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December 2015

Liability Limits in Subrogation

Adam Grant
Adam Grant,
Partner

By Adam Grant

First presented at a client seminar. Also quoted in Canadian Underwriters' May 22, 2018, article "Did 1970s fire insurance subrogation decisions really set a precedent?"

Go to the Addendum added on May 24th, 2018.

In order to fully consider the viability of subrogation in any given action, it is important to determine any limitations on recovery which may be in place. In the context of carriage for reward, it is well understood that limitation of liability clauses are usually inserted into Bills of Lading or other agreements, and are often established by statute, or international convention.

Outside of the realm of carriage of goods, limitation of liability clauses have gained far more acceptance since the 2010 decision of the Supreme Court of Canada in Tercon Contractors Ltd. v. British Columbia (Transportation and Highways)1, which established that limitation of liability or exclusion of liability clauses would be presumptively enforceable.

Recently, Canadian courts have employed further contractual terms to limit or exclude the liability of parties entrusted with the carriage of goods, notwithstanding their clear responsibility for the loss.

Interpretation

In the context of carriage for reward, the traditional test for interpretation of limitation or exclusion of liability clauses arises from Canada Steamship Lines v. The King2, where the Privy Council set out a three-step analysis for the interpretation of such clauses.

Under Canada Steamship, a court must first consider whether there is an express exemption of liability for negligence, and if so, give effect to that provision. Second, if there is no express reference to negligence, the court must consider whether the words used are broad enough to encompass negligence. If the second step is satisfied, then the court must consider whether liability can be determined on any basis other than negligence. If liability can be so established, then the clause will not be applied.

This test was considered to be a strict one, such that clauses which did not expressly refer to negligence were often considered to be ineffective.

The Supreme Court's decision in Tercon preferred a global interpretation of the contract in order to determine whether a limitation of liability clause is enforceable, but also came to the conclusion that such clauses should be presumptively enforceable. Unfortunately, the Supreme Court did not expressly refer to Canada Steamship, or indicate that its reasoning was incorrect.

The Federal Court of Appeal has recently clarified this issue in Pêcheries Guy Laflamme Inc. v. Capitaines propriétaires de la Gaspésie (A.C.P.G) Inc.3 where the court expressly eliminated the three-step analysis in Canada Steamship as being a strict test to be applied. Instead, the court suggested that Tercon is the reigning law, but the Canada Steamship analysis can continue to provide a guide to interpretation of limitation of liability clauses.

A covenant to insure is a contractual term requiring one party to obtain insurance coverage for specified types of risks.

Covenants to Insure

A covenant to insure is a contractual term requiring one party to obtain insurance coverage for specified types of risks. On its face, such a contractual term is nothing more than a requirement to pay for an insurance policy. However, the Supreme Court confirmed in the 1970s4 that a covenant to insure is actually an allocation of risk for the specified types of losses as between the parties to the contract.

Covenants to insure arise predominantly in lease agreements, where either the landlord or tenant are obligated to obtain insurance policies to provide coverage for specified property, and specified risks. In that context, the covenant establishes that the party which was obligated to obtain insurance coverage is responsible for any loss which would have been covered by that insurance, even if caused by the negligence of the other party. This essentially creates a complete waiver of subrogation, notwithstanding that the agreement may make no express mention of subrogation.

Importantly, a covenant to insure is broader than a waiver of subrogation, and applies to allocate the risk, whether or not such insurance has actually been taken out as required.

The Ontario Superior Court of Justice and Court of Appeal have recently broadened the scope of the covenant to insure in the Sanofi Pasteur case5. In that case, a contract existed between the plaintiff, who was storing goods with one of the defendants. The contract required the plaintiff to take out all risks insurance for the loss of its goods, which were worth in excess of $4 million. As a result of a failure in a temperature monitoring system, the goods were spoiled.

The court held firstly that the covenant to insure eliminated the liability of the bailee, but also that independent companies providing security services, and who manufactured some of the security systems in use could also obtain the benefit of the covenant to insure. The reasoning used was that the provision of a monitored security system was a part of the contract, and it would have been well known that outside parties would be involved in providing that system. As a result, the plaintiff's subrogated claim was fully dismissed as against all parties.

In a similar case, which more directly involves transportation of goods, in De Beers Canada Inc. v. Ootahpan Company Limited6, the court dismissed a subrogated action brought in relation to damage caused to a transformer during the course of transferring it from a railcar to a truck. There was an earlier agreement between the plaintiff and one of the defendants for the provision of logistics services contained a covenant to take out all risks insurance, covering all contractors and subcontractors. The court held that this covenant applied to all of the defendants, such that subrogation was not permitted.

Waivers of Subrogation provide that one party waives the right to subrogate as against stated parties, or types of parties.

Waivers of Subrogation

Waivers of subrogation are contained in a number of agreements, including insurance policies, and are far more easily understood in their effect. They provide that one party waives the right to subrogate as against stated parties, or types of parties.

