2017 ONSC 618

COURT FILE NO.: CV-15-532849

DATE: 20170127

ONTARIO

SUPERIOR COURT OF JUSTICE

BETWEEN:

Bassett & Walker International Incorporated

Plaintiff

– and –

Export Development Canada

Defendant

Andrew Faith, Jeffrey Haylock, for the Plaintiff/ Moving Party/Responding Party

Heather Gray, for the Defendant/Responding Party/Moving Party

HEARD: December 1, 2016

AKBARALI, J:

Overview

[1] The plaintiff, Bassett & Walker International Inc. (“BWI”), is a Canadian exporter holding an accounts receivable insurance policy from the defendant, Export Development Canada (“EDC”). Subject to certain conditions, the policy insures BWI for loss BWI suffers due to non-payment of amounts owing to it under contracts when the non-payment is the result of the occurrence of risks enumerated in the policy. These risks include repudiation and default.

[2] BWI claimed under the policy for certain unpaid receivables and for demurrage charges relating to nine shipments of whey powder that BWI sent to Zhejiang Cereals Oils & Foodstuffs Import & Export Co. (“Zhejiang”) in China. EDC indemnified BWI for part of its loss, but based on an exclusion clause and a dispute clause in the policy, declined to indemnify BWI for all of its loss.

[3] The parties each move for summary judgment to determine the coverage dispute.

Background and Overview of the Parties’ Positions

[4] For purposes of these motions, the nine whey powder shipments that BWI sent to Zhejiang fall into three groups.

[5] First, there are the partially paid shipments, these consisting of four shipments of three different types of whey powder[^1] that Zhejiang received, and for which it made partial payment of 70%. The documentation shows that these shipments were ordered between October 2013 and March 2014 and warehoused in China between March 2014 and June 2014.

[6] Second, there are the completely unpaid shipments, these consisting of three shipments of two different types of whey powder[^2] that Zhejiang received but did not pay for at all. The documentation shows that these shipments were ordered between October 2013 and April 2014, and warehoused in China in July 2014[^3].

[7] Finally, there are the unreleased shipments, these consisting of two shipments, each of a different type of whey powder,[^4] that arrived in China but which BWI never released to Zhejiang, and which were eventually sold to another company at a discount. These shipments were held in port in China until they could be resold. During that time they incurred demurrage, or storage fees. As I will describe below, while the documentation of these transactions is confusing, it demonstrates that the shipments arrived in China in June and August 2014.

[8] EDC fully indemnified BWI for the completely unpaid shipments but declined to indemnify BWI for the partially paid shipments or the unreleased shipments. EDC relies on a clause that excludes coverage if BWI changes payment terms with the buyer without EDC’s consent. EDC also relies on a dispute clause in the policy that defers its liability to indemnify BWI if there is a dispute between BWI and the buyer with respect to the indebtedness.

[9] Zhejiang claims that it does not owe any more money to BWI with respect to the partially paid shipments because BWI extended a 30% credit to it as a result of quality problems with the shipments. EDC thus argues that BWI changed the payments terms with Zhejiang without EDC’s consent and that a dispute exists with respect to the partially paid shipments. EDC also relies on Zhejiang’s claim that it never ordered the unreleased shipments to argue that a dispute exists with respect to those shipments.

[10] BWI argues that it had a long and successful relationship with Zhejiang that included over 50 orders in respect of which there were no problems. It points out that its president, Nick Walker, travelled to China in September 2014 to attempt to collect the outstanding receivables from Zhejiang. Mr. Walker deposes that, during that trip, Zhejiang told him that the Chinese market for whey products had declined and Zhejiang had too much inventory. BWI argues that Zhejiang’s excess inventory and the declining whey market is the explanation for all of Zhejiang’s defaults and its repudiation of the unreleased shipments.

[11] BWI thus argues that the exclusion clause does not apply, because it never agreed to change payment terms with Zhejiang, and that the disputes that Zhejiang claims are not tenable. It also argues that EDC should, in any event, be estopped from relying on the dispute clause because it is subrogated to the whole of BWI’s loss, but has failed to pursue Zhejiang for the debt, in effect unfairly turning the dispute clause into an exclusion clause.

