COURT OF APPEAL FOR ONTARIO

CITATION: Strategic Associates Incorporated v. Export Development Corporation, 2007 ONCA 140

DATE: 20070203

DOCKET: C43826

RE: STRATEGIC ASSOCIATES INCORPORATED in its Capacity as Receiver and Manager of 891884 ONTARIO LIMITED (Appellant) – and – EXPORT DEVELOPMENT CORPORATION (Respondent)

BEFORE: GOUDGE, GILLESE and LANG JJ.A.

COUNSEL: Won J. Kim and Victoria Paris for the appellant

Jacqueline Dais-Visca for the respondent

HEARD & RELEASED ORALLY: February 28, 2007

On appeal from the judgment of Justice Randall Echlin of the Superior Court of Justice dated June 10, 2005.

E N D O R S E M E N T

[1] This is an appeal from the judgment of Echlin J., who dismissed the appellant’s insurance claim on the basis that coverage was excluded by the terms of the policy.

[2] The appellant, Strategic Associates Inc. (Strategic), was the receiver for Hinterhoeller Yachts (Hinterhoeller). Hinterhoeller purchased export credit insurance from the respondent, Export Development Canada (EDC), for the purpose of permitting it to extend credit to non-Canadian purchasers of its Nonsuch boats.

[3] When Hinterhoeller went into receivership, it had not been paid for three boats: two had been delivered to a U.S. dealer, Eastern Yacht Sales Inc. (Eastern) and the third had been shipped to Spain. Eastern sought to return the boats because Hinterhoeller was no longer able to fulfill its warranty obligations, as a result of which the dealer was limited to selling the boats on an “as is, with all faults and defects” basis.

[4] Hinterhoeller, through Strategic, claimed for its losses under the EDC policy. EDC denied coverage. The trial judge dismissed Strategic’s ensuing action against EDC.

[5] On appeal, the appellant argues that the trial judge erred in failing to apply correct principles of interpretation; in finding as a fact that the U.S. Dealer Policy formed part of the export contract within the meaning of the policy; in failing to find certain terms of the policy ambiguous, thus invoking contra proferentem in favour of the insured; and, finally, in his assessment of damages.

[6] It appears that the trial judge blended the issue of whether the insured proved its loss with the insurer’s burden, if so alleged, that the exclusion applied. The law is well settled that insurance coverage must be approached in two stages. First, the insured must prove that its loss is covered by the policy. Second, if the insured proves such a loss, the onus shifts to the insurer to establish the exclusion. Coverage provisions are interpreted broadly and exclusions provisions narrowly.

[7] In light of the trial judge’s error, this court must apply the correct law to the facts as found by the trial judge, provided the trial judge made no palpable and overriding error in arriving at his factual conclusions.

[8] The main claim on this appeal is with respect to the U.S. boats and these reasons first address that claim. We then address the second issue regarding the appellant’s claim for consequential losses for the boat delivered to Spain.

[9] On the undisputed facts found by the trial judge, in our view the appellant clearly established that its losses for the U.S. boats came within the policy; in particular, under s. 3(1) that provides coverage for losses resulting from “the buyer not paying for goods delivered to and accepted by the buyer”. The insured established at trial that the boats were delivered and accepted and that Eastern did not pay. This was sufficient to prove the loss.

[10] Since the loss was covered, we turn to the question of the exclusion, remaining mindful of the onus on the insurer to prove the exclusion, and the requirement to interpret exclusions narrowly.

[11] The policy specifically excluded coverage where “the buyer does not accept or pay for the goods because of a dispute between the Exporter and the buyer with respect to the export contract” (s. 20(2).

[12] The appellant raises two issues regarding the interpretation of this exclusion: the interpretation of “export contract” and of “dispute”.

[13] The documents encompassed by the term “export contract” were central at trial. After hearing evidence on the issue about the purchase order, the warranties shipped with the boat, and the U.S. Dealer Policy provided to Eastern, the trial judge concluded that the Dealer Policy, which contained warranties, formed part of the export contract. In our view, there was ample evidence to support this finding, including reference to terms on the purchase order that could only be understood by reference the Dealer Policy.

[14] In addition, there was no issue at trial that Hinterhoeller provided warranties; the only dispute was whether those warranties appeared in the owner’s manual delivered with the boat or in the U.S. Dealer’s policy earlier provided to Eastern. While the trial judge concluded that the Dealer Policy formed part of the export contract, and that finding is supported by the evidence, in our view, whether those warranties appeared in the Dealer Policy or in the owner’s manual is of no moment. Indeed, the respondent’s case is even stronger because the warranties were delivered with the boat, as the appellant conceded. Consequently, the purchase order for the boat included the warranties. Either way, the trial judge was entitled to conclude that the warranties formed part and parcel of the export contract.

[15] We turn then to the interpretation of “dispute”. On this issue, Eastern did dispute payment for the boats and it did so because it took the view that, due to the receivership, Hinterhoeller was unable to fulfill its warranties.

[16] “Dispute” is not defined in the policy and to that extent is ambiguous. On this issue, the respondent concedes that the insurer cannot rely on a frivolous dispute to exclude coverage because such an interpretation would be inconsistent with the very purpose of the policy. The respondent concedes that to exclude coverage, the dispute must be legitimate or tenable. We agree. In this case, the dispute is clearly a legitimate one as evidenced by the letter from Eastern’s U.S. counsel setting out its position under applicable U.S. law.

[17] Since the insurer established that the exclusion applies, the result below should not be disturbed. Accordingly, the appeal with respect to the two boats shipped to Eastern must be dismissed.

[18] Regarding the second issue of the consequential losses flowing from the recovery of the boat shipped to Spain, these losses are submitted as s. 16 costs under the policy. Under s. 16, the costs had to be approved by EDC. It is clear that they were not and we are satisfied that EDC acted reasonably in refusing to give its approval for these costs. We are supported in this view by the trial judge’s conclusion that he could find only a small proportion of the special damages were satisfactorily established by the appellant and the small proportion that was established related to all three boats.

[19] We did not call on the respondent with respect to punitive damages. Given our disposition of the appeal, it is unnecessary for us to deal with this issue.

[20] In the result, the appeal is dismissed.

[21] Costs are awarded to the respondent fixed in the amount of $15,000 inclusive of Goods and Services Tax and disbursements.

“S.T. Goudge J.A.”

“E.E. Gillese J.A.”

“S.E. Lang J.A”