November 7, 2012
OTTAWA, Ontario—A decision by the Federal Court of Appeal has cleared the way for businesses that move cargo by rail to appeal penalties and ancillary charges, even when those charges are written into confidential contracts.
“It is quite a significant win for the shipper community,” says Bob Ballantyne, president of the Canadian Industrial Transportation Association (CITA).
The origins of the judgment stem from a dispute between Peace River Coal Inc and Canadian National Railway Company (CN), and evolved to include the Canadian Industrial Transportation Association, and a number of legal challenges.
Originally, Peace River Coal signed a confidential contract to have CN transport its coal. A clause subjected Peace River to a fuel surcharge tariff (Tariff 7402) that kicked in when the monthly average price of fuel equaled or exceeded a strike price of $1.25. Partway through the contract period, CN advised its clients—including Peace River—the strike price at which the tariff would be applied had been changed to $2.30 (Tariff 7403). (A higher strike price means if fuel costs drop below the set figure, customers don’t benefit from the decline.)
Based on its understanding of the 2008 amendments to the Canada Transportation Act, Peace River filed a complaint with the Canadian Transportation Agency (CTA) asking it to examine the fairness and reasonableness of the change in charge.
That was the first link in a chain of challenges and appeals.
CN responded by bringing a motion before CTA to dismiss the complaint. Its reasoning was that because the rate was part of a confidential contract instead of being posted as part of the public tariff, CTA had no jurisdiction to intervene. Then CITA got involved by petitioning the Governor in Council to hear the complaint, despite the confidential nature of the contract.
Eventually the dispute reached the Federal Court where a judge found in favour of CN. That ruling was based on a number of factors, including CTA’s lack of jurisdiction to intervene in private, confidential contracts.
The Federal Court of Appeal was then asked to look at the lower court’s judgement. It overturned the earlier ruling. Justice Eleanor Dawson, who authored the ruling on behalf of the court (which was issued this week) wrote:
“In my respectful view, the Judge, sitting on judicial review, erred by entering into this interpretive exercise of the Agency’s home statute. If it was necessary for a determination to be made as to whether CN Tariff 7402 was a component for the rates for the movement of traffic, and I have found that it was not, the issue should have been returned to the Agency, the entity charged with the responsibility of interpreting its home statute.”
According to Ballantyne this ruling is “effectively immediately. So the agency now, in effect, has their sailing orders as to how to deal with these complaints. So if a complaint came in now, my understanding is they would have to act based on this decision by the Court of Appeal.”
Being able to have complaints or disputes heard is important to the shippers, and Ballantyne says this hasn’t been happening.
“A lot of potential complaints have been on the shelf waiting for the courts to rule on this. I don’t expect to see a lot of complaints come forward but I expect to see some. It’s like all these provisions. They are expensive and not particularly easy to apply. Shippers will look at them judiciously. They will look at how much money is involved and what they feel their chances of success are. I wouldn’t expect to see them be overly used, but just having them there, is helpful. Making sure shippers have the right to do this has some effect on railway behaviour,” says Ballantyne.
If this ruling is allowed to stand unchallenged (at this point in time, “CN is reviewing the ruling in detail and is assessing its options,” according to Mark Hallman, CN’s director of communications and public affairs), CITA would consider it to be a victory for its members.
“I’d say this is very positive for the shippers. The shippers fought hard to get this provision put into the Act in 2008 and until it got settled, it essentially rendered this provision useless, because most medium-to-large shippers ship under confidential contracts and not under tariff. This is significant. And large shippers may have very, very large bills for ancillary charges for things like demurrage and some of the other charges.”
Disputes about what constitute fair versus unfair charges is just one symptom of an ongoing conflict between rail companies and their customers. The federal government has been contemplating the creation of a service level agreement to manage the relationships between rail companies and their customers. Shippers are pushing for legislation to give them more negotiating power, especially in situations where they only have one option for a rail carrier.
In contrast, railways maintain that a competitive marketplace already exists. Speaking for CN, Hallman outlines his company’s position on service level agreements.
“Canada has a world-class rail service and the lowest freight rates among OECD countries. CN strongly encourages the Canadian government to stay the course with a commercial approach to rail service. Additional regulation could stifle innovation and chill the positive momentum CN has developed.”
“But if the government decides to legislate railway-customer service agreements, the new rules should be balanced and targeted. CN believes such legislation should require mediation as a first step to give commercial solutions a better chance to prevail. The rules should also require the Canadian Transportation Agency itself—not a roster of arbitrators—to arbitrate any service dispute, so as to limit the possibility of unintended consequences damaging Canada’s rail network. And arbitration should only be available to rail customers who depend on a single railroad, in line with the shippers’ call that regulation act as a ‘backstop’ to address cases where they claim railway market power is an issue.”
From the shipper’s perspective, Ballantyne is optimistic the relationship between carriers and customers will warm.
“I’m hopeful. We have to see what changes to the law are coming out of the rail service agreement, but I would hope that if the changes do what shippers hope they do—which is to really encourage genuine, reasonably balanced commercial negotiations between the railways and their customers—relations will generally improve.”