Question:

1)Explain the issue:

The issues for determination are which of the parties to this action is responsible for the infestation of rusty grain beetles in a shipment of peas loaded onto a ship at Vancouver; which party is responsible for the damage arising from the infestation; and, a determination of the amount of damages.

CASE STUDY:

JUDICIAL CENTRE OFREGINA

BETWEEN:

PREMIUM GRAIN & SEED LTD.

PLAINTIFF

(DEFENDANT BY COUNTERCLAIM)

- and -

FINORA CANADA LTD.

DEFENDANT

(PLAINTIFF BY COUNTER-CLAIM)

- and -

CANADIAN NATIONAL RAILWAY COMPANY

THIRD PARTY

Patrick A. Kelly, Q.C.for the plaintiff

Philip J. Galletfor the defendant

Donald N. Krukfor the third party

JUDGMENTDAWSON J.

June 2, 1999

[1]The issues for determination are which of the parties to this action is responsible for the infestation of rusty grain beetles in a shipment of peas loaded onto a ship at Vancouver; which party is responsible for the damage arising from the infestation; and, a determination of the amount of damages.

BACKGROUND FACTS

[2]The plaintiff, Premium Grain & Seed Ltd. ("Premium") is a company in Melfort, Saskatchewan that purchases peas from local growers and sells them to third parties. The defendant, Finora Canada Ltd. ("Finora") is a company which purchases, transports and exports peas.

[3]On January 23, 1995, Premium and Finora entered into Purchase Contract No. P-134053 (the "first contract") wherein Premium agreed to sell to Finora 500 metric tonnes of Canada grade No. 2 bulk large yellow peas.

[4]On April 13, 1995 Premium and Finora entered into another Purchase Contract No. P-134057 (the "second contract") wherein Premium agreed to sell to Finora 750 metric tonnes of Canada grade No. 2 bulk large yellow peas.

[5]All contracts made between Premium and Finora prior to April13, 1995, including the first contract, were made subject to the Trade and Arbitration Rules for the Canadian Special Crops Association ("CSCA trade rules"). The CSCA trade rules require a purchaser to make payment to a seller within fourteen days of receipt of shipping documentation or the purchaser is liable to pay interest on the amount outstanding at the rate of the seller's bank prime rate plus two percent. The CSCA trade rules prohibit the purchaser from withholding payment to set-off claims. The second purchase contract entered into between Premium and Finora did not contain a provision which confirmed that the second contract was subject to CSCA trade rules.

[6]On May 17, 1995 Finora provided shipping instructions to Premium for the first contract. Finora paid the cost of shipping the peas to Vancouver.However, under the terms of the first contract Premium was responsible for and made all of the arrangements with respect to ordering the rail car, arranging the loading, inspecting the rail car and releasing the loaded rail car into the care of the shipper. Premium arranged for the delivery of the peas utilizing the services of the third party, Canadian National Railway ("CNR").

[7]On June 2, 1995 Premium transported the peas by truck from its storage facility to its CNR railroad siding, which is approximately 1.5 miles from its storage facility. Premium's employees loaded 89.705 tonnes of peas into CNR rail car No.385522, (the "CNR rail car"), being a portion of the peas purchased by Finora pursuant to the first contract on that same day. Two other rail cars were also loaded with Premium's peas pursuant to the first contract.

[8]The CNR rail car is a metal three hopper grain car with centre beam construction. It was Premium's standard procedure to clean all rail cars prior to loading peas into the car. Premium's established procedure for cleaning is as follows: Premium's employee would open the top and bottom hatches of the rail car. The employee would stand in the bottom hatch and would use shovels and brooms to remove any product or ice in the car.The product would be removed out the bottom hatch. If there is product on the top of the rail car near hatches it is also removed. Any material collected from the rail car is removed from the railway siding site by Premium. Once cleaned, a rail car is then loaded with the peas. It normally takes three hours to load this type of hopper car.

[9]On June 2, 1995, as the peas were being loaded onto the CNR rail car, Premium took representative samples from the peas. It took three one kilogram bag samples.

