Ocean Fisheries Ltd. v. Pacific Coast Fishermen'S Mutual Marine Insurance Company, docket T-2205-96

     T-2205-96

Between:

     OCEAN FISHERIES LTD.

     Appellant

     (Plaintiff)

     - and -

     PACIFIC COAST FISHERMEN'S MUTUAL

     MARINE INSURANCE COMPANY

     Respondent

     (Defendant)

     REASONS FOR ORDER

TEITELBAUM, J.:

     The Appellant, Ocean Fisheries Ltd. (hereinafter "Ocean") has made a motion to set aside the order of Prothonotary Hargrave under Rule 336(5) of the Federal Court Rules, C.R.C. 1978, c. 663. The Prothonotary stayed the Appellant's action and ordered it to arbitration in its dispute over insurance coverage.

FACTS

     On October 3, 1996, the Appellant Ocean instituted an action against its insurance carrier, Mutual Marine Insurance Co. (hereinafter "Mutual") for the insured value on a vessel. Mutual had entirely rejected Ocean's claim for constructive total loss of the ship named the "North Land". As a basis for this refusal, Mutual stated that the "North Land" when it capsized was not captained by a skipper approved under the terms of Ocean's insurance policy. In response to Ocean's statement of claim, Mutual made a motion on November 15, 1996, before the Federal Court to stay Ocean's action and refer the parties to arbitration under the terms of the insurance policy, the company by-laws, Article 8(1) of the Commercial Arbitration Code as set out in the schedule to the Commercial Arbitration Act, R.S.C. 1985, c.17 (2nd. Supp.) (hereinafter "Arbitration Act") and Division H of the Federal Court Rules. In a decision filed January 7, 1997, the Prothonotary upheld Mutual's motion and stayed Ocean's action against Mutual. The Prothonotary referred the parties to arbitration in their dispute over insurance coverage according to the binding terms of the insurance agreement and Mutual's by-laws.

ISSUES

     Both parties to the appeal agree that the issues are as follows:

1.      Did the Prothonotary err in holding that the policy of insurance did not have to be read contra proferentum?

2.      Did the Prothonotary err in his interpretation of Section 13 and Section 15 of the by-laws of the Respondent and in his holding that this action came within the scope of the by-laws?

STATUTORY PROVISION

     The basis for setting aside the order of a prothonotary is in Rule 336(5) of the Federal Court Rules. The relevant portions read:

Any person affected by an order or decision of a prothonotary, other than a judgment under Rules 432 to 437, may appeal therefrom to the Court and such appeal shall be made by an application of which a notice shall be given to all interested parties setting forth the grounds of objection . . . .

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DISCUSSION

The Ambiguity Argument and the Application of contra proferentum

     The Appellant argues that the Prothonotary misinterpreted the law on the issue of ambiguities in the by-laws. The Prothonotary rejected Ocean's argument that the by-laws contained fatal ambiguities that should be construed against Mutual. Under the doctrine of contra proferentum, these ambiguities should be strictly read against Mutual because it had authored the policy and by-laws. First, the Prothonotary ruled that there were no ambiguities in the policy. Second, in obiter, he argued that even if there had been ambiguities, the full rigour of the contra proferentum rule had to be modified because of the particular nature of Mutual as a "non-profit organization of policy holding vessel-owning fishermen" (2nd para., p.1 of the Prothonotary's decision). The Prothonotary stated at page 9 of his reasons:

I do not see that there is any ambiguity and have found the dispute is one for arbitration under section 15 of the Mutual's by-laws. However, in the event that I am wrong and there is some ambiguity, I have considered how such ambiguity ought to be dealt with: this is not an instance in which any ambiguity in the arbitration provisions ought automatically to be construed against the Mutual, but rather the arbitration provisions ought first to be considered in the overall context and nature of a Mutual.

The Prothonotary cited the Supreme Court's decision in [1980] 1 S.C.R. 888">Consolidated-Bathurst Export Ltd. v. Mutual Boiler and Machinery Insurance Company, [1980] 1 S.C.R. 888 (hereinafter "Consolidated Bathurst"). Justice Estey at page 899 explained the rationale for the contra proferentum rule in cases where the insurance carrier is "the author, or at least the party in control of the contents of the contract". According to the Prothonotary, because there is an "identity of interest between the owners of the Mutual and its insureds" (p.9 of the Prothonotary's decision), the usual rule of ambiguity does not strictly apply. The Prothonotary also held that this was not a typical case in which the insurance carrier authored or was in control of the contents of the contract.

