A ship may also be subject to a Mareva Injunction order where a party’s assets are frozen within the subject jurisdiction. Further, a judgment debtors’ ship can be seized and sold as an asset of that judgment debtor’s to satisfy any outstanding debts.
(*3) Rule 22(1) of the Federal Court Act R.S.C 1985, c.F-7); 2002 c.8. s.14
(*4) Letters of Undertaking are not technically sufficient under the Canadian Federal Rules of Court, but are routinely negotiated.
(*5)  2 S.C.R 617
(*6) See Justice Lafreniere’s decision in Offshore Interiors Inc. v Worldspan Marine Inc. (*5)2014 FC 625
(*7) The defendants argued that their was a conditional sales agreement and sought declarations relating to their alleged entitlement under the province’s PPSA, S. 59(2) to dispose of the Vessel and to waive the necessity of notice in this regard. The Court found that the critical facts in dispute had to be resolved before the issue could be addressed.
(*8) See Quebec North Shore Paper Co. v. Canadian Pacific Ltd., 1976 CanLII 10 (SCC),  2 S.C.R. 1054, and in McNamara Construction (Western) Ltd. v. The Queen, 1977 CanLII 13 (SCC),  2 S.C.R. 654
(*9) , 1986 CanLII 91 (SCC),  1 S.C.R. 75 at page 766
(*10)  F.C.J. No. 1120 at para. 35. It should be noted that this case was argued by Rui Fernandes.
(*11) The equivalent in the Federal Court Rules is Rule 490 (1). “On motion, the Court may order, in respect of property under arrest, that… (f) where the property is deteriorating, it be sold forthwith.”
(*12) 2005 FC 95 (CanLII). See also Brotchie v Karey T (The)  F.C.J No. 1266.
(*13) See Moody Estate, 2008 BCSC 786 (CanLII), at paras. 18 to 27. See also the foundational case of The “Myrto”  2 Lloyd’s Rep. 243 at p. 260 where the court therein that the court must have a good reason for ordering the sale pendente lite.
4. The Gig Economy – Blurring The Lines
A gig economy has been defined as “an environment in which temporary positions are common and organizations contract with independent workers for short-term engagements.” (*1)
The phrase “gig economy” was coined in early 2009, when the unemployed made a living by gigging, or working several part-time jobs, wherever they could.(*2)
It is predicted that by 2020, 40 percent of American workers will be independent contractors. As a result of the digital age, workers are increasingly mobile and cab work can from anywhere. As a result “freelancers can select among temporary jobs and projects around the world, while employers can select the best individuals for specific projects from a larger pool than that available in any given area.” (*3)
The gig economy is also spawning a host of new commercial activity. Individuals and small companies sell every product imaginable online. It is capitalism in its original form and has commented as follows:
This explosion of small-scale entrepreneurship might make one wonder whether we are returning to the economy of the 18th century, described by the economist Adam Smith in his book An Inquiry Into the Nature and Causes of the Wealth of Nations. The economy Smith described was a genuine market economy of individuals engaging in commerce with one another. Over the following two centuries, however, the emergence of mass production and distribution yielded modern corporations. The entrepreneurs of Smith’s time gave way to the salaried employees of the 20th century. (*4)
In addition to direct online selling of services and products, freelancers also utilize peer to peer exchange platforms. The rise of companies such as Uber and Airbnb has meant more and more people have started to work in the gig economy. Students with a car can utilize the Uber platform to make money in between classes. Retired person can occasionally let out spare rooms on the Airbnb platform. Prior to computers, GPS enabled smartphones and tablets, such activity was likely not to take place. Providers to the gig economy don’t have to commit to full days of work. A mom can pick up her kids from school (and then switch to being an Uber driver). In the gig economy, the lines between personal and professional become increasingly blurred.
The dark side of the gig economy is that the same issues faced by traditional temporary employees continues to exist. Workers do not get health benefits, paid vacation time, pensions or other safety net provisions such as unemployment insurance.
This past year has also seen some actions against the gig economy. Uber faces a class action lawsuit in California by its drivers. The complaint alleges that Uber misclassified drivers as independent contractors, failed to pay overtime wages and compensation, owes expense reimbursement, and didn’t turn over gratuities. (*5) Some technology companies are starting to convert their work forces from contractors to full-time employees. Others companies are offering gig workers more perks. Lyft offers a retirement savings programme for drivers with retirement benefits provider Honest Dollar. Oliver Hsiang, Lyft’s Vice President of Partnerships, said in a press release, “We’re excited to partner with Honest Dollar to help drivers achieve these goals. This first-of-its-kind product is designed to meet the unique needs of independent contractors through access to financial planning and investment tools.”(*6)
The line between gigs and fixed salary “real jobs” is getting increasingly blurred.