[10]On June 2, 1995 the temperature in Melfort, Saskatchewan at 10:00 a.m. was 23.3Celsius. The temperature rose to 28.4Celsius at 4.00 p.m. and dropped to 18.7Celsius at 7.00 p.m. The wind velocity during those hours ranged from 13 kilometres per hour to 20 kilometres per hour. The wind between 9.00 a.m. and 11.00 a.m. was coming from the east. Between noon and 7:00 p.m. the wind was coming from the south, except at 5.00 p.m., when it was coming from the north.

[11]Approximately 150 yards to the east of Premium's railway siding in Melfort is a cereal grain elevator owned and operated by Saskatchewan Wheat Pool.

[12]After the peas were loaded, the CNR rail car was sealed by Premium. The rail car was not unsealed until arrival at the Pioneer Grain Terminal in Vancouver. Pursuant to the CNR Straight Bill of Lading dated June 2, 1995, the car load of peas was to be shipped via CNR to Finora c/o Pioneer Grain Terminal, c/o M.V. Sanko Royale, North Vancouver, British Columbia.

[13]On or about June 18, 1995 the CNR rail car was received at Pioneer Grain Terminal in Vancouver. The peas were directly loaded onto the ship, M.V. Sanko Royale. To load the ship, thebottoms of the CNR rail car were opened and the peas free-flowed from the bottom of the hoppers into the receiving pit of the ship. While the peas free-flowed from the hopper and prior to the peas entering the receiving pit on the ship, representative samples of the peas were drawn and sealed for testing by the Canadian Grain Commission. The other two rail cars containing Premium's peas for the M.V. Sanko Royale were not subject to similar random testing.

[14]Finora paid Premium on the first contract prior to the peas being loaded onto the M.V. Sanko Royale.

[15]On June 20, 1995 the Canadian Grain Commission informed Finora that the analysis of the sample of peas from the CNR rail car determined the presence of a live infestation of the rusty grain beetle. The rusty grain beetle is a beetle which normally attacks stored cereal grains.

[16]As a consequence of the infestation, the M.V. Sanko Royale had to be fumigated before it could leave port. The fumigation costs paid by Finora totalled $95,058.25, consisting of $43,265.00 for cargo fumigation costs; $8,017.25 for ship's shore expenses for delay; and, $43,776.00 representing additional shipping costs, demurrage and loss of dispatch.

[17]Finora deducted $95,058.25 from the amount owing to Premium under the second contract, as it had already paid Premium the funds in relation to the first contract.

[18]Premium claimed against Finora for the $95,058.25 which Finora withheld on the second contract. Premium alleged the $95,058.25 was wrongfully withheld as the CSCA trade rules applied to the second contract, and such trade rules prohibited Finora from withholding payment to offset the claim. Premium also claimed interest on the $95,058.25 at the rate of prime plus two percent.

[19]Finora defended the claim stating that it was entitled to set-off the cost of fumigation against the purchase price on the second contract. Finora also counter-claimed against Premium for $95,058.25 for breach of contract, misrepresentation and breach of warranty, based on delivery of bug infested peas under the first contract.Finora denied that the CSCA trade rules applied to the second contract.

[20]Premium then claimed against CNR as a third party, for any sum which Finora may recover against Premium. Premium claimed the peas became infested while in CNR's hands in its capacity as carrier. CNR defended the third party claim alleging that the peas were infested prior to delivery to CNR.

LIABILITY

[21]The first issue for determination is which party to this action, Premium (the seller and shipper), Finora (the buyer) or CNR (the carrier) is legally responsible for the damage arising from the infestation.

[22]Premium suggests that the infestation was caused by CNR. It suggests that the CNR rail car was infested with the rusty grain beetle which infested the peas.CNR denies that the rail car was infested with the beetle. CNR asserts that the peas were infested when the rusty grain beetles flew into the rail car during the process of loading the peas onto the rail car, while the peas were still Premium's responsibility. Both Premium and CNR concede that Finora did not cause the infestation.

