Date: 19991207
Docket: T-2522-96
BETWEEN:
MORLINES MARITIME AGENCY LTD.
Plaintiff
- and -
IKO INDUSTRIES LTD.
Defendant
REASONS FOR ORDER
LUTFY J.:
[1] This is an action by the plaintiff carrier for recovery of freight costs. The defendant shipper has already paid an intermediary, the freight forwarder, which went bankrupt before paying the carrier. The issue in this case is to determine which party, the carrier or the shipper, must bear the cost of the freight forwarder"s failure.
[2] The facts are substantially uncontested and the credibility of the witnesses was never seriously challenged. The summary that follows represents my findings of fact.
THE RELATIONSHIP AMONG THE PARTIES: MORLINES, MARINE AND IKO
[3] Morlines Maritime Agency Ltd. ("Morlines") acted as an agent for B.O.L. Cypress Ltd. ("BOL"), which is a shipping line for cargo shipments across the North Atlantic. Morlines managed BOL"s shipments in the port of Montreal and solicited cargo for export, collecting freight charges that became due.
[4] Marine Marketing Ltd. ("Marine") was a freight forwarder that arranged for the shipment of cargo from its offices in Montréal, Quebec.
[5] IKO Industries Ltd. ("IKO ") is a manufacturer of roofing parts, with a plant in Madoc, Ontario and a sales division in Belgium, IKO Sales International.
[6] In 1996, just starting out in the export business, IKO explored possible arrangements to ship its granules to its division in Belgium. After first communicating with ocean lines directly, IKO eventually contacted Marine, a freight forwarder, to arrange for the shipments.
[7] IKO asked for and was offered by Marine a flat rate for shipment from terminal Montreal to the door of IKO"s plant in Ham, Belgium. This all-inclusive rate included all freight and handling charges as well as the freight forwarder"s commission. It was IKO"s understanding that Marine would invoice IKO and that IKO would then pay Marine.
[8] Although it was clear that Marine would engage one (or more) shipping lines to carry IKO"s cargo, IKO apparently had no detailed knowledge of Marine"s subsequent arrangements with Morlines for this purpose. IKO dealt directly with Marine to provide all necessary information about the cargo that was to be shipped.
[9] At least one representative of Morlines understood that Marine was arranging the shipment of cargo for clients other than IKO.1 The IKO representative testified that Marine used at least one carrier, other than BOL or Morlines, for the shipment of its product to Belgium. I find that the freight forwarder Marine had clients other than IKO and also dealt with carriers, or their agents, other than Morlines.
[10] In early 1996, Marine contacted Morlines to arrange for the shipment of IKO"s cargo. Marine and Morlines agreed that invoices for freight costs would be sent directly to Marine, and that Marine would provide Morlines with post-dated cheques on receipt of the bills of lading. The date of the post-dated cheque at the outset was fifteen days after the date of sailing, though this agreement later changed to provide thirty days after the date of sailing. Morlines made no credit verification of either Marine or of IKO.
[11] According to the Morlines representative, until this dispute arose, IKO was never advised by Morlines that the latter ultimately intended to hold IKO responsible for the invoices it sent to Marine. Similarly, IKO never informed Morlines that it would be ultimately responsible for the invoices Morlines sent to Marine. Morlines understood that the freight payments it received from Marine originated from the shipper IKO.
[12] In the normal course of arranging the shipments, there was no direct communication between the shipper IKO and the carrier BOL or its agent Morlines. However, the bills of lading are evidence of a relationship between the shipper and the carrier. In the bills of lading prepared by Morlines, IKO was listed as the shipper, IKO Sales as the consignee, BOL as the carrier and Marine as the forwarder. IKO delivered its cargo directly to the Montreal terminal using containers and sheds provided by Morlines. IKO requested Marine to find a carrier and knew, from information obtained from Marine and incorporated into its own invoices to its sales division in Belgium, that Morlines was actually carrying some of its cargo. Finally, Morlines knew that Marine was setting up the shipments on behalf of IKO.
[13] The first direct communication between IKO and Morlines was the carrier"s letter of demand of October 8, 1996 for the outstanding freight that had not been paid by Marine Marketing.
DIFFICULTIES WITH THE PAYMENT OF THE CARRIER"S FREIGHT CHARGES
[14] In February 1996, IKO developed an internal procedure for the shipments to Ham, Belgium, and it started shipments in May 1996. IKO would pick up cargo containers in Montreal and bring them back to the IKO plant to be loaded. They would then bring the containers back to Montreal, storing them in Morlines" terminal sheds. Marine would receive details about the containers, sheds, and vessel numbers from Morlines, then pass this information on to IKO.
[15] The bills of lading for shipments of the cargo were prepared by Morlines with information provided by Marine. The bills of lading listed IKO as the shipper and IKO Sales in Belgium as the consignee. The bills of lading were provided directly to Marine. The IKO representative testified that he never knew of the amount of Morlines" freight charge because his invoice from Marine only showed to all inclusive flat rate. I infer from this evidence, which I accept, that IKO was never in receipt, prior to this dispute, of the bills of lading issued by Morlines which clearly disclosed the freight charge.
