Docket: T-1599-15
Citation:
2016 FC 1190
Ottawa, Ontario, October 25, 2016
PRESENT: The
Honourable Mr. Justice O'Reilly
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BETWEEN:
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CANADIAN
NATIONAL
RAILWAY COMPANY
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Applicant
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and
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LOUIS DREYFUS
COMMODITIES
CANADA LTD
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Respondent
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PUBLIC JUDGMENT AND REASONS
(Confidential
Judgment and Reasons issued October 25, 2016)
I.
Overview
[1]
The applicant, Canadian National Railway Company
(CN), provides rail transportation services to the respondent, Louis Dreyfus
Commodities Canada Ltd (LDC), a seller and shipper of grain. After the parties failed
to agree on contractual terms for the 2015-2016 crop year, LDC requested arbitration
with the Canadian Transportation Agency; the Agency referred the matter to an
arbitrator in 2015.
[2]
The arbitrator concluded that CN was obliged to
meet LDC’s request for xxx rail cars a
week at LDC’s facilities in xxxxxxxx xxx xxxxxxx,
xxxxxxxxxxxx, xxx xxxxx xxxxx, xxxxxx xxxxxxx.
He rejected CN’s argument that it was entitled to ration the number of cars
supplied during periods of peak demand and inclement winter weather.
[3]
CN argues that the arbitrator’s decision was
unreasonable because it failed to abide by the requirements set out in the Canada
Transportation Act, SC 1996, c 10 (ss 169.37, 169.38 – see Annex for
provisions cited). In particular, CN says that the arbitrator omitted reference
to factors he was required to consider, including the level of service that LDC
actually required, CN’s operational requirements and restrictions, and CN’s
obligations to other shippers. CN asks me to overturn the arbitrator’s decision
and refer the matter to another arbitrator.
[4]
LDC defends the arbitrator’s decision, noting
that he based his conclusions on the evidence regarding LDC’s requirements, the
occasional need for short periods of rationing, and CN’s ability to meet other
shippers’ needs by increasing its capacity. LDC submits, therefore, that the
arbitrator’s decision was reasonable and should be upheld.
[5]
Having reviewed the arbitrator’s decision and
the evidence before him, I am satisfied that the decision was unreasonable as
the arbitrator failed to take proper account of certain mandatory statutory
requirements. I must, therefore, grant CN’s application for judicial review.
II.
The Arbitrator’s Decision
[6]
The main issue before the arbitrator involved
the appropriate terms of service owed by CN to LDC for the 2015-2016 crop year.
He began by noting the statutory obligations in section 169.37 of the Act,
which requires an arbitrator to take into account, among other things, the
following factors:
•
The traffic to which the service obligations
relate;
•
The service that the shipper requires with
respect to the traffic;
•
The railway company’s service obligations to
other shippers, as well as obligations to persons and companies;
•
The railway company’s and shipper’s operational
requirements and restrictions;
•
The availability of alternative, effective,
adequate, and competitive means available to the shipper for transporting the
goods; and
•
Any additional information the arbitrator
considers relevant.
[7]
LDC requested that CN provide at least xxx rail cars per week (except during the
Christmas break). The arbitrator accepted that LDC is essentially captive to
CN’s services because, in this situation, CN is the sole service provider at
LDC’s facilities, trucking is not an economically viable alternative to rail,
and interswitching with the Canadian Pacific Railway is infeasible.
[8]
In response to CN’s submission that LDC did not
actually require xxx cars per week, the
arbitrator found that LDC’s past shipping rates were not representative of its
current needs because CN failed to supply the number of cars LDC had required
in previous years. xxxxx xxxxxx, xxxxxxxx xx xxx, xxxxxxxx
xxxx xxx xxxxxxx xxxxx xxxxxxx xxxxxx xx xxx xxx xxx xxxx (xxxxxxx
xx xxxxxxxxx).
The arbitrator found that LDC had invested in expanding capacity at its
facilities, and concluded that CN’s unwillingness to supply sufficient cars
should not impair LDC’s growth. In his view, LDC had sufficient capacity to
move an amount of grain that would justify the number of cars it had requested.
[9]
CN proposed to the arbitrator that LDC’s request
be subject to CN’s rationing methodology, which involves allocating rail cars
on a pro rata basis according to data from a portion of the 2012-2013 crop year.