[23]The first contract between Premium (as seller and shipper) and Finora (as buyer) provided that the peas would be delivered "F.O.B. Melfort."That is, the peas remained at the risk of Premium until such time as the CNR rail car was sealed. When Premium sealed the rail car, the rail car was released to CNR and, the property in the peas passed to Finora, together with the risk, pursuant to the terms of the contract and the Bill of Lading. (Bitumar Inc. v. Canada(1990),45 F.T.R. 24 (T.D.). Until the release of the rail car into the custody of CNR, the peas remained the responsibility of Premium. If the peas were infested prior to the rail car being released to Finora, then the issue of liability is between Premium and CNR (as carrier) and Finora would not be legally liable for the damage. If the infestation occurred after the rail car was released to Finora, then the issue of liability is between Finora and CNR.

[24]CNR is a common carrier. At common law, a common carrier's liability is that of an insurer of goods. As stated inRolland Paper Company Limited. v. Canadian National Railway Company and National Cartage & Storage Limited(1957),1957 CanLII 277 (MB QB),22 W.W.R. 673at 678 (Man. Q.B.), a common carrier is responsible:

...for the safety of goods entrusted to it, so long, at any rate, as they remain in its hands in its capacity as carrier. About its only exemption from the consequences of having received property into its care is when loss or damageis the result of an act of God, or of the enemies of the Sovereign, orflows from an inherent vice or natural deterioration of the thing being carried.... [Emphasis added].

[25]A common carrier's liability may be limited by contract, subject to any statutory restrictions. The terms of the contract of carriage between CNR and Premium are found in the Bill of Lading, dated June 2, 1995 which reads in part:

Received...goods described below, in apparent good order....It is mutually agreed ... that every service to be performed hereunder shall be subject to all the terms and conditionsapproved by the Canadian Transport Commissionby General Order No. T-5dated February 1, 1965 ...which are agreed to by the shipper and accepted for himself and his assigns. [Emphasis added].

Section 3 of Appendix "A" to General Order No. T-5 states in part:

The carrier shall not be liable for loss, damage, or delay to any of the goods herein described, caused bythe act of God the Queen's or public enemies, riots, strikes, defect, orinherent vice in the goods, or the act or default of the shipper or owner....[Emphasis added].

Here, the Bill of Lading and General Order No. T-5 really mirror the law as set out inRollandPaper, supra. CNR is liable for damage if the damage occurred to the peas while in CNR's possession, unless there was an inherent vice in the peas or unless the damage was caused by an act or the default of Premium.

[26]When loss or damage occurs to goods, a shipper must prove that the loss or damage took place in the carrier's hands. This is usually done by proving the condition of the goods when received by the carrier and the condition at discharge. If the shipper proves that the goods were in good condition when the goods were received by the carrier, and faulty at the time of discharge, the onus shifts to the carrier to prove that the goods were not in good condition and/or that the damage was not caused by their negligence.

[27]Premium suggests that the peas wereprima faciein good condition when they were received by CNR, and relies on the Bill of Lading which states that the goods were received in "apparent good order". InProduits Alimentaires Grandma Ltee. v. Zim Israel Navigation Co. et al.(1987),8 F.T.R. 191 (T.D.)at para.27, Dub J. of the Federal Court Trial Division stated that a clean bill of lading, that is a bill of lading which states that the cargo was "received in apparent good order and condition" is, at common law,prima facieevidence of good order of the cargo at the time of receipt by the carrier. On appeal however (reported at(1988),86 N.R. 39atpara.3), the Federal Court of Appeal said:

The appellant's principal attack on the trial judgment concentrates on the view which Dub, J., had of the effect of a clean bill of lading on the burden of proof.We are inclined to thinkthat this attack is well founded andthat Dub J., may have given too much weight to the clause in the bill of lading that the goods were in "apparent good order and condition" (emphasis added); where damage is caused by an unapparent condition, such as moisture, a clean bill in those terms may not be enough to support the shipper's claim.[Emphasis added]

In effect, the words "in apparent good order" mean nothing more than that there was nothing specially noticeable about the goods which would require to be marked on the receipt. In cases where the defect is not observable, a plaintiff must do more than simply rely on a clean bill of lading. Premium must do more than rely on the bill of lading to prove the peas were in good condition. As stated inBalfour, Guthrie & Co. v. C.P.R.[1917] 3 W.W.R. 410 (B.C.S.C.)(a case involving a question of the liability of a shipowner in delivering a cargo of grain in damaged condition) at p. 414:

... It thus appears that negligence should not be presumed simply from an apparent deterioration in the condition of the grain between the time of loading and discharge.Has the plaintiff supplied the requiredprima facieevidenceas to the cargo being in good condition at time of shipmentso as to shift the onus to the defendant, and require that it should, to relieve itself from liability, prove that the grain was unfit for shipment and that no negligence existed on its part ....? [Emphasis added].

