Newsletter > November 2017
In this issue:
1. News & Upcoming Events
2. The New American “ELD Rule”
3. Doing Business in Canada – Part 2
4. Blockchain 101 – Part 3
5. Product Manuals and Misrepresentation
6. Update on Anti-Bribery
7. Occupiers’ Liability Update
8. Severability Clause and Poor Drafting
9. Fed. Ct. Lacks Jurisdiction Trucking
10. Aviation Want of Prosecution
1. News & Upcoming Events
- Canadian Board of Marine Underwriters Fall Conference, November 28th, 2017, Toronto Ontario.
- Women’s International Shipping & Trade Association Annual General Meeting Montreal November 30, 2017. Kim Stoll is the Vice President Central Region and will be in attendance.
- Grunt Club Annual Dinner, December 1st, 2017, Montreal Quebec. Kim Stoll will be attending representing the firm.
- Canadian International Freight Forwarders Association presentation on “Bill 148: Important Changes (and Increased Costs!) for Ontario Employers” on December 5th, 2017 in Toronto. Registration is available at ciffa.com events page. Carole McAfee Wallace will be presenting a member-to-member webinar.
- Toronto Transportation Club Annual Dinner, December 7th, 2017, Toronto Ontario.
- Canadian Association of Importers and Exporters on December 15th, 2017 in Toronto. Rui Fernandes will be on a webinar panel presenting on “Cargo Damage, Insurance and Risk”.
- Conference of Freight Counsel at Tucson, Arizona on January 7-8, 2018. Gordon Hearn will be attending representing the firm.
- Transportation Lawyers Association “Chicago Regional” meeting on January 19, 2018 in Chicago, Illinois. Rui Fernandes will be speaking on “Cargo Claims.” Rui Fernandes, Gordon Hearn and Louis Amato-Gauci we will be in attendance representing the firm.
- Fernandes Hearn LLP 18th Annual Seminar, January 17th, 2018, Toronto Ontario, by invitation. Tentative Program:Date: Wednesday January 17th, 2018
Location: The Advocates’ Society Education Centre
250 Yonge Street, Suite 2700 Toronto
Cost: $65.00 – Includes light lunch and materials (by download)
Registration: Sharifa Green, Fernandes Hearn LLP 416-203-9500
Send cheques to: Fernandes Hearn LLP,
155 University Ave. Suite 700, ON M5H 3B7
Limited to 120 attendees 6.0 RIBO Credits (Technical Category)Topics and Speakers:
8:00-8:25 Registration & Coffee 8:25-8:30 Welcome 8:30-9:30 NAFTA Update and Effects on Transportation 9:30-10:30 Autonomous Vehicles, Vessels and Aircraft 10:30-10:45 Coffee 10:45-11:45 Insurance Online- Risks for Brokers, Insurers and Customers 11:45-12:45 Blockchain, Smart Contracts, and Accountability 12:45-1:30 Lunch 1:30-2:30 Hurricanes, Fires, Climate Change, Risk Analysis and Legal / Insurance Issues 2:30-3:00 Social Media: Source of Information and Use in Legal Matters 3:00-4:00 Medical and Recreational Marijuana Use During Employment
- Fernandes Hearn LLP is one of the sponsors for the Marine & Energy Symposium of the Americas 2018 (“MESA 2018”) conference April 18-20, 2018 in Toronto. The following is the program for the conference.Where? Omni Kind Edward Hotel, Toronto Canada When? 18-20 April 2018 Registration:
Wednesday, April 18, 2018
6:00 – 8:00 pm Registration – Mezzanine, Omni King Edward Hotel
6:30 – 8:00 pm Opening Reception – Palm Court, Omni King Edward Hotel
8:00 pm Dinner on your own – or join us at a pre-arranged restaurantThursday, April 19, 2018
8:00 am to noon Registration – Mezzanine, Omni King Edward Hotel
Time Joint Session – Vanity Fair Ballroom 9:00 to 10:00 am Arctic Exploration and Shipping / The Polar Code
Moderator: Rui Fernandes, Partner Fernandes Hearn LLP
Peter Pamel – Partner Borden Ladner Gervais,
Aldo Chircop – Professor of Law; Canada Research Chair (Tier 1) in Maritime Law and Policy Dalhousie University
10:00 to 11:00 am Seabed Mining
Moderator: James Manson – Associate, Fernandes Hearn LLP
Wylie Spicer – Counsel – McInnes Cooper
11:00 to 11:15 Coffee Break 11:15 am to 12:15 pm Aftermath and Implications of Recent Catastrophic Hurricanes
Moderator: Kim Stoll – Partner, Fernandes Hearn LLP
Mark Newcomb – Counsel and VP Claims & Insurance, Zim Integrated Shipping Services Ltd.
12:15 pm to 1:15 pm Lunch – Keynote Address
Concurrent Session Time Session A – Vanity Fair Session B – Kensington 1:15 to 2:15 pm Application of Jurisdiction Clauses in Different Countries
Shelley Chapelski – Partner Norton Rose Fulbright
Robert Reeb – Shareholder
Marwedel, Minichello & Reeb
Fabiana Simões Martins – Siano & Martins
LNG Contracts and Transportation
Vanessa Rochester – Counsel Norton Rose Fulbright
2:20 to 3:20 pm Arrest of Vessels in Various Jurisdictions & Alternatives Update on HNS Convention 3:25 to 4:25 pm Issues Arising from Project Cargo
John Evans – Berkshire Hathaway
Port Security and Liability
Bruce Hennis, Managing Partner, Hennes Communications (USA)
6:00 PM MESA 2018 Cocktail Reception and Dinner – Hotel
Friday, April 20, 2018
Concurrent Session Session A – Vanity Fair Session B – Kensington 9:00 to 9:55 am Limitation of Liability by Statute – Conventions and in Contracts
George Arghyrakis – E.G. Arghyrakis & Co.
Steve Block – Foster Pepper LLC (USA)
Impact of Climate Change on Shipping and Energy Projects 10:00 to 10:45 am Autonomous Ships and Equipment Cyberterrorism in Transportation and Energy Projects 10:45 to 11:00 am Coffee Coffee 11:00 to 11:45 am Offshore Exploration and Exploitation: Liability and Compensation Issues
Lawrence Mallizzi – Senior Manager – O’Brien & Gere
Pipeline Technologies, Development Issues and Litigation
Joshua Jantzi, Partner, Dentons Canada LLP
Kori Patrick, Technical Manager, Research & Development, Enbridge, Edmonton Alberta
11:55 am to 12:45 pm Emerging Issues in Insurance
in Marine and Energy
Simon Swallow – Chief Executive Shipowner’s Club
Brian Murphy – Vice President, Berkley Offshore
Wind Turbine Litigation
Sarah Powell – Partner – Davies Ward Phillips & Vineberg LLP
12:45 pm to 2:00 pm Lunch – Presentation on Arbitration in Canada
2. The New American “ELD Rule” Comes into Effect on December 18, 2017
The New ELD Rule
Since the 1930s, commercial motor vehicle drivers have used paper logs to track hours of service. Paper log books are manually completed and rely exclusively on the driver’s input. They are time consuming and difficult to audit.
Technology eventually entered the picture, with carriers presently having other options of tracking hours of service by way of automatic onboard recording devices (AOBRDs), devices with logging software programs and most recently ELDs (electronic logging devices).
Subject to a few exceptions, effective December 18, 2017 with the implementation of the “ELD Rule” (*1), the U.S. Federal Motor Carrier Safety Administration (FMCSA) will require all commercial motor vehicle carriers to submit their hours of service records through the use of ELDs. This new Rule calls for the Secretary of Transportation to adopt regulations requiring ELD use in commercial motor vehicles involved in interstate commerce, when operated by drivers who are required to keep records of duty status (*2).
An ELD is a piece of hardware that connects directly to the engine’s control module to automatically record driver compliance with hours of service requirements. Electronic Logging Devices (ELDs) replicate and automate the logbook process. Engine information on speed, motion changes, distance driven, and engine hours are automatically tracked and loaded into the ELD system. GPS location information is also tracked in the ELD. The driver simply needs to log in, and comment on each change of status.
The following benefits have been cited with the use of ELDs:
(1) making it easier, simpler, and quicker to keep driver logs.
(2) by limiting mistakes and reducing form and manner errors.
(3) providing information to drivers and motor carriers so that drivers can better manage fatigue and schedule issues.
(4) correctly recording location and accurate information to easily track duty status.