The arbitrator found that this approach was never representative of LDC’s true
historic share for the facilities and, in any case, was based on outdated
evidence.
[10]
CN also urged the arbitrator to consider its
obligations to other shippers, which sometimes requires CN to limit allocations
to individual shipping companies in order to be fair to the overall market.
However, the arbitrator rejected the idea that allocating cars was a “zero sum game” in which meeting one shipper’s needs
would result in limiting the needs of another. He noted that the rationing of
cars occurs almost annually for most of the crop year, regardless of crop size,
and rejected the proposition of treating rationing as a normal business
practice. Rather, citing an earlier Canadian Transportation Agency decision, he
found that rationing should be carried out only for short periods in exceptional
circumstances.
[11]
Finally, the arbitrator concluded that CN would
not fail to meet service obligations to other shippers in order to satisfy
LDC’s needs. The forecast for the 2015-2016 crop year predicted a reduced yield
of 60 million metric tonnes (MMT), down from 78 MMT in 2014-2015 and 84 MMT in
2013-2014. In that light, the arbitrator found that CN should have had sufficient
inventory to provide LDC with its requested xxx
cars per week without impinging on other shippers’ requirements. He concluded
that this outcome was commercially fair and reasonable to the parties,
referring to section 169.38 of the Act.
[12]
The arbitrator’s sole concession to CN was in relation
to the performance standard to which CN would be held: CN was required to
deliver 90% of LDC’s order within three weeks, and 100% within three months.
III.
Was the Arbitrator’s Decision Unreasonable?
[13]
The parties agree that I can overturn the
arbitrator’s decision only if it was unreasonable. As the arbitrator was
dealing with a matter of “interest arbitration”
rather than “rights arbitration”, the decision
merits considerable deference (Public Service Alliance of Canada v NAV
Canada, 2015 ONSC 1407 (Div Ct)).
[14]
LDC supports the arbitrator’s decision and
vehemently contests CN’s arguments, characterizing CN’s application as “vexatious” and “pernicious”.
LDC says that CN’s position flouts the statutory arbitration scheme, which was
meant to protect shippers against monopolistic abuses by the railway. LDC also contends
that CN’s submissions contradict CN’s obligation to supply shippers with
sufficient cars, and points to CN’s past conduct that was the subject of previous
service complaints by LDC.
[15]
LDC relies heavily on an Agency decision in
relation to an earlier LDC service level complaint: Louis Dreyfus
Commodities Canada Ltd v Canadian National Railway Company (Case No
14-02100, Oct 3, 2014) [LDC#1]. LDC contends that the arbitrator’s decision
conforms with the principles set out in LDC#1 and should be upheld.
[16]
In my view, LDC#1 does not go as far as LDC maintains.
[17]
In LDC#1, the Agency set out a number of broad
principles relating to a railway company’s obligation to provide an adequate
level of service under the Act. It began by noting that the purpose of section
113 is to “counterbalance the monopoly or near monopoly
power that a railway company may exert with respect to certain shippers in some
circumstances” (at para 14). In keeping with that purpose, the Agency
found that a railway company’s service obligation to provide adequate and
suitable accommodation to shippers is “unconditional,
subject to a shipper meeting its correlative obligations” (at para 22).
The railway company owes that duty to each individual shipper, and the railway
company’s compliance must be assessed according to the shipper’s request for
services, not according to the combined requests of other shippers or its own
car allocation or rationing policies (at paras 23-24). When a shipper complains
about the level of service it has received, the Agency will look to the railway
company for evidence of the efforts it made to provide adequate service or a
compelling explanation for its failure to do so (at para 31). The overarching
principle is that the railway company must act reasonably: it is not expected
to do the impossible, but it must show that it could not reasonably have
complied with the shipper’s request (at paras 32, 34, referring to Patchett
& Sons Ltd v Pacific Great Eastern Railway Co, [1959] S.C.R. 271 at 274).
[18]
The Agency also set out a framework for
assessing individual complaints regarding level of service. The following
questions arise in that assessment (at para 36):
•
Is the shipper’s request reasonable?
•
Did the railway company fulfill it?
•
If not, did the railway company have a
reasonable justification for its failure?