Rui M. Fernandes
Follow Rui M. Fernandes on Twitter @RuiMFernandes and on Linkedin. See also his blog at http://transportlaw.blogspot.ca
(*2) http:/ft.com – Leslie Hook, December 29, 2015
(*5) The determination of whether an individual is a dependent or independent contractor has a number of legal ramifications. See the Fernandes Hearn LLP newsletter article on this topic – November 2015.
5. “Virtual Airline” Needs No Licence
On March 29 2016 the Canadian Transportation Agency released its decision (*1) as to whether a reseller, NewLeaf Travel Company Inc. (“NewLeaf”), was operating an air service and was required to have a license pursuant to section 57(a) of the Canada Transportation Act, S.C. 1996 (“CTA”).
A “reseller” is a person who does not operate aircraft and who purchases the seating capacity of an air carrier and subsequently resells those seats, in its own right, to the public. NewLeaf Travel Company Inc. was selling tickets to the public and using Flair Airlines Ltd. (who holds an air operator’s certificate) aircraft and crew.
Paragraph 57(a) of the CTA states that “no person shall operate an air service unless, in respect of that service, the person holds a licence issued under this Part.” The Agency summarized the law on interpretation set out by the Supreme Court of Canada:
In interpreting the expression “operate an air service,” the words are to be read in their entire context and in their grammatical and ordinary sense, harmoniously with the scheme of the legislation, the object of the legislation, and the intention of Parliament (Rizzo & Rizzo Shoes Ltd. (Re),  1 SCR 27 at para. 21).(*2)
The Agency found that after having carefully considered the wording of the CTA and the Air Transportation Regulations, SOR/88-58, the CTA’s underlying public policy purposes, and the submissions received during the consultation period, the most reasonable interpretation of what it means to operate an air service does not capture resellers, as long as they do not hold themselves out to the public as an air carrier operating an air service.
The Agency arrived at this decision after reviewing a number of prior decisions including two decisions involving Greyhound and after its own internal review.
In 1996, the CTA’s licensing parameters were tested when Greyhound Lines of Canada Ltd. (“Greyhound”) proposed to market and sell air services, on its own behalf, while entering into a contract with Kelowna Flightcraft Air Charter Ltd. (“Kelowna Flightcraft”) to operate the aircraft. The Agency, in Decision No. 232-A-1996 and Decision No. 292-A-1996, determined that Greyhound would operate the air service and, therefore, required a licence. The Agency arrived at its determination on the basis that the person that had commercial control over the sale of the air service was required to hold the licence, irrespective of whether they operated aircraft.
Greyhound and Kelowna Flightcraft petitioned the Governor in Council (“GIC”) to reverse the Agency’s decisions. The GIC, on the recommendation of the Minister of Transport, determined that Greyhound Canada Transportation Corp., a successor corporation to Greyhound, would not be operating the air service (Order-in-Council No. P.C. 1996-849). The GIC, however, placed a number of conditions on its decision, including that Greyhound Canada Transportation Corp. inform all prospective purchasers of the air services that Kelowna Flightcraft would be providing the air service.
In 2014, the Agency initiated an internal review of whether resellers are “operating air services” and are therefore required to hold a licence. The Agency subsequently became aware of NewLeaf’s plan to market and sell air services, while not operating aircraft, and in August 2015, initiated an inquiry, pursuant to section 81 of the CTA, into whether NewLeaf would be operating an air service and therefore would be required to hold a licence. The Agency decided to complete its review of whether resellers were required to hold a licence as part of this inquiry, and also decided to hold public consultations on the matter.
It is interesting to note that after this decision was released on March 29th, 2016 NewLeaf issued a press release the day after, stating:
NewLeaf Travel Company initially launched its website and began selling tickets to seven Canadian destinations on January 6, 2016. The Canadian public’s response to NewLeaf’s launch of low cost airfares for those destinations was overwhelming, and reinforces the fact that Canada needs, and can support, an ultra low cost unbundled travel option that creates competition in air travel.
“We want to thank the thousands of Canadians across the country who have expressed their support, especially those who have gone above and beyond by signing our petition and writing letters to the Minister of Transport. This backing shows that Canadian travellers truly desire an ultra low-cost air service option which NewLeaf, in conjunction with Flair Airlines, will provide. We are energized by the results of the review, and look forward to the bright future that lies ahead for NewLeaf and the Canadian travelling public,” said [Chief Executive Officer] Young.
