Armada Lines Ltd. v. Chaleur Fertilizers Ltd., [1997] 2 SCR 617

Armada Lines Ltd. v. Chaleur Fertilizers Ltd., [1997] 2 S.C.R. 617

Armada Lines Ltd. (now

Clipper Shipping Lines)                                                                     Appellant

v.

Chaleur Fertilizers Ltd.                                                                     Respondent

Indexed as:  Armada Lines Ltd. v. Chaleur Fertilizers Ltd.

File No.:  24351.

1997:  March 11; 1997:  June 26.

Present:  La Forest, L’Heureux‑Dubé, Sopinka, Gonthier, Cory, Iacobucci and Major JJ.

on appeal from the federal court of appeal

Maritime law ‑‑ Arrest of cargo ‑‑ Damages ‑‑ Wrongful arrest -- Cargo’s owner posting security to secure release of  cargo ‑‑ Arrest and security undertaking later set aside ‑‑ Whether cargo’s owner entitled to damages for loss of interest in posting security ‑‑ Whether cargo’s owner entitled to damages for wrongful arrest of  cargo in absence of bad faith or gross negligence on part of arresting party ‑‑ Federal Court Rules, C.R.C., c. 663, Rules 344, 1003.

The respondent failed to produce a cargo for loading onto the appellant’s ship on dates which had been agreed upon.  The appellant issued a statement of claim, commencing an action in rem against the cargo and an action in personam against the respondent, alleging breach of contract.  It then proceeded to have the respondent’s cargo arrested, pursuant to Rule 1003 of the Federal Court Rules.  The respondent secured the release of its cargo on bail, by posting security in the amount of $80,000.  Approximately 20 months later, the respondent successfully brought a motion to strike out the appellant’s statement of claim in the in rem action and to set aside the arrest of the cargo and the security undertaking. The appellant continued its action in personam.  The respondent counterclaimed for damages arising out of the arrest of the cargo.  The trial judge allowed the appellant’s claim for breach of contract and dismissed the respondent’s counterclaim.  On appeal, the Federal Court of Appeal set aside the judgment, dismissed the breach of contract action and awarded the respondent  $36,650 in damages for the wrongful arrest of the cargo, compensating the respondent for the loss of interest incurred as a result of posting security and for the loss of use of working capital.  The appellant appealed to this Court solely on the issue of the damages for wrongful arrest.

Held:  The appeal should be allowed in part.

The Federal Court of Appeal did not err in awarding damages for the loss of interest incurred as a result of posting security.  Rule 344 of the Federal Court Rules gives that court full discretionary power over the payment of costs of all parties involved in the proceedings.  An award of costs may include those expenses which arise directly from maintaining the security provided in order to obtain the release of the arrested property.  The Federal Court of Appeal erred, however, in awarding damages for the loss of use of working capital under the heading “damages for wrongful arrest”.   A court may only award damages for wrongful arrest where the arresting party acts with either bad faith or gross negligence.  Here, there is no evidence that the appellant acted with either. Any change to extend the scope of the common-law liability rule for maritime arrest should be made by Parliament, not the courts.

Cases Cited

Applied:  The “Evangelismos” (1858), 12 Moo. P.C. 352, 14 E.R. 945; referred to:  The “St. Elefterio”, [1957] P. 179; Antares Shipping Corp. v. The “Capricorn”, [1977] 2 F.C. 274; Frontera Fruit Co. v. Dowling, 1937 A.M.C. 1259 (1937); Mondel Transport Inc. v. Afram Lines Ltd., [1990] 3 F.C. 684; Third Chandris Shipping Corp. v. Unimarine S.A., [1979] 2 Lloyd’s Rep. 184; Rhône (The) v. Peter A.B. Widener (The), [1993] 1 S.C.R. 497.

Statutes and Regulations Cited

Admiralty Act 1988 (Austl.), No. 34 of 1988, s. 34(1)(a)(ii).

Federal Court Rules, C.R.C., c. 663, rr. 344 [rep. & sub. SOR/87‑221, s. 2], 1003 [am. SOR/92‑726, s. 12; am. SOR/94‑41, s. 7].