(5) being a good management tool and back office asset to improve productivity and enhance compliance, and
(6) requiring less paperwork, and resulting in driver logs being orderly, clear, and accurate.
The ELD Rule applies to most motor carriers and drivers who are currently required to maintain records of duty status. The Rule applies to commercial buses as well as trucks, and regardless of driver nationality or cargo origin or destination where cross-border carriage is involved. Accordingly Canadian and Mexican carriers are affected, as they need to be in compliance when operating in the United States. This will also raise interface issues with how they comply with log book retention and production laws once they have cross the border back into their home jurisdiction.
As mentioned, there are some exceptions to the application of the ELD Rule, including:
(1) Drivers who operate under short-haul exceptions may continue using timecards where they are not required to keep a “record of duty status”.
(2) Drivers who use paper records of duty status for not more than 8 days out of every 30-day period.
(3) Drivers who conduct drive-away / tow-away operations, in which the vehicle being driven is the commodity being delivered.
(4) Drivers of vehicles manufactured before 2000.
(5) Where the carrier is using a “grandfathered” Automatic On-board Recording Device (AOBRD) (*3) they may use that system in lieu of an ELD however they must convert to an ELD regime by December 18, 2019. (While both ELDs and AOBRDs log hours of driver service, ELDs capture greater “data insight” from the engine).
The ELD Rule prescribes ELD performance and design standards, which are to be certified and registered with the FMCSA. The motor carrier is responsible for checking that their device is registered. This includes checking both the registration and revocation list periodically. The list of registered and revoked ELDs is listed on an FMCSA website (*4). In the event that an ELD is removed from the registration list, FMCSA will make efforts to notify the public and affected users.
Under the new regime, upon request from an authorized enforcement officer, a driver will have to provide certain prescribed supporting documents in his or her possession. The ELD Rule establishes what supporting documents drivers are required to have so as to back up the ELD record of duty status. Beginning on December 18, 2017, a driver using an ELD must also have an ELD information packet onboard the commercial motor vehicle containing the following items:
1. A user’s manual for the driver describing how to operate the ELD;
2. An instruction sheet describing the data transfer mechanisms supported by the ELD and step by-step instructions to produce and transfer the driver’s hours-of-service records to an authorized safety official;
3. An instruction sheet for the driver describing ELD malfunction reporting requirements and recordkeeping procedures during ELD malfunctions; and
4. A supply of blank driver’s records of duty status graph-grids sufficient to record the driver’s duty status and other related information for a minimum of 8 days.
Motor carriers will be required to keep the ELD record of driver service data, and a back-up copy of that data on a separate device. The carrier must ensure that these records are stored securely to protect driver privacy.
Driver ELD Training and “Logging In”
Carriers should only purchase an ELD that is self-certified by the manufacturer to be compliant and, as mentioned above, is registered and listed on the FMCSA website.
Carriers must ensure that ELDs are installed and that drivers and administrative staff are trained to use them by the implementation deadline. Drivers must understand and be able to use ELDs by the required deadline, including how to annotate, edit and certify their record of duty status and collecting required supporting documents. As mentioned drivers will also need to know how to display and transfer data to safety officials when requested.
ELD user accounts must be set up by a motor carrier for:
1. Commercial motor vehicle (CMV) drivers who are employed by the motor carrier and who are required to use the ELD, and
2. Support personnel who have been authorized by the motor carrier to create, remove, and manage user accounts; configure allowed ELD parameters; and access, review, and manage drivers’ ELD records on behalf of the motor carrier.
A driver must have only one driver account with a carrier, with a unique identification number and password. An owner/operator must have a single account as a driver, and a separate account for administrative functions (setting up user accounts, etc.). If a driver does not log onto the ELD, as soon as the vehicle is in motion, the ELD will: i) provide a visual or visual and audible warning reminding the driver to stop and log into the ELD, ii) record accumulated driving and on-duty, not-driving, time in accordance with certain ELD “defaults” under the unidentified driver profile; and iii) not allow entry of any information into the ELD other than a response to the login prompt.
The Canadian ELD Mandate
The CCMTA (Canadian Council of Motor Transport Administrators) is in the process of finalizing a Canadian ELD Mandate proposal who is expected to release their ruling within the next year or so.
It is inevitable that Canada would follow the U.S. lead in requiring ELDs at some point in the future. The same underlying policies exist in favor of the prescription of ELDs in Canada and a synchronization with the U.S. is imperative given the huge volume of cross border traffic between the countries. Until there is such a synchronization there will be logistical challenges with carriers and drivers ensuring cross border compliance. A driver crossing the border into Canada will need to ensure that they can account for their full hours of service for any applicable time period as a function of the both the compulsory ELD data for a U.S. leg combined with the method of recording hours of duty status for any Canadian leg of transit. How will all the data be recorded, and can it be timely produced to an enforcement officer?
Canadian carriers will have to be alive to these harmonization issues and what may be a short implementation window on the Canadian side once Canadian technical ELD standards are set. For companies currently using in-truck technology and the wide range of onboard devices available, can they be upgraded to ELD standards? For those carriers currently using ELD technology, will their system meet the technical standards once established?
The Canadian ELD Mandate is currently still in development and has a long way to go before it will be published. Similar to the process used in arriving at the U.S. ELD mandate, the CCMTA will go through a phased review and feedback process to ensure that all arguments are heard before making a final decision. The present indications are that the CCMTA mandate may be published by the spring of 2019, however there are currently no dates for the Canadian ELD compliance deadline.
(*1) The ELD Rule is mandated by the U.S. Congress by section 32301(b) of the Commercial Motor Vehicle Safety Enhancement Act, enacted as part of MAP-21, (Pub. L. 112-141, 126 Stat. 405, 786-788, July 6, 2012).
(*2) See Part 395, 49 CFR 395.8(a) as to the requirement to log driver hours of service.
(*3) See US statute 49 CFR 395.15
3. Doing Business in Canada – Part 2(*1) – Foreign Investment in Canada
Generally, there are few restrictions on foreign investment in Canada, although some screening does take place and some sectors are subject to special limits at the federal or provincial levels.
A non-Canadian investor acquiring a business with a presence in Canada or establishing a new Canadian business may be subject to foreign investment review or notification requirements under the Investment Canada Act (“ICA”). The process is separated by the type of investor and the type of business. The Investment Canada Act contains two separate review processes. These two processes are subject to differing thresholds and different procedures, and consider different factors. The first process provides for the review of only those significant investments over certain specified financial thresholds. This process considers whether such investments will be of “net benefit to Canada”. The second process applies generally to any investment by a non-Canadian in or into Canada, regardless of size, and considers whether the investment might reasonably be expected to injure Canada’s national security.
Private Sector WTO Investments
The review threshold is $1 billion in enterprise value for investments to directly acquire control of a Canadian business by:
- WTO investors (a person or entity from countries, other than Canada, that are members of the World Trade Organization) that are not state-owned enterprises; and
- by non-WTO investors that are not state-owned enterprises where the Canadian business that is the subject of the investment is, immediately prior to the implementation of the investment, “controlled by a WTO investor”.
Starting January 1, 2021, and for subsequent years, the threshold level will be adjusted annually based on growth in nominal GDP in accordance with the formula in the ICA (i.e., the growth in nominal GDP at market prices multiplied by the threshold amount determined for the previous year.)
The manner of calculating the enterprise value of the Canadian business that is the subject of the investment is the Investment Canada Regulations depending, on whether the Canadian business is a publicly traded entity, non-publicly traded entity or acquired by the acquisition of assets, respectively.
Private Sector Trade Agreement Investments
The review threshold is $1.5 billion in enterprise value for investments to acquire control of a Canadian business by:
- trade agreement investors that are not state-owned enterprises; and
- by non-trade agreement investors that are not state-owned enterprises where the Canadian business that is the subject of the investment is, immediately prior to the implementation of the investment, “controlled by a trade agreement investor”.
As defined in subsection 14.11(6) of the Act and the accompanying schedule, trade agreement investors include entities and individuals whose country of ultimate control is party to one of the following trade agreements:
• Canada-European Union Comprehensive Economic and Trade Agreement Implementation Act
• North American Free Trade Agreement
• Canada-Chile Free Trade Agreement Implementation Act
• Canada-Peru Free Trade Agreement Implementation Act
• Canada-Columbia Free Trade Agreement Implementation Act
• Canada-Panama Economic Growth and Prosperity Act
• Canada-Honduras Economic Growth and Prosperity Act
• Canada-Korea Economic Growth and Prosperity Act
Starting January 1, 2019, and for subsequent years, the threshold level will be adjusted annually based on growth in nominal GDP in accordance with the formula set out in subsection 14.11(3) (i.e., the growth in nominal GDP at market prices multiplied by the threshold amount determined for the previous year.)