[16] For each of the shipments carried by Morlines, Marine sent an invoice to IKO and IKO paid Marine in full. At the outset, Marine paid regularly and there were no difficulties concerning the timely payment of Morlines" invoices.
[17] However, there were apparently some problems with payments from Marine to Morlines, sometime in June or early July 1996. Some of the Marine cheques were returned for insufficient funds. The payment schedule was changed to thirty days after sailing, but there were still problems with cheques returned for non-payment. Morlines always contacted Marine, never IKO, to deal with these problems. In September 1996, Morlines eventually withheld delivery of some containers to secure payment of all outstanding debts. IKO learned that its cargo was held overseas, and contacted Marine for an explanation of the delay. IKO was lead to believe that the delay was not due to financial problems.
[18] Marine eventually provided a certified cheque in an amount sufficient for Morlines to release the cargo that was being detained. However, the remaining balance was not paid. After requesting Marine to pay the balance owing, Morlines then sent a letter of demand on October 8, 1996 to IKO to request that they pay the outstanding shipping charges. In the words of the Morlines letter to IKO: "We ... have no alternative but to look to IKO Industries Ltd., as shipper of the cargo, for payment of these outstanding amounts." On October 18, 1996, IKO replied denying any responsibility for the amounts due from Marine.
[19] The plaintiff Morlines brings the present recovery action for US$48,912, the amount still due for the shipment of IKO"s cargo to Belgium. The quantum of the claim is not contested.
ANALYSIS
[20] In Marine Cargo Claims, Professor Tetley aptly described the dual role of the freight forwarder. His comments, in my view, are applicable to the facts of this case:
| II. Freight Forwarder - Dual Role |
| The freight forwarder traditionally acts as an agent who arranges for the shipment of goods belonging to his client/the shipper. The freight forwarder as agent arranges for transportation, pays freight charges, insurance, packing, customs duties etc., and then charges a fee, usually a percentage of the total expenses. All the costs are (or should be) disclosed to the client. |
| At times, the freight forwarder has acted as principal contractor arranging the carriage in his own name. His fee payable by the shipper is a straight freight charge. He then arranges to pay lower freight rates to the carrier and obtains his profit from the difference between the two. Very often the freight forwarder consolidates the cargoes of a number of clients into a single container, resulting in savings which benefit the freight forwarder and the clients. On these occasions the freight forwarder"s responsibility to the shipper is often that of a carrier.2 [Footnotes omitted.] |
[21] The liability of a shipper to the carrier for freight, where the third party has not remitted payments, has also been canvassed by Professor Tetley:
IV. Responsibility when the Freight Forwarder Becomes Bankrupt
| The question whether the freight forwarder acted as principal or agent is usually best answered in misfortune, i.e. when the forwarder is declared bankrupt and the charges paid by the shipper/client to the forwarder have not been remitted to the actual carriers along the route. Those carriers then claim their freight directly from the shipper and the courts must decide if the original payment by the shipper to the freight forwarder constituted payment to the carrier. In other words, was the freight forwarder, in receiving the freight, acting as agent of the shipper or as agent of the carrier? |
| The legal relationship of the freight forwarder to the shipper depends on the facts of each case and so does the answer to the question whether payment of freight by the shipper to the freight forwarder is to be deemed payment to the carrier. |
| In C.P. Ships v. Les Industries Lyon Corduroys Ltée, Addy J. set down the law with clarity: |
| Where a debtor [the shipper], instead of paying his creditor [the carrier], chooses to pay a third party [the freight forwarder], he does so at his peril. Where the money is not turned over to the creditor [the carrier], the onus is then on the debtor [the shipper] to establish either: |
| (1) that the creditor actually authorized the third party to receive the money on his behalf, or |
| (2) that the creditor held the third party out as being so authorized, or |
| (3) that the creditor by his conduct or otherwise induced the debtor to come to that conclusion, or |
| (4) that a custom of the trade exists to the effect that in that particular trade and in those particular circumstances, both the creditor and the debtor normally would expect the payment to be made to the third party.3 |
[22] The decision in C.P. Ships v. Les Industries Lyon Corduroys Ltée,4 referred to by Professor Tetley, has been followed in a number of cases, both in this Court and in other jurisdictions.5 On the basis of these decisions, the shipper will not be held liable to pay the carrier if, on the facts in the particular case, the shipper can set up one of the defences set out in C.P. Ships.
[23] After a careful analysis of the facts before me, I have come to the conclusion that both the third and the fourth branches of the C.P. Ships test have been met by the defendant shipper IKO.
[24] I find that Morlines conducted itself in such a way that IKO would be induced to believe that Marine was actually authorized to receive payments. IKO"s shipments via Morlines began in early May 1996 and continued until some time in September 1996. IKO made some ten payments to Marine during this period.
