Canada: Unpacking The Crate: A Carrier's Tools For Collecting Unpaid Freight Charges

The modern shipping industry has drastically influenced the complexity of cargo movements. Not only has the advent of intermodal shipping processes expanded the parties involved in moving cargo to its destination, a proliferation of freight forwarders, load brokers and other intermediaries has placed layers of separation between shippers, carriers and consignees.

All of this has the effect of increasing the risk to the carriers who actually move the cargo from one location to another. With the growing complexity of logistics transactions and the industry as a whole, carriers often risk losing out on the payment of freight charges if an intermediary goes bankrupt or otherwise decides to withhold payment. As Hearn et al., discuss, the US approach is a principled policy stance that the carrier always gets paid,¹ be it from the shipper or the consignee.² Although the law in Canada is not so straightforward, carriers have a myriad of legal tools to collect on unpaid freight charges beyond merely advancing a claim for breach of contract against the party by whom they were retained.

Expanding the scope of contractual obligations under bills of lading:

Legislation in some Canadian jurisdictions provides that where the contract of carriage is evidenced by a bill of lading, the carrier is given recourse to any named consignees or endorsees of the bill of lading, even in situations that would typically be barred by the common law doctrine of privity of contract. In application, this means that a carrier may be able to pursue payment from a shipper or consignee, even if there is no contract between the carrier and that party.

The Federal Bills of Lading Act³ applies to contracts of carriage coming within the constitutional competence of Parliament, like carriage by air, rail, sea, and interprovincial trucking. In such cases, Section 2 of the Act establishes that every consignee or endorsee on a bill of lading who receives the goods covered by the bill of lading receives both the benefits and obligations of the contract it evidences. Accordingly, for contracts of carriage coming within the ambit of the Act,⁴ a carrier may have recourse to the consignee or endorsee for any unpaid freight charges, even if such entities were not privy to the contract of carriage.

In Ontario, Section 7(1) of the provincial Mercantile Law Amendment Act⁵ contains wording almost identical to the federal legislation.⁶ However, the provincial legislation features a more expansive definition of a “bill of lading,” which includes mere receipts for goods if they are accompanied by an undertaking to move them.⁷ Combined with the application of the Mercantile Law Amendment Act⁸ to areas within the constitutional competence of Ontario, like trucking within the province, the Act has always been of great use to Ontario trucking companies seeking payment of unpaid freight charges.

Using agency law to collect from upstream parties (even if they have already sent payment downstream):

Carriers are in a particularly precarious position in cases where the entity responsible for paying freight charges instead pays a third party, like a load broker or freight forwarder, who is then expected to remit payment to the carrier. However, agency law may permit the carrier to target the entity that forwarded payment downstream by, in effect, forcing that entity to pay twice.

The relevant law in this area stems from the seminal case of Canadian Pacific Ships v Industries Lyon corduroys Ltée.⁹ In this case, the Federal Court of Canada dealt with a scenario in which the plaintiff carrier sought payment from the defendant consignee for freight charges. The defendant consignee argued that it was not liable, as it had paid a third party load broker which it believed to be an agent of the plaintiff carrier. When the load broker went bankrupt without remitting payment, the plaintiff carrier sued the defendant consignee for the freight charges.

Justice Addy gave full judgment for the plaintiff carrier on the grounds that there was no basis for the defendant consignee to reasonably believe that the load broker could receive payment on behalf of the carrier;¹⁰ in effect, the defendant consignee was required to pay for the freight charges twice. In resolving the dispute, the Court held that in cases where a debtor pays a third party, instead of remitting the freight charges directly to the carrier, the onus is on the debtor to show that one of the following is true to avoid paying a second time:¹¹

1. The carrier actually authorized the third party to receive money on its behalf;
2. The carrier held out the third party as so authorized;
3. The carrier, by its conduct or otherwise, induced the debtor to come to that conclusion; or,
4. A custom of the trade exists to the effect that in that particular trade and in those particular circumstances, both the carrier and the debtor would normally expect the payment to be made to the third party.

The reasoning in CP Ships has since been applied in a multitude of cases, including in Ontario,¹²Alberta,¹³ British Columbia,¹⁴ and in the Federal Court of Canada.¹⁵ It stands as a warning to those who utilize the services of a carrier but funnel payment of freight charges through an intermediary.

Asserting a trust over funds collected for the carrier's benefit:

Trust law also provides a mechanism for carriers to collect unpaid freight charges. Although the facts may support the imposition of an express trust over funds delivered to an intermediary for the benefit of a carrier, legislation may also impose a constructive trust in some situations.

In Ontario, a useful statutory trust in this regard is established by Section 191.0.1(3) of the Highway Traffic Act:

Although the statutory trust described above only applies to funds received by an intermediary who also retained the carrier, the assertion of a fiduciary relationship imposes strenuous equitable responsibilities in favour of carriers regarding the remission of freight charges.

The effectiveness of a statutory trust claim is diminished in circumstances where an intermediary, like a load broker, becomes insolvent or bankrupt. However, creative carriers should be mindful of the Supreme Court of Canada's holding in Air Canada v M & L Travel Ltd,¹⁷ which gives rise to the possibility that directors of corporate trustees are liable in cases where failure to remit freight charges impressed by a statutory trust constitutes knowing assistance to fraud or breach of trust by the directors.

Conclusion:

With the ever-present risk of personal injury and damage to cargo, not to mention the stress of battling traffic, the logistics industry has enough to worry about without also contending with unpaid freight charges. Although the law in Canada does not provide automatic assurances of payment, carriers seeking freight charges have unique tools at their disposal to enforce payment.

Footnotes

1 M Gordon Hearn et al, “The Carrier Must Get Paid - Fact or Fiction” (2012) 13:5 TTL 14 at 14.

2 See e.g. Exel Transp. Services, Inc. v CSX Lines LLC, 280 F Supp 2d 617 (SD Tex 2003).

3 Bills of Lading Act, RSC 1985, c B-5 [BLA].

4 Ibid.

5 Mercantile Law Amendment Act, RSO 1990, c M.10 [MLA].

6 BLA, supra note 3, s2.

7 MLA, supra note 5, s1.

8 Ibid.

9 Canadian Pacific Ships v Industries Lyon corduroys Ltée (1982), [1983] 1 FC 736, 17 ACWS (2d) 387 [CP Ships].

10 Ibid at paras 15-16.

11 Ibid at para 13.

12 See e.g. Saima Avandero SpA v Coppley Noyes & Randall Ltd (2000), 98 ACWS (3d) 962 (Ont SupCt).

13 See e.g. Crossline Carriers Inc v Selkirk Specialty Wood Ltd, 2004 ABPC 147, 49 BLR (3d) 225.

14 See e.g. Dan Gamache Trucking Inc v Encore Metals Inc, 2008 BCSC 343, 40 CBR (5th) 235.

15 See e.g. Mediterranean Shipping Co SA v BPB Westroc Inc, 2003 FC 942, 238 FTR 135.

16 Highway Traffic Act, RSO 1990, c H.8, s191.0.1(3).

17 Air Canada v M & L Travel Ltd, [1993] 3 SCR 787, 108 DLR (4th) 592.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.