[28]Here Premium has producedprima facieevidence which indicates that the peas were in good condition at the time of shipment. Arthur Cay, the President of Premium testified that Premium had no acquaintance with the rusty grain beetle either prior to or since this shipment of peas. The rusty gain beetle is a beetle which normally hosts in stored cereal grain. Premium deals only in peas and none of its equipment is used to store or move cereal grains or any crop other than peas.

[29]Further, Cay testified that Premium takes random samples of peas from the farmers when the farmer brings his/her peas into Premium's cleaning and storage site. Premium retains these samples. In this case Premium was able to identify some of the farmers whose peas went into the shipment that was loaded onto the CNR rail car. Premium arranged for six of these samples to be tested by both the Canadian Grain Commission and Agriculture Canada, Food and Inspection Branch. These samples were free of any bugs of any kind.

[30]Premium also took samples from three bins storing cleaned peas at their storage site, after being advised of the infestation. Premium arranged for both the Canadian Grain Commission and Agriculture Canada to test the stored clean peas. They too were free of any insect or mites.

[31]During the process of cleaning peas, two by-products of peas are produced: split peas and refuse screenings (straw, pods and dust). After the infestation was discovered, Premium arranged for samples of split peas on site at its storage facility to be tested by both the Canadian Grain Commission, and Agriculture Canada. The split peas were free from any bugs or mites. After the infestation, samples of refuse screenings from Premium's storage site were also tested by both the Canadian Grain Commission and Agriculture Canada and found to be negative for any stored grain pests.

[32]Most importantly, Premium took representative samples of the peas sold to Finora as they were being loaded into the CNR rail car. The peas were shipped from Premium's storage site to the railway siding site by Premium's truck. The process of loading the CNR rail car involved dumping clean peas from the truck onto a tubed conveyor belt and then loading the peas into the CNR rail car from the conveyor belt. As the peas went through the conveyor auger into the CNR rail car, representative samples of the peas were taken. Three one kilogram samples were taken. I am satisfied that the process of sampling was representative of the peas loaded into the CNR rail car. Premium submitted these samples to both the Canadian Grain Commission and Agriculture Canada. Both agencies confirmed that the samples from the peas sold to Finora which were loaded into the CNR rail car did not contain any rusty grain beetles.

[33]Accordingly, I am satisfied that the peas loaded into the CNR rail car were free of any infestation as they were being loaded into the CNR rail car. There was no inherent vice in the goods. The peas were in good condition at the time of shipment.

[34]This shifts the onus to CNR to prove that the peas were unfit for shipment and/or that the damage was not caused by any negligence on their part.

[35]CNR denies that its rail car was infested with the beetle at the time of loading.Rather it asserts that the peas became infested when rusty grain beetles flew from the cereal grain elevator within proximity of Premium's rail siding, into the open hatches of the rail car, during the process of loading the peas into the rail car.

[36]CNR called Dr. Samuel Loschiavo, an entomologist, to support its theory. Dr. Loschiavo was qualified as an expert, able to express an opinion as to the infestation of the rusty grain beetle. Dr. Loschiavo testified as to the life habits and life cycle of the rusty grain beetle. He testified that the rusty grain beetle attacks farm stored grain and/or elevator stored moist grain. The adult feeds on damaged grain, as does the larvae. An adult beetle can feed on wheat dust, wheat residue and wheat with high humidity and temperature. Rusty grain beetles will not develop in grain with less than 12 percent moisture or with relative humidity less than 40 percent. Neither peas nor canola are normally a host of the rusty grain beetle. The beetles do not normally feed on such products unless moisture is present. Dr. Loschiavo did not know the relative humidity or moisture content of peas.

[37]Dr. Loschiavo also testified that the rusty grain beetle can fly at temperatures of 23Celsius or higher. The beetle can also be carried by wind.