[25] Thus, four months passed by without any communication from Morlines that they expected IKO to pay them directly, even when Marine"s cheques were not being accepted for payment. In fact, there was no communication at all from Morlines until they sent the default letter on October 8, 1996. For the entire period, IKO was aware that its shipments were being delivered, and it had no reason to doubt that it should continue to pay Marine. Even when IKO"s cargo was temporarily detained, Morlines did not notify IKO that there was a problem with the payment method. I would find it quite reasonable for IKO to have believed that Marine was actually authorized to receive payment for the shipments that were being carried by Morlines.
[26] With respect to the fourth branch of the test in C.P. Ships, I am satisfied on the evidence before me that both IKO and Morlines expected that payment would in fact be made to Marine. A sales representative for Morlines provided evidence that the carrier expected payment from the freight forwarder:
| Q: You understood the relay, you understood that the agreement you entered into, that Marine Marketing would do what it has to do to get the money from IKO? |
| Q: And you would do what you had to do to get money from Marine Marketing? |
| Q: Was it contemplated by you that the arrangement entailed you getting money from IKO? |
| Q: It was only when Marine Marketing didn"t pay? |
[27] In explaining why Morlines did not conduct a credit check of either IKO or Marine, the manager at Morlines further confirmed that his company expected payment from Marine:
| Q: Why didn"t you do any credit checks of IKO Industries? |
| A: We were vaguely aware they were a large, substantial corporation. We didn"t feel the need to do a credit check on them. We were instructed not to issue the invoices directly to them, so we didn"t do any work in that sense. |
| Q: Why would the fact that you weren"t issuing invoices to them have impacted on your decision to check their credit? |
| A: I guess it wouldn"t really, now that I think of it. |
| Q: What just caused you to change your mind? |
| A: I think when we spoke originally, it would never come up to check their credit or not. |
| Q: Why wouldn"t it ever come up? |
| A: The instructions we had for payment were via Marine Marketing. |
...
| Q: It was your understanding Marine Marketing was the one paying and that was the company that would have made sense to check their credit? |
| A: It was our understanding they were receiving funds from IKO and, in turn, paying us with those same funds. |
| Q: Correct. So again, the party you were relying upon to pay your funds, your accounts, was Marine Marketing. |
| Q: And you took comfort in the fact that Marine was getting its money from IKO. |
| Q: And the credit check, you didn"t do any credit check on IKO? |
...
| Q: You understood that IKO would be paying Marine Marketing in accordance with an agreement between those parties? |
| A: Yes, that"s what I understand.7 |
[28] No representative from Marine was called as a witness.
[29] In summary, the facts in this case are similar to those in American President Lines, Ltd. v. Pannill Veneer Co.8 where Jerome A.C.J. stated:
| On the totality of the evidence, I am persuaded that the reasonable expectations of all the parties in the circumstances of this case was that Canapack would bill the defendant for the shipping charges and that the defendant would pay Canapack who in turn would pay the plaintiff. The plaintiff"s own conduct leaves little doubt that it expected payment from Canapack. |
[30] I conclude that both the carrier and the shipper expected payment to be made to the third party Marine. Morlines" conduct throughout the entire transaction was such that IKO would be induced to believe that Marine was authorized to receive payment. Indeed, on the evidence before me, IKO did not even know the precise amount of the freight to be paid until the dispute arose.
[31] Accordingly, this action is dismissed. If necessary, counsel may file written submissions concerning costs within fourteen days of the date of these reasons.
"Allan Lutfy"
J.F.C.C.
Ottawa, Ontario
December 7, 1999
__________________
1 Discovery transcript, p. 6.
2 William Tetley, Marine Cargo Claims, 3rd ed. (Montréal: Les Éditions Yvon Blais Inc., 1988) at p. 692.
3 Ibid. at p. 699.
4 [1983] 1 F.C. 736.
5 Earl Paddock Transportation Inc. v. Accuride Canada Inc. (1991), 3 O.R. (3d) 493 (Gen. Div.); Algocen Transport Inc. v. Hinspergers Poly Industries Ltd. (1988), 64 O.R. (2d) 444 (Dt. Ct.); General Signal Ltd. (c.o.b. Aurora/Hydomatic Canada Operations) v. Magnum Express Inc. (1995), 79 O.A.C. 287 (Div. Ct.); American President Lines, Ltd. v. Pannill Àveneer Co. (1997), 36 B.L.R. (2d) 1 (F.C.T.D.); Lyn-Pax Trucking Ltd. v. Doc Warehousing & Distributing Inc. (1991), 2 B.L.R. (2d) 132 (B.C.S.C.); Norfolk & Western Railway v. Great Lakes Brick and Stone Ltd. (1995), 19 B.L.R. (2d) 285 (B.C.S.C.); Rudie Wilhelm Warehouse Co. v. Mitsubishi Canada Ltd. (1991), 3 B.L.R. (2d) 97 (B.C.S.C.); Gershman Produce Co. Ltd.. v. Douglas Traffic Consulting Ltd. et al. (1991), 50 B.L.R. 129 (Ont. Ct. (Gen. Div.)).
6 Discovery transcript, pp. 11-12.
7 Transcript, pp. 38-39 and 41-42.
8 (1997), 36 B.L.R. (2d) 1 (F.C.T.D.), at paragraph 8.
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