The manner of calculating enterprise value of the Canadian business that is the subject of the investment is prescribed in sections 3.3, 3.4 and 3.5 of the Investment Canada Regulations depending on whether the Canadian business is a publicly traded entity or acquired by the acquisition of assets, respectively.
State Owned Enterprise WTO Investments
The review threshold for 2017 is $379 million in asset value for investments to directly acquire control of a Canadian business by:
- WTO investors that are state-owned enterprises; and
- non-WTO investors that are state-owned enterprises where the Canadian business that is the subject of the investment is, immediately prior to the implementation of the investment, “controlled by a WTO investor”.
The official amount was published on page 664 of the Canada Gazette on February 11, 2017.
This threshold will be annually revised to reflect the change in Canada’s nominal gross domestic product (GDP) in accordance with the formula set out in subsection 14.1(2) (i.e., the annual change in nominal GDP at market prices multiplied by the threshold amount determined for the previous year).
The manner of calculating the value of the Canadian business that is the subject of the investment is prescribed in section 3.1 of the Investment Canada Regulations and is based on the Canadian business’ asset value as shown on the balance sheet of the Canadian business at the end of the last completed fiscal year before its proposed acquisition.
Non-WTO Investments and Investments in Cultural Business
The thresholds for investments which are subject to review are 5 million dollars in asset value for direct investments and 50 million dollars in asset value for indirect transactions. These thresholds apply to investments by an investor who is not a “WTO investor”, as defined in subsection 14(6) of the Act, which involve the acquisition of control of a Canadian business which is not “controlled by a WTO investor” immediately prior to the implementation of the investment.
These thresholds also apply to investments made by all non-Canadian investors to acquire control of a Canadian business that is a cultural business as described in section 14.1(6) of the Act. Notwithstanding the above, any investment which is usually only notifiable, including the establishment of a new Canadian business, and which falls within a specific business activity listed in Schedule IV of the Investment Canada Regulations (cultural heritage or national identity), may be reviewed if an Order-in-Council directing a review is made and a notice is sent to the investor within 21 days following the receipt of a certified complete notification.
The manner of calculating the value of the Canadian business that is the subject of the investment is prescribed in Section 3.1 of the Investment Canada Regulations and is based on the Canadian business’ asset value as shown on the balance sheet of the Canadian business at the end of the last completed fiscal year before its proposed acquisition.
Cultural Business Activities
The prescribed business activities for which the Minister of Canadian Heritage is responsible are set out in Schedule IV to the Investment Canada Regulations
These are set out as:
• Publication, distribution or sale of books, magazines, periodicals or newspapers in print or machine readable form.
• Production, distribution, sale or exhibition of film or video products.
• Production, distribution, sale or exhibition of audio or video music recordings.
• Publication, distribution or sale of music in print or machine-readable form.
Investments that are subject to review require the filing of detailed information concerning the target business and the investor’s plans for it. The review process generally takes at least 45 to 75 days. A non-Canadian investor will be required to satisfy the relevant Minister that the transaction will likely be of “net benefit” to Canada before the Minister will approve the transaction. The Minister of Innovation, Science and Economic Development (formerly the Minister of Industry) or the Minister of Canadian Heritage in the case of cultural transaction are responsible for the reviews.
Net Benefit to Canada
In determining “net benefit to Canada,” the Minister must consider:
• The effect of the investment on the level and nature of economic activity in Canada;
• The degree and significance of participation by Canadians in the Canadian business and the industry of which it forms a part;
• The effect of the investment on productivity, industrial efficiency, technological development and product innovation and variety in Canada;
• The effect of the investment on competition within an industry in Canada;
• The compatibility of the investment with national industrial, economic and cultural policies; and
• The contribution of the investment to Canada’s ability to compete in world markets.
If the Minister initially decides that the investment will not be of such benefit, the non-Canadian will be given an opportunity to make representations and submit undertakings with respect to the investment with a view to satisfying these requirements.
Certain statutory provisions restrict foreign investment and ownership in specific areas, including the financial services, air transportation, and broadcasting and telecommunications sectors. There are also foreign investment disincentives for media and publishing. Transactions which the Canadian government believes may be injurious to Canada’s “national security,” including minority investments, can be reviewed and blocked or unwound by the government.
The ICA provides in section 38 certain guidelines on the national security review of investments. The factors considered include but not limited to the following, as they relate to national security:
• The potential effects of the investment on Canada’s defence capabilities and interests;
• The potential effects of the investment on the transfer of sensitive technology or know-how outside of Canada;
• Involvement in the research, manufacture or sale of goods/technology identified in Section 35 of the Defence Production Act;
• The potential impact of the investment on the security of Canada’s critical infrastructure. Critical infrastructure refers to processes, systems, facilities, technologies, networks, assets and services essential to the health, safety, security or economic well-being of Canadians and the effective functioning of government.
• The potential impact of the investment on the supply of critical goods and services to Canadians, or the supply of goods and services to the Government of Canada;
• The potential of the investment to enable foreign surveillance or espionage;
• The potential of the investment to hinder current or future intelligence or law enforcement operations;
• The potential impact of the investment on Canada’s international interests, including foreign relationships; and,
• The potential of the investment to involve or facilitate the activities of illicit actors, such as terrorists, terrorist organizations or organized crime.
The ICA contains a number of exempt transactions, such as the acquisition of shares by a person whose business is dealing in securities. An investment to acquire an interest in an existing Canadian business that does not result in an acquisition of control under the ICA will also generally not be subject to notification or review.
General Restrictions on Corporate Investment in Canada Applicable to Non-Threshold Investments – Residency of Directors
The federal Canada Business Corporations Act (the “CBCA”) requires that at least one quarter of the directors of most federal corporations be resident Canadians. For CBCA corporations doing business in certain industries, such as book publishing and uranium mining, the residency requirement for directors is higher. Some provinces also have residency requirements for directors.
To be a resident Canadian for federal purposes, a person must generally be either a Canadian citizen, or a permanent resident under the federal Immigration and Refugee Protection Act. In addition, subject to some limited exceptions, a person must already be ordinarily resident in Canada in order to be considered to have resident status.
In many cases, it is possible to avoid these residency requirements by incorporating in a province or territory with less onerous or no residency requirements, such as British Columbia, New Brunswick, the Northwest Territories, Nova Scotia, Nunavut, Prince Edward Island, Québec and the Yukon, followed by extra-provincial registration in each of the other provinces and territories in which the corporation intends to conduct business.
Rui M. Fernandes
Follow Rui M. Fernandes on Twitter @RuiMFernandes and on Linkedin. See also his blog at http://transportlaw.blogspot.ca
(*1) This article is part 2 of 17 parts dedicated to a review of doing business in Canada. Subsequent articles will include Business Structures, Securities Regulation, Canadian Immigration, Employment Laws, Directors and Officers, International Trade, Competition, Sale of Goods, Intellectual Property, Privacy, Real Property, Environmental Laws, Taxation, Insolvency, Litigation and ADR.
4. Blockchain 101 – Part 3
This Part 3 of the article on blockchain (*1), Blockchain 101, deals with the legal issues arising from use of blockchain platforms and applications.
The blockchain is a “trustless” technology. “Trustless” means—for the first time in history—exchanges for value over a computer network can be verified, monitored, and enforced without the presence of a trusted third party or central institution.32 Because the blockchain is an authentication and verification technology, it can enable more efficient title transfers and ownership verification. Because it is programmable, it can enable conditional “smart” contracts. Because it is decentralized, it can perform these functions with minimal trust without using centralized institutions.36 Because it is borderless and frictionless, it can provide a cheaper, faster infrastructure for exchanging units of value. (*2)
By definition blockchain is decentralized, highly encrypted and offers new capabilities to engage activities in ways that don’t fit neatly into existing legal frameworks. The current legal framework is a patchwork attempt to fit blockchain into existing legal frameworks. Government regulators have identified some basic risks around blockchain-based currencies, and have begun staking jurisdictional claims. “Policymakers are currently revisiting complex, interwoven regulatory frameworks — primarily banking laws, commodities laws, and securities laws—to shoehorn the technology into existing frameworks and consider where new ones might be appropriate.” (*3)
Some of the following issues arise.