     According to the cover page of the Members' handbooks submitted as exhibits to the affidavit of Tony R. Thompson, Secretary and General Manager of Mutual, Mutual's by-laws formed an integral part of the insurance policy. The by-laws numbered Section 13 and Section 15 explicitly discussed arbitration.

     Section 13 of the by-laws entitled "Claims" sets out the procedures to be followed in the handling and resolution of claims and specifically provides for arbitration in cases where the terms of settlement are unsatisfactory. It reads:

13. Claims

(f). . . if the Directors or said Committee on behalf of the Company is not willing to pay the claim in full in the amount claimed by the claimant, the Directors or said Committee, shall notify the claimant as to the terms upon which the Company is prepared to settle the said claim.

(g)      If the claimant is not willing to accept the said terms of settlement in full satisfaction of his claim, he must within thirty (30) days or within such longer period as the Directors may in their sole discretion allow, from the mailing of such notice communicate to the Directors in writing, his refusal to accept the same, and if he fails to do so within such time he shall be bound to accept the same in full satisfaction of his claim.

(h)      Within thirty days after communicating his refusal to accept the terms of settlement set forth in the Director's notice, the claimant may elect to apply for arbitration of his claim in one of the manners hereinafter provided and such election shall be final; that is to say;

1.By giving notice to the Company within such period that he desires an informal arbitration of his claim, or

2.By giving such notice within thirty days that he desires arbitration of his claim in accordance with the provisions of the Commercial Arbitration Act of British Columbia, S.B.C. 1986, c.3,hereinafter called formal arbitration.

(i)      If the claimant fails to give such notice or take such proceedings for either an informal arbitration or a formal arbitration, he shall be deemed to have accepted the terms of settlement set forth in the Directors' notice, and shall be estopped from claiming any sum in excess thereof.

     Section 15 of the by-laws, entitled "Disputes" concerns the resolution of disputes between an insured member and shareholder and Mutual. It reads:

15.      Disputes

(a)      Any dispute arising out of the affairs of the Company between a member or shareholder thereof, or any person aggrieved who at any time has been a member or shareholder of the Company, or any person claiming through such member or person aggrieved, and the Company or any Director thereof with respect to the interpretation and/or application of these by-laws or any claim against the Company or a Director thereof, shall be determined by arbitration.

(b)      The provision of arbitration provided in Section 13 of these by-laws shall apply with respect thereto insofar as applicable. Where not applicable, the provisions of the Commercial Arbitration Act of the Province of British Columbia, S.B.C. 1986, c.3 shall apply . . .

    

     After a careful reading of by-laws 13 and 15, and after hearing the submissions of the parties, I am satisfied that the by-laws may be considered to be ambiguous. Section 13 speaks of "claims" while Section 15 speaks of "disputes arising out of the affairs of the company". The Prothonotary denied that there were any ambiguities in the by-laws and went on to interpret the scope of Section 15 of the by-laws and the meaning of disputes. However, at page 14 of his decision, the Prothonotary speculated about what is a "reasonable reading" of Section 15 of the by-laws because of Mutual's status as an organization formed to give efficient and economical insurance to ship owners. More often than not, when one has recourse to such policy-oriented arguments and "reasonable readings", it is because there are ambiguities in the statute or by-law.

     With respect, I also do not know on what basis the Prothonotary could have concluded that this case does not concern an insurance carrier authoring or being in control of the contents of the insurance contract. The mere fact that the insurance carrier is a mutual insurance company is not enough to conclude that the contra proferentum doctrine should not apply. I believe the Prothonotary erred when he stated that there is an identity of interest between Mutual and Ocean. The Mutual is an incorporated company and thus has its own identity. The insured is a shareholder and, as such, has its own identity.

