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Liability for On Deck Cargo

Published in the January 2007 issue of Transportation Notes - View Article

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In a decision arising out of a contract for the construction of an ocean fishing vessel, the Federal Court of Appeal has clarified the impact of attornment on the issue of enforceability of foreign judgments.

The case of Morgan v. Guimond Boats Limited arose from a contract under the terms of which the defendant, a New Brunswick corporation, agreed to construct a 50-foot ocean vessel for the plaintiff, a resident of the State of Hawaii. The boat was intended for use in the waters off Hawaii.

The boat was built, paid for and delivered in New Brunswick. After the plaintiff had taken the boat to Hawaii, a dispute arose over the boat’s seaworthiness.

The purchaser commenced action in the District Court of the State of Hawaii. The defendant brought a motion to challenge the jurisdiction of the District Court and was unsuccessful. No appeal was taken from this decision. The defendant then filed a defence to the claim and did not make any further explicit reference to jurisdiction. This defence was filed in April of 2003 and the matter proceeded for approximately a year, during which time the defendant participated in a number of interim proceedings including a scheduling conference, a settlement conference and a final pre-trial conference. Then in March of 2004, counsel for the defendant filed a motion for leave to withdraw. Counsel advised the court that he was instructed to withdraw and that his client would contest any attempt to enforce judgment in Canada.

The District Court granted the request to withdraw and proceeded to enter judgment against the defendant for approximately $400,000.

In the fall of 2004, the successful plaintiff commenced an action in the Federal Court of Canada in order to enforce the District Court’s judgment.

In resisting a claim for summary judgment, the defendant raised two main objections. In the first place, it argued that there was no federal statutory basis for the claim and that the Federal Court accordingly lacked jurisdiction to execute the foreign judgment. The summary judgment Judge had little difficulty with this aspect of the case. Paragraph 22(2)(n) of the Federal Courts Act assigns jurisdiction to the Federal Court in respect of “any claim arising out of a contract relating to the construction, repairs or equipment of a ship”. This provision plus the Supreme Court of Canada’s definition of Canadian maritime law in a string of cases from ITO-International Terminal Operators Ltd. v. Meda Electronics Inc., to Ordon Estate v. Grail puts it beyond serious doubt that the Federal Court did have jurisdiction.

The Judge at first instance did, however, err in his disposition of the second issue raised by the defendant which he described as “much more troubling”. Here the question was whether the District Court had personal jurisdiction over the defendant. The Judge began by correctly observing that Canadian courts should, when considering whether a foreign judgment is enforceable, apply the “real and substantial connection” test. That test has been applied to inter-provincial disputes for 15 years and was clearly extended to foreign judgments by the Supreme Court of Canada in the case of Beals v. Saldanha, decided in 2003.

The Judge, applying the test, found that the connection of the defendant with Hawaii was “fleeting and relatively unimportant”. He then turned his attention to the significance of the fact that the defendant had actively participated in the proceedings before the District Court. Here he found two difficulties. In the first place, he was of the view that the law of Hawaii with respect to raising and preserving an objection to jurisdiction was not clear. While the defendant was unsuccessful in his motion to oust the jurisdiction of the District Court, the Judge of first instance in the Federal Court was doubtful concerning the effect of the filing of a defence and the subsequent withdrawal of counsel. He concluded that it was not clear whether the defendant successfully preserved his objection to jurisdiction.

The Judge then turned to the more important part of his decision, namely the impact of the “real and substantial connection” test to the law of attornment. Whereas attornment is a well known and traditional source of jurisdiction, the Judge thought that it could not be applied alone, without reference to the examination of connections to the jurisdiction. He expressed the view that a party could, by appearing and participating in a proceeding in a way which would give rise to attornment, “bolster” the connections between itself and the jurisdiction. However, in his view of the matter, the ultimate question should still be answered by considering the extent of those connections. If they turn out to be essentially non-existent, there is nothing to “bolster”.

Applying these considerations to the facts at hand, the motion Judge concluded that the test for summary judgment had not been met. There were, he thought, complex questions of law which could not be answered without “a clear picture of the underlying jurisdictional facts”.