Transaction Reporting, and Taxation
In both Canada and the U.S., legislation is currently in place that requires banks and other financial institutions to report transactions over a certain amount. This is designed to counter money laundering and to ensure taxation of blockchain transactions. How will this be done? In blockchain there is no central authority tracking the transaction. Who is responsible for reporting it? Who is to collect the tax on it? This area of the law will have to be developed.
Money Laundering and Illegal Monetary Transactions
Blockchain transactions are essentially automated. Funds can be dispersed autonomously (using a cryptocurrency). Recently, lawmakers in West Virginia deemed it a felony to use bitcoin or other cryptocurrencies for money laundering, with an update to the state’s anti-money laundering statutes. The law specifically created a definition for cryptocurrency that is recognized as a ‘monetary instrument’ in the state. Other jurisdictions will have to follow. (*4)
Blockchain records on public platforms are visible to all, even though individual elements of the transactions are encrypted and not publicly visible. The platform is decentralized and this decentralization may give rise to privacy law breaches. Some financial organizations are required by law to be able to permanently remove data when required to do so by a court (right to be forgotten laws). Due to the nature of the decentralization of Blockchain platforms this is currently not possible. Blockchains don’t allow for data to be deleted, but rather only updated in subsequent blocks, which may not be sufficient to comply.
Evidence in Court
Blockchain records may have more legal bearing in courts due to the stringent encryption techniques and how records are created with time stamped blocks linked into chains by hashes. Some jurisdictions are already working towards making such records available in court proceedings. (*5):
A bill in Vermont passed that would make records verified through blockchain technology admissible as evidence in court.
Laws such as this create a kind of legal backing for blockchain-based information.
In Nevada, a bill has deemed smart contracts and blockchain signatures acceptable records under state law.
As blockchain ledgers and systems become more common, their possible use in cases as evidence and discovery becomes more likely. This means lawyers will need to know such records exist as well how to handle that evidence as well as what specific information to request.
A smart contract is a computer program that controls the transfer of currency or assets or information or data between parties. The “contract” sits on the blockchain platform and is self-executing. It has been described as (*6):
Smart contracts help you exchange money, property, shares, or anything of value in a transparent, conflict-free way while avoiding the services of a middleman. The best way to describe smart contracts is to compare the technology to a vending machine. Ordinarily, you would go to a lawyer or a notary, pay them, and wait while you get the document. With smart contracts, you simply drop a bitcoin into the vending machine (i.e. ledger), and your escrow, driver’s license, or whatever drops into your account. More so, smart contracts not only define the rules and penalties around an agreement in the same way that a traditional contract does, but also automatically enforce those obligations.
Current contracts could be converted to smart contracts, possibly illuminating some grey areas. The risks are that the smart contracts are not as flexible or as encompassing as normal contracts. The conversion has been described as follows (*7):
“Commonly used terms in credit documentation such as ‘best endeavours’, ‘material adverse effect’ and ‘reasonable notice’ are currently very complex to translate into smart contracts. In case of the second definition for example, a borrower must inform the bank if something is happening within the company that could have a major impact on the company’s continuity. It’s very difficult to fully write out…
If an attempt is made to do so, there’s a chance that unforeseen situations will not be covered. Additionally, there shall be a time consuming discussion between the borrower and the bank about the exact wording of each situation that needs to be described. A practical approach is to combine the two: a smart contract can record all measurable events and actions to be taken automatically, and all other more vague provisions can be included in the ‘normal’ agreement.”
Some jurisdictions are in the process of implementing legislation that validates blockchain “signatures” and smart contracts. (*8)
Smart contracts will have to comply with existing laws. For example, if a smart contract issues a bill of lading, will the bill of lading be required to be in a certain format to be legal? According to which jurisdiction?
Jurisdiction and Conflict of Laws
The principles of contract and title differ across jurisdictions and therefore identifying the appropriate governing law is essential. At its simplest level, every transaction could potentially fall under the jurisdiction(s) of the location of each and every node in the network. The platform is decentralized and nodes may be in different jurisdiction. Important nodes are the nodes of the initiator of the transaction, the miner, and the recipient. Where the transaction involves a series of individual transactions, which law applies. In essence, it’s the same problem faced in the shipping industry where, for example, the seller is in China, the carrier is located in Denmark, the goods travel by ship to a destination port and is railed, trucked and warehoused in different jurisdictions.
The inclusion of an exclusive governing law and jurisdiction clause is therefore essential and should ensure that a customer has legal certainty as to the law to be applied to determine the rights and obligations of the parties to the agreement and which courts will handle any disputes. The inclusion of the clause in a smart contract will be critical.
On a public blockchain platform there is no central authority. Who is liable for issues arising from the infrastructure itself? What if trades are not settled or are settled incorrectly. Who do you hold liable? The main issue affecting public blockchain is the inability to control and stop its functioning. How do you regulate a decentralized autonomous organization (DAO)? Should DAOs be granted some form of legal status? Should regulators require that a platform organizer (for example Maersk or IBM or Microsoft) be required to appoint a free-standing company tasked with maintaining the DAO and enforcing the legal obligations? Would all users of the platform have to agree to an all-encompassing wrap around agreement on its use in addition to the terms and conditions of the smart contract?
Who Owns the IP and Data on Blockchain?
At common law, as a general principle there is no property right in information itself, but that while individual items of information do not attract property rights, compilations of data – for example in a database – may be protected by intellectual property rights. What if the information is of a technical nature subject to a patent? How is enforcement done? What if the database of information is sold? What happens when a customer exits a blockchain? Is the customer entitled to a copy of the data? Is the vendor is obliged to hand over all such data on expiry or termination of the agreement and a complete record of all transactions stored on the blockchain?
Transactional lawyers will need to understand blockchain and the values associated with different model propositions, especially ownership of data residing on decentralised ledgers and intellectual property ownership of the blockchain. These issues will need to be considered in the context of the business value proposition and competitive barriers to entry.
Blockchain is simply an evolution. From the rise of ATMs in the 70s, internet banking in the 80’s, e-commerce in the ‘90s to the current debates around how the world will adapt to driverless cars, the adoption of blockchain gives rise to legislative issues.
Rui M. Fernandes
Follow Rui M. Fernandes on Twitter @RuiMFernandes and on Linkedin. See also his blog at http://transportlaw.blogspot.ca
(*1) see September 2017 FHLLP newsletter for Part 1 and October 2017 for Part 2.
(*2) Kiviat, Trevor “Beyond Bitcoin: Issues in Regulating Blockchain Transactions”, 65:569 Duke Law Journal.
(*3) Ibid, page 589.
(*4) see https://thenextweb.com/worldofbanking/2017/05/15/7-interesting-laws-blockchain-apps-will-force-to-change/#.tnw_7KE6jgfJ
(*7) Supra, note 4.
(*8) Arizona. See https://www.coindesk.com/arizona-bill-blockchain-smart-contracts/
5. Product Manuals, Customer Instructions and Your Web Site Too: Be Careful What A Negligent Misrepresentation Might Do To You
Your company may sell products in respect of which you issue a product manual or a series of instructions. Your company may act as a consultant respecting after-market repairs or how to operate a particular product. For that matter in the transportation industry we see various web sites devoted at least in part to offering “how to” shipping advice to customers or potential customers. One can think of a number of scenarios where such representations are relied and acted upon by a third party. What if there was an error in the instruction or in a factual statement made that causes harm to a third party relying on the same?
In the case of Queen v. Cognos Inc. (*1), the Supreme Court of Canada set out the test for a case to be made out by a plaintiff against a defendant for “negligent misrepresentation”:
– there must be a duty of care based on a ‘special relationship’ between the party making the representation and the party receiving it
– the representation in question must be untrue, inaccurate or misleading;
– the party making the representation must have acted negligently in making the representation,
– the party receiving the representation must relied in a reasonable manner on the negligent representation, and
– the reliance must have been detrimental to the party receiving and relying on the same in the sense that damages resulted.
Communications as to a company’s services, product lines and the like are of course the life blood of commerce. The Internet would not exist without websites endeavoring to provide some level of service and information to customers or trying to woo customers. Past articles in this Newsletter have admonished the importance of a company being deliberate in identifying and managing risk assessment – including any potential contractual or civil liability. One part of the mix always relates to assessing a company’s exposure to liability as a function of the law governing the place of where that business is conducted. Perhaps the product is made, or the company head office is located in a jurisdiction with an “industry friendly” legislation imposing favourable defences, or for that matter regulated limitations on liability. Perhaps there are is a conservative notice of claim regime or a statute of limitations in effect provision some further measure of risk mitigation. It follows that where parties enter into an international or a cross-border contract a “choice of law” risk management consideration comes to the fore with the ability of contracting parties to agree on what body of law will govern a dispute on or a claim arising from a contract.