[12] BWI also seeks reimbursement for demurrage it incurred while searching for another buyer for the unreleased shipments. EDC argues that demurrage is not covered under the policy in any circumstances.

Summary of Conclusions

[13] I agree with the parties that this case is appropriate for summary judgment. I find that the exclusion clause in the policy with respect to changing payment terms does not apply because BWI and Zhejiang never agreed to new payment terms.

[14] I find that EDC’s liability under the policy to indemnify BWI for the loss it suffered related to the partially paid shipments and the unreleased shipments is deferred by reason of the dispute clause. The dispute clause applies when a dispute is legitimate or tenable. The dispute around the partially paid shipments is tenable. BWI gave credit notes to Zhejiang in amounts that match the unpaid balance of each invoice and the discount Zhejiang claims BWI gave to it.

[15] I also find that the dispute related to the unreleased shipments is tenable. There are inconsistencies in the documentation of the unreleased shipments. It is tenable that Zhejiang did not order the product, or did not order it to be delivered in the summer of 2014, or that there was another mistake.

[16] I find that EDC is not estopped from relying on the dispute clause. The elements required to establish estoppel by representation have not been met.

[17] I find that the policy, by its terms, excludes BWI’s claim for demurrage.

[18] As a result, I dismiss BWI’s motion for summary judgment. I dismiss EDC’s motion for a declaration that the 30% credit note is an amount BWI agreed the Buyer (Zhejiang) was entitled to take into account by way of credit or set-off; or that the 30% credit note was a change in payment terms for which BWI failed to seek EDC’s prior written approval. I allow EDC’s motion for summary judgment dismissing the plaintiff’s action.

The Policy

[19] The resolution of this coverage dispute turns on the interpretation of the policy. I describe the key provisions below.

[20] The policy insures against “Loss” if it is “an amount that was payable by the buyer which was not paid as a direct result of the occurrence of a covered Risk or which would become payable under the Eligible Contract if the Risk had not occurred.”

[21] Default is a risk covered under the policy. Default is defined as “the failure of the buyer to pay by the Due Date all or any part of the Gross Invoice Value of goods that were delivered in accordance with the terms of the Eligible Contract and accepted by the buyer.”

[22] Repudiation is also a risk covered under the policy, defined as “failure or refusal of the buyer to accept goods within 30 days from the date on which the goods were placed at the buyer’s disposal…”.

[23] Coverage is subject to a dispute clause that operates as a condition precedent to coverage. The dispute clause is set out in s. 7 of the policy:

If there is a dispute between the Insured and the buyer with regard to any matter which brings into question the amount owing (or whether there is any amount owing) by the buyer to the Insured (a “Dispute”), the Insurer shall have no liability with respect to the claim until the Dispute is finally settled, by negotiation or otherwise, and the Loss amount is clearly established.

[24] The purpose of the dispute clause is to ensure that EDC is subrogated to only clear and non-litigious rights and is not placed in the position of seeking to enforce a right that relies on information or answers from its insured.

[25] The policy also provides for certain exclusions to coverage. In s. 8(2), the policy provides that EDC is not liable for the payment of a claim for Loss if the insured has agreed with the buyer to change the payment terms under the contract unless (relevant for the purposes of this motion) EDC has given its prior written approval, or the agreement was made in circumstances described in s. 9 of the policy.

[26] Section 9 of the policy provides that the insured may agree with the buyer to extend the due date if certain conditions are met, including that the extended due date is not more than 90 days from the original due date, and it does not result in the insured having granted credit to the buyer for a total period in excess of 180 days.

[27] The policy requires an insured to mitigate its losses. Section 14 directs the insured to, among other things, “take all practicable measures, including any measures requested by [EDC], to prevent the occurrence of any Loss or minimize the amount of any Loss that may occur or that has occurred.” By the terms of s. 14, the obligation to prevent and minimize loss applies prior to and after the filing of a claim.