[38]It was Dr. Loschiavo's opinion that there was a high probability that the beetles flew from the Saskatchewan Wheat Pool elevator, which is approximately 150 yards from Premium's railway siding, into the open hatches of the CNR rail car, during the process of loading the rail car. Dr. Loschiavo was also of the opinion that the beetles flying into the open hatches of the rail car was the more likely source of the infestation than was Premium's suggestion that the beetle was present in the rail car.

[39]Dr. Loschiavo came to this opinion because in Melfort on June 2, 1995, the temperature was above 23Celsuis and there was a wind, both which were conducive to the beetle flying or having been carried into the rail car. He was also influenced by the design of the CNR rail car. The sides of the hopper car are smooth and he said there is only a small likelihood that there would be any residue of grain in the cracks or crevices. Also, Dr. Loschiavo testified that he had been informed that canola was transported in the rail car immediately previous to the peas and, as canola is not normally a host of the beetle, it was his opinion that it was unlikely that the rail car was infested at the time of loading. Dr. Loschiavo also based his opinion on the assumption that none of the loads carried in the rail car prior to the peas were infested with the rusty grain beetle.

[40]While Dr. Loschiavo's opinion as to the probable cause of the infestation is plausible, it is based on a series of assumptions which were not proven in evidence. CNR was unable to substantiate that the rail car was free from the rusty grain beetle on June 2, 1995 prior to loading the peas. This was one of Dr. Loschiavo's underlying assumptions. While CNR adduced evidence that the rail car had no complaints of infestations either prior to or after June 2, 1995 this evidence was not evidence that the rail car was free from infestation.

[41]Firstly, CNR does not clean its rail cars regularly. CNR visually inspects rail cars after they are unloaded. If there is no apparent problem with the car, the rail car is loaded again without cleaning. If there is a problem, the car is sent to Edmonton for hopper washing. A record of the inspection is kept only if there is a problem with the inspection. A visual inspection of the rail car would not necessarily detect an infestation of the rusty grain beetle. Secondly, CNR only keeps records of infestations of rail cars if an infestation was reported. That is, CNR keeps records of infestations, but only if there was a complaint of infestation and testing was undertaken. If the rail car was not tested for infestation, there would be no complaint of infestation and no infestation record. CNR did not test the rail car for infestation in the two loads carried in this rail car, after the beetle infestation, despite the fact that CNR knew the car was infested on June18, 1995. The lack of an infestation record or an inspection record does not confirm the absence of the rusty grain beetle within the CNR rail car.

[42]Further still, this rail car carried cereal grain many times prior to June 2, 1995. The rail car made seven trips, carrying seven different loads between February10, 1995 and June 2, 1995. Five of the loads carried cereal grain, one load carried feed wheat and one load carried canola. The load of canola was carried immediately previous to the peas. As stated by Dr. Loschiavo, an adult beetle can feed on wheat dust, wheat residue and wheat with high humidity and temperature. If there was wheat dust, wheat residue or wheat in the rail car, the beetle could have survived, even though canola was the most recent shipment carried in the rail car. CNR affirmed that the rail car was not cleaned between April 27, 1995 and June 2, 1995. While the CNR rail car is a smooth sided hopper car, it does contain cracks and crevices where moist wheat residue or dust could congregate.

[43]In summary, CNR adduced evidence that the rail car carried numerous loads of cereal grain between February, 1995 and June 2, 1995. Cereal grains are a host of the beetle. The rail car was not cleaned, between April 27, 1995 and June 2, 1995 and perhaps not before that. The rail car was not tested for infestation between February, 1995 until at least two loads after the June infestation. This evidence does not establish that the rail car was free from the rusty grain beetle on June2, 1995.

[44]Further, while Dr. Loschiavo has suggested that the rusty grain beetle flew from the neighbouring cereal grain elevator into the rail car during loading, there was no evidence adduced to suggest that the elevator was a host of the rusty grain beetle.No evidence was adduced to prove that the elevator ever had any acquaintance with the beetle. There was no evidence produced to indicate that the beetle was or even may have been in the area of the rail car on June 2, 1995.