To the extent that a business enterprise draws comfort in terms of risk management on a friendly “local law” care must be taken in noting that it will not always be automatically applicable. Perhaps the parties in question are based in different jurisdictions, and they did not have a written contract. Perhaps there was a contract in writing or the parties could not agree on such a term. Or perhaps the claim arises outside of a strict contractual relationship, in a tort claim based on “negligent misrepresentation” where the court might a “special relationship” in the context of which a negligent misstatement had been made with a corresponding detrimental reliance on the part of a plaintiff. As we see in the recent decision of Thorne v Hudson Estate (*2) where the negligent misstatement transcends borders, unintended consequences may follow.
The Tort of Negligent Misrepresentation: What Law Applies?
The Thorne v. Hudson Estate claim arose as a result of a tragic flight from Oshawa, Ontario to Wilmington, Delaware in May 2007. During the flight, a twin-engine Beech aircraft lost power in its left engine. The plane crashed shortly after aborting an attempted emergency landing at an airfield in Dunkirk, New York. The two pilots and the passenger were killed.
The estates of the deceased commenced actions. The action by the passenger’s estate settled out of court. The trial of the claims by the pilot’s estates is scheduled to be heard in January 2018, in Toronto.
The pilot’s estates sued the companies that inspected and maintained the engine, namely Aviation Technical Consultants and Corporate Aircraft Restorations Inc. As well, the estates sued the manufacturer of the engine, the Continental Motors, Inc. (“CMI”, formerly known as Teledyne Continental Motors Inc. and Teledyne Technologies Incorporated). In turn, Aviation Technical Consultants and Corporate Aircraft Restorations Inc. asserted their own claims against CMI alleging:
– improper design of the engine and replacement parts,
– misleading repair instructions, and
– the failure to warn about certain engine failures
Following the conclusion of examinations for discovery, CMI moved for summary judgment on the basis that the claims asserted against it were barred by the United States federal General Aviation Revitalization Act of 1994 (“GARA”) (*3). In general terms, GARA bars a civil action against an aircraft manufacturer for damages for deaths arising out of an accident involving an aircraft which is brought more than 18 years after the date of delivery of the aircraft to its first purchaser. In this case, there was no dispute that CMI originally delivered the aircraft in early 1968. CMI argued that since the aircraft crashed in New York State, GARA applied and barred the various claims against it.
The motion judge who heard the motion for summary judgment dismissed CMI’s motion to dismiss the claim based on GARA, declaring that Ontario law –not GARA – applied to this claim. CMI appealed.
The parties agreed on the appeal that the motion judge correctly concluded that the principles set out in Tolofson v. Jensen (*4) govern the choice of law in tort. In Tolofson, the Supreme Court of Canada held that “the law to be applied in torts is the law of the place where the activity occurred, i.e., the lex loci delicti.” CMI submitted on the appeal that the tortious activity occurred in New York State, where the plane crashed. Aviation Technical Consultants and Corporate Aircraft Restorations Inc. however argued that the crux of their claims against CMI involved allegations of negligent misrepresentations contained in the repair instructions CMI periodically published to the respondents and which they followed to repair and maintain the engine. Pointing to the decision of this court in Central Sun Mining Inc. v. Vector Engineering Inc. (*5), that the tort of negligent misrepresentation occurs where the misinformation is received or acted upon, they asserted that the tortious activity in question occurred in Ontario where they received CMI’s repair instructions and performed maintenance on the engine.
After carefully reviewing the pleadings in the court action, the Court of Appeal noted that the motion judge corrected concluded that:
The crux of the claims and cross-claims against CMI is not negligence in the production of the engine that malfunctioned…Rather, the claims against CMI are in the nature of negligent misrepresentation, and take aim at the allegedly faulty instructions issued by CMI from time to time in the form of bulletins and manuals for the repair and overhaul of its engine.
Accordingly, the Court of Appeal ruled that Ontario law governed the “crux” of the claim against CMI, pertaining to its written instructions on the engine inspection and maintenance. Analyzing the provisions of GARA, the Court noted that by its terms it only regulates the ability of a party to seek compensation from general aviation airplane manufacturers in American courts. As the U.S. Congress does not have the power to regulate Canadian courts and what law they apply – the GARA language not even containing any such suggestion – the Court of Appeal ruled that “this is not a case where CMI deserves (summary) judgment based on an application of GARA”.
In the result, CMI will have to defend itself at a trial, and it was unable to have the case thrown out against it notwithstanding that it may have been able to direct that result in a claim brought against it in its own backyard in the United States.
The Take Away
The possible exposure to a claim in tort for negligent misrepresentation presents a significant risk to any business. Unlike a pure contractual setting, where the parties might at least provide for a delineation on what are or are not intentional factual or binding statements, or for that matter what is considered to be inside or outside of an agreement – companies must be aware of the possible application of the above factors to create some form of duty of care in what they say and represent lest the same be relied upon to the detriment of a third party. This risk is exacerbated with the fact that it may be a foreign law that may be held to govern a situation. Foreign companies issuing “statements” for consumption and application in Canada may well find themselves like CMI to be subject to Canadian laws, and for that matter if the Canadian experience is any indication, Canadian companies may find themselves subject to foreign tort law should the converse apply.
Perhaps the solution for any company distributing statements for widespread consumption is to simply ensure their accuracy accompanied by cautionary or limiting language. Perhaps something like: “The information conveyed in this article is not intended to be the provision of legal advice but is meant for general consumption as to certain legal trends that may be of interest to business”.
(*1)  1 S.C.R. 87 at para. 34
(*2) 2017 ONCA 208
(*3) Pub.L. No. 103 298, 108 Stat. 1552 (codified at 49 U.S.C. § 40101 notes)
(*4)  3 S.C.R. 1022
(*5) 2013 ONCA 601 (CanLII)
6. Update on Anti-Bribery: Facilitation Payments No Longer Allowed
As of October 31, 2017, “Facilitation Payments” (amounts paid to expedite the performance by a foreign official of any act of a routine nature) are no longer allowed under Canadian anti-bribery laws. In the October 2017 issue of The Navigator, we discussed anti-bribery legislation in Canada, including the fact that “Facilitation Payments” were one of the exceptions to the general anti-bribery rules under the Corruption of Foreign Public Officials Act (“CFPOA”) (*1), but that this exception was expected to soon be repealed.
An Order in Council by the Governor General fixed October 31, 2017 as the date that companies are no longer allowed to make Facilitation Payments in order to secure performance by a foreign official for routine acts that are normally part of their duties or functions, such as issuing a permit, licence or qualification to do business in another country. (*2) Since the intent to repeal section 3(4) of the CFPOA, which previously allowed these types of payments, was announced in June 2013, the delay in passing the repeal was meant to allow “Canadian organizations to adjust their practices and internal policies in a manner conducive to conducting business without recourse to facilitation payments.” (*3) We note that Facilitation Payments to Canadian officials are already prohibited under Canadian law.
What Does This Mean for Your Business?
We strongly recommend having a review conducted of your existing anti-bribery policies to ensure that they properly address the prohibition of Facilitation Payments, especially if, in order to operate, your company requires a permit, licence, or visa that is issued by a foreign public body (for example, this could include safety fitness certificates, operating authorities, food and drug licences, carrier or freight forwarder customs codes, import or export certificates or related licences, environmental permits, building permits, etc…), or if it is bidding on or is engaged in government contracts with foreign countries.
The more often your company is required to interact with public officials abroad, including the United States and Mexico, the more exposed it is to potentially breaching Canada’s anti-bribery laws, even if it has a third party working as an intermediary on its behalf.
A breach of our laws does not need to be committed in Canada for the CFPOA to apply. Its reach extends to acts committed outside of Canada if the person committing the act is a Canadian citizen, a permanent resident who is present in Canada after having committed the act or omission, or is a public body, corporation, society, company, firm or partnership that is incorporated, formed or otherwise organized under the laws of Canada or a province. (*4)
A breach of the CFPOA is considered an indictable offence and a person can be liable to imprisonment for up to 14 years. (*5) Note that directors and officers can potentially be found liable. Additionally, the monetary penalties awarded by the Courts for foreign and domestic bribery are often steep as there is no cap on the amount of the fines that can be ordered. For example, some of the leading cases for severe bribery included fines upward of C$9 million. (*6)
Make sure your company has a robust anti-bribery policy in place addressing interactions with both domestic and foreign officials, including Facilitation Payments and its accounting and record keeping methods. Ensure that the policy is circulated to employees and third-party contractors, and is monitored and enforced.