The Agency warned resellers to not hold themselves out to the public as air carriers, stating (*3):
While the Agency finds that, on balance, the most reasonable interpretation of the statutory licensing provisions and their underlying objectives is that resellers are not operating air services and therefore, are not required to hold a licence, this will only be the case as long as those resellers do not hold themselves out to the public as an air carrier operating an air service. The Agency finds that if they choose to do so, resellers would be operating an air service and would be required to hold a licence, thereby ensuring that the consumer protection purposes of the legislation are not undermined.
In determining whether a person is holding themselves out as an air carrier operating an air service, the Agency will consider whether the person promotes themselves as an air carrier, including providing images of aircraft with their livery and using business name(s) and words/phrases that create the impression that they are an air carrier.
Lack of clear disclosure on its Web site, marketing material, and on tickets it issues of the identity of the operating air carrier would be indicative of the reseller holding itself out as an air carrier operating the air service. Web sites and marketing materials that use business names (e.g., “air”, “air lines”, “airlines” “airways”, “aviation”, “fly”, “jet”, or “sky”) or phrases and words (e.g., “our fleet of aircraft”, “our crew”, “we fly”) that convey that the reseller is an air carrier operating the air service would also be indicative of holding oneself out as operating an air service. In contrast, clearly identifying the air carrier that will operate the air service, that the reseller’s role is limited to reselling the air carrier’s capacity, and that the air carrier’s tariff’s terms and conditions apply to the flight would not be indicative of a person holding themselves out as an air carrier operating an air service.
The Agency notes that a passive approach by the reseller that neither clarifies nor refutes any impression by the public that the reseller is an air carrier operating an air service could also be indicative of the reseller holding itself out as an air carrier operating an air service. The public should be clearly informed about whether they are contracting and dealing with the operator of the air service so that they can assess any risk and make informed decisions.
As of the time this article was written the NewLeaf service (and website) is up and running. It is interesting to note that the website now states “Flights operated by Flair Airlines Ltd.” Presumably this is to ensure that it meets the Agency requirements set out above.
It is also interesting to note that on June 9th the Federal Court of Appeal issued its decision in Lukacs v. Canadian Transportation Agency and Newleaf Travel Company Inc. [2016 FCA 174]. Dr. Lukacs is a well known air passenger rights advocate. Dr. Lukacs needed leave of the Federal Court of Appeal to appeal the decision of the CTA. On June 9th the Federal Court of Appeal granted Dr. Lukacs leave. The Court of Appeal noted that Dr. Lukacs participated in the consultation before the Agency undertaken with respect to the change in the interpretation of the licencing requirements applicable to domestic resellers of air service. This was sufficient to afford him standing to launch the appeal. The Court also found that he would possess standing as a public interest litigant. The test for public interest standing involves consideration of three inter-related factors: first, whether there is a justiciable issue, second, whether the individual seeking standing has a genuine interest in the issue, and, third, whether the proposed proceeding is a reasonable and effective way to bring the matter before the courts. The Court ordered the appeal to proceed on an expedited basis. We expect to see a decision within the next six months.
Rui M. Fernandes
Follow Rui M. Fernandes on Twitter @RuiMFernandes and on Linkedin. See also his blog at http://transportlaw.blogspot.ca
(*1) Decision 100-A-2016.
(*2) Ibid, at para. 25.
(*3) Ibid, at paras. 42-45.
6. Air Canada Overhaul Litigation: Supreme Court Hearing Delayed and Likely Averted
The Quebec Court of Appeal dismissed an appeal brought by WestJet with respect to a decision of the province’s Superior Court, which had refused to circumvent a certified class action against the airline on the basis of jurisdiction.
The class action is one of the various proceedings claiming damages in the aftermath of the widely publicized 2008 decision of the Canadian Transportation Agency (« CTA ») that the industry standard « one seat-one price» basis for charging passengers was an undue obstacle to access to air transportation for obese and disabled persons requiring more than one seat.
WestJet argued that the provincial courts should cede jurisdiction in favour of the CTA to decide claims against the airline either as a matter of law or as a matter of deference to the CTA’s expertise in the field. The Court of Appeal upheld the judge of first instance’s decision that the plaintiffs were entitled to proceed in the Quebec Superior Court.
La Cour d’appel du Québec a rejeté un pourvoi formé par Westjet, le deuxième transporteur aérien canadien, qui contestait une décision de la Cour supérieure du Québec ayant rejeté sa requête en exception déclinatoire.