[45]Premium has proven that the peas were in good condition at the time of shipment.The onus is on CNR, as the carrier, to prove on a balance of probabilities, that the peas were infested during the process of loading and/or that the infestation was not caused by any negligence on its part. The evidence adduced is insufficient and does not satisfy me that the infestation was caused by the beetle flying into the rail car and that the rail car was free from the beetle. CNR has failed to discharge this onus.

[46]CNR further suggests that even if the source of the infestation was its rail car, Premium, not CNR is responsible for the infestation, because it is Premium's responsibility and obligation to clean and inspect the rail car prior to loading the peas, under the terms of Premium's contract with Finora. Specifically, the shipping instructions provided by Finora to Premium on May 17, 1995, provided in part:

ALL TRUCKS/CONTAINERS/RAIL CARS MUST BE INSPECTED FOR CLEANLINESS AND MUST BE IN SOUND CONDITION....

CNR suggests that even if the rail car was infested, Premium failed to meet its obligation to clean the rail car and is therefore liable.

[47]Premium produced evidence which indicated that it is their standard procedure to clean the rail car prior to loading. However, Premium did not adduce evidence from the employee who allegedly cleaned the rail car in question. CNR suggested that the court should draw an adverse inference against Premium because it failed to call the employee that actually cleaned the rail car. That is, the court should infer that the car was not cleaned by Premium and therefore, if the peas became infested by being commingled with an infestation present in the rail car, it remains Premium's responsibility.

[48]Cleaning as was routinely carried out by Premium would remove product or ice contained in the rail car from previous shipments. However, such cleaning would not guarantee the removal of an infestation of the grain beetle. The CNR hopper car contains crevices where moist cereal grain residue or dust could congregate. According to Dr.Loschiavo, the beetle could survive on such dust or residue, if moist. Routine cleaning as was undertaken by Premium would knock out residual product but would not be guaranteed or even intended to eliminate an infestation. Only fumigation would remove such an infestation. I am satisfied that Premium cleaned the rail car in question. But whether Premium actually cleaned the car or not, is not determinative, because such routine cleaning would not eliminate the presence of the beetle.

[49]Premium has proven, on a balance of probabilities, that the peas were in good condition when they were loaded onto the rail car. CNR has failed to prove that the peas were infested prior to loading and/or that no negligence existed on its part. CNR has not satisfied me, on a balance of probabilities that the CNR rail car was not infested at the time of loading. I find that CNR caused the infestation of the peas.

[50]Having found that the infestation of the peas was caused by the rusty grain beetle being present in the rail car, it cannot be said that the peas became infested only after the rail car was released to CNR, that is once property in the peas passed to Finora. The peas became infested during the process of loading, by being mixed with an infestation in the rail car. The peas had not yet been delivered to Finora, according to the Bill of Lading andTheSale of Goods Act(Bitumar Inc. v. Canada, supra). As property in the peas did not pass to Finora at the time the infestation occurred,Finora is not liable for the damage.

[51]As between Premium and CNR, CNR as the common carrier, is liable for the damage.

DAMAGES

[52]Premium claimed damages against Finora in the amount of $95,058.25 plus interest at prime plus two percent. Premium alleges that Finora wrongfully set-off the costs paid by Finora for fumigation against the second contract, in contravention of the contract terms. Premium alleges that the second contract was subject to the CSCA trade rules, which prohibit such set-off.

[53]Finora defends Premium's claim and counterclaim for the amount it paid for the fumigation costs. Finora alleges that the CSCA trade rules do not apply to the second contract. It says it was entitled to set-off the costs of fumigation against the proceeds of the second contract.

[54]All contracts made between Premium and Finora prior to the second contract, including the first contract, contained a provision that the contract was subject to the CSCA trade rules. Finora and Premium had entered into 20 contracts prior to April 13, 1995. The CSCA trade rules state the following:

Partiesentering into a contractforpurchase or sale of Canadianspecial crops,may by mutual agreement,agree that such purchaseand salebe governed by these TRADE AND ARBITRATION RULES.These rules may be referred to in short as "C.S.C.A. TRADE AND ARBITRATION RULES" and this should be included in any written exchange in order that these rules will apply.

RULE 1

It shall be the responsibility of all parties to include in their original correspondence of trade a full description of the transaction as noted below.