[19]
According to the Agency, if a shipper made a
reasonable request for service and the railway company failed to meet it, the
focus will turn to the reasonableness of the railway company’s conduct in the
circumstances. If the railway company cannot show that it took reasonable steps
to respond to the shipper’s request, the Agency will consider appropriate remedies.
[20]
The Agency noted that the railway company must
make reasonable arrangements to respond to shippers’ requests, including adding
staff or increasing capacity. The reasonableness of the railway company’s
conduct is a factual question that must be assessed according to the evidence
available (at paras 51, 53); this includes circumstances beyond the railway
company’s control, such as weather, congestion, operational restrictions, and
derailments (at para 59). However, car rationing by the railway would be
appropriate only in exceptional circumstances and for short periods of time
when demand exceeds car supply, such as during peak demand periods (at para
60). Rationing would not be appropriate for lengthy periods when peak demands
are “prolonged and predictable”, or when
shortfalls simply become routine (at para 61).
[21]
The Agency recognized that railway companies
have to make business decisions about the size of their fleets and how they are
distributed, but they cannot do so in a manner that contradicts their service
obligations to shippers (at para 71). They cannot simply point to the limited size
of their fleets as a justification for a failure to meet shippers’ needs (at
para 72).
[22]
On the facts of LDC’s complaint, the Agency
found that CN had failed to meet LDC’s service requests. The Agency then
considered whether there was a reasonable justification for CN’s conduct. CN had
argued that its failure was a product of applying its car allocation policy
during periods of extreme demand. However, CN did not provide evidence of how
that policy actually operated so as to bring about the shortfall in the number
of cars it provided to LDC, nor did it explain exactly what its policy was. The
Agency accepted that CN could apply an allocation policy, but the policy had to
be clearly defined and communicated to shippers. In addition, the policy could
not violate shippers’ rights to service, such as providing a shipper no cars at
all (at paras 156, 163).
[23]
Recently, the Federal Court of Appeal upheld the
Agency’s decision, finding that the Agency’s interpretation of the Act was
reasonable (Canadian National Railway Company v Dreyfus, 2016 FCA 232).
In particular, the Court affirmed the principle in Patchett that service
obligations must be interpreted reasonably (at para 20).
[24]
LDC also contends that other Agency decisions
favour its position. I disagree. The Agency has, in fact, recognized the
permissibility of CN’s car allocation policy.
[25]
In Louis Dreyfus Commodities Canada Ltd v
Canadian National Railway Company (Case No 14-05609, March 12, 2015), LDC
asked the Agency to order CN not to apply its car allocation policy to LDC’s
facilities. CN asked the Agency to dismiss LDC’s application. The Agency agreed
with CN that LDC’s application did not disclose a reasonable cause of action
because the question of whether application of the rationing policy would
result in failure by CN to meet its obligation to provide proper service was a
factual one that could not be decided in the abstract. The Agency did not
interpret its decision in LDC#1 as a prohibition on rationing; rather, the Agency
concluded that CN’s car allocation policy must not be inconsistent with its
service obligations.
[26]
In Louis Dreyfus Commodities Canada Ltd v
Canadian National Railway Company (Case No 14-05341, June 18, 2015), LDC
complained that CN had breached its level of service obligations for the
2013-2014 crop year. The Agency applied its approach from LDC#1. It found that
LDC’s demand for rail cars was reasonable, even though it exceeded historical
demands. CN was able to provide only about 83% of the requested cars during the
relevant period and, therefore, had failed to meet LDC’s reasonable requests.
In terms of whether CN had a valid reason for not providing the cars requested,
the Agency considered the size of the 2013-2014 crop, CN’s efforts to acquire
additional cars, the upward shift in LDC’s demands, the harsh winter weather
that year, CN’s need to implement its car allocation policy, and the lack of
lead time available to CN to respond to the prevailing circumstances. The
Agency concluded that CN had provided a reasonable explanation for its
inability to meet all of LDC’s requests: the two main factors – crop size and
weather – were out of CN’s control.
[27]
LDC also refers to two other Agency decisions
that it says favours its position. Again, I disagree.
[28]
Subsequent to LDC#1, the Agency released Richardson
International Limited v Canadian National Railway Company (Letter Decision
No 2014-12-18, December 18, 2014) and Viterra Inc v Canadian National
Railway Company (Letter Decision No 2014-12-18, December 18, 2014). These decisions
are essentially identical, so I need refer only to Richardson.
