Provincial Workers' Compensation Scheme Bars Federal Statutory Cause of Action

Two brothers, Joseph and David Ryan, were Newfoundlanders who, like many others in that province earned their living by fishing the North Atlantic.  On September 19, 2004, the Ryan brothers died when their ship, The Ryan's Commander capsized while returning from a fishing trip off the coast of Newfoundland.  Joseph and David's widows and children (the "Ryan Estates") applied for and received compensation under Newfoundland and Labrador's  Workplace Health, Safety and Compensation Act ("WHSCA").

 

Then, proceeding under the federal Maritime Liability Act ("MLA") the Ryan Estates commenced an action against the builders of The Ryan's Commander, Universal Marine Limited, Marine Services International Limited ("Marine Services") and an employee of Marine Services, alleging negligence in the design and construction of the boat.  The Ryan Estates also sued the Attorney General of Canada alleging negligence in the inspection of the boat by Transport Canada. 

 

Marine Services and its employee applied to the Workplace Health, Safety and Compensation Commission ("Commission") of Newfoundland and Labrador for a determination of whether the action was prohibited by virtue of section 44 of the WHSCA.  That section provides: "the right to compensation under the Act is instead of the rights of action, statutory or otherwise, to which a worker or his dependents are entitled against an employer because of a injury in which compensation is payable or which arises in the course of the worker's employment".   The Commission held that the action was statute barred by section 44.  

 

The Ryan Estates applied to the Newfoundland and Labrador's Supreme Court to judicially review the Commission's findings.  On review, the court overturned the decision of the Commission holding that the doctrines of "interjurisdictional immunity" and "federal paramountcy" applied and therefore the action should be allowed to proceed.  The majority of the Newfoundland and Labrador Court of Appeal upheld the trial court's decision.  

 

Marine Services further appealed to the Supreme Court of Canada.  The SCC allowed the appeal and held that section 44 of the WHSCA was constitutionally applicable and operative and therefore the action started by the Ryan Estates was statute barred.  The Supreme Court held that the statutory bar of section 44 applied on the facts of this case.  The WHSCA did not only benefit an "employer" in a direct employment relationship with an injured worker.  Any employer that contributed to the compensation scheme and any worker of such an employer benefited from the statutory bar as long as the worker was injured in the course of his employment and the injury occurred in the conduct of operations usual in or incidental to the industry carried on by the employer. 

 

In this case, the Commission found that the injury that led to the death of the Ryan brothers occurred "in the conduct of the operations usual in or incidental to" the industry carried on by Marine Services.  Such a finding was entitled to deference.  It was a question of mixed fact and law that the Commission answered by assessing the evidence and interpreting its home statute.  Moreover, the WHSCA contains a privative clause. In light of these factors, the standard of reasonableness applied.  

 

In respect of the constitutional issues involving the division of powers between the federal government and the province of Newfoundland and Labrador raised by the Courts of Newfoundland, the Supreme Court held a two prong test must be met to trigger the application of interjurisdictional immunity.  The first step is to determine whether the impugned legislation trenches on the core head of power listed in sections 91 or 92 of the Constitution Act, 1867.  Then, if the impugned legislation trenches on the core head of such a power, the second step is to determine whether the encroachment is sufficiently serious. 

 

The Supreme Court held that interjurisdictional immunity did not apply in this case.  The first prong of the test was met but not the second.  A provincial statute of general application such as the WHSCA, cannot have the effect of indirectly regulating an issue of maritime negligence law which is at the core of the federal power over navigation and shipping.  

 

Section 6(2) of the MLA provided that:  if a person dies by the fault or neglect of another under circumstances that would have entitled the person, if not deceased, to recover damages, the dependents of the deceased person may maintain an action in a court of competent jurisdiction for their loss resulting from the death against the person from whom the deceased person would have been entitled to recover. 

 

Section 44 of the WHSCA alters the range of claimants who may make use of the statutory maritime negligence action provided by section 6(2) of the MLA and therefore trenches on the core of the federal power over navigation and shipping.  However, section 44 of the WHSCA does not impair the exercise of the federal power over navigation and shipping.  The intrusion of section 44 is not significant or serious when one considers the breadth of the federal power over navigation and shipping, the absence of impact on the uniformity of Canadian Maritime law, and the historical application of worker's compensation schemes in the Maritime context.

 

Secondly, the Supreme Court held that the doctrine of federal paramountcy did not apply in this case under a proper interpretation of the MLA.  Accordingly to this doctrine, when the operational effects of provincial legislation are incompatible with the federal legislation, the federal legislation must prevail and the provincial legislation is rendered inoperative to the extent of the incompatibility.  Federal paramountcy applies where there is an inconsistency between a valid federal legislative enactment (section 6(2) of the MLA) and a valid provincial legislative enactment (section 44 of the WHSCA) but not between a common law rule and a valid provincial law.  The inconsistency can arise from two different forms of conflict - the operational conflict, when compliance with one statute means a violation of the other statute, and the frustration of the federal purpose.  The standard for invalidating provincial legislation on the basis of frustration of federal purpose is high.  

 

The Supreme Court held that section 6(2) of the MLA which provides a cause of action to the Ryan Estates makes room for the operation of provincial workers compensation schemes.  The WHSCA and the MLA can operate side by side without conflict.  The language of section 6(2) of the MLA which provides that a dependent may bring a claim "under circumstances that would have entitled the person, if not deceased, to recover damages", suggests that there are situations where a dependent is not allowed to bring an action pursuant to that section.  Such a situation occurs where a statutory provision such as section 44 of the WHSCA prohibits litigation because compensation has already been awarded under a workers' compensation scheme.  The statutory bar in section 44 of the WHSCA removes compensation for workplace injury from the tort system, of which the MLA is a part.

 

The WHSCA which establishes a no-fault regime to compensate for workplace related injury does not frustrate the purpose of section 6(2) of the MLA which was enacted to expand the range of claimants who could start an action in Maritime negligence law.  The WHSCA simply provides for a different regime for compensation that is distinct and separate from tort. 

 

Regards,

 

Blair

Standard Form Bank Guarantees May Trump Common Law Protections

Cheryl Cusack and Jason Brasseur are married.  In 2005, Ms. Cusack signed a "continuing" guarantee for the indebtedness of Mr. Brasseur's company to the Royal Bank of Canada ("RBC") for $150,000.  The guarantee covered present and future liabilities of the company and were not tied to any specific loan between RBC and the company.  Ms. Cusack received independent legal advice before signing the guarantee. 

 

RBC also held a first ranking security interest in the company's assets and a personal guarantee from Mr. Brasseur.

 

In 2006, RBC agreed to increase the company's operating line of credit to $250,000.  Ms. Cusack and Mr. Brasseur each gave fresh personal guarantees for $250,000 to RBC that covered the company's present and future liabilities.

These guarantees were also continuing guarantees and were not tied to any specific loan between RBC and the company. 

 

Ms. Cusack acknowledged that she received independent legal advice before signing the fresh guarantee. 

 

In 2008, the amount of the loan covered by the loan agreement between RBC and the company was increased to $500,000.  RBC did not request a new guarantee from Ms. Cusack but did obtain a new personal guarantee from Mr. Brasseur in the amount of $500,000.  The 2008 loan agreement stated that the new loan agreement "supersedes and cancels" the 2006 agreement.  It also stated that among the security for the loan and all other obligations of the company to the bank was Ms. Cusack's 2006 guarantee in the amount of $250,000. 

 

In 2009 the loan agreement between RBC and the company was again increased to $750,000.  Mr. Brasseur signed a new personal guarantee for that amount.  RBC did not request a new guarantee from Ms. Cusack and left in place her 2006 guarantee for $250,000.  

 

RBC did not have any contact with Ms. Cusack at any time.  She never saw any of the loan agreements between RBC and the company.  RBC provided the guarantee forms to Mr. Brasseur who gave them to Ms. Cusack, along with the form for independent legal advice.

 

The company's business failed in 2011.  RBC made demands on Mr. Brasseur and Ms. Cusack under their guarantees.  His 2009 guarantee and her 2006 guarantee.  

 

The Ontario Court of Appeal (Justices MacPherson, Cronk and Lauwers) held that the single issue in the case was whether Ms. Cusack had contracted out of the of protection provided to a guarantor by common law and equity.  

 

The court held that it has long been the law that a guarantor will be released from liability on a guarantee in circumstances where the creditor and the principal debtor agree to a material alteration of the terms of the loan agreement without the consent of the guarantor.  The issue as to whether a guarantor remains liable will be determined by the interpretation of the contract between the parties and determining the intention of the parties as demonstrated by the wording of the contract and the events and circumstances surrounding the transaction as a whole.

 

It was common ground that RBC and the company made loan arrangements over time which increased the risk to which Ms. Cusack was exposed by her guarantee even though her financial exposure was capped at $250,000.  At common law, these alterations in the loan arrangements would have resulted in Ms. Cusack's discharge from liability on the guarantee in the absence either of her consent or clear language in the guarantee permitting RBC and the company to make the alternations without her consent. 

 

The Court of Appeal however found that the standard form bank guarantee contained such clear language and that the bank did not need to and had no duty to inform the guarantor about future credit facilities and that the guarantor had the onus of inquiring about the state of the accounts between the bank and the principal debtor. 

 

The Court of Appeal held that the language of the guarantee was very broad and was plainly designed to ensure that a guarantor does not contract out of the ordinary protections of the common law.  It held that the first paragraph on the first page of the guarantee was critical.  Such paragraph provided that Ms. Cusack would pay on demand to RBC "all debts and liabilities, present or future, direct or indirect, absolute or contingent, mature or not, at any time owing by" the company to RBC.  The clause made it clear that RBC could increase the amount of its loan to the company and Ms. Cusack would remain liable under the guarantee. 

 

The guarantee was what is known as a "continuing" or "all accounts" guarantee.  The difference between a specific guarantee and a continuing or all accounts guarantee is that the second form of guarantee is for the debts of the company already incurred or which would be incurred subsequently.  In addition, such a guarantee provides that all monies borrowed from the bank shall be deemed to form part of the liabilities despite circumstances that include irregularities, defects or informality in the borrowing.  

 

With respect to whether there was a "material alternation" in the terms of the guarantee that would relieve Ms. Cusack from liability, the Court of Appeal held that analytically, a court was required to consider two distinct steps in this regard.  The first step was to consider whether the challenged alternation to the underlying loan arrangement was material as a matter of law.  The second step was to consider whether the language of the guarantee permitted the material alteration.

 

In this case, the court held that while the subsequent advances by RBC to the company were material alterations to the principal loan contract, they were contemplated by the parties, permitted by the clear language of the guarantee and inherent in a continuing all accounts guarantee that contemplated increases in the size of the underlying indebtedness.

 

Regards,

 

Blair