PURCHASE OR SALE CONTRACT MUST INCLUDE THE FOLLOWING:

...

J)C.S.C.A. TRADE AND ARBITRATION RULES of which both parties admit full knowledge to apply.

...

RULE 11

...

G)It is not permissible to withhold payment to offset claims. In all cases, payment shall be made in full when due....[Emphasis added]

[55]The second purchase contract entered into on April 13, 1995 did not contain a provision that the contract was subject to CSCA trade rules.

[56]Premium seeks to admit parol evidence to interpret the second contract. The admission of parol evidence is limited to certain circumstances. As stated in G. H. L. Fridman,The Law of Contract, 2^nded. (Carswell: Toronto, 1986) at pp. 435-36:

... [W]hile it is not possible to admitparolor other extrinsicevidenceto alter the contract by adding to or subtracting from its terms as written, such evidencemaynonethelessbe introduced to explain, without contradicting, the language of the contract, for example, by showing the true nature of the transaction or legal relationship of the parties, or by adding a term where to do so is necessary to give effect to the obvious intention of the parties. This may occur when the parties have plainly omitted something which was intended to be,and must be a part of their agreement, that is, to complete the contract, to fill in gaps, such as the consideration which was left unstated .... [Emphasis added]

[57]Premium suggests that it was the obvious intention of Premium and Finora that the CSCA trade rules would apply to the second contract. Premium says that it was their general custom and practice that the CSCA trade rules apply to all Premium's contracts. It argues further, that there is an undisputed history of the contractual relationship between Premium and Finora that the CSCA trade rules apply to all contracts. Premium suggests that it should be implied that the CSCA trade rules are applicable as a term of the contract, having regard to the history of the relationship of the parties.

[58]Arthur Cay testified that it was Premium's policy and practice that every contract that Premium entered into was subject to the CSCA trade rules. Cay testified that he was dealing with an individual named Mr. Berg at Finora with respect to the second contract. Cay said he had never dealt with Berg on any previous contract. Cay did not discuss with Berg applying the CSCA trade rules to the second contract. When Cay received the second contract from Finora, he did not notice that the contract failed to indicate that it was subject to CSCA trade rules.

[59]While the parol evidence sought to be introduced establishes a history of a relationship between Finora and Premium, with respect to the purchase and sale of peas, it does not clearly confirm that it was the intention of the parties that the CSCA trade rules would be a term of the second contract. Each contract made between Finora and Premium contained its own terms respecting price, quantity, quality, packing and the applicability of the CSCA trade rules. Each contract was negotiated independently from the other contracts. While it was Premium's policy that all contracts it entered into would be subject to such trade rules, there was no evidence that Finora had a similar policy. There was no discussion between Premium's representative and Finora's representative as to whether the CSCA trade rules would apply to the second contract. The issue was not raised by Cay or Berg during the formation of the second contract. There was no agreement between the parties that the CSCA trade rules would apply. The written contract itself did not indicate that the CSCA trade rules would apply. When Cay received the contract, it did not reference the CSCA trade rules as applying. Cay did not raise it with Finora's representative. While there is evidence of the previous contracts of the parties, the CSCA trade rules themselves specifically state that any contract must include specific reference and agreement to the CSCA trade rules applying. The second contract did not contain such a clause.

[60]The evidence of the parties' dealings on the second contract does not convince me that it was the intention of Premium and Finora that the CSCA trade rules would apply to the second contract.I am not prepared to imply that the CSCA trade rules were a term of the second contract.

[61]Accordingly, Finora was entitled to set-off its proper damages incurred by reason of Premium's breach of the first contract against the purchase price of the second contract, and Premium's claim against Finora must fail.

[62]The final question for determination is what are the proper damages.The total costs paid by Finora were $95,058.25, consisting of $43,265.00 for cargo fumigation costs; $8,017.25 for ship's shore expenses for delay; and, $43,776.00 representing additional shipping costs, demurrage and loss of dispatch.