[29]
Richardson dealt
with a level of service complaint based on CN failing to supply the quantity of
cars to which the shipper was entitled under CN’s car allocation policy. In
addition, CN reduced Richardson’s allocation by a further 300 cars during
certain weeks of the 2013-2014 crop year.
[30]
Naturally, the Agency relied heavily on LDC#1 in
analyzing Richardson’s complaint, summarizing that decision by saying that “a railway company’s fundamental service obligation. . .
is to provide adequate and suitable accommodation for ‘all traffic offered for
carriage’ unless it is not reasonably possible to do so” (at para 53). For
the 2013-2014 crop year, it was not reasonably possible for CN to meet all
demands. The question then was whether CN’s car allocation policy was a
reasonable response to the circumstances. According to the Agency, generally railways
should rely on rationing only in temporary situations where they cannot provide
full service; it should not be a routine means “to
smooth out the seasonality of the demand for Canadian grain shipping”
(at para 54).
[31]
As for the rationing policies themselves, the
Agency stated that they must be “clear, transparent,
fair, temporary and consistently executable in the short term” and “preferably,
be the product of consultation and industry input” (at para 58).
Richardson did not actually question the validity or soundness of CN’s car
allocation policy, which was based on the neutral criterion of historical market-share
data for grain shippers; rather, Richardson’s complaint was directed at CN’s
failure to abide by its own policy.
[32]
The Agency found that it was reasonable for
Richardson to expect to receive the number of cars to which it was entitled
under CN’s car allocation policy. The Agency went on to find that CN had failed
to comply with Richardson’s reasonable request, even recognizing that railway
companies must be given some measure of flexibility. Although the Agency
appreciated that railways sometimes resort to rationing as a means to ensure
that “all shippers would be treated fairly and
equitably in receiving a portion of their actual service demand” (at
para 175), that is not a justification for failing to apply the policy fairly
and consistently.
[33]
In its conclusion, the Agency stated that the
key criteria for a fair rationing methodology are consistency in reporting the
total available car supply and communication to shippers of the precise number
of cars they can expect to receive. The Agency also set out some general
governing principles about car rationing, including (at para 187):
•
Rationing should be a last resort for dealing
with unexpected demand surges;
•
Rationing should be temporary, for as short a
period as possible, with normal service returning as soon reasonably possible;
and
•
Rationing must be fair, consistent, and
transparent.
[34]
These decisions, including that of the Federal
Court of Appeal, all reflect the principles stated by the Supreme Court of
Canada in Patchett, above. Justice Rand, as he then was, stated for the
majority that a rail carrier’s duty “is permeated with
reasonableness in all aspects of what is undertaken . . .” (at p 274).
Therefore, a railway “is not bound to furnish cars at
all times sufficient to meet all demands”; rather, reasonableness is a
factual inquiry and “how each situation is to be met
depends upon its total circumstances” (at p 275).
[35]
Bearing these principles in mind, I find that
the arbitrator’s decision was unreasonable. By effectively eliminating the
possibility of rationing cars in appropriate circumstances, the arbitrator
ignored CN’s obligations to other shippers and its operational restrictions, both
of which are mandatory statutory considerations.
[36]
While there is ample support for the proposition
that car allocation policies should be invoked infrequently and only for
limited periods, that they cannot override shippers’ legitimate and reasonable
demands, and that they should be based on fair and transparent criteria, I see
no justification for the arbitrator’s conclusion that CN’s service obligation
to LDC should not take account of the possibility of rationing. The
arbitrator’s approach essentially eliminates the possibility of adapting to a
harsh Canadian winter, a patently unrealistic scenario.
[37]
Since reasonableness of service is a factual
question, an arbitrator assessing a prospective arrangement between a railway
company and a shipper should take account of the possibility that unforeseeable
circumstances may arise. Not all the pertinent facts are known at the
commencement of the crop year, so an arbitrator has to contemplate and accommodate
various factors that may affect the delivery of cars. The arbitrator did not do
so here.
IV.
Conclusion and Disposition
[38]
The arbitrator overlooked important mandatory
statutory factors when he concluded, in effect, that CN was prohibited from
rationing its supply of cars to LDC, even in exigent circumstances. I find that
the arbitrator’s approach was unreasonable; I must, therefore, overturn his
decision and refer the matter to another arbitrator, with costs to CN.
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