(*1) S.C. 1998, c. 34.
(*2) Canada Gazette, Vol. 151, No. 23, November 15, 2017.
(*4) CFPOA, s. 5(1).
(*5) Ibid., s. 3(2).
(*6) See for example: R v Niko Resources Ltd.,  AWLD 4536 and R v Griffiths Energy International,  AH 412 (Alta QB).
7. Occupiers’ Liability Update: Liability for Gross Negligence and Contributory Negligence
Winter is here and snow and ice are coming. For our “property and casualty” clients, what follows is an update on the most recent case law in the area of occupier’s liability including a refresher.
Sidewalks and premises may suffer accumulations of ice and snow in the winter months. Occupiers have obligations to ensure that those who walk upon the sidewalks and premises are reasonably safe.
Occupiers are required to have systems of reasonable maintenance and inspection in place regarding the safe condition of their premises. The standard of care is not that of an insurer, but the systems must be reasonable and be in place and in regular use. If the systems are reasonable and in use on or about the date of loss within the facts of the case, there should be no liability upon the occupier for damages sustained by someone who slips and falls on those premises.
Further, people who walk upon sidewalks or premises are also required to be aware of their surroundings, wear appropriate clothing and footwear for the season/weather in question and act reasonably as well. If the injured person is found to have acted unreasonably within the facts of a case, that person may be found to have acted negligently and damages will be reduced to the percentage of that contributory negligence.
For public sidewalks, the issue will be one of whether the defendant City in question was had reasonable systems of maintenance and inspection in place at the date of loss and that the system was engaged. If it did, the City will only be liable for personal injury caused by ice or snow, if it was grossly negligent.
In Costerus v. The Corporation of the City of Kitchener (*1), Mr. Justice Nightingale of the Ontario Superior Court revisited the obligations of municipalities regarding their duties regarding ice and snow removal and also reinforced the obligations of pedestrians navigating their way on City sidewalks in Canadian winters.
Each negligence case is necessarily fact driven and occupier’s liability cases are no exception.
On an early January morning in 2010, the plaintiff, Krista Costerus, walked her dog and noted that the sidewalks in her neighbourhood were icy and that it was snowing that day. Later that morning, she left her home to travel to the Kitchener Campus of Medix College. Despite the weather, she chose to wear running shoes instead of one of her over two pairs of boots. On her walk to school, she noted some residential areas were clear because salt had been spread by the homeowners. She testified that she walked more slowly because she knew that the public sidewalks on her route were icy. She also knew that the City did not maintain the public sidewalks in the morning though they were usually clear by evening. She admitted that she had never called the City to complain about the sidewalk maintenance.
Unfortunately, after walking about three blocks, and even though she saw the icy area ahead at the city bus stop, Ms. Costerus fell, injuring herself. Although she admitted that the roadway was clear and that she had a safe alternate route, she did not think to use the roadway instead of the icy sidewalk, and fell.
For the City’s part, the City had a system of maintenance and inspection in place to handle winter conditions, including ice and snow clearing and removal. There was a monitoring of weather conditions and the City could call in staff earlier than their assigned shifts, when snow accumulated by more than 8 cm.
In this case, the appropriate personnel were aware of a freeze and thaw cycle overnight that could cause icy conditions in the early morning and before the plaintiff’s fall at 7:45 a.m. The City’s witnesses confirmed that there was likely no clearing/salting of the sidewalk in question at any time on the morning of the plaintiff’s fall or any regular maintenance in that regard. The supervising manager, pursuant to City policy, also had no authority to call the staff in early for their shifts early, where there was no snow accumulation of 8 cm and only icy conditions. Further, there had been no priority at all given by the City to situations involving icy conditions and, therefore, no inspections carried out by the City despite the known freeze/ thaw cycle warning.
The Court accepted the plaintiff’s evidence that the public sidewalk in question was icy, as there was no evidence to the contrary. The City had only given evidence that it had not received any complaint calls about sidewalk conditions. This was not a case that involved a small patch of ice that existed despite the reasonable efforts of the City employees pursuant to a reasonable system of maintenance and inspection in place.
Damages were agreed upon by the parties and the only issues were (1) whether the City was liable for failing to clear/salt/sand the public sidewalk to provide a reasonably safe premises; and (2) the degree of contributory negligence on the part of the plaintiff for failing to keep a proper lookout or taking reasonable steps to protect herself.
Under Section 44 of the Municipal Act 2001 (*2), the city is the responsible to keep its highways (which include sidewalks) in a state of repair that is reasonable in the circumstances including the character and location of the site. If it defaults in that obligation, it is liable for all damages any person sustains because of that subject to the Negligence Act (*3).
Section 44 (3) of the Act states that a municipality is not liable for failing to keep its sidewalks in a reasonable state of repair if:
a) it did not know and could not reasonably have been expected to have known about the state of repair of the highway;
b) it took reasonable steps to prevent the default from arising; or
c) at the time the cause of action arose, minimum standards applied to the highway and to the alleged default and those standards have been met.
For sidewalks specifically, S. 44(9) states that a municipality is not liable for a personal injury cause by snow or ice on a sidewalk in cases of gross negligence.
Here the question was whether the City honoured its duty to have systems in place and engaged and, where it failed to do so, did that failure constitute “gross negligence”.
The Trial Decision
The Court found that the City did not place sidewalk maintenance as a priority at all. The City did not have reasonable systems of maintenance and inspection in place for the city sidewalks in general for any conditions let alone under icy conditions. Therefore there was also no reasonable policy to engage. The City’s policy of only permitting maintenance staff to start earlier upon snow accumulation of 8 cm or more, but not upon the real possibility or existence of icy conditions was not a reasonable policy or reasonable care for protection of those walking on the sidewalks. (*4) The City knew or ought to have known that the freeze/thaw cycle could cause hazardous conditions equal or worse than that of snow accumulation of 8 cm. The City had also experimented with earlier start times, which they discontinued due to noise complaints.
This was not a case where reasonable attempts had been made but, despite same, someone still fell. A standard of perfection was not required. In this case, the City was grossly negligent.
The Court however also turned its attention to the plaintiff, who also could not escape responsibility for failure to wear proper footwear in winter, when she knew from her own observation earlier in the morning that it was icy outside. She failed to take an alternate safe route when she saw the icy conditions and the safe route was available to her. The Court found the plaintiff 50 percent contributorily negligent and reduced her damages accordingly, pursuant to the Negligence Act.
The Court will look at each case on its facts. Occupiers of private property will also have the duty to have and engage reasonable systems of maintenance and inspection, which may also include the hiring of third party contractors to help fulfill the occupier’s responsibilities, which cannot be simply passed to another party. At law, there is less protection for private property owners in that the standard expected is not one of gross negligence (which is not as easily reached as simple negligence) (*5); however, simply hiring someone to do the job may not be enough. Properly drafted contractual provisions must be in place to ensure that there is protection including, for example, indemnity and hold harmless clauses and clear stipulations of the duties and obligations of both contracting parties. A poorly worded contract may negate any and all protections that should have been in place. No contract at all is obviously affords no protection. Now is the time for review of snow clearing and maintenance contracts to ensure that your business and premises are winter ready.
Kim E. Stoll
Follow Kim on LinkedIn and at url: linkedin.com/in/kim-stoll-transportationlaw and on Twitter @KimEStoll
(*1) 2017 ONSC 6030
(*2) S.O. 2001
(*3) R.S.O. 1990, as amended
(*4) Billings v Mississauga 210 ONSC 3101
(*5) Private property owners, however, are not responsible for the clearing of public sidewalks. Failure to clear a public sidewalk by a private property owner may be a breach of a by-law and subject to a fine, but will it not attract tort liability.
8. Precision in Drafting Employment Contracts: A Severability Clause Will Not Save Poor Drafting
A well-drafted employment contract can limit an employee’s entitlement to only the statutory minimum notice and severance provided for in the employment standards legislation, when employment is terminated without cause. In the absence of such a contractual provision, an employee is entitled to common law notice, which is always greater than the statutory entitlements, often significantly so. It is not surprising that employees consistently look for a way to render these contractual termination provisions void and unenforceable.