Authors Cited

Nossal, Shane.  “Damages for wrongful arrest of a vessel”, [1996] Lloyd’s Mar. & Com. L.Q. 368.

Sharpe, Robert J. Injunctions and Specific Performance, 2nd ed. Aurora, Ont.:  Canada Law Book, 1992 (loose-leaf updated November 1996, release 4).

APPEAL from a judgment of the Federal Court of Appeal, [1995] 1 F.C. 3, 170 N.R. 372, setting aside a judgment of the Trial Division (1993), 60 F.T.R. 232. Appeal allowed in part.

Jon H. Scott and Bruce W. Johnston, for the appellant.

Thomas L. McGloan, Q.C., and Guy Spavold, for the respondent.

The judgment of the Court was delivered by

1                                   Iacobucci J. -- This appeal raises the issue of when a party can recover damages flowing from the arrest of a ship or cargo pursuant to Rule 1003 of the Federal Court Rules, C.R.C., c. 663.

I.  Facts

2                                   In February of 1982, the appellant, Armada Lines Ltd. (“Armada”), and the respondent, Chaleur Fertilizers Ltd. (“Chaleur”), entered into a contract wherein the appellant agreed to transport the respondent’s cargo of fertilizer from Belledune, New Brunswick, to Lome, Togo.  According to the terms of the agreement, Chaleur was to have its cargo ready for loading onto the appellant’s ship by March 30.  However, owing to problems with its suppliers, Chaleur could not present its cargo for loading until April 9.

3                                   On April 16, following fruitless negotiations between the parties, Armada filed a statement of claim, commencing an action in rem against the cargo and an action in personam against Chaleur, alleging breach of contract.  Once it had filed the statement of claim, Armada proceeded to have the defendant cargo arrested, pursuant to Rule 1003 of the Federal Court Rules.  On April 23, Chaleur secured the release of the cargo on bail, by posting security in the amount of $80,000.

4                                   Approximately 20 months later, Chaleur brought a motion to strike out Armada’s statement of claim in the in rem action.  On December 12, 1983, Rouleau J. granted the motion, dismissing Armada’s action in rem against the cargo of fertilizer, setting aside the arrest of the cargo and setting aside the $80,000 undertaking with respect to security.  Rouleau J. did not give any reasons for judgment.

5                                   Armada continued its action in personam, alleging breach of contract.  Chaleur counterclaimed for damages arising out of the arrest of the cargo of fertilizer.  The Amended Statement of Defence quantified Chaleur’s damages as follows:

(1)   Loss of interest in posting security to May 31, 1983: $3,806.37.

(2)   Loss of use of working capital to May 31, 1983: $32,000.

6                                   At trial, Reed J. allowed Armada’s claim for breach of contract and dismissed Chaleur’s counterclaim: (1993), 60 F.T.R. 232.  A subsequent appeal to the Federal Court of Appeal was successful, as Heald J.A., writing for the Court of Appeal, reversed Reed J., dismissed the breach of contract action and awarded Chaleur $36,651.27 for the wrongful arrest of its cargo:  [1995] 1 F.C. 3, 170 N.R. 372.  The appellant appeals to this Court solely on the issue of the damages for wrongful arrest.

II.  Relevant Statutory Provisions

7                                   Federal Court Rules, C.R.C., c. 663

Rule 1003. (1) In an action in rem, a warrant for the arrest of property may be issued at any time after the filing of the statement of claim or declaration.

(2) An application for a warrant under paragraph (1) may be made by filing an affidavit, entitled "Affidavit to Lead Warrant", which shall contain a statement showing

(a)       the name, address and occupation of the applicant for the warrant;

(b)       the nature of the claim;

(c)       that the claim has not been satisfied;

(d)       the nature of the property to be arrested, and, if the property is a ship, the name and national character of the ship and the port to which she belongs; and

(e)       [Repealed, SOR/94‑41, s. 7]

(f) if the application is for a warrant against a ship described in subsection 43(8) of the Act, that the person making the affidavit shows reasonable grounds to believe that the ship for which the warrant is sought is beneficially owned by the person who is the owner of a ship that is the subject of the action.

