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Case Comment: Canada 3000 Aftermath
Published in the November 2008 issue of Transportation Notes - View Article
The real end of the line this month came on November 20th when the Supreme Court of Canada denied leave to appeal the decision of the Canadian Transportation Agency in the “one-passenger one-fare” litigation. As is usual on leave applications, the no reasons were given. We reported on the CTA decision in Volume 4, Issue 2 of this newsletter and will not rehash what was said there. Accordingly, we move on to another case which we think may likely be the last word on a dispute arising out of a well known aviation insolvency.
Canada 3000 Airlines failed seven years ago this month but at least one dispute arising out of that insolvency made its way to trial only in the fall of this year. The decision in Guarantee Company of North America v. Resource Funding Limited was released on October 21, 2008. The dispute was between the insurance companies which provided certain bonds required by the Canadian Transportation Agency and a company which provided an indemnity in respect of the liability of the insurance companies under those bonds.
Canada 3000 operated as a charter air carrier and the Canadian Transportation Agency required it to provide security to protect the payments it received from its charterers. The security was in the form of a bond provided by the Guarantee Company of North America (GCNA) and ACE/INA. These co-sureties in turn obtained security to protect their positions. The primary security was in the form of an escrow account. Canada 3000 deposited amounts received from their charterers in this account and funds relating to any particular flight were released only after the flight had taken place. Additional security was in the form of indemnity agreements from Canada 3000, related companies and its parent, Resource Funding Limited (RFL). It was this last indemnity agreement which gave rise to these proceedings.
The issue in the action was whether RFL had been released from its indemnity obligation. Resolution of the issue required the examination of conflicting evidence relating to several meetings and discussions which took place in the fall of 2000. In that period of time, the insurance broker who acted for Canada 3000, Simon Barten, conveyed to GCNA and ACE the fact that RFL was requesting to be released from its indemnity obligation. Mr. Barten documented the discussions in a few emails. A key email message, sent to Canada 3000 and the representative of the insurers (Luc Lanthier) stated: “Luc will prepare a new Agreement for execution deleting Resource Funding as you requested”. This new agreement was never prepared.
GCNA and ACE contended that RFL remained liable under the indemnity. The trial judge resoundingly rejected their arguments and found that RFL had been released from all obligation. This conclusion is based on a close factual analysis. Furthermore, it appears to us that the trial judge’s disposition of the legal arguments are correct. We predict that the trial outcome will withstand any appeal.
As to the facts, the crucial question was whether there was an agreement to release RFL. All discussions took place in a social setting. There were no minutes. A very important document was the email which Mr. Barten sent on September 21, 2000 following a lunch with Mr. Lanthier. This is the document which sets out Mr. Barten’s understanding that Mr. Lanthier would be drafting a new agreement which would release RFL. Mr. Lanthier agreed that he did receive this message. The fact that he did not deny the statement would be of great importance.
On September 26, Messrs Barten and Lanthier spoke by telephone. Mr. Barten confirmed this the next day in an email which instructed the insurers to “proceed with the renewal as follows”. Among the items which followed was this: “Revise indemnity agreement deleting Resource Funding”. In the meantime, Mr. Lanthier was concluding an annual review of Canada 3000. This document contained language which made it clear that all the relevant individuals at both GCNA and ACE were in agreement that RFL should be released.
The last important documentary evidence of the agreement to release was an email from the representative of ACE. This stated that the writer was in agreement with the comments in the Annual Review and was prepared to “give up a good security”. As time was pressing (the Canadian Transportation Agency wanted evidence that the bonding arrangement was being renewed) he agreed a new bond should be drawn up which he would personally deliver to Canada 3000.
Notwithstanding the fact that the documentary record established that GCNA and ACE had agreed to release RFL, the insurers insisted that no binding agreement had been reached. They stated that the process of releasing RFL would only have begun once the latter had made a written request to be released. They stated that this requirement had been communicated to Mr. Barten, that Mr. Barten acknowledged the request and explained that he had asked his client for the letter but could not persuade the client to respond.