In the case of Timberwest Forest Corp. v. Pacific Link Ocean Services, the Federal Court of Appeal upheld a lower court decision, which enforced a waiver of subrogation of which the defendant was unaware. The plaintiff had taken out an insurance policy containing a waiver of subrogation as against the defendant, who was specifically named. The plaintiff purchased a cargo of logs, which were to be towed by barge. Unbeknownst to the plaintiff, the defendant was contracted by the vendor to tow the logs. The logs were lost at sea, and the plaintiff commenced a subrogated claim.

Ordinarily, this type of a waiver of subrogation could be rendered null and void by virtue of the Hague-Visby Rules. However, the court found that, because the cargo was to be stored on deck, it did not constitute “goods”, such that the prohibition in the Hague-Visby Rules did not apply, and the waiver of subrogation was enforceable.

Statutory Limitations Where the carriage of goods is performed internationally, the rules surrounding such carriage, and limitations of liability for failure of that carriage, is often prescribed by international conventions, which are adopted in Canada by statute.

Liability of carriers for losses or damage suffered during international carriage by air is governed by the Montreal Convention, which is adopted in Canada by way of the Carriage by Air Act7. Importantly, the Supreme Court of Canada has recently confirmed, in Thibodeau v. Air Canada8, that the scheme set out by the Montreal Convention is the exclusive basis for remedy as against an international air carrier for losses during international carriage by air. There is no opening for liability to be established other than as set out in the convention.

Pursuant to the Montreal Convention, damage to cargo is strictly limited to 17 SDR per kilogram of cargo, unless some greater amount is specially declared as the value for the cargo. Different limitations apply to loss of baggage, delay, or injury to passengers.

With respect to international carriage by sea, the Hague-Visby Rules continue to be in force, as adopted in Canada under the Marine Liability Act9.

Conclusion

Recent decisions from a number of courts have made it relatively clear that any exclusion clauses which may apply to limit or eliminate subrogation are going to be interpreted broadly, thus increasing the risk that subrogated claims will be defeated.

Therefore, in considering the prospects of subrogation in relation to loss of or damage to cargo, it is important to look to the Bill of Lading, and other shipping documentation to establish the routinely expected limitation of liability clause. However, it can also be critical to look to other contracts relating to the carriage, and various statutes to determine whether there is any further basis to limit or exclude liability altogether.

By conducting this type of careful analysis, one will be able to identify subrogated claims which are likely to be defeated by the application of limitation or exclusion clauses, such that efforts are expended more efficiently.

Addendum added May 24, 2018

The recent decision of the Court of Appeal in Royal Host GP Inc. v 1842259 Ontario Ltd.10 has reiterated an important concept in respect of covenants to insure, as discussed above.  Ultimately, the parties to a contract are free to craft their own bargain, such that each agreement must be assessed and considered on its own language.  Although a covenant to insure or other type of clause barring subrogation may be present, parties are free to include other language which may explicitly exempt those terms from having the effect of barring subrogation claims in some or all circumstances.

In the Royal Host case, a covenant to insure included in a lease contained express language indicating that the tenant was not relieved of liability resulting from its own negligence, and that it was not entitled to the protection of the insurance coverage taken out by the landlord.  The Court of Appeal agreed that this had the effect of contracting out of the usual legal implications of a covenant to insure.

As the Superior Court warned in GTAA v Foster Wheeler,11 however, in order to contract out of these well-known and well-understood implications of covenants to insure, clear and unambiguous language is needed.


1Tercon Contractors Ltd. v. British Columbia (Transportation and Highways), [2010] 1 S.C.R. 69
2 Canada Steamship Lines Ltd v The King, [1952] UKPC 1, [1952] AC 192
3 Pêcheries Guy Laflamme Inc. v. Capitaines propriétaires de la Gaspésie (A.C.P.G) Inc., 2015 FCA 78
4 Cummer-Yonge Investments Ltd. v. Agnew-Surpass Shoe Stores Ltd. [1975], 55 D.L.R. (3d) 676 (S.C.C.), Pyrotech Products Ltd. v. Ross Southward Tire Ltd. [1975], 57 D.L.R. (3d) 248 (S.C.C.), Smith v. T. Eaton Co. [1977], 92 D.L.R. (3d) 425 (S.C.C.).
5 Sanofi Pasteur Limited v. UPS SCS, Inc. et al., 2014 ONSC 2695, aff'd 2015 ONCA 88
6
De Beers Canada Inc. v. Ootahpan Company Limited et al, 2013 ONSC 2550, aff'd 2014 ONCA 723
7 Carriage by Air Act,
R.S.C. 1985, c. C-26
8
Thibodeau v. Air Canada, [2014] 3 S.C.R. 340
9 Marine Liability Act, S.C. 2001, c. 6
10 Royal Host GP Inc. v. 1842259 Ontario Ltd., 2018 ONCA 467
11 Greater Toronto Airports Authority Association Inc. v. Foster Wheeler, 2011 ONSC 1442


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