Cette action constitue un recours collectif déjà certifié par la Cour supérieure du Québec (*1). La partie demanderesse réclame une indemnité pour le prétendu préjudice résultant de la politique tarifaire de WestJet. Historiquement WestJet, comme son concurrent domestique Air Canada, a appliqué la politique d’un siège-un tarif (« politique 1S1T »). En application de celle-ci, lorsqu’un passager avait besoin de plusieurs sièges, soit en raison de son obésité, soit en raison d’un handicap nécessitant la présence d’un accompagnateur et/ou d’un siège supplémentaire, le passager était tenu de payer le tarif multiplié par le nombre de sièges requis.
En 2008, l’Office des transports du Canada (« l’Office ») avait dénoncé cette politique sur le marché interne en décidant que les compagnies aériennes ne pouvaient exiger des frais supplémentaires pour les sièges additionnels fournis aux personnes ayant une déficience physique (*2). L’Office a déclaré que les transporteurs en cause —WestJet, Air Canada et Air Canada Jazz — devaient prendre des mesures correctives pour éliminer cet obstacle au déplacement à travers le Canada des personnes ayant une déficience. Par conséquent, les transporteurs ont adopté une politique d’un passager-un tarif (« politique 1P1T »), éliminant ainsi les charges supplémentaires pour les sièges additionnels fournis en raison d’une déficience chez un passager.
Le champ d’application de cette décision était explicitement limité aux vols internes. En 2015, l’Office a refusé d’étendre l’application de sa décision aux vols transfrontaliers et internationaux (*3). Selon l’Office, le contexte international présente des paramètres additionnels tels que les lois et règlements internationaux, les accords bilatéraux et les alliances et autres accords commerciaux entre les transporteurs qui devraient être pris en considération par l’Office dans le cadre de sa réflexion sur l’application de la politique 1P1T aux vols internationaux.
Suite à la décision de l’Office en 2008, des actions collectives ont été initiées à travers le Canada aux fins de réclamer une indemnisation monétaire pour les passagers ayant été préjudiciés par la politique 1S1T. En 2013, Mme Chabot a été certifiée comme représentant pour instituer un tel recours collectif à l’encontre de WestJet au nom de tous les résidents du Québec ayant payé des frais additionnels au bénéfice de WestJet en application de la politique 1S1T.
WestJet a déposé devant la Cour supérieure une requête en exception déclinatoire par laquelle elle a contesté la juridiction rationae materiae de la Cour supérieure au profit de celle de l’Office. Cette requête a été rejetée par le juge de première instance (*4). WestJet a formé un pourvoi à l’encontre de cette décision.
La juridiction matérielle de la Cour supérieure
La Cour d’appel a d’abord considéré si le recours collectif visait une adjudication des droits ou la réglementation des tarifs de la partie demanderesse, cette dernière ne relevant pas de la juridiction de la Cour en l’absence d’une disposition législative expresse. Hogue J.C.A. pour la Cour d’appel a conclu que l’action se fondait essentiellement sur la réclamation d’une indemnité pour un préjudice et que, par conséquent, les cours de droit commun avaient une juridiction prima facie.
La Cour d’appel a ensuite considéré l’argument de WestJet selon lequel la Loi sur les transports au Canada (« la Loi ») (*5) aurait implicitement confié une juridiction exclusive à l’Office pour régler ce différend. Selon une jurisprudence constante de la Cour Suprême, deux conditions doivent être satisfaites pour que la compétence des cours de droit commun soit restreinte au profit d’un autre tribunal: une disposition législative expresse, et l’attribution exclusive à un autre tribunal (*6). Ces exigences n’ont pas été assouplies au cours des années et elles n’étaient pas réunies en l’espèce. La Loi ne confère pas une juridiction exclusive à l’Office, le recours est par conséquent admissible devant les cours du droit commun.
Le déclin discrétionnaire
WestJet a subsidiairement argué que même si le législateur n’a pas privé la Cour supérieure de sa compétence pour juger du différend entre les parties, le juge de première instance aurait néanmoins dû accueillir sa requête eu égard, d’une part, à la compétence exclusive de l’Office pour déterminer si les politiques des transporteurs constituent un obstacle au déplacement et, d’autre part, à la plainte alors pendante devant l’Office concernant l’application de la politique 1P1T aux vols transfrontaliers et internationaux.