The Federal Court of Appeal, in a unanimous decision released early in December, did not agree that there are such difficulties. With respect to the first of the issues, it found the evidence clear enough: the defendant did not succeed in preserving a jurisdictional objection under the law of Hawaii. As to the second, the Justices on appeal found that the imagined legal complexity rested on a faulty assumption. While it is clear that the “real and substantial connection” test must be applied to determine enforceability, this test does not diminish the force of attornment. The latter takes its effect, ultimately, from the choice of the party. By participating in a proceeding, a party expresses his willingness to be bound by the resulting determination. Indeed, the Supreme Court makes particular reference to this issue in Beals, where Justice Major, when speaking of the importance of connection to the jurisdiction, notes: “Although such a connection is an important factor, parties to an action continue to be free to select or accept the jurisdiction in which their dispute is to be resolved by attorning or agreeing to the jurisdiction of a foreign court.”Under the Hague-Visby Rules (which are incorporated into Canadian law as Schedule 3 of the Marine Liability Act) an ocean carrier is not permitted to exclude its liability for damage to “goods” where the damage is caused by the fault of the carrier. However, the word “goods” is defined to exclude cargo carried on deck. A decision of the Court of Appeal for British Columbia released in December, 2006, considers two issues of interest: How might the description of cargo in a bill of lading affect the availability of an exclusion defense? If such a defense fails because of inadequate description, should the ultimate responsibility rest with the carrier or with its shipping agent?

The participants in the relevant transactions were the vessel owner and charterer, (for simplicity we will refer to these collectively as “Gearbulk”), the shipping agent (Seaboard International) the shipper (Timberwest) and two consignees in Europe. The essential contractual documents were a Contract of Affreightment (COA) between Gearbulk and Seaboard, a master bill of lading issued by Gearbulk and two bills of lading issued by Seaboard to its customers.

Gearbulk carried a cargo of lumber from British Columbia to Antwerp. The greater part of the shipment was stowed on deck and was damaged as a result of the negligence of persons for whom Gearbulk was responsible. Accordingly the question was whether Gearbulk should have the benefit of a clause excluding its liability.

The Seaboard bills contained the notations: “Stowage: 86% OD 14% UD” and “ALL CARGO CARRIED ON DECK AT CARGO OWNER’S SOLE RISK AS STATED ON THE REVERSE IN CLAUSE 6 OF THE CONDITIONS.” It was common ground that the contracts allowed the lumber to be carried on deck, at the carrier’s option.

The shipper prevailed in an earlier action against Gearbulk. The trial judge (upheld by the Court of Appeal) found that the description of the cargo carried on deck was not adequate. He reasoned that the reference in the Seaboard bills of lading to a volume of lumber stowed on deck was a rough estimate which was inadequate for a number of reasons. He was impressed by the fact that the shipment contained a range of packages, the values of which varied considerably. He concluded that even a precise volume calculation “would not, without more, have helped the consignees determine their respective risks in relation to the carriage of the cargo”. This conclusion, which will turn out to be crucial for the disposition of the litigation, appears to assume that the consignees (or more realistically their insurers) would care. This is not likely the case.

Having been found liable for damages of $550,000, Gearbulk made a claim for indemnity as against Seaboard. It advanced a number of grounds for the claim, including one under the terms of the COA. In particular, it argued that it was entitled to an indemnity because Seaboard issued two bills of lading and that this constituted a variance from the Gearbulk bill. Clause 16 of the COA imposed on Seaboard an obligation to indemnify in the event of losses resulting from such a variance. Although the Seaboard bills undoubtedly differed from the Gearbulk bill, that difference was not the cause of the liability imposed by the court. Given the court’s analysis of what is required by way of description of the cargo, the Gearbulk bill would not have afforded any greater protection.

Gearbulk also argued for indemnity on the basis of the common law which recognizes that an indemnity may be appropriate where an agent fails to achieve a result within the reasonable contemplation of principal and agent. Again this failed. Although the court did not say so, one might argue, on behalf of the agent, that to hold it liable on this basis would be to require it to foresee the construction the court would place on the bills of lading. The foreseeability of that construction might be clear to one learned in the law (although certainly not to this author) but would hardly be expected in the world of commerce.