[63]Premium and CNR argue that the costs of fumigating the entire ship, of the ship's shore expenses for delay and additional shipping costs are too remote to be compensated. They suggest the damages claimed by Finora were not within the reasonable contemplation of the parties at the time the contract of carriage was entered into. Premium and CNR argue that such damages were caused by Finora's decision to load the peas directly onto the exporting ship. They suggest that had Finora held the peas in storage until the testing was complete, Finora would have avoided such unreasonable costs. They suggest Finora alone should bear the responsibility for those costs.

[64]The modern test of remoteness of damage in contract cases stems from the decision inHadley v. Baxendale(1854),9 Ex. 341,156 E.R. 145. As stated by RitchieJ. of the Supreme Court of Canada inBrown & Root Limited v. Chimo Shipping Limited,1967 CanLII 47 (SCC),[1967] S.C.R. 642at 648,in reference toHadley, supra,"... damages for breach of contract are limited to the ordinary consequence which would follow in the usual course of things from such breach or for the consequences of the breach which might reasonably be supposed to have been in contemplation of both parties at the time they made the contract...."

[65]This principle involves two aspects: an objective test, that is, what the reasonable man would or ought to have foreseen as being the likely or probable consequence of his breach and, a subjective test, that is, whether the damages, although not ordinarily foreseeable, were foreseeable in light of the parties particular contract and its special circumstances. The appropriate general test is one of "reasonable contemplation" by the parties at the time of the contract, whether or not the results are more serious than would have been reasonably contemplated (G. H. L. Fridman,The Law of Contract, 3^ded. (Carswell: Toronto, 1994) at 717).

[66]Where the objective doctrine is involved, before damage is properly treated as recoverable underHadley v. Baxendale, supra, it must have been the direct, physical result or consequence of the breach of contract that is in question. Direct damage is that which flows naturally from the breach without other intervening cause and independently of special circumstances, while indirect damages does not so flow.It must be shown that it was the infestation, and not some other intervening factor which caused the loss. Here the question is: Were the fumigation expenditures a foreseeable consequence of the breach and therefore recoverable?

[67]The foundation for the subjective test is the defendant's knowledge of some special circumstances which would lead him to realize, as a reasonable man seized of that knowledge, that the plaintiff might suffer some extra, extraordinary, or normally unforeseeable damage, beyond or different from the kind or extent of damage which would otherwise be within the reasonable contemplation of the parties.

[68]Premium and Finora had previously entered into twenty contracts like this. Premium was not inexperienced with the process. Premium, Finora and CNR knew that the peas were for export. They knew the peas were going to be loaded onto a ship for export, as the M.V. Sanko Royale was identified on the Bill of Lading. The parties were aware that the peas from one CNR rail car would be commingled with peas from other cars.

[69]All the parties were aware that the peas were subject to random testing by Agriculture Canada. All were aware of the consequences of an infestation, that is that fumigation would be necessary and, the costs associated therewith. The bill of lading in question did not suggest that the peas would be stored. The discussions between the parties did not suggest that the peas would be stored prior to shipping. Nor can it be said that any of the parties expected that any peas which became subject to random testing would be held separately from other peas.

[70]Further, Finora indicated that all peas exported for human consumption are directly loaded onto the exporting ship, because if peas are handled too often they split. All of the parties were familiar with the qualities of peas purchased for human consumption. It cannot be suggested that they did not contemplate the peas being directly loaded onto the exporting ship.

[71]In the circumstances, the costs of fumigation generally, are a direct consequence of the infestation (that is the breach). Further, all parties were possessed of the particular knowledge that the peas were subject to export. It cannot be said that Finora's decision to load the peas directly onto the ship was unreasonable. The costs of fumigation of the ship, the ships expenses for delay and additional shipping costs, including demurrage and loss of dispatch were within the reasonable contemplation of the parties in the particular circumstances. The damages are assessed at $95,058.25.

SUMMARY

[72]Premium's claim against Finora is dismissed with costs. Finora is successful in its claim against Premium and is entitled to set-off the $95,058.25 against the second contract, which it has already done. Finora shall have costs of its counterclaim against Premium.

[73]Premium shall have judgment against CNR in the amount of $95,058.25 plus pre-judgment interest. In addition, CNR shall pay to Premium its costs of the third party proceedings, as well as the costs by this judgment ordered to be paid by Premium to Finora, forthwith after taxation thereof or after agreement by the parties as to the amount thereof.