Liability of North American Rail Carriers - One Continent, Two Systems

April 2006

The Federal Court in Canada recently held that a Confidential Rate Agreement covering carriage by rail and providing for various limitations on the liability of the rail carrier binds only the immediate parties.¹ Any other party who suffers damage arising from a railway accident can claim the benefit of the Railway Traffic Liability Regulations, which do not provide for any limitations of liability, and is protected by section 137 of the Canada Transportation Act, which bars any limitations of liability that are not in writing and signed by that party.

Moreover, the Court also held that section 137 prevented the railway carriers from invoking the benefit of an ocean carrier's "himalaya clause", which provides for subcontractors to benefit from limitations of liability found in the ocean carrier's bill of lading, contrary to the position adopted by the United States Supreme Court in Kirby v Norfolk Southern Railway.*

The facts in this case were virtually identical to the Kirby case. Boutique Jacob Inc. requested its freight forwarder to arrange for a shipment of clothing from Hong Kong to Montreal. The freight forwarder engaged Pantainer Ltd. to perform the transport, to which Pantainer agreed by issuing its bill of lading as carrier. Pantainer subcontracted the job to OOCL, who confirmed its undertaking electronically by an EDI waybill. A sealed container was received at OOCL's Hong Kong terminal and was transported by ship, without incident, to Vancouver where it was discharged. OOCL had made arrangements with the Canadian Pacific Railway (the CPR) to carry the container by rail to Montreal. The train derailed during transit and part of the cargo in the container was totally damaged.

The cargo underwriters for Boutique Jacob commenced suit against Pantainer, OOCL and the CPR, principally because the CPR, whilst denying liability, also argued that if it was liable then it benefited from limitations of liability contained in its Tariff ($20,000), from the Confidential Rate Agreement with OOCL, and from the US $2 per kilo limitation (effectively amounting to $1,433) found in the OOCL terms and conditions. Pantainer claimed over against OOCL arguing that it was not bound by OOCL's terms and conditions since the EDI waybill did not contain any terms and conditions on the back when it was printed, and sought an indemnity of whatever amounts the Court might condemn it to pay. OOCL denied any contractual relationship with Boutique Jacob and denied doing anything wrong. It argued that if its liability was exposed, then the performance of its undertaking was subject to its regular terms and conditions which are publicly available on its website.

One of the reasons OOCL was sued was due to recourse under the law of bailment, which forms part of Canadian Maritime Law. Under bailment principles, an owner of cargo is permitted to sue for compensation, not only its contractual partner (Pantainer) but also each and every party to whom its goods were delivered for onward transport (the sub-bailee, OOCL and the sub-sub-bailee, CPR). The law recognizes that various parties in the chain only agree to perform subject to terms and those terms are opposable to the owner of cargo provided that the owner had agreed that its contractual partner could sub-contract on terms usual in the trade. Accordingly, CPR raised the argument that its tariff limitation of liability condition, which is available on its website, was incorporated into its Confidential Rate Agreement with OOCL and therefore was opposable, since it was a term upon which it agreed to carry the goods.

In its judgment, the Court held that when parties deal with each other regularly and use their websites for electronic data processing purposes and general online traffic control, they cannot claim that they had no knowledge of standard terms and conditions which appear on that website, simply because they never cared to look at them. If anything, this judgment supports the proposition that in electronic commerce parties should protect themselves by ensuring that their up-to-date standard terms and conditions are available on their websites.

By coincidence, Pantainer and OOCL both had the same term exempting them from all responsibility for cargo loss "arising from any cause or event which the carrier could not avoid and the consequences of which the carrier could not prevent by the exercise of due diligence". The Court held that not only did OOCL have a defence against Pantainer under its terms and conditions but, even in the event it was not able to invoke its term against Boutique Jacob, it was perfectly acceptable for it to invoke Pantainer's "himalaya clause" to benefit from the exemption clause, which Pantainer had stipulated for itself and for all its subcontractors.

Under US law, as stated in Kirby, the CPR would have been entitled to invoke the US $2 per Kilo limitation in OOCL's waybill conditions and a limitation in Pantainer's bill of lading, effectively amounting to $1,976, against a potential liability for $71,000. There was a Confidential Rate Agreement between OOCL and the CPR. This document was ordered sealed by the Court to protect confidentiality. The Court held that the CPR could not invoke its tariff limitation because it did not have a signed agreement with Boutique Jacob. Nor could the railway rely on a confidential agreement which was a sealed document to limit liability due to the fact that Boutique Jacob would never have any means of knowing whether that agreement altered the tariff limitations.

Where the law is clearly different from the US is that the Court also held that the CPR could not invoke the "himalaya clause" in OOCL's terms nor in Pantainer's bill of lading and claim the benefit of limitations of liability because s.137 prevented railways from reducing their legal liability except under the terms of a written and signed agreement to which the CPR and the claimant were a party. The final result was that the Court dismissed the action against Pantainer and OOCL and found that the CPR alone was responsible for all cargo damages, based on the arrived sound market value.

With thanks to David Colford of Brisset Bishop, Montreal, for preparing this article.

* Steamship Mutual website article on Kirby

1. Boutique Jacob Inc. v Pantainer Ltd., Panalpina Inc., Orient Overseas Container Line Ltd., and Canadian Pacific Railway 2006 FC 217