                                                                   . . .

(5) A warrant may be issued under paragraph (1) by the Court, a prothonotary, or an officer of the Registry who has been authorized by order of the Court to issue warrants under this Rule. A prothonotary or any officer so authorized may, instead of issuing a warrant, refer the matter to the Court. The Court, upon an application for a warrant or upon a reference of an application to it, may require that notice of the application be given to designated persons. The warrant (Form 34) shall be signed by the person issuing it or, if it is issued by the Court, by the presiding judge.

(6) The warrant shall be served by the marshal, or any person lawfully authorized to act in his stead, in the manner prescribed by these Rules for the service of a statement of claim or declaration in an action in rem, and thereupon the property shall be deemed to be arrested.

III.  Judgments Appealed From

A.  Federal Court (Trial Division)

8                                   The trial judge based her dismissal of Chaleur’s counterclaim on the lengthy delay between the arrest of the cargo and the motion to set aside the arrest, a period of some 20 months.  In the opinion of the trial judge, if Chaleur had acted promptly in bringing the motion to set aside the arrest, it could have avoided virtually all of the costs involved in maintaining the security.  She said (at p. 239):

To the extent that the [respondent] incurred costs in maintaining security, from April 23, 1982 to December 12, 1983, the length of time involved was a matter under its control.

9                                   For these reasons, the trial judge dismissed the counterclaim.  However, she did award the respondent its costs associated with the two motions, first, to obtain bail and, second, to set aside the arrest.

B.  Federal Court of Appeal, [1995] 1 F.C. 3

10                               Writing for a unanimous Court of Appeal, Heald J.A. first looked at the December 12, 1983 order by Rouleau J., which set aside the warrant of arrest of the cargo.  The Court of Appeal concluded that this order amounted to a finding that Armada had acted “unlawfully” in effecting the arrest.

11                               Next, the Court of Appeal addressed the trial judge’s finding that, by failing to bring the motion to have the arrest set aside within a reasonable time, Chaleur was the author of its own loss.  Heald J.A. disagreed with the trial judge and said that the law did not obligate the owner of arrested cargo to act immediately in opposition to the arrest (at p. 19):

In essence, [the trial judge] was imposing a duty upon the owner of the arrested cargo of a ship to take immediate action to have that arrest ... set aside.  I am not aware of any legal justification for the imposition of such a duty.

12                               Having decided that the delay did not dispose of Chaleur’s counterclaim, Heald J.A. turned to examine the law relating to the arrest of cargo.  In his view, the maritime arrest procedure offers a plaintiff interlocutory relief similar to that provided by a Mareva injunction.  Rule 1003 of the Federal Court Rules sets out the criteria applicable to the granting of a warrant for the arrest of property.  In the opinion of the Court of Appeal, the Rule 1003 guidelines are “consistent” with the rules which govern Mareva injunctions.  Heald J.A. explained (at p. 20):

In each instance, the onus is undoubtedly cast upon the plaintiff to show that the arrest requested is necessary for the protection of its rights.

13                               The court did acknowledge one apparent difference between the two: in order to obtain a Mareva injunction, a plaintiff must give an undertaking in damages; by contrast, Rule 1003 makes no mention of undertakings.  However, in the view of the Court of Appeal, the omission of the undertaking requirement from the text of the Federal Court Rules does not preclude the courts from effectively reading such language into the legislation.  Heald J.A. said (at p. 20):

While Rule 1003 does not specifically require an undertaking as to damages for wrongful arrest, I think it to be a necessary inference that the plaintiff assumes the consequences of such an arrest.

Heald J.A. concluded that, if a plaintiff obtains an arrest of cargo which later turns out to be “illegal”, the plaintiff “must suffer the consequences of that illegality” (p. 20).

14                               In the present case, Heald J.A. found that Armada had arrested the cargo “without legal justification” (p. 20).  Accordingly, the Court of Appeal held that Armada must suffer the consequences of that illegality and compensate Chaleur for the damages which flowed from the arrest.