     In Consolidated-Bathurst, supra, Mr. Justice Estey said at page 899 that it was trite law that any ambiguities in a contract of insurance are to be construed against the insurer:

... Insurance contracts and the interpretative difficulties arising therein have been before Courts for at least two centuries, and it is trite to say that where an ambiguity is found to exist in the terminology employed in the contract, such terminology shall be construed against the insurance carrier as being the author, or at least the party in control of the contents of the contract. This is, of course, not entirely true because of statutory modifications to the contract, but we are not here concerned with any such mandated provisions. Meredith, J.A., put the proposition in Pense v. Northern Life Ass'ce Co. (1907), 15 O.L.R. 131 at p. 137 (C.A.):

There is no just reason for applying any different rule of construction to a contract of insurance from that of a contract of any other kind; and there can be no sort of excuse for casting a doubt upon the meaning of such a contract with a view to solving it against the insurer, however much the claim against him may play upon the chords of sympathy, or touch a natural bias. In such a contract, just as in all other contracts, effect must be given to the intention of the parties, to be gathered from the words they have used. A plaintiff must make out from the terms of the contract a right to recover; a defendant must likewise make out any defence based upon the agreement. The onus of proof, if I may use such a term in reference to the interpretation of a writing, is, upon each party respectively, precisely the same. We are all, doubtless, insured, and none insurers, and so, doubtless, all more or less affected by the natural bias arising from such a position; and so ought to beware lest that bias be not counteracted by a full apprehension of its existence.

(Adopted in this Court in Pense v. Northern Life Ass'ce Co. (1908), 42 S.C.R. 246.)

Such a proposition may be referred to as step one in the interpretative process. Step two is the application, when ambiguity is found, of the contra proferentum doctrine. This doctrine finds much expression in our law, and one example which may be referred to is found in Cheshire and Fifoot's Law of Contract, 9th ed. (1976), at pp. 152-3:

If there is any doubt as to the meaning and scope of the excluding or limiting term, the ambiguity will be resolved against the party who has inserted it and who is now relying on it. As he seeks to protect himself against liability to which he would otherwise be subject, it is for him to prove that his words clearly and aptly describe the contingency that has in fact arisen.

     I take the above to mean that any ambiguities in a contract of insurance are to be construed against the insurer. I cannot and do not read into the above that any ambiguities in a contract of insurance are to be construed against the insurer unless the insurer is a mutual insurance company. In the case at bar, Mutual, the Respondent, has shareholders as do other insurance companies.

     In Insurance Law in Canada, 2nd Ed. (Toronto:Carswell, 1991) by Craig Brown and Julio Menezes, the authors state at page 127:

6:4:10. Contra proferentem ought not to apply to minimum compulsory plate insurance provided by Crown insurers. It has been applied to optional and extended coverages which are contractual and not statutory in nature. The question of whether it applies to cover provided by private insurers under regulated circumstances is a matter what will be highly controversial and, of necessity likely to lead to a subset of interpretive principles.[footnotes omitted]

     In the same vein, in MacGillivray & Parkington on Insurance Law, 8th. Ed. (London: Sweet & Maxwell, 1988 ) the following is said at pages 454-455:

1103. Ambiguity and the contra proferentum rule. If there is any ambiguity in the language used in a policy, it is to be construed more strongly against the party who prepared it, which means in the majority of cases against the insurer. This rule of construction, that verba chartarum fortius accipiuntur contra proferentem, is a principle applicable to all commercial transactions where one party has prepared the form of contract. A party who proffers an instrument cannot be permitted to use ambiguous words in the hope that the other side will understand them in a particular sense, and that the court which has to construe them will given them a different sense. The result of using ambiguous expressions is generally a decision against those who deal in such ambiguities.

1104. The language used in a policy, more particularly in the written part of it, may be the language of the assured, as, for instance, where the description of the property or limits of the risk are taken verbatim from the proposal. Sometimes clauses may be drafted by a broker to express the particular needs of the assured. In such cases the rule that the instrument is to be construed against the party who prepared it is likely to operate in favour of the insurer.[footnotes omitted]

     In both quotations, there is no suggestion that policies issued by mutual insurance companies should be dealt with in a different manner from policies issued by any other insurance company.

     I am satisfied that the Prothonotary erred in law when he concluded that the contra proferentem doctrine did not apply to the facts of this case and erred when he was of the opinion that Section 13 or 15 were not ambiguous.

