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Demurrage, Maximum Grain Revenues and Judicial Review
Published in the April 2008 issue of Transportation Notes - View Article
The transportation industry has been in the centre of a recent debate respecting the proper scope of judicial review of administrative action in Canada. We reported on one such case involving rail transportation in the March 2008 edition of Transportation Notes.
The issue has now reached the Supreme Court of Canada in the Dunsmuir case (see End of the Line, in this edition) which did not arise from a transportation dispute. However, what we believe to be the first appellate consideration of Dunsmuir did. On April 3rd the Federal Court of Appeal released its decision in Canadian National Railway Company v. Canadian Transportation Agency, (CN v. CTA) a case argued just days after Dunsmuir was released.
At issue in CN v. CTA is the role the Agency may play in reviewing demurrage charges assessed by the railway. Before entering into a consideration of the case, it is necessary to say a few words about the special statutory regime which applies to the carriage, by rail, of western grain in Canada.
The rates a Canadian railway may charge for the movement of western grain for export have long been regulated. The history of this regulation goes back at least to the Crow’s Nest Pass Agreement of 1897. The most recent version of regulation came into effect in the year 2000. Rates are no longer directly regulated, but the revenues which rail carriers can derive from the movement of western grain are subject to a statutory cap. The way in which this revenue is to be calculated is described in the Canada Transportation Act and the Canadian Transportation Agency has jurisdiction to audit the rail carriers’ calculation of Western Grain Revenues.
There are a number of revenue items which are related to the carriage of western grain which must be excluded from the calculation in accordance with the formula set out in the legislation. In particular, demurrage is not to be included and neither is that portion of revenue related to a multi-modal movement which is in respect of a transportation mode other than rail.
The meaning of “demurrage” is central to the resolution of the issues raised in this case. Demurrage is a charge made by railway companies for the detention of a car beyond the free time allowed for loading or unloading. It is intended to penalize inefficient activities beyond the carrier’s control.
In April 2006, CN adopted a new demurrage policy. The Agency audited CN’s Western Grain Revenues for the year ended July 31, 2006 and in the course of doing so determined that amounts which CN had collected as demurrage could not reasonably be characterized as demurrage. Because of this conclusion, CN was required to add the demurrage charges to its Western Grain Revenues otherwise calculated. As a result of this, and other adjustments required by the Agency in the course of the audit, CN was determined to have exceeded its statutory revenue cap and ordered to pay the excess amount to the Western Grains Research Foundation, along with a penalty.
CN appealed this decision to the Federal Court of Appeal, which has jurisdiction to entertain appeals of Agency decisions on questions of law and jurisdiction. As noted above, the Supreme Court had released the Dunsmuir decision only days before argument in the Federal Court of Appeal. Both parties relied on Dunsmuir.
As the case involves the interpretation, by the Agency, of provisions of its “home statute” at first blush it would appear that Dunsmuir requires review on a reasonableness standard. However, the Federal Court of Appeal found otherwise. It noted that the Supreme Court has stated that it is “not necessary to conduct an exhaustive analysis where the appropriate standard has already been determined in a satisfactory manner in a prior decision”. The Court then referred to its earlier decision, Canadian Pacific Railway Company v. Canadian Transportation Agency and Canadian Wheat Board, (the CP Rail case) released in June of 2003 and concluded that the standard of review should be correctness. While the Court’s reasoning in reversing the Agency may be justified if the review properly proceeded on a correctness standard, we would note at this point that the Court’s determination of the standard of review appears questionable. The CP Rail case, on which the Court relied for determination of the standard, was indeed a case in which a decision of the Agency was reviewed on a correctness standard. Furthermore, the issue of substance was the same as that which arises in the present case. However, the proper standard of review was not argued or determined in the CP Rail case as all parties agreed that the Agency’s interpretation was to be reviewed on a correctness standard. Developments since 2003 support a finding that the review should be on a reasonableness standard and of course this is what the Agency argued in the present case.