15                               For these reasons, the Court of Appeal allowed the respondent’s counterclaim, with costs, awarding $36,651.27 with interest calculated at 11.31 percent per annum from April 16, 1982.

IV.  Issues

16                               1.    Did the Federal Court of Appeal err in awarding damages for loss of interest in posting security?

2.    Did the Federal Court of Appeal err in awarding damages for the loss of use of working capital under the heading “damages for wrongful arrest”?

V.  Analysis

A. Did the Federal Court of Appeal err in awarding damages for loss of interest in posting security?

17                               The Court of Appeal, in allowing Chaleur’s counterclaim, awarded damages to compensate the respondent for interest paid on the $80,000 loan which was taken out in order to post security.  In my view, the Court of Appeal did not err in making this award.

18                               Rule 344 of the Federal Court Rules gives the Federal Court full discretionary power over the payment of costs of all parties involved in the proceedings.  An award of costs may include those expenses which arise directly from maintaining the security provided in order to obtain the release of the arrested property.  In The “St. Elefterio”, [1957] P. 179, at p. 187, Willmer J. said:

[T]he plaintiffs, if their alleged cause of action turns out not to be a good one, will be held liable for costs, and those costs will include the costs of furnishing bail in order to secure the release of the ship.

And in Antares Shipping Corp. v. The “Capricorn”, [1977] 2 F.C. 274 (C.A.), Le Dain J. said (at p. 279):

[T]he expense of giving bail forms part of the taxable costs for which security may be ordered to be given under Rule 446.

19                               In this case, the expense of giving bail included the roughly $3,800 in interest which the respondent paid to its creditor for the $80,000 security payment.  Therefore, in my opinion, the Court of Appeal did not err in awarding the respondent the interest which it paid on the bail money.

B.  Did the Federal Court of Appeal err in awarding damages for the loss of use of working capital under the heading “damages for wrongful arrest”?

20                               The rule governing when a party can claim damages for wrongful arrest was laid down in The “Evangelismos” (1858), 12 Moo. P.C. 352, 14 E.R. 945.  In that case, the Privy Council held that a court may only award damages for wrongful arrest where the arresting party acts with either bad faith or gross negligence (at p. 359):

Undoubtedly there may be cases in which there is either mala fides, or that crassa negligentia, which implies malice, which would justify a Court of Admiralty giving damages . . . .

The real question . . . comes to this: is there or is there not, reason to say, that the action was so unwarrantably brought, or brought with so little colour, or so little foundation, that it rather implies malice on the part of the Plaintiff, or that gross negligence which is equivalent to it?

Holmes J. explained in Frontera Fruit Co. v. Dowling, 1937 A.M.C. 1259 (5th Cir. 1937), at p. 1266:

The gravamen of the right to recover damages for wrongful seizure or detention of vessels is the bad faith, malice, or gross negligence of the offending party.

21                               The rule in The “Evangelismos” survives to this day.  See, for example, Mondel Transport Inc. v. Afram Lines Ltd., [1990] 3 F.C. 684 (T.D.).  I am not aware of any Canadian case where a court has awarded damages for wrongful arrest in the absence of conduct amounting to either malice or gross negligence.

22                               In this case, none of the courts below found that the appellant acted with either bad faith or gross negligence.  This would seem to preclude a claim for wrongful arrest.  However, on this point, the respondent made two submissions.  First, counsel argued that the rule in The “Evangelismos” should no longer be followed and that damages for wrongful arrest should not be limited to cases of bad faith or gross negligence.  In the alternative, counsel invited this Court to reach its own finding of mala fides or crassa negligentia based on the evidentiary record.  I will address each of these arguments in turn.

23                               In asking this Court to depart from the Evangelismos rule, the respondent focused on the similarities between the maritime arrest procedure, on the one hand, and the seizure of assets pursuant to a Mareva injunction, on the other.  And, indeed, in substance, the two orders are not dissimilar: both the admiralty arrest and the Mareva injunction restrain a defendant from dealing with his or her property prior to judgment.  However, despite this similarity of purpose and effect, the rules surrounding the two remedies differ in certain important respects.