The claim and the scope of the by-laws

     I agree with the Appellant's submission that the Prothonotary also erred when he held that the circumstances or facts of this case were not covered by Section 13 but were covered by Section 15. The Prothonotary held that Section 13 of Mutual's by-laws was not applicable because Section 13 goes to the arbitration of the amounts and terms of claim settlement. In this case, Mutual had not offered to settle Ocean's claim at a reduced rate but issued instead a complete denial of all coverage based on an alleged breach of a condition set out in the Members' Handbook. However, the Prothonotary held that Section 15 was applicable because the action instituted by Ocean was in fact a dispute over coverage. The Prothonotary recognized a distinction in the by-laws between "claims" (Section 13) and "disputes" (Section 15) by holding at page 12 of his decision that a "dispute may come into being and need to be resolved before any claim payment is required". The Prothonotary rejected the Appellant's argument that only the quantum of the claim, and not insurance coverage itself, was the subject matter of arbitration (p. 13).

     The parties were in agreement that the Arbitration Act enacting the United Nations Commission on International Trade Law (hereinafter the "UNICTRAL" Code) was the relevant governing statute.¹ In particular, Article 8 of the UNICTRAL Code provides:

(1)      A court before which an action is brought in a matter which is the subject matter of an arbitration agreement shall, if a party so requests not later than when submitting his first statement on the substance of the dispute, refer the parties to arbitration unless it finds that the agreement is null and void, inoperative or incapable of being performed.

     The Prothonotary decided that despite the strict wording of the by-laws and the mandatory nature of Article 8 of the UNICTRAL Code, the Court still had a residual jurisdiction to determine whether Ocean's dispute actually fell within the ambit of the arbitration provisions in the by-laws. I am in agreement with the Prothonotary on this issue. The Prothonotary cited the cases of T1T2 Limited Partnership v. Canada (1994), 23 O.R. (3d) 67, Gulf Canada Resources Ltd. v. Arochem International Ltd. (1992), 66 B.C.L.R. (2d) 113 and Nanisivik Mines Ltd. v. F.C.R.S. Shipping Ltd. (1994), 113 D.L.R. (4th) 536 as authority for a Court's power to decide a jurisdiction objection when dealing with an application to refer a matter to arbitration.

     The approach as to whether a particular matter falls within the scope of an arbitration provision is set out in the case of Heyman et al. v. Darwins Ltd., [1942] 1 All E.R. 337. In this case, Viscount Simon states at page 339:

The answer to the question whether a dispute falls within an arbitration clause in a contract must depend on (a) what is the dispute, and (b) what disputes the arbitration clause covers.

     The question is then to determine what is the dispute between the Appellant and the Respondent. The Prothonotary characterized the action as a "dispute as to coverage". The Appellant makes the strong submission that the dispute between the parties is not a dispute but a claim and submits Exhibits "C", "D", "E" and "F" to the affidavit of Tony Thompson (Tab 4 of Chambers Brief of Respondent) as evidence of the same. The Exhibits contain correspondence between representatives of Ocean and Mutual following the capsize of the "North Land". Exhibit "C" is a letter dated April 19, 1996, sent by the Respondent to the Appellant wherein the Respondent characterizes the issue as a claim. In at least five places in the letter, the word "claim" is used to describe what the Appellant is seeking.

19 April 1996

OCEAN FISHERIES LTD.,

2305 Commissioner St.,

Vancouver, B.C.

V5L 4A1

Attention: Jim Geros and/or E.A. Safarik

VIA "FAX" AND "CERTIFIED MAIL"

Dear Sirs:

Re:      1.      Claim #25-96, NORTH LAND      Skipper: Joseph Campbell

- capsized March 19, 1996

2.      Policy No. 11244, NORTH LAND

The above noted claim for capsizing of the NORTH LAND while under the command of Joseph Campbell was considered at a recent meeting of the Board of Directors.

It was noted that Dave Campbell was approved by the underwriter to operate the NORTH LAND per the skipper list received from Ocean Fisheries Ltd. dated February 14, 1996 whereas Joseph Campbell had not at any time been approved to skipper the vessel. Being that neither Joseph Campbell nor any other persons aboard at the time of capsizing had been approved to skipper the NORTH LAND, the Board of Directors did not approve the claim.

The rules contained in the Members' Handbook state that your insurance policy with the Mutual is null and void if a non-approved skipper operates the vessel. The Mutual considers the insurance claim is null and void but not that the insurance policy was made null and void as a result of the capsizing. As your claim has been declined, we are unable to accept for payment costs relating to the capsizing and we enclose charges from Tom-Mac Shipyards Ltd. that were forwarded to our office.

The Board has asked that you arrange alternate insurance coverage for the vessel being that we are unable to continue its present coverage because of the non-acceptance of the claim bearing in mind the vessel's damaged condition. We will hold off cancellation of our coverage until Noon, PST, April 29th, 1996 latest unless advised you have arranged alternate coverage prior to that time.

Yours truly,

Tony R. Thompson,

General Manager

& Secretary

Encl.

     [emphasis added]

     Exhibits "D", "E" and "F" also only speak of a "claim". The Prothonotary made no mention of the wording of these letters in his decision. I therefore hold that Section 13 concerning "claims" is the relevant by-law in the case at bar.

     I agree with the submissions of the Appellant on the conditions for making Section 13 of the by-laws applicable to a particular case. An offer of settlement is a condition precedent for arbitration under Section 13. For instance, Section 13(f), (g) and (h) contemplate an offer of settlement. This condition has not been met in the controversy between Ocean and Mutual because there was no offer of settlement in the correspondence found in the Exhibits. A denial of coverage is not an "offer of settlement" to satisfy a claim made by an insured. However, I am satisfied that the Appellant filed a claim that may well have fallen under Section 13 of the by-laws if the other conditions like an offer of settlement had been satisfied. If an offer of settlement had been made and this offer of settlement was not acceptable to the Appellant, the Appellant would have had to submit the claim to arbitration.

     However, I do take issue with certain aspects of the Appellant's characterization of the scope of Section 13. Counsel for the Appellant argues that under Section 13(h), a claimant is given a right of election to choose arbitration. Section 13(h) reads, "the claimant may elect to apply for arbitration". Counsel submits that "hence, the by-law (13) does not require arbitration but merely gives the claimant the option to have the claim determined by arbitration." (para. 30, p.6, Chambers Brief of the Appellant). I disagree that Section 13 is a purely optional clause. Section 13 is permissive in one respect because the claimant is given the option of initiating arbitration in either a formal or informal guise. However, if the claimant does not ask for arbitration and an offer of settlement is made by the Directors of the Respondent insurance company, the claimant is deemed under Section 13 of the by-laws to have accepted the offer. I hold that contrary to the Appelllant's submission, the choice or election under Section 13 is not that if one does not accept arbitration, one is automatically permitted to commence an action in Court.

     As well, I am satisfied from the facts of this case, that the dispute does not fall within Section 15 of the by-laws. Section 15 deals with a dispute "arising out of affairs of the Company". A claim for a loss would, I am satisfied, not fall within this by-law. This by-law refers to matters involving company disputes over the administration of Mutual or everything except claims under an insurance policy. In the alternative, at the very least, Section 15 is ambiguous and therefore must be interpreted against the Respondent.

     The appeal is allowed and the Appellant is not subject to the arbitration clauses contained in the policy of insurance (by-laws 13 and 15).

OTTAWA      "Max M. Teitelbaum"

     __________________________

March 26, 1997.      J.F.C.C.

__________________

¹      In its original notice of motion, Mutual had asked for an order pursuant to the Arbitration Act or alternatively, if the Arbitration Act was found to be inapplicable, an order pursuant to Section 50 of the Federal Court Act, R.S.C. 1985, c.F-7 . It appears from the Prothonotary's reasons for order in the first paragraph on page 5 and the actual Order itself that the order was made pursuant to the Arbitration Act. However, in the last paragraph of page 5 of the Prothonotary's reasons, he writes, "at issue is whether the Mutual is entitled to a stay of this action, under section 50 of the Federal Court Act, in favour of arbitration as provided for in the Mutual's by-laws" [my emphasis]. I believe that this single brief reference to section 50 of the Federal Court Act is a small oversight or error that bears little weight on the substance or merit of what to be decided.