[28] The policy provides guidance on the computation of loss. Section 19 provides:

the amount of the Loss that is covered by the Policy will be computed in the Contract Currency, and is the Gross Invoice Value of the goods Shipped together with any additional insurance, freight or other handling costs (exclusive of demurrage) that were incurred as a result of any interruption or diversion of delivery due to the occurrence of the Risk which resulted in the Loss less [certain amounts].

[29] Section 27 of the policy provides a right of subrogation of the whole of the loss to EDC once it pays a claim, even if the insured is not fully indemnified:

Subject to Subsection 27(2), on payment of a claim by an Insurer, the Insurer shall be fully subrogated to the Insured’s recovery rights in respect of the Loss, whether or not the Insured has been fully indemnified for such Loss. The Insurer may institute legal proceedings in the Insured’s name against any person for purposes of exercising any such subrogated right.

[30] Section 28 of the policy provides for the recovery obligations of the insured. On payment of a claim, it is mandatory for the insured to take all steps to recover the loss, as directed by the insurer. These may include providing EDC with the authorizations and documentation necessary to permit EDC to institute legal proceedings, and transferring and assigning to EDC all right, title and interest in all amounts owed to the insured in respect of the loss.

[31] The policy also provides for the sharing of any funds recovered from the buyer when EDC pays a claim, including first to reimburse EDC’s external costs or expenses and second to EDC and the insured in the same proportion in which they shared the loss.

The Recovery Agreement

[32] In addition to the policy, EDC and BWI entered into a separate recovery agreement. After EDC made payment in respect of the completely unpaid shipments, it wrote to BWI to remind BWI that EDC was fully subrogated to all of BWI’s recovery rights whether or not BWI had been fully indemnified for the loss. It specifically referenced the full amount of BWI’s claim, including the portion relating to the completely unpaid shipments, which EDC had covered, and the unindemnified portions relating to the partially paid shipments and the unreleased shipments.

[33] In its letter to BWI, EDC advised that it intended to take certain actions against Zhejiang to attempt to recover the full amount of the debt and it would “like to propose” entering into a separate agreement to take recovery. EDC reminded BWI that if Zhejiang contacted BWI directly, BWI was obliged to inform Zhejiang that BWI assigned all recovery rights in respect of the debt to EDC.

[34] BWI signed the recovery agreement, which granted EDC the exclusive right to pursue the debt owed by Zhejiang. The agreement also provided that EDC could act in its own discretion and had no obligation to take any action with respect to the debt.

[35] The effect of the recovery agreement and the policy of insurance is that EDC now holds the sole right to pursue the entirety of the debt, having indemnified BWI for only a portion of it.

Issues

[36] The issues before me are:

a. Does the exclusion in s. 8(2) of the policy apply to the partially paid shipments, such that EDC does not have to indemnify BWI because BWI agreed to different payment terms with Zhejiang without having the consent of EDC or complying with s. 9 of the policy?

b. Does the dispute clause apply to the partially paid shipments?

c. Does the dispute clause apply to the unreleased shipments?

d. Is EDC estopped from relying on the dispute clause?

e. Is demurrage covered under the policy?

The Appropriate Test for Summary Judgment

[37] Summary judgment is appropriate where there is no genuine issue for trial. This will be the case where the summary judgment process provides me with the evidence required to fairly and justly adjudicate the dispute, by allowing me to make the necessary findings of fact and to apply the law to the facts, and where summary judgment is a timely, affordable and proportionate procedure: see Hyrniak v. Mauldin, 2014 SCC 7, 2014 S.C.C. 7, 1 S.C.R. 87, at paras. 49-50, 66.

[38] In this case, the parties agree that summary judgment is appropriate. The issues before me are primarily ones of policy interpretation. The evidentiary record before me is sufficient to allow me to find the necessary facts. Summary judgment is the most expeditious, affordable and proportionate means of resolving this dispute.

Was there an agreement to change the payment terms relating to the partially paid shipments?

[39] EDC has denied coverage for the partially paid shipments based on the exclusion in s. 8(2) that provides that EDC is not liable where the insured agrees with the buyer to change the payment terms unless EDC has given its prior written approval or the insured has complied with s. 9 of the policy.