Il existe des circonstances pouvant justifier un déclin de sa juridiction par la Cour supérieure en faveur d’un tribunal spécialisé ayant une juridiction concurrente, tel n’était cependant pas le cas en l’espèce. Le recours collectif vise une indemnisation monétaire pour les membres de la classe. En 2008, l’Office n’a pas ordonné le remboursement aux passagers des frais déjà payés comme mesure réparatrice bien que cette possibilité soit prévue au paragraphe 172 (3) de la Loi. En outre, l’Office ne peut pas accorder des dommages moraux ni exemplaires tels que réclamés dans l’action collective. C’est donc à juste titre que la Cour supérieure avait refusé de décliner sa juridiction au profit d’un tribunal dépourvu de la juridiction d’octroyer une partie de la réparation réclamée par la partie demanderesse.
Une décision préalable de l’Office
Selon WestJet, la cour ne pouvait accorder des dommages aux passagers affectés par la politique 1S1T avant que l’Office n’ait déterminé si cette politique représente un obstacle aux déplacements dans les sphères transfrontalières et internationales. Par une décision adoptée unanimement par la Cour, Hogue J.C.A. a écarté cet argument. L’action instituée par la partie demanderesse est basée sur la responsabilité contractuelle de WestJet, et l’examen par la cour de la prétendue faute contractuelle du transporteur se distingue de la notion d’un obstacle au transport des personnes handicapées qui serait en cause devant l’Office. Par conséquent, la Cour supérieure ne devait pas suspendre le recours devant elle en attente d’une décision de l’Office.
L’action se poursuivra alors devant la Cour supérieure.
(*1) Chabot c. WestJet 2013 QCCS 5297
(*2) Décision OTC n° 6-AT-A-2008
(*3) Chabot c. WestJet 2013 QCCS 5297
(*4) Chabot c. WestJet 2015 QCCS 2288
(*5) Décision OTC n° 324-AT-A-2015
(*6) Fortier c. Longchamps  R.C.S. 240, Succession Ordon c. Grail  3 R.C.S. 437
7. Can Individual Employees of Insurance Brokers be Found Personally Liable to Clients?
The Superior Court of Justice recently released its decision on a motion brought by the Defendants in Regal Windows & Doors Systems Inc. et al v Marsh Canada Limited et al. (*1) The Defendants brought a motion for an order striking out, without leave to amend, the Statement of Claim as against the three employees of Marsh Canada Limited (the “Broker”) who were named as individual defendants in the lawsuit.
The Court decided that the Statement of Claim, as it was currently drafted, was completely devoid of any factual allegations against the individual defendants to substantiate a reasonable cause of action. However, it noted that the Plaintiffs may have a facts that they have not yet pleaded. On that basis, the Court granted permission to the Plaintiffs to amend their Statement of Claim to plead facts that could sustain a viable claim against the individual defendants personally.
The Plaintiffs obtained a commercial insurance policy (the “Policy”) through the Broker with Intact Insurance Company (the “Insurer”) with respect to certain premises in London, Ontario. A theft and/or vandalism occurred on the premises resulting in significant damages.
The Plaintiffs claimed those damages from the Insurer, who denied coverage due to numerous breaches of the terms of the Policy. The Plaintiffs then started this action against the Broker and the individual defendants for breach of contract, negligence and breach of fiduciary duty and/or professional duty. The Plaintiffs also started a separate action against the Insurer.
Positions of the Parties
The Plaintiffs argued that the allegations made in their Statement of Claim revealed a valid cause of action as against the individual defendants. They further stated that if the Court should find that the claims against the individual defendants should be struck, then the Plaintiffs should be given the chance to amend their claim to better plead a cause of action.
The Defendants stated that the Plaintiffs did not plead a cause of action against the individual defendants. They argued that at all material times, the individual defendants were employees of the Broker and their actions with respect to obtaining and renewing the Policy were performed in their capacity as employees. The Defendants argued that there were no allegations put forth by the Plaintiffs that (i) the actions of the individual defendants were outside of the scope of their employment; or (ii) that the individual defendants had a relationship with the Plaintiffs that would give rise to a duty of care. The Broker also admitted vicarious liability for the conduct of the individual defendants.
The individual defendants also stated that the Court should infer that the Plaintiffs have no factual basis to make any allegations against them as the Plaintiffs did not attempt to amend their Statement of Claim at any time during the three months of notice that they had of the individual defendants’ intent to bring this motion.
Reasoning of the Court
The Rules of Civil Procedure permit a party to request the judge’s permission to strike out a pleading on the ground that it discloses no reasonable cause of action. (*2) The Court stated that to strike out a pleading, it must be “plain and obvious” that the Statement of Claim is “devoid of material facts that are sufficient to establish a reasonable cause of action.” (*3)
The Court noted that the Plaintiffs needed to plead sufficient facts that the individual defendants owed a duty to the Plaintiffs beyond their actions as employees as well as facts to establish personal liability as against the individual defendants. (*4)
The Court relied on the decision of the Ontario Court of Appeal in Montreal Trust Co. of Canada v ScotciaMcLeod (*5) where it was stated that:
“The decided cases in which the employees and officers of companies have been found personally liable for actions carried out under a corporate name are fact-specific. In the absence of findings of fraud, deceit, dishonestly, or want of authority on the part of the employees or officers, they are also rare…In every case, however, the facts giving rise to personal liability were specifically pleaded. Absent allegations which fit within the categories above, officers or employees of limited companies are protected from personal liability unless it can be shown that their actions are themselves tortious or exhibit a separate identity or interest from that of the company so as to make the act or conduct complained of their own.”
However, the Court also noted that the striking of pleadings should be exercised with “great care and reluctance”. (*6)
The Court reviewed the Statement of Claim and found that no allegations were made specifically against the individual defendants as to fraud, deceit, dishonesty or want of authority. Additionally, no allegations indicated that the individual defendants had a relationship with the Plaintiffs that formed the basis of a duty owed by the former to the latter. None of the allegations took the individual defendants outside of their role as employees of the Broker and the Statement of Claim actually made it clear that they were employed by the Broker as licensed insurance agents.
The Court reinforced the principle that it is not sufficient to simply add the individual employees’ name with every claim made against a corporate defendant. The Plaintiffs needed to set out specific allegations that separated the actions of the individual defendants from those of the Broker or plead how they owed a duty to the Plaintiffs.
On that basis, the Court found that the Plaintiffs failed to substantiate a reasonable cause of action as against the individual defendants.
However, the Court still had to address whether the Plaintiffs could amend their Statement of Claim. The individual defendants argued that the Broker, in its Statement of Defence, takes responsibility for the individual defendants on the basis of vicarious liability. On the other hand, the Plaintiffs argued that not to allow them to amend their claim would cause them irreparable prejudice since they may have facts that support a cause of action.
The Court recognized that the Broker admitted that it is vicariously liable for the conduct of the individual defendants. Yet, the Court stated that it should be “cautious to prevent a plaintiff to make a factually supportable cause of action.” (*7)
Ultimately, the Court decided to grant the Plaintiffs permission to amend their Statement of Claim to plead facts that can sustain a viable claim against the individual defendants.
Although this case does not make a formal decision on liability of the employees of the Broker, it highlights the circumstances under which employees should take caution. They should avoid acting outside the scope of their employment duties or creating a relationship with clients where clients are relying on them to a point which could be construed as creating a duty of care to the clients. Employees should also avoid situations where clients could try to claim that they have actual fraudulently, dishonestly, with deceit, or outside of their authority. This decision suggests that in any of these circumstances, there is a possibility that individual employees of a broker could be found personally liable to clients.
This decision also highlights the reluctance of the Court to strike a plaintiff’s claim for lack of factual support for a cause of action, without first giving the plaintiff the opportunity to first amend their claim. It will be interesting to follow this case to see if the Court will make a finding with regard to specific circumstances where employees of a broker could be found liable in their personal capacity.
(*1) 2016 ONSC 4040 [hereinafter, “Regal Windows”].
(*2) RRO 1990, Reg. 194, Rule 21.01(b).
(*3) Regal Windows, at 10.
(*4) Ibid., at 12.
(*5) 1995 CarswellOnt 1203,  OJ No. 3556 (ONCA) at 25.
(*6) Regal Windows, at 14.
(*7) Ibid., at 29.
8. The Defence of Inherent Vice: A Case Study
At law, carriers have an obligation to deliver the shipments that they are entrusted with in the same condition as when they were received. However, they are not automatically liable for any kind of damages occurring to shipments while in transit and in their care, control and custody. For example, carriers are not liable for damages caused by an inherent vice of the shipment. In Société d’assurances générales Northbridge v. Garage Marcel Simard Inc., (*1), the Quebec Superior Court recently had to rule on the application of the inherent vice defence.
1. The Facts
In this case, a corporation called Pro-Combustion Inc., insured by Société d’assurances générales Northbridge, was at all material times specialized in the supply of mobile heating devices to commercial and industrial clients. On or about November of 2010, the services of Pro-Combustion Inc. were retained to supply and deliver a boiler to an entity located in Chibougameau, Québec.