The recent Ontario Court of Appeal decision of North v. Metaswitch Networks Corporation (*1) is yet another case of an employee challenging the enforceability of a termination provision in an employment contract. Mr. North’s employment was terminated without cause after almost 3 ½ years of service. Pursuant to his employment contract, he was entitled only to notice and severance, if applicable, and benefit continuation in accordance with the Ontario Employment Standards Act, 2000 (“ESA”). The termination provision also contained the following sentence: “In the event of the termination of your employment, any payments owing to you shall be based on your Base Salary, as defined in the Agreement.” In addition to his Base Salary, Mr. North was paid commission. He argued that the exclusion of commission from the calculation of the notice payment was contrary to the ESA, which requires notice to be calculated based on all wages earned, including commission. The ESA provides, in s. 5(1), that one cannot contract out of any employment standard, and doing so renders the provision void and unenforceable. As a result, Mr. North argued that the termination provision in his employment contract was unenforceable and he was therefore entitled to common law notice.
The employer argued that if the termination provision was illegal, because of one offending sentence, then that sentence could be excised from the contract by using the severability clause which provided as follows: “If any part of the Agreement is found to be illegal or otherwise unenforceable by any court of competent jurisdiction, that part shall be severed from this Agreement and the rest of the Agreement’s provisions shall remain in full force and effect.” The application judge agreed with the employer, excised the offending sentence, and upheld the termination provision with the employee being entitled to ESA notice only (although calculated based on Base Salary and commission). Mr. North appealed this decision to the Ontario Court of Appeal.
The appeal court referred to its decision from earlier this year in Wood v. Fred Deeley Imports Ltd. (*2), which confirmed that contracting out of even one of the employment standards, and not substituting a greater benefit, renders the termination clause void and unenforceable. The court also referred to the Supreme Court of Canada decision in Machtinger v. HOJ Industries Ltd. (*3), which summarized the policy reasons that support the finding that where there has been contracting out of an employment standard, the effect is to void the entire provision, instead of removing the offending clause. The Supreme Court stated that given the objective of the ESA to protect the interests of employees, an interpretation that encourages employers to comply with the minimum requirements is to be favoured. If the only sanction employers potentially face for failing to comply with the minimum notice periods is an order that they minimally comply, there will be little incentive for an employer to comply in the first place.
Where there is a severability clause in the contract, using it to remove the illegality effectively rewrites the offending provision and this has the effect that the Supreme Court was concerned about – that is, that employers will have an incentive to contract out of the ESA but include a severability clause to save the offending provision in the event that an employee has the time and money to challenge the contract in court. The appeal court held that the preferred approach to employment contract interpretation is to first assess the termination clause to see whether there is any contracting out of an employment standard. If there is, the termination clause is void, and there is nothing to which the severability clause can be applied. As a result, the appeal court found in favour of Mr. North and he was entitled to common law notice. While the appeal court did not make a finding as to the length of common notice to which Mr. North was entitled, it will certainly be significantly greater than the 3 weeks he would have received under the ESA.
This case is yet another reminder of the importance of precision and clarity in the drafting of employment contracts, and that the failure to take care in drafting can be costly.
Carole McAfee Wallace
(*1) 2017 ONCA 790 (CanLII)
(*2) 2017 ONCA 158 (CanLII)
(*3) 1992 CanLII 102 (SCC)
9. Soline Trading et al. v. MSC et al. – FC appeal judge affirms lower court ruling; reconfirms lack of maritime jurisdiction over land carriers
A few months ago, in Certain Underwriters at Lloyds and Soline Trading Ltd v. Mediterranean Shipping Company S.A., 2017 FC 460, the limits of the Federal Court’s jurisdiction in maritime matters once again came up for consideration. Following existing Federal Court jurisprudence, Prothonotary Mireille Tabib clearly confirmed that in its current state of evolution, the scope of Canadian maritime law does not apply to an ocean carrier’s third-party claim, founded in negligence, against a land-based carrier in connection with a cargo mis-delivery, in circumstances where there was no contract of any kind in place between the two carriers themselves.
As reported in this newsletter in September 2017, the Court’s decision was under appeal and was expected soon. However, as we noted, we saw the Prothonotary’s decision as being in line with existing principles and jurisprudence concerning how far the Federal Court’s jurisdiction should extend. In our view, an appellate reversal of the Court’s decision in this case would have been surprising.
Recently, the Federal Court released its appeal decision, 2017 FC 893. As expected, Justice LeBlanc dismissed the appeal brought by Mediterranean Shipping Company S.A. (“MSA”), and confirmed the result reached by Prothonotary Tabib at first instance.
As reported earlier, this case is about the misdelivery of a cargo of shrimp. The plaintiff, Soline Trading Ltd. (“Soline”), purchased two containers of frozen shrimp and hired the defendant, Mediterranean Shipping Company S.A. (“MSC”), to transport the containers from Ecuador to Montreal. Both containers arrived uneventfully and were discharged from MSC’s vessel by MSC’s agent/sub-contractor, Termont Terminal, on or about June 26, 2013.
Soline had by then sent instructions to its local carrier to attend at Termont Terminal and retrieve the containers. This carriage mandate had nothing to do with the contract of ocean carriage being the subject of the MSC involvement. Soline’s carrier, however, was only able to retrieve one of the containers.
The other container of shrimp was co-opted by a rogue. Apparently, the rogue contacted another carrier, the Third Party, 4103831 Canada Inc. (o/a Trans-Salonikios) (“Trans-Salonikios”), and engaged Trans-Salonikios to attend and pick up the second container of shrimp from Termont Terminal. Trans-Salonikios, who had no reason to doubt its instructions, complied with the rogue’s instructions and completed the delivery, although in reality it had no authority to do so.
Ultimately, the second container of shrimp was never seen again.
This (of course) led to a cargo claim brought in the Federal Court by Soline against MSC. The matter has not yet been heard, but is expected to proceed to trial in 2018. One of the major issues is whether MSC is liable for the misdelivery of the shrimp from the Termont Terminal to Trans-Salonikios, who then unwittingly delivered it into the rogue’s hands.
The Third Party Claim Against Trans-Salonikios
MSC then launched a Third Party Claim against Trans-Salonikios, alleging that Trans-Salonikios was negligent in attending to retrieve the container of shrimp at the rogue’s behest.
The Motion to Strike
Trans-Salonikios promptly brought a motion to strike the Third Party Claim on the basis that the Federal Court had no jurisdiction to hear MSC’s claim against Trans-Salonikios because the claim being asserted by MSC did not pertain to maritime or admiralty law matters.
The Prothonotary’s Decision
As reported previously, Prothonotary Tabib granted Trans-Salonikios’s motion and dismissed the Third Party Claim.
MSC then appealed the Prothonotary’s decision to a single judge of the Federal Court, basically seeking to have a higher court consider the very same issues that it had raised before Prothonotary Tabib. In Justice LeBlanc’s words at paragraph 14 of his reasons, “MSC has essentially made the same arguments on appeal.”
Justice LeBlanc began his analysis by reviewing the law with respect to determining whether the Federal Court has jurisdiction over a certain subject matter. As set out by the Supreme Court of Canada in such cases as ITO-International Terminal Operators v. Miida Electronics Inc.,  1 SCR 752 [Miida], the following test must be met:
1. There must be a statutory grant of jurisdiction by 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; and
3. The law on which the case is based must be a “law of Canada” as these terms are used in section 101 of the Constitution Act, 1867. (*1)
The Court then noted MSC’s arguments as to why the test was met in this case, and thus Federal Court ought to have jurisdiction over the Third Party Claim by MSC against the land carrier, Trans-Salonikios. First, MSC argued that s. 22(1) of the Federal Courts Act provides the statutory grant of jurisdiction over the Third Party Claim, because that section confers on the Federal Court concurrent 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” (*2). MSC argued that its claim against Trans-Salonikios fell within the definition of “Canadian maritime law” as defined in the Federal Courts Act:
Canadian maritime law means the law that was administered by the Exchequer Court of Canada on its Admiralty side by virtue of the Admiralty Act, chapter A-1 of the Revised Statutes of Canada, 1970, or any other statute, or that would have been so administered if that Court had had, on its Admiralty side, unlimited jurisdiction in relation to maritime and admiralty matters, as that law has been altered by this Act or any other Act of Parliament;
MSC insisted that section 22(1) of the Federal Courts Act is to be given a “broad and purposeful interpretation so as to include all claims which stem from a contract relating to the carriage of goods by sea” (*3), and that the words “maritime” and “admiralty” of the definition of “Canadian maritime law” are to be interpreted “within the modern context of commerce and shipping” (*4).
