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The Reasonableness of Confidential Contracts in the Railway Industry: Canadian National Railway Co. v. Canada (Attorney General)

May 28, 2014

On May 23, 2014, the Supreme Court of Canada (“SCC“) released its decision in Canadian National Railway Co. v. Canada (Attorney General), 2014 SCC 40.  The SCC’s decision means that under the Canada Transportation Act, S.C. 1996, c. 10 (“CTA”) there is an almost “unlimited or unconditional” right to petition the Governor in Council (“GIC“) who has broad powers to vary or rescind a decision of the Canadian Transportation Agency (the “Agency“) on points of fact, policy, and law, whereas appeals to the Federal Court of Appeal are limited to questions of law or jurisdiction.  Importantly, the SCC also held that the GIC was reasonable in concluding that a party to a confidential contract used in the railway industry could bring a complaint under section 120.1 of the CTA, while leaving open the issue of whether in any particular case a confidential contract might preclude a shipper from such relief.

Formerly, railway companies had to issue and publish tariffs before charging that rate for the movement of traffic.  In 1987, Parliament introduced confidential contracts to railway legislation to allow flexibility in the negotiation of rates.  Parties to confidential contracts cannot submit a matter governed by the contract to the Agency for final offer arbitration unless both parties consent.  However, in 2001, section 120.1 was added to the CTA to provide a new remedy for shippers subject to unreasonable charges and associated terms and conditions for the movement of traffic or for the provision of incidental services that are found in a tariff, provided that those tariffs apply to more than one shipper and are not the result of final arbitration.

In this case, a railway company and a coal loading company entered a multi-year confidential contract that allowed the railway to charge a mileage-based fuel surcharge when the monthly average price of diesel fuel equalled or exceeded a set “strike price”.  Less than two months into the contract, the railway advised its customers that it would raise the “strike price” for subsequent contracts by  US$1.05 per gallon, and refused the coal loading company’s request to apply the higher strike price to its existing contract.  Under the contract the railway could unilaterally change the fuel surcharge tariff, but the coal loading company had no mechanism to challenge those changes, so the coal loading company applied to the Agency to require the railway to apply the higher strike price to existing contracts (meaning fuel would have to be US$2.30 per gallon or more before the fuel surcharge could be applied).

The railway succeeded in having the Agency dismiss the coal loading company’s application on the grounds the Agency did not have jurisdiction to amend the contract.  While the coal loading company did not seek leave to appeal the decision, a trade association representing the interests of shippers filed a petition with the GIC requesting a variance of the Agency’s decision.  The GIC rescinded the Agency’s decision, finding that the coal loading company’s application was for the benefit of all shippers subject to the same fuel surcharge, and that the existence of the contract was not relevant to whether the charge in the tariff applying to multiple shippers was reasonable. However, the SCC left it open for the Agency to consider whether fuel surcharges are a component of the “rates for the movement of traffic” within the meaning of section 120.1(7) of the CTA.

Finally, note that the SCC applied the standard of review analysis set out in Dunsmuir v. New Brunswick, 2008 SCC 9 to the adjudicative decision of the GIC.  The court reasoned that “Unlike cases involving challenges to the vires of regulations, … the Governor in Council does not act in a legislative capacity when it exercises its authority under s. 40 of the CTA to deal with a decision or order of the Agency.”  Of course, as the SCC said in Attorney General of Canada v. Inuit Tapirisat of Canada, [1980] 2 S.C.R. 735 at 758, “the dividing line between legislative and administrative functions is not always easy to draw”, meaning an analysis of whether a decision is “legislative” or not will still have to occur.  In this case, the SCC concluded the GIC’s decision only had to be reasonable, rather than “correct”.  This case provides further authority by the SCC that “the Dunsmuir framework applies to administrative decision-makers generally and not just to administrative tribunals.”

DISCLAIMER: NOT LEGAL ADVICE.  This article is for information purposes only and is not intended to be relied on as legal advice. You should not rely on, or take or fail to take any action, based upon this information, or disregard professional legal advice or delay in seeking legal advice because of something you have read on this site or in this article. The author, Shane R. Hopkins-Utter would be pleased to discuss resolutions to specific legal concerns you may have.

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