November 26 2008
In Timberwest Forest Corp v Pacific Link Ocean Services Corp Timberwest sued a corporate carrier and various individual defendants for the loss overboard of a shipment of logs.(1) The Federal Court severed the triable issues and did not concern itself with the circumstances of the loss or with quantum (thought to be in the million-dollar range). Instead, the court considered particular issues associated with marine insurance law. Specifically, it considered whether a ‘waiver of subrogation’ clause was rendered void by the operation of the Hague-Visby Rules.(2) It also considered whether the benefits of the waiver of subrogation clause extended to defendants other than the named carrier, such as the carrier’s employees and subcontractors.
The Federal Court found that the parties had agreed to oust the application of the Hague-Visby Rules to the contract of carriage. Therefore, the Hague-Visby Rules did not operate to nullify the waiver of subrogation clause and the carrier was entitled to assert the clause against Timberwest’s insurance company. The Federal Court also found that the other defendants, which included employees and subcontractors of the carrier, were proper third-party beneficiaries of the waiver of subrogation.
Timberwest, a British Columbia land management company, entered into a contract with Harwood Products Inc, a California-based lumber mill, for the sale of 11,464.17 cubic metres of Douglas fir logs. Timberwest and Harwood began doing business in the late 1990s. The sales were originally sold free on board(3) at Timberwest’s storage yard at its Fraser River log sort facility. At that stage, Harwood took delivery, title and risk, then arranged and paid for carriage of the logs to Eureka, California. In 2002 the arrangement changed: while Harwood continued to arrange for carriage of the logs, title and risk remained with Timberwest until payment, which was not due until delivery in California.
Under the new arrangement, Timberwest had an insurable interest in the logs during carriage and consequently arranged for insurance coverage with its cargo insurer, St Paul & Marine Insurance Company. Timberwest had already obtained cargo insurance for US-bound shipments with another carrier. The court described the specific coverage outlined in that policy as follows:
"the required insurance policy was to name the carrier and its affiliates as additional insureds and to expressly waive subrogation against them, any vessel used in the performance of the contract and the master and crew of such vessel.”
An additional premium was charged by St Paul in consideration of the waiver of subrogation.
When Timberwest sought coverage for the Harwood shipments, Timberwest’s marine broker Marsh Canada Ltd specifically requested that the insurance policy also contain a waiver of subrogation clause, under which St Paul agreed not to subrogate against the carrier in the event that Timberwest filed an insurance claim under the policy due to some fault of the carrier. The policy specifically and individually named the carrier as Pacific Link Ocean Services Corporation.
Contract of carriage
Pursuant to the terms of the log sale, Harwood contracted with Pacific Link, which had chartered a tug and barge available for use. Pacific Link entered into a contract of carriage with Harwood, unaware that Timberwest had arranged insurance coverage over the cargo, which contained the waiver of subrogation clause. The contract of carriage contained the “usual hold harmless provisions as to the carrier/shipper” and incorporated a Pacific Link form of bill of lading, which was not seen by Timberwest, Marsh or St Paul at the relevant time. However, the court was of the view that these parties had an opportunity to review the bill of lading and found, as a matter of law, that they were bound to the terms of the document.
The bill of lading provided in bold print on its face that “ALL GOODS ARE CARRIED ON DECK AT SHIPPER’S RISK”. The warning referred to Clause 9 of the contract of carriage, which provided that “all cargo is carried on deck unless otherwise expressly stated in this bill of lading”.
During the voyage the logs which had been carried on deck were swept off the barge and lost at sea. Timberwest claimed under the policy and was indemnified by St Paul. In the subsequent litigation St Paul commenced a subrogated action in Timberwest’s name against Pacific Link, the contractual carrier and the charterer of the tug and barge. The other named defendants were the owners of the tug and tow, the master of the tug and the crewmembers who had loaded the logs on board the barge.
In the published decision the Federal Court broke down its analysis into key questions regarding marine insurance.