MSC emphasized that the second part of the definition of “Canadian maritime law”, as underlined above) was “adopted for the purpose of assuring that Canadian maritime law would include unlimited jurisdiction in relation to maritime and admiralty matters” (*5). Hence, a subject matter will be within Canadian maritime law, and therefore subject to the Court’s jurisdiction, if it is “so integrally connected to maritime matters as to be legitimate Canadian maritime law within federal legislative competence” (*6). Tortious conduct that is sufficiently connected with navigation and shipping is one example of the broad scope of what the definition of Canadian maritime law encompasses (*7). MSC submitted, therefore, that the second part of the definition of “Canadian maritime law” was critical to the disposition of the matter, and nourished the statutory grant of jurisdiction.
MSC also argued, third, that Canadian maritime law is a “law of Canada” within the meaning of section 101 of the Constitution Act, 1867 as it falls under Parliament’s legislative authority over navigation and shipping pursuant to section 91(10) of that Act.
Fundamentally, MSC argued that the Prothonotary had mischaracterized the Third Party Claim as being a matter of trucking governed by provincial law as opposed to a matter of theft of a container while at port. In so doing, argued MSC, the Prothonotary had failed to properly appreciate the modern context of navigation and shipping as evidenced by the fact that Trans-Salonikios’s activities were exclusively focused on the logistics of container movement and delivery, in the context of shipping and port activities, and, as a result, were “integrally connected to the operations of Termont Terminal”.
The Court agreed with MSC that Canadian maritime law embraces all claims in respect of maritime and admiralty matters in the modern sense, and that these matters are not frozen in time (*8). However, the Court went on to state that in determining whether a particular claim involves a maritime or admiralty matter, the Court “must avoid encroachment on what is in ‘pith and substance’ a matter of local concern involving property and civil rights or any other matter which is in essence within exclusive provincial jurisdiction under section 92 of the Constitution Act” (*9). As the Court noted, the test for making that determination is whether the claim’s subject-matter is so integrally connected to maritime matters as to be legitimate Canadian maritime law.
Thus, for Justice LeBlanc, the issue was whether MSC’s claim against Trans-Salonikios was a claim made under or by virtue of “Canadian maritime law”.
Here, the Court parted ways with MSC. Justice LeBlanc held that there was little support in the case law for the proposition that a land carrier’s activities should engage Canadian maritime law. While MSC attempted (again) to argue that Trans-Salonikios was no different than a stevedore operation (which can be subject to the Federal Court’s maritime jurisdiction), Justice LeBlanc observed:
Here, there is hardly any proximity of Trans Salonikios operations to the sea. Besides picking-up goods on occasion, Trans Salonikios does not operate from a port area like a terminal operator does. If there is any proximity, it is with the land. There is also no connection between Trans Salonikios and the contract of carriage by sea entered into in the present case since, as pointed out by Prothonotary Tabib, Trans Salonikios is not even alleged to be contractually bound to any party to that contract.
Various other arguments, similar to those raised before the Prothonotary, were also raised by MSC. None succeeded. For example, MSC suggested that because Canadian maritime law provided for legal uniformity nationwide in tort, in respect of collisions and other accidents occurring in the course of navigation, a similar regime should applicable with respect to tortious conduct of land carriers alleged to have failed to deliver cargo to the rightful consignee. Justice LeBlanc rejected this argument, noting that nothing before him demonstrated such a need.
Ultimately, Justice LeBlanc concluded that the integration of the logistics between a terminal operator and a trucker does not bring the matter of the trucker’s activities within federal jurisdiction. In his words:
Trans Salonikios remains fundamentally a trucker governed by provincial law and it has not been shown … that the historical roots and unique character of Canadian maritime law require formal legal uniformity, as it does in the area of tortious liability for accidents occurring in the course of navigation, for the tortious liability of land carriers alleged to have failed to deliver to its rightful owner cargo picked up at a port terminal.
In the result, the appeal was dismissed.
(*1) See the Court’s decision at paragraph 21.
(*2) Section 22(1) of the Federal Courts Act, R.S.C. 1985, c. F-7, provides:
22 (1) The Federal Court has concurrent original jurisdiction, between subject and subject as well as otherwise, 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) See Pantainer Ltd. v. 996660 Ontario Ltd., 183 F.T.R. 211 at paragraph 100 (TD).
(*4) See Miida at paragraph 21.
(*7) See, e.g., Whitbread v. Walley,  3 S.C.R. 1273 (SCC).
(*8) See the Court’s decision at paragraph 29.
(*9) See the Court’s decision at paragraph 30. See also Miida at paragraph 21.
10. Want of Prosecution: Aviation Claim Applies Test for Dismissal in B.C.
While the Ontario Rules of Civil Procedure set out a firm deadline for a plaintiff to set down an action for trial within five years of commencement, failing which the action is dismissed administratively without warning (*1), British Columbia’s Supreme Court Rules provide a more discretionary avenue to relief for defendants facing proceedings which are neglected or abandoned by the plaintiff.
B.C. Rule 22-7(7) provides that, “If, on application by a party, it appears to the court that there is want of prosecution in a proceeding, the court may order that the proceeding be dismissed” (*2).
The test for want of prosecution was articulated by the B.C. Court of Appeal in Irving v. Irving (*3), and was more recently reiterated by the same court in PMC Builders & Developers Ltd. v. Country West Construction Ltd. (*4). Four factors are considered: Length of delay; (2) Reasons for delay; (3) Whether delay has caused serious prejudice; and most importantly (4) whether justice requires a dismissal.
In Scurfield v. Air Canada (*5), an action was brought by an Alberta based lawyer, who was arrested in 2008 on arrival into Kamloops, B.C. after a flight from Calgary, AB. The plaintiff was alleged to have vandalized the washroom on the aircraft and was arrested and detained by RCMP officers. The plaintiff brought proceedings against the airline, federal government, provincial government, the airport and an unnamed security company claiming damages arising out of his alleged assault and false imprisonment upon disembarkation from the aircraft.
The plaintiff brought his action under cover of his counsel of record in 2010 on the eve of his deadline under the Limitations Act. Mr. Scurfield’s lawyer served a List of Documents almost a year later and then laboured over providing copies of the producible documentation as listed. Plaintiff’s counsel did not respond to a request for particulars and notice was first provided by the lawyer representing the airport that relief may be sought on the basis of want of prosecution some 2.5 years after the action commenced if the plaintiff did not take prompt steps. Despite such warning, counsel for the plaintiff never canvassed dates for examinations for discovery nor responded to efforts of others to so convene examinations.
In 2017, the airline, federal government and the airport brought this motion for dismissal of the plaintiff’s claim. The plaintiff provided no responding materials; however, he did request an adjournment at the time of the hearing through an agent counsel following the dismissal of his lawyer of record days before. The request for adjournment was denied by Hyslop J.
Madam Justice Hyslop then applied the Irving/PMC Builders test to the matter and determined that a dismissal for want of prosecution was indicated.
The premises for the decision of the judge were that there had been inordinate delay in prosecuting the claim, including the time lapsed until the issuance of the claim on the eve of the limitation period, that same delay had caused significant prejudice to the defendants, which prejudice was compounded by the gravity of the accusations against them of assault and false imprisonment. On the overarching criterion of the interest of justice, given the passage of time and the centrality of issues of credibility of narration of events to the outcome of the proceedings, the judge held that the matter could not be fairly tried at least a decade post events.
The decision reinforces the principle that justice should be rendered in a timely manner, which principle underpins the much-abbreviated limitation periods to commence civil proceedings now in effect. It is interesting to note that the court considered the period before commencing the claim in weighing whether there had been want of prosecution. The cases in B.C. turn on their particular facts, and leave a much greater grey rea for judicial discretion on both sides, as compared to the Ontario Rules of Civil Procedure, which provide for a generous five years to bring a claim to trial ready, but then push the action over a largely unforgiving cliff once that deadline is passed.
(*1) Rules of Civil Procedure R.R.O. 1990, Reg. 194, Rule 48.14
(*2) Supreme Court Civil Rules, BC Reg. 168/2009, Rule 22-7(7)
(*3) Irving v. Irving,  BCJ No 970
(*4) PMC Builders & Developers Ltd. v. Country West Construction Ltd, 2009 BCCA 535
(*5) Scurfield v. Air Canada, 2017 BCSC 1437
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