Having reviewed the documentary evidence, the trial judge then undertook a careful analysis of the evidence given by the most important witnesses. He made clear and specific findings respecting credibility. These were entirely in favour of Mr. Barten’s version of events. The witnesses who appeared for the insurers testified to having a recollection of facts favourable to their case, while otherwise remembering little. On a number of occasions they gave evidence at trial which contradicted prior statements and they made assertions which lacked plausibility. A review of the evidence offered by the plaintiffs’ witnesses occupies six pages of the decision and is generally uncomplimentary. To choose one of several notable points, the judge was clearly unimpressed with the statement that Mr. Barten was asked to provide a letter from RFL. All the evidence suggested that if Mr. Barten had been asked to obtain a letter, he would have passed that request on to RFL. The individual who owned RFL had been pressing hard for the release, and it is inconceivable that the letter would not have been provided, if requested. This implausibility, combined with the fact that the documentary evidence contains nothing to suggest that a letter was requested, led the judge to conclude that no request was made.
On the other hand, Mr. Barten’s evidence was very positively received. His evidence was “balanced and reliable”. He did not overreach, but admitted to no recollection of one important meeting when it would have been in his interest to make assertions about what transpired at that meeting.
Having concluded that the insurers did agree to release RFL, the judge noted that no formal agreement was committed to writing. This was not fatal however. Mr. Lanthier “acknowledged on cross-examination that it was not unusual in the surety business to make an agreement and do the paperwork later”. It was Mr. Lanthier who was to draft the agreement. Accordingly, when he failed to do so, it did not “lie in the plaintiffs’ mouth . . . to rely upon the lack of any signed document in pursuing this case”.
The plaintiffs also raised points of law. In the first place they argued that there was no consideration for the agreement to release RFL. As every first year law student knows, without consideration there can be no enforceable contract. This cornerstone of contract theory asserts that, in order to give legal effect to a promise, something of value must be given in exchange. There is no doubt that this is good doctrine, but as every lawyer with even a little experience knows, the meritorious cases which will be defeated by a “lack of consideration” argument are very few. It is quite impossible to enter into a doctrinal discussion in this brief note. The trial judge gave two basic reasons for finding in favour of RFL. There was consideration, in the strictest sense, in that RFL had given thought to moving its account if its request for a release was not honoured. Even if this deliberation was not communicated to the insurers, the decision not to cause Canada 3000 to seek bonding facilities elsewhere constituted consideration. In the second place, the judge noted that Canada 3000 and the remaining companies providing an indemnity had clearly given consideration to the sureties and this mutuality of promises was enough to establish the enforceability of the contract.
Finally, the plaintiffs relied on the terms of the indemnity agreement. Three provisions in particular were advanced. None of these provided any support for the plaintiffs’ case. The first was a “Hail Mary” of the most desperate sort. It was dismissed as “an interpretation which makes no sense”. The remaining two clauses both referred to notice in writing. It was argued that RFL could not have achieved its contractual objective without a document in writing. There were at least two ways of addressing these arguments. That preferred by the trial judge was the doctrine of estoppel. There clearly was an agreement to release. This was found as a fact. It is possible that the terms of the contract make this agreement unenforceable. However, the unenforceability can only be established if the plaintiffs are allowed to introduce evidence to prove the unenforceability. This they are prevented from doing. They knew there was an agreement. They were silent about any need for a written request. This amounted to a representation that there was no further requirement to establish an agreement. RFL relied on this representation. It took no further steps to put alternate bonding arrangements in place. From these facts, it followed that GCNA and ACE could not rely upon the alleged “request in writing” requirement.
There was one final nail in the coffin. The insurers had agreed to dispense with the escrow bank account agreement. This significantly increased RFL’s exposure. RFL did not consent to the release of the escrow agreement. Applying a principle from the law of guarantee, the judge found that RFL was released from its indemnity obligations when the insurers released the escrow account.
GCNA v. RFL
2008 CanLII 56006