The first question was whether the waiver of subrogation clause in favour of Pacific Link, contained in Timberwest’s insurance policy, was rendered null and void and of no force and effect by the Hague-Visby Rules. The plaintiff asserted that since the shipment was governed by an international contract of carriage, the Hague-Visby Rules applied and pursuant to Article III(8), any clause in the contract of carriage which relieved the liability of the carrier or ship, other than provided for in the rules, was null and void and of no force and effect.
In the event that the court determined that Pacific Link could rely on the protection of the waiver of subrogation clause as an additional insured, the Federal Court then considered whether the other named defendants could claim similar protection as third-party beneficiaries or additional insureds.
Effect of Hague-Visby Rules on waiver of subrogation clause
The general rule is that shipments of goods by water from Canadian ports, if covered by a bill of lading, are compulsorily subject to the Hague-Visby Rules. Article III(8) of the Hague-Visby Rules states that any clause relieving or lessening the liability of the carrier, other than as provided for in the rules, is null and void and of no effect. However, the general rule is modified in the case of deck cargo. The Hague-Visby Rules recognize the special risk posed by deck cargo and therefore allow parties to allocate such risk between themselves, provided that: (i) the bill of lading on its face states that the goods are carried on deck; and (ii) the cargo is carried on deck.
A complicating factor in the litigation was that no bill of lading was ever issued for the voyage, although the parties agreed that it was contemplated that a bill of lading would be issued.
In light of the application of the Hague-Visby Rules, Timberwest argued that the defendants did not establish that an on-deck bill of lading would have been issued and so the waiver of subrogation was null and void and did not apply to the benefit of Pacific Link as carrier. In response, the defendants argued that the bill of lading, although not actually issued, would have provided that all the cargo was carried on deck, as indeed was the case.
The court reviewed the evidence and found that in the circumstances, Timberwest could not rely on the contract of carriage to submit that the shipment was covered by a bill of lading, without at the same time acknowledging that it would have been an on-deck bill of lading. The court found that:
The court held that the Hague-Visby Rules were properly excluded from application and the parties were at liberty to manage their risk themselves through the use of liability limiting clauses.
The defendant’s other argument was that the waiver of subrogation in the insurance policy was different from a benefit of insurance provision contained in the contract of carriage. Specifically, Pacific Link contended that nothing in the contract of carriage itself offended Article III(8), since the insurance policy was a separate contract negotiated between Timberwest and its insurer.
Extension of waiver of subrogation clause to third parties
It is a general rule of contract law that a third party can neither benefit from nor be burdened by a contract. Over the years, the general rule has been modified by the Supreme Court of Canada - at least as far as the benefits of a contract are concerned. It is appropriate to relax the doctrine of privity of contract where (i) the parties intended the benefit to apply to the third party and (ii) the activities of the third party were specifically contemplated in the contract.(4) In Fraser River Pile & Dredge Ltd v Can-Dive Services Ltd the Supreme Court of Canada said that there were sound policy reasons for relaxing the general rule in circumstances involving a waiver of subrogation clause:
“Fraser River in the course of this appeal has been unable to provide any commercial reason for failing to enforce a bargain entered into by sophisticated commercial actors…when sophisticated commercial parties enter into a contract of insurance which expressly extends the benefit of a waiver of subrogation clause to an ascertainable class of third-party beneficiary, any conditions purporting to limit the extent of the benefit or the terms under which the benefit is to be available must be clearly expressed.”
On the basis of these Supreme Court of Canada decisions, the Federal Court quickly established that the carrier, Pacific Link, was entitled to benefit from the waiver of subrogation clause because it had been specifically and individually named in the policy and was performing the services provided for in the contract of carriage.