To fulfill its contract, Pro-Combustion Inc. retained the services of the defendant Garage Marcel Simard Inc. to pick up the boiler already loaded on a trailer belonging to Pro-Combustion Inc. and to deliver it to its client located in Chibougameau, Québec. Few days later, an employee of the defendant picked up the trailer on which was loaded the boiler and attached it to its tractor using a whell lift and a chain system. While attaching the trailer to its tractor, the defendant’s employee noticed some rust on the trailer but did not think much of it other than it was normal for a trailer that spends most of its time outside to be rusted.
While in transit on the highway, a metal platform being part of the trailer’s structure split up causing the trailer to detach from the defendant’s tractor and to rollover in a nearby ditch. The boiler was completely destroyed and the trailer suffered extensive damages as a result of this accident. The plaintiff Société d’assurances générales Northbridge indemnified its insured pursuant to terms of its policy and brought a subrogated action against the defendant Garage Marcel Simard Inc. before the Quebec Superior Court (N.B. Subrogated claims are brought in the insurer’s name in Quebec). The defendant denied all liability based namely on the fact that the loss was the result of an inherent vice of the trailer provided by Pro-Combustion Inc.
2. The Legal Issue
In its ruling, the Quebec Superior Court had to determine whether or not the defendant Garage Marcel Simard Inc. was entitled to deny liability for the damages to the boiler and the trailer based on the fact that those damages resulted from an inherent vice of the trailer.
3. The Law
Pursuant to section 2049 of the Quebec Civil Code, carriers are not liable for damages to goods in their care, control and custody arising out of an inherent defect:
“2049. The carrier is bound to carry the property to its destination.
He is bound to make reparation for injury resulting from carriage, unless he proves that the loss was caused by superior force, an inherent defect in the property or natural shrinkage.” [Emphasis Added]
4. The Ruling
The Quebec Superior Court held that the damages suffered by Pro-Combustion Inc. had been directly caused by an inherent vice of the trailer for which the defendant Garage Marcel Simard Inc. was not liable.
In its ruling the Quebec Superior Court found that there was uncontradicted evidence that the failure of the trailer’s metal platform was the sole cause of the Pro-Combustion Inc.’s damages. Accordingly, the Court found that the defendant Garage Marcel Simard Inc. was not liable for this loss pursuant to section 2049 of the Quebec Civil Code.
Finally, the Court addressed the plaintiff’s argument that the defendant carrier could not rely on the exclusion of liability found at section 2049 of the Quebec Civil Code since it was aware of the existence of the trailer’s inherent vice, i.e. the rust, prior to picking up the boiler. The Court noted that it was doubtful that specific knowledge of an inherent vice to a shipment by a carrier was sufficient to deprive the carrier from the exclusion of liability found at section 2049 of the Quebec Civil Code. In any event, the Court found that it could not be presumed that a carrier is aware of an inherent vice just because one of its employees, with no real expertise in metallurgy, had noticed some rust on a trailer to be picked up for carriage.
Accordingly, the claim by the plaintiff Société d’assurances générales Northbridge was dismissed.
*1 Société d’assurances générales Northbridge c. Garage Marcel Simard Inc., 2015 QCCS 4959 (CanLII).
9. Global Law Update
A. U.S.A. – Marine Insurance
On May 20, 2016, the United States Court of Appeals for the Second Circuit affirmed a decision of the Southern District of New York in Fireman’s Insurance v. Great American Insurance, No. 14-cv-1346, holding that under the doctrine of uberrimae fidei, as well as Mississippi Common law, an insurance contract is void ab initio if the insured is found guilty of misrepresenting material facts which a prudent and reasonable insurance underwriter would have otherwise taken into consideration when determining whether to issue a policy.
The case involved a marine construction firm Signal International LLC (“Signal”). Signal had insured a dry dock it owned in Texas. Signal failed to disclose material information regarding the poor condition of the dock. It had also ignored several recommendations for the dock’s repair. Signal obtained pollution and excess property insurance from Great American Insurance and Max Specialty Insurance Company. The dock thereafter sank. Great American Insurance and Max Specialty Insurance Company argued their policies did not cover the costs of removing the dock from the site and for cleaning up the site.
The court allowed Insurance and Max Specialty Insurance Company to void the policy ab initio for Signal misrepresenting the condition of the dock.
B. U.K. – Interpretation of Letter of Undertaking in Arrest Proceedings
The issue in this case(*1) was whether the claimant owners could apply to the court to require the defendant P&I club to increase the level of security available under a letter of undertaking issued by the club to the owners. The owners pleaded that the use of the words “liberty to apply” in the LOU meant that the court had power to make such a requirement. The club pleaded that the court had no such power. The parties each issued summary judgment applications against the other, and it was common ground that the case raises a question of construction and law suitable for disposition on a summary basis.
