Federal Court of Canada Applies Québec Civil Code to Rail Cargo Damage Occurring in the United States

In this rail cargo claim case, the plaintiff, ABB Inc. (“ABB”), was a manufacturer of electrical equipment headquartered in Quebec. ABB had contracted with the defendant Canada National Railway Company (CN) for the transportation by rail of an electrical transformer from its plant in Quebec, to a customer in the United States. CN, in turn, had retained the services of the defendant CSX Transportation, Inc. (“CSXT”) for the American leg of the voyage by rail. While being carried by CSXT, the transformer was damaged when it hit a bridge. CSXT’s software used for clearance analysis had failed to identify the insufficient height of that bridge.

In 2011, ABB and CN had signed a “Confidential Transportation Agreement” (the “2011 Agreement”], which limited CN’s liability for the carriage of dimensional loads. The transformer subject of the claim was a dimensional load. The 2011 Agreement provided that “CN’s liability for any loss or damage to the said Dimensional Loads, or any part thereof, shall be limited to USD $25,000, unless negligence is proven”.

In 2014, ABB contacted CN to obtain a quote for the transportation of the transformer to the United States. CN then issued a “Dimensional Services Proposal”. That proposal contained a mention reading “For Limited Liability of $USD 25,000.00.” In March 2015, ABB issued a purchase order to CN, referencing the price quoted by CN in the July 2014 proposal (the proposal and quote are referred to in this article as the “2015 Agreement”). While the 2011 Agreement qualified the limitation of liability by the wording “unless negligence is proven,” the  2015 Agreement did not.

ABB sued both CN and CSXT for damages at the Federal Court of Canada. CN denied any liability since it had delivered the transformer in good condition to CSXT. CSXT denied any liability on the basis that it had no direct contractual relationship with ABB.

The main issue in this Federal Court action was therefore which limitation of liability provision applied; that of the 2011 Agreement or that of the 2015 Agreement? ABB contented the limitation in the 2011 Agreement applied, which made an exception if the negligence of the carrier was proven. CN and CSXT, on the other hand, argued the relevant limitation was found in the 2015 Agreement, which was not subject to such exception. All parties agreed that the damages suffered by ABB were of $1.5 million. Questions of liability aside, the court’s decision on the issue of which limitation of liability applied would make the difference between a recovery of $25,000 and a recovery of $1.5 million.

The Federal Court found in favour of ABB.

1. Liability of a Rail Carrier for Cargo Damage

In its decision, the court noted that the Railway Traffic Liability Regulations, SOR/91-488 (the “Liability Regulations”) provide that a railway carrier is liable for “any loss or damage to the goods” in its possession. They also set forth certain causes of exoneration such as an “act of God,” a war, a quarantine, etc., which reflects the common law liability of a carrier as a bailee of the transported goods as well as the liability of a carrier under Article 2049 of the Civil Code of Québec.

The court then went on to note that a shipper and a railway company may substitute a different regime if they do so in compliance with subsection 137(1) of the Canada Transportation Act, SC 1996, c 10 (the “CTA”). Such provision provides that a shipper and a railway can agree on a different liability regime “only by means of a written agreement that is signed by the shipper […]. “

1. The Claim Against CN

ABB’s case against CN rested on two main propositions: first, that the limitation of liability applicable was the one found in the 2011 Agreement, which made an exception for cases of negligence and, second, that CN was liable for damage sustained by the transformer while it was being carried by CSXT.

Jurisdiction Over Carriage by Rail

The court first observed that carriage by rail was a matter that came under federal jurisdiction, according to sections 91(29) and 92(10)(a) of the Constitution Act, 1867. In the exercise of that jurisdiction, the federal government enacted the CTA which regulates railway transportation and other transport modes.

The court found that the enactment of federal legislation under that head of jurisdiction did not, however, exclude the application of provincial legislation. Provincial “private law” can supplement gaps in federal railway legislation.

To come to that conclusion, the court relied on case law and on section 8.1 of the Interpretation Act, RSC 1985, c I-21, which reads: “8.1 Both the common law and the civil law are equally authoritative and recognized sources of the law of property and civil rights in Canada and, unless otherwise provided by law, if in interpreting an enactment it is necessary to refer to a province’s rules, principles or concepts forming part of the law of property and civil rights, reference must be made to the rules, principles and concepts in force in the province at the time the enactment is being applied. “

The court noted that the application of provincial legislation to a head of federal jurisdiction can only be ousted when either the interjurisdictional immunity[1] doctrine or paramountcy[2] doctrine apply.

The court found that none of those doctrines applied to oust the application of provincial law to carriage by rail and noted that courts have been reluctant to find the federal government’s purpose in enacting a federal legislation is to exclude the application of provincial law and “cover the field”.

The court determined that section 8.1 of the Interpretation Act requires the application of provincial private law to supplement provisions of federal legislation that resort to private law concepts and rejected the idea that there is a “federal law” of contract that could fulfill that role[3].

Since the CTA refers to concepts of private law, such as “contract” and “liability”, but does not set out all the legal rules derived from such concepts and that are necessary to adjudicate the issues in the action, the court found that according to section 8.1 of the Interpretation Act, the first step of the analysis was to determine which provincial law should be applied as a “background” to the CTA.