Having determined that it should review the Agency’s decision on a correctness standard, the Court turned its attention to the words of the statute and the construction placed on that statute by the same Court in the CP Rail decision. The key statutory provision is paragraph 150(3)(b) of the Canada Transportation Act which provides that a railway subject to the provision should not include in the calculation of its revenue from the transportation of western grain “any amount that is earned by the company and that the Agency determines is reasonable to characterize . . . as being in respect of demurrage”.
The decision of the Court comes down to this: The Agency does have jurisdiction to determine whether a particular charge can be reasonably characterized as demurrage. However, once it is determined that a charge is reasonably characterized as demurrage, the Agency cannot go further and examine the reasonableness of the charge.
In support of this conclusion, the Court notes there is a long history of regulation of rail rates in Canada. At one time, a predecessor of the Canadian Transportation Agency did have a general jurisdiction to “disallow any tariff or any portion thereof that it considers to be unjust or unreasonable”. From this, the Court concluded that Parliament could have adopted the well known terminology if it had wished to invite the Agency to inquire into the reasonableness of demurrage charges. The fact that it rather empowered the Agency to determine whether it is reasonable to characterize a charge as “being in respect of demurrage” points to a much more narrow jurisdiction.
Given that demurrage is a charge for detention of a car beyond the free time given for loading and unloading, the concept of demurrage requires the existence of some free time. This is a proposition which the Federal Court of Appeal recognized in the CP Rail case of 2003. Both the Agency, in the decision below, and the Court in the decision under discussion, accepted CP Rail as binding (or persuasive) authority. The Agency reviewed the changes to CN’s demurrage policy in some detail. It found that between 2001 and 2006 CN had eliminated as much as four days from the free time previously allowed. It also found that its present rules were “far more strict than those which apply to general carload shipments for both CN and CP, or which apply to CP’s transport of grain.” It concluded that the reduction of free time was of such a magnitude as to make it tantamount to the elimination of free time.
The Agency’s conclusion respecting these changes is expressed as follows in paragraph 68 of its decision: “. . .such an elimination would take a demurrage policy beyond what can be reasonably characterized as one”. It may be noted that the Agency restricted its finding to the terms identified in the statute. That is, it claims not to be reviewing the demurrage charges for reasonableness, but rather determining only whether the charges can reasonably be considered as demurrage at all. It claims to find that they cannot. The Court however does not accept this description of the Agency’s decision. It refers to the same paragraph 68 and states: “The Agency finds that the reduced free time renders CN’s demurrage policy ‘unreasonable’”. Since the Agency has no authority to enter into a consideration of the reasonableness of the policy, its decision is overturned to that extent.
The result of this case flows directly from the determination of the standard of review. It may be recalled that the Court chose to review on a correctness standard and cited the earlier CP Rail case as precedent. It may also be recalled that the CP Rail case contains no discussion of the issue of standard of review as all parties were agreed that the correctness standard should apply. Having selected the standard, the Court then examines the crucial Agency finding, which is that the changes made by CN are tantamount to the elimination of free time altogether. The Court points to a number of factors which it believes undermine this finding. It notes that 87% of CN’s grain traffic is unloaded within the one free day which is still allowed in the amended policy. It concludes that all the elements of demurrage are present in the CN charges and that the Agency could not properly have concluded otherwise. From this it follows that the Agency can have reached its conclusion only by examining the reasonableness of the charges.
If the standard of review was properly determined to be correctness, it appears to us that the Court was entitled to substitute its view for that of the Agency and the case was well decided. However, we are troubled by the determination of the review standard, which appears to have been made without any detailed consideration or persuasive authority. If the proper standard, following Dunsmuir, was reasonableness, a very different analysis would necessarily follow. The question would no longer be whether the Agency had arrived at the one correct characterization of demurrage for the purposes of its determination. Rather, the question would be whether it should be seen as reasonable to identify the essence of demurrage in the context of conditions which prevail in the shipment of a particular commodity in a particular market. In determining such a question the Agency should, in accordance with Dunsmuir, be entitled to considerable deference and a court reviewing on a reasonableness standard may well have upheld the Agency’s decision.
Canadian National Railway Company v. Canadian Transportation Agency
2008 FCA 123