The clause in question provided:
“It is agreed that both Charterers and Owners shall have liberty to apply if and to the extent the Security Sum is reasonably deemed to be excessive or insufficient to adequately secure Owner’s reasonable Claims.
The case arose out of an incident in the Indonesian port of Padang on 9 October 2013 in which the chemical tanker, “FSL NEW YORK” was damaged during loading, and there was an escape of cargo. At the time, the vessel was on charter to ICOF Ship Chartering Pte Ltd. Both owners and charterers asserted claims against each other, owners threatening to arrest vessels owned by the group of which charterers are part.
The defendant P&I club, Norwegian Hull Club, of which charterers are members, provided owners with an LOU in the sum of US$3,500,000.
The Court held that:
In the context of disputes which may lead to the arrest of a vessel, a letter of undertaking issued by a P&I club is a convenient means of providing alternative security, and such letters are widely accepted internationally as such … The letter is issued at the request of a member of the club to the party making a claim, but issue is a matter of discretion, and there is no obligation on the club to do so … The purpose is to place the claiming party in no less a favourable position than if it had begun an action in rem and arrested the vessel… Subject to its particular terms, such an instrument will be treated as giving rise to a primary obligation undertaken by the issuer analogous to a bank guarantee … In that case, the special principles of construction applicable to contracts of suretyship will not apply, since these are premised on the surety’s secondary liability. Letters of undertaking should be construed as commercial contracts having regard to their commercial purpose.
The Court applied the interpretation that “is consistent with business common sense.” Of course, the parties took diametrically different positions as to what constituted business common sense. The Court then proceeded to weigh different factors in the LOU in the interpretation.
The Court held that the “liberty to apply” in the letter of undertaking did not give owners the right to apply to the court to require the defendant P&I club to increase the amount of its undertaking. The Court accepted the club’s construction that this provision enables owners to arrest charterers’ assets if the security provided proves to be inadequate, and notwithstanding the prohibition against arrest or re-arrest provided for earlier in the instrument. The right to enforce an increase in the amount of the security lay against the charterers, and not against the P&I club direct.
C. U.S. – Limitation of Liability Applies to Passenger in Recreational Vessel
In a recent decision of the United States Court of Appeals for the Second District a vessel owner was entitled to bring a limitation action for injuries sustained by a passenger while diving off a recreational vessel when it was anchored in shallow navigable waters in Lake Oneida.(*2)
The owner of the vessel, Bruce Germain, and four others (including the complainant) had left Brewerton New York on the shore of Lake Oneida for an excursion on Mr. Germain’s 38 foot motor boat. Lake Oneida is connected to and part of the New York State Erie Canal System. Using the federal shipping lane, the five headed to the shallow Three Mile Bay, a popular spot for recreational swimming. The bay was less than a nautical mile from the shipping lane. On anchoring, the bay was already crowded with other boats. Later, as they were preparing to leave, the claimant back flipped off the port side of the vessel into the water striking his head on the lake floor. The complainant suffered a serious spinal cord injury.
At issue was whether a recreational injury occurring on a recreational vessel anchored in a shallow recreational bay of navigable waters could meet the test the Supreme Court had set out in 1972 for admiralty jurisdiction. In addition the Court of Appeal had to consider whether the matter met the “modern test” for admiralty tort jurisdiction: Could the activity disrupt maritime commerce and did it bear sufficient relationship to traditional maritime activity?
The Court of Appeals articulated the Supreme Court’s instruction that “ordinarily” “every tort involving a vessel on navigable waters falls within the scope of admiralty jurisdiction.” Jerome B. Grubart Inc. v. Great Lakes Dredge & Dock Co. 513 U.S. 527, 543 (1995). The Appeals Court reviewed the history of admiralty jurisdiction and the “modern test” and found that a passenger who jumped from a vessel onto open navigable waters has a “more than fanciful potential to disrupt maritime commerce.” In addition, the Second Circuit stated that Germain’s maritime activity was the transport and care of passengers onboard of a vessel on navigable waters, which constituted a substantial relationship to traditional maritime activity.
Follow Rui M. Fernandes on Twitter @RuiMFernandes and on Linkedin. See also his blog at http://transportlaw.blogspot.ca
(*1) FSL-9 Pte Limited and Northern Tankers v. Norwegian Hull Club  EWHC 1091 (Comm.)
(*2) In Re Petition of Bruce Germain 15-665 issued June 1, 2016.
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