24                               A plaintiff who obtains a Mareva injunction, like a plaintiff who obtains any type of interlocutory injunctive relief, must give an undertaking to compensate the defendant for damages sustained by reason of the injunction, should the action ultimately fail.  Third Chandris Shipping Corp. v. Unimarine S.A., [1979] 2 Lloyd’s Rep. 184 (C.A.), at p. 189; R. J. Sharpe, Injunctions and Specific Performance (2nd ed. 1992 (loose-leaf)), at ¶ 2.470.  By contrast, Rule 1003(2) of the Federal Court Rules, which governs the arrest of a ship or cargo, does not require that the plaintiff give any undertaking for damages.  Furthermore, as discussed above, the common law only imposes liability for damages flowing from the arrest of property if the plaintiff acted with either mala fides or crassa negligentia.

25                               The respondent argued that the disparity between these two sets of rules operates unfairly against defendants in admiralty law actions.  To remedy this unfairness, the respondent suggested imposing a new rule on maritime law.  Under this proposed rule, a plaintiff who effects a maritime arrest and then has his or her claim dismissed will be liable for all damages caused by the arrest.  This position finds support among certain academic writers, who have criticized the Evangelismos rule as being out of step with modern developments in the common law.  See, for example, S. Nossal, “Damages for the wrongful arrest of a vessel”, [1996] Lloyd’s Mar. & Com.  L.Q. 368.

26                               While I have some sympathy with this argument, in my view, any such change in the law falls not to the courts, but rather to the legislature to carry out.  As noted above, the rule in The “Evangelismos” is of long standing.  Whether it does or does not operate harshly upon defendants is a question best resolved by the legislature.  As this Court said in Rhône (The) v. Peter A.B. Widener (The), [1993] 1 S.C.R. 497, at p. 531:

. . . whether this regime is responsive to modern realities is a question of policy to be determined by Parliament and not the courts whose task is to interpret and give effect to the intention of Parliament.

27                               In this regard, I note that, apparently alone among the common law jurisdictions, Australia has departed from the rule in The “Evangelismos”.  Section 34(1)(a)(ii) of the Australian Admiralty Act 1988, No. 34 of 1988, provides that a party may recover damages arising out of the arrest of property if the arrest was obtained “unreasonably and without good cause”.  As pointed out by counsel for the appellant, this change was effected not through judicial means, but rather by specific legislative enactment.  In my opinion, any analogous change in Canadian law must originate in the legislative branch of government.  For these reasons, in my view, the rule in The “Evangelismos” remains good law in Canada.

28                               I will next address the respondent’s second argument that this Court should make its own finding of mala fides or crassa negligentia based on the evidence.  I wish to emphasize that none of the courts below, not the motions court judge, or the trial judge, or the Court of Appeal, addressed this issue.  An examination of their respective reasons and orders reveals no indication that any of the judgments were based on a finding of either bad faith or gross negligence.  Furthermore, I could find no evidence in the record which would support such a finding.  Given the lack of supporting evidence and the failure of any of the courts below to address the issue of bad faith or gross negligence, in my opinion, it would not be appropriate for this Court to make such a finding.

29                               Accordingly, given that this Court has no evidence that the appellant acted with either mala fides or with gross negligence, in my view, the Court of Appeal erred in awarding damages for wrongful arrest.

VI.  Conclusion

30                               For the foregoing reasons, I would allow this appeal in part, as follows:

(i)    The appeal from the judgment of the Federal Court of Appeal on the respondent’s counterclaim is allowed with costs.

(ii)   However, the respondent may recover its costs in the motion to strike the action in rem and to set aside the arrest.  These costs include the $3,806.37 in interest costs incurred as a result of maintaining the $80,000 security.

Because success has been divided, I would not otherwise disturb costs ordered in the courts below.

Appeal allowed in part.

Solicitors for the appellant:  McMaster Meighen, Montreal.

Solicitors for the respondent:  Gilbert, McGloan, Gillis, Saint John.