[40] BWI argues that it did not agree to accept partial payment in satisfaction of the whole amount owing and therefore there was no agreement to change the payment terms. In the alternative, BWI argues that if it did agree to change the payment terms, it was only an agreement to extend the due date, as provided for in s. 9 of the policy, such that s. 8(2) does not apply. In this regard, BWI points to Mr. Walker’s trip to China in September 2014 during which he attempted to collect the outstanding amount.

[41] BWI’s evidence is that Zhejiang first refused to pay anything in respect of four invoices for shipments it had ordered and received (the partially paid shipments). Mr. Walker deposes that in the summer of 2014, Zhejiang refused to make any payments unless BWI accepted only 70% of the receivables. Mr. Walker agreed because he felt he had no choice; he needed funds. Mr. Walker then went to China in September 2014, to make a surprise visit to Zhejiang to collect the remaining funds owing. On cross-examination, he said he was “hoping that the 30 percent, at some point in time, would be forthcoming before we released anything further to them, which they were asking us to do.” Mr. Walker deposes that, during his visit to China, Zhejiang representatives told him that Zhejiang was insisting on a 30% discount because market prices for whey products had dropped and Zhejiang had too much inventory.

[42] Mr. Walker was not able to obtain payment of the outstanding receivables. When he returned from China, BWI made a claim to EDC. In connection with that claim, in October 2014, EDC demanded payment of the receivables that were outstanding. In response, Zhejiang alleged that there were quality problems with the products for which it had received a 30% discount from BWI. Zhejiang claimed to have received four credit notes documenting the 30% discount.

[43] BWI says Zhejiang was never given, and has never produced, any credit notes. However, an email from Mr. Walker to EDC makes reference to BWI having sent credit notes to Zhejiang because Zhejiang apparently required them for its accounting purposes and in order to make the 70% partial payments.

[44] Four credit notes in respect of the partially paid shipments were in evidence before me. I note that the number of credit notes BWI produced is consistent with the number of credit notes Zhejiang claims it received. Mr. Walker testified that the credit notes are an internal accounting procedure by which BWI keeps track of its outstanding receivables.

[45] Given these facts, the question is whether the exclusion clause in s. 8(2) applies: did BWI agree with Zhejiang to change the payment terms for the balance of the receivables?

[46] Because s. 8(2) is a clause excluding coverage, it must be narrowly construed in favour of the insured: see Derksen v. 539938 Ontario Ltd. 2001 SCC 72, [2001] 3 S.C.R. 398 at para. 46.

[47] I find that the agreement to change the payment terms that is contemplated by s. 8(2) must include an agreement as to the new payment terms. “Change” implies a change to something – in this case, new payment terms.

[48] I cannot find that BWI and Zhejiang reached any agreement with respect to new payment terms. Zhejiang insisted it would pay only 70% of the receivable, and BWI felt compelled to acquiesce to Zhejiang’s demand that it not pay the full amount, at least at that time. BWI risked receiving nothing if it did not acquiesce (and, I note, BWI in fact received nothing in respect of the completely unpaid shipments, which were fully indemnified by EDC).

[49] BWI’s actions were consistent with its obligation to mitigate set out in s. 14 of the policy. Its actions were reasonable, given that by accepting what it could get at that time from Zhejiang – 70% - it may well have received more than market value for the whey products. For example, when BWI eventually sold the unreleased shipments to a third party buyer in China, it did so at discounts that were steeper than 30%.

[50] BWI held out hope of recovering the remaining 30%. That is evidenced by Mr. Walker’s trip to China. But there is no evidence before me of any agreement between BWI and Zhejiang as to when, or even if, the remaining 30% would be paid.

[51] As a result, the exclusion in s. 8(2) that EDC is not liable for a loss if “the insured has agreed with the buyer to change the payment terms” does not apply.

[52] Given my conclusion, it is not necessary to deal with the applicability of s. 9 of the policy.

Does the dispute clause apply to the partially paid shipments?

[53] In reliance on Zhejiang’s claim that it received credit notes from BWI for the outstanding balance owing on the partially paid shipments, EDC argues that the dispute clause applies and therefore its liability to indemnify BWI is deferred. BWI argues that Zhejiang’s dispute with respect to the partially paid shipments is frivