Charterer required to pay for damages not covered by insurance

The appeal by the charterer from the decision of the arbitrator ruling that it was the intention of the parties that the risk of loss or damage to the barges rested with the charterer and that the owner could proceed with its claim for damages. The British Columbia Supreme Court (the “Court”) upheld the arbitrator’s decision and concluded that the charterer did not acquire “tort immunity” by virtue of its agreement to insure the barges.

Lafarge Canada Inc. v. JJM Construction Ltd., [2010] B.C.J. No. 2610, December 24, 2010, British Columbia Supreme Court, C. Lynn Smith J.

The owner, JJM Construction Ltd. (“JJM”), owns four large hopper barges. Under charter party agreement the charterer, Lafarge Canada Inc. (“Lafarge”), had use of those barges for a period of time. JJM took the position that when Lafarge returned the barges they were damaged and in need of extensive repairs. The parties went to arbitration over Lafarge’s responsibility for the cost of repairs to the barges.

Lafarge brought a motion before the arbitrator arguing that the Supreme Court of Canada “trilogy” of Cummer-Yonge, Pyrotech and T. Eaton (Agnew-Surpass v. Cummer-Yonge, [1976] 2 S.C.R. 221; Ross Southward Tire v. Pyrotech Products, [1976] 2 S.C.R. 35; T. Eaton Company v. Smith et al., [1978] 2 S.C.R. 749) a line of commercial lease cases, governed the interpretation of the charter party agreements. Lafarge took the position that those principles dictated that because Lafarge had agreed to obtain certain insurance with respect to the barges, the risk of damage to the barges passed to JJM. The arbitrator, J. M. Buchan, ruled that the intention of the parties was that the risk of loss or damage to the barges rested with Lafarge and that JJM could proceed with its claim for damages.

The central issue before the Court was whether the arbitrator was correct in concluding that Lafarge did not acquire “tort immunity” by virtue if its agreement to insure the barges. To determine this issue, the Court considered whether it was the intention of the parties, objectively determined, that the owner of the barges would have no recourse to the charterer for the cost of repairs of damages to the barges, but instead would be limited to recovery from the insurer.

Pursuant to the charter party agreements, the charterer was required to procure at its sole expense, and maintain during the term of the charter party insurance over the hull and machinery as well as protection and indemnity insurance. The charter party agreement provided that all insurance shall name the owner as an additional insured.

When a claim was made by JJM with respect to damages to the barges, the insurer of Lafarge took the position that it would pay only minimal amounts, insufficient in JJM’s view, to repair the barges.

The arbitrator held that the cases in the Supreme Court of Canada trilogy dealt with subrogated claims by landlords’ insurers to recover monies paid by way of indemnity to landlords following fire damage which was caused by the tenants’ negligence. These cases involved landlords covenanting to insure the property and to obtain insurance and in such circumstances the tenants were immunized against claims by the landlords for losses that were or should have been as contemplated by the landlords’ covenants. In that circumstance, the tenants intended to shelter under the umbrella of the landlords’ insurance coverage and had paid consideration therefore. The arbitrator decided that Lafarge and JJM did not contemplate or agree under the charter agreement that Lafarge would shelter itself under JJM’s insurance.

On appeal to the Court, Lafarge argued that the only reasonable interpretation of Lafarge’s covenants to repair is that JJM would effect repairs and then seek reimbursement from Lafarge, and that since the contract must be read as a whole, such reimbursement is satisfied by Lafarge having arranged and paid for insurance. In other words, in Lafarge’s view, the covenant regarding insurance qualifies the obligation to repair.

On appeal, JJM submitted that the purpose of the provision requiring Lafarge to obtain insurance coverage was not to modify the repair covenants; rather, its purpose was to ensure that JJM could recover for damage to the barges even if Lafarge got into financial difficulty.

The Court held that the relevant facts in the Supreme Court of Canada trilogy on which Lafarge relied were distinguishable from the facts in this case. The Court held that the first distinction relates to the identity of the parties seeking to shelter under the covenant. In the trilogy and in other cases upon which JJM relies, Party A covenanted to insure, or in fact insured, with Party B paying the insurance premiums, and Party B sought exoneration from responsibility for damage covered by the insurance. None of these cases involves the situation here, where the very party that covenanted to insure seeks to shelter behind the existence of the insurance in denying responsibility for damage caused by its own acts. The Court held that Lafarge, not JJM is the party that covenanted to insure and that chose both the insurance and the insurer; JJM, not Lafarge, is the beneficiary of that covenant.

The appeal from the arbitrator’s decision and award was dismissed.

This case was digested by Katherine E. Linton and edited by David W. Pilley of Harper Grey LLP. If you would like to discuss this case further, please feel free to contact them directly at klinton@harpergrey.com or dpilley@harpergrey.com or review their biographies at http://www.harpergrey.com.

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