Turning to the other defendants, Timberwest argued that this case did not fall within either of the principled or established exceptions to the doctrine of privity of contract. It argued that the policy named Pacific Link only and the waiver of subrogation did not extend to those other co-defendants that may have been involved in the maritime venture. Pacific Link asserted that the individual defendants were its employees or, alternatively, its subcontractors and should benefit from the waiver of subrogation clause as additional unnamed insureds on the basis that they were intended third-party beneficiaries. This argument essentially provided that since Pacific Link was a corporate entity, it would by implication require the assistance of the other named defendants in order to perform its contractual obligations. The carrier argued that: (i) this involvement was reasonably foreseeable and known to both Timberwest and Harwood; and (ii) the duties performed by the defendants were those exact duties contemplated by the parties as necessary to carry out the contract of carriage.
The Federal Court sought to determine whether the reference to Pacific Link in the insurance policy was limited to Pacific Link as such, or whether the reference extended to the “co-defendants in their capacity as shipowners, masters, officers, crew and stevedores concerned in the carriage of the cargo”. It considered the broad definition of ‘carrier’ found in the contract of carriage and also evidence of correspondence between the broker and the underwriter. It found that the intention between Marsh, on behalf of Timberwest, and St Paul was for St Paul to waive subrogation against the carrier. Therefore, the Federal Court concluded that the waiver of subrogation, which specifically named Pacific Link only, was in fact “intended to cover all those who were party to the contract of carriage”. In the result, the Federal Court ruled that the waiver of subrogation clause applied in favour of all the defendants and consequently St Paul was unable to subrogate Timberwest’s claim.
The Federal Court then spent some time setting out the policy reasons for reaching its conclusion and decided that an extension to the other defendants of the benefit of insurance did not offend the existing case law. However, the court said that if the existing law was offended, the change was permissible in the circumstances. It noted that the courts have historically frowned upon efforts by insurers to avoid exemption and limitation clauses by suing the opposite party’s servants, agents and subcontractors. Finally, the court noted that the insurer had received valuable consideration from Timberwest in exchange for the waiver of subrogation clause and stated that it would be an affront to commercial reality and good insurance practices to allow it to sue its own insureds to recover losses covered by the policy.
In this case the Federal Court considered the interesting problem of how to deal with the apparent intention of the insurer and the insured to extend the benefit of a waiver of subrogation to parties not specifically named on the policy.
The Federal Court demonstrated a broad, purposive approach in dealing with this problem - one that left the doctrine of privity in its wake. Despite the fact that the policy did not expressly extend the benefit of the waiver of subrogation clause to the other defendants, or even to an ascertainable class of third-party beneficiaries in which the other defendants might be included, the Federal Court further relaxed the doctrine of privity of contract to give effect to “commercial reality, justice and fairness”. According to the Federal Court:
“For good and valuable consideration provided by Timberwest, St Paul agreed that all the defendants were additional insureds and it waived subrogation against them. It would be an affront to commercial reality and to good insurance practice to allow it to sue its own insureds to recover losses covered by the policy.”
Courts recognize the sound commercial practice of protecting employees, agents and subcontractors that actually perform maritime contracts and will closely scrutinize attempts by insurers to recover from these individuals where their corporate employer or principal is otherwise protected by a waiver of subrogation clause. In this case, the question is whether the Federal Court has gone too far.
(1) 2008 FC 801.
(2) The Hague-Visby Rules are a set of international rules for the carriage of goods by sea. Their official title is the International Convention for the Unification of Certain Rules of Law relating to Bills of Lading and they were drafted in Brussels in 1924. After being amended by the Visby Amendments (officially the Protocol to Amend the International Convention for the Unification of Certain Rules of Law Relating to Bills of Lading) in 1968, the rules became known as the Hague-Visby Rules. In Canada, Part 5 of the Marine Liability Act (formerly the Carriage of Goods by Water Act) governs the carriage of goods by sea to or from Canada and within Canada. The act implements the Hague-Visby Rules.
(3) The term ‘free on board’ is commonly used when shipping goods to indicate who pays loading and transportation costs and/or the point at which the responsibility of the goods transfers from shipper to buyer.
(4) London Drugs Ltd v Kuehne & Nagel International Ltd and Fraser River Pile & Dredge Ltd v Can-Dive Services Ltd.
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