The “Suppletive” Provincial Law Applicable

The court noted that when an action is brought at the Federal Court, since both the common law and civil law have equal status, there is no single set of conflict of laws rules that can alone determine the law of which province applies. As such, both the private international law rules of the Civil Code of Québec and conflict of laws rules of the common law should be looked at.

The court found that article 3113 of the Civil Code of Québec, which provides for a  presumption that the law that governs in contractual matters is that “where the party who is to perform the prestation which is characteristic of the act has his (…) establishment”, and the proper law analysis as developed in Imperial Life Assurance Co of Canada v Colmenares, 1967 CanLII 7 (SCC), [1967] SCR 443, both pointed to the application of Québec law. CN performed the obligation characteristic of the contract (i.e. the carriage) and CN was headquartered in Québec; ABB was also headquartered in Québec; ABB’s employees involved in concluding the agreements worked mainly in Québec; the transportation movement originated in Québec and the Bill of Lading was issued in Québec.

The Limitation of Liability Applicable

CN contended that the 2015 Agreement was a “separate agreement”, entirely distinct from the 2011 Agreement, and which limitation of liability superseded the one concluded in 2011. The court disagreed. It found that while the 2011 and 2015 agreements were conceptually separate, they were related and had to be analysed together.

It found that by entering into the 2011 Agreement, the parties had set certain terms of their future contractual relationships and defined the parameters of the limitation of liability. There was no evidence supporting the argument that the parties had intended to make the limitation of liability wording in the 2011 Agreement inapplicable.

Since the 2015 Agreement for carriage provided for a limitation of liability without defining its parameters, the court determined that recourse had to be had to the 2011 Agreement to define them. As such, the interpretation to be favoured was that, when it offered to carry the transformer subject to its “limited liability”, CN was referring to the standard limitation of liability clause that the parties had agreed to in 2011, which contained an exception for when the negligence of the carrier is proven.

In coming to such conclusions, the court relied principally on articles of the Civil Code of Québec and Québec case law.

Section 137 of the CTA

The court also found that the 2015 Agreement did not comply with section 137 of the CTA, because it was not “signed by the shipper.”

The court distinguished the cases of Mitsubishi Heavy Industries Ltd. v. Canadian National Railway Company, 2012 BCSC 1415 and Canadian Pacific Railway Company v Boutique Jacob Inc, 2008 FCA 85, where the courts held that any agreement between the shipper and the carrier was an “agreement signed by the shipper” within the meaning of section 137, irrespective of its form, as long as there was meeting of the minds. It observed that those cases dealt with a situation where a third party, and not the shipper itself, was challenging the application of a confidential agreement containing a limitation of liability between the shipper and the carrier. The parties to the confidential agreements in those cases did not dispute the validity of the confidential agreements or their compliance with section 137.

CN Liable for CSXT’s Negligence

Based on section 8 of the Liability Regulations, the court accepted that CN was liable for CSXT’s negligence.

Section 8 of the Liability Regulations deals with the situation where goods are successively carried by more than one carrier: “8. (1) Where the transportation of goods involves more than one carrier, the originating carrier shall be liable for any loss of or damage to the goods or for any delay in respect of the goods while the goods are in the possession of any other carrier to whom the goods have been delivered. “

CN contended that section 8 did not apply since the 2011 Agreement superseded the Liability Regulations in their entirety.  It reasoned that since subsection 137(2) provides that “if there is no agreement, the railway company’s liability to the shipper […] shall be dealt with […] in the manner set out in the regulations”, it followed that if there was an agreement under subsection 137(1), such ousted the Liability Regulations in their entirety.

The court opined such could not have been the legislative intent. Where an agreement made pursuant to subsection 137(1) deals with a single specific issue, it prevails over the provisions of the Liability Regulations that deal with that specific issue only; it does not oust the Liability Regulations in their entirety.

CSXT’s Negligence

CSXT argued that ABB had not established a standard of care that CSXT would have failed to meet. The court noted that the notion of “standard of care” was a common law concept that did not apply since the “suppletive” law applicable in this case was Québec law.

Since “negligence” was a concept also known in civil law, the court also rejected CSXT’s argument that by using the word “negligence” in the 2011 and 2015 agreements the parties had intended the common law to apply to their agreement and not the civil law.

The court observed that “negligence” is defined as a “failure to act with the care required of a reasonable person in order to avoid the occurrence of a foreseeable damage in given circumstances.”

It determined that the damage that would occur if an oversize load is not properly cleared is easily foreseeable. A railway company does not act reasonably where it fails to ensure that the clearance under a bridge along the proposed route is greater than the height of the oversize load.

As a result, since CSXT had been proven negligent, the exception to the limitation of liability provided for in the 2011 Agreement applied. Also, under the provisions of the Liability Regulations governing successive carriers, CN was directly liable to ABB for the damage caused by CSXT’s negligence.

[1] Occurs where the application of provincial legislation would impair the core of federal jurisdiction.

[2] Paramountcy describes the situation in which provincial and federal legislation conflict, in which case federal legislation is paramount.

[3] For that proposition, the judge referred to: Desgagnés Transport, at paragraph 47; Quebec North Shore Paper Co v Canadian Pacific Ltd, 1976 CanLII 10 (SCC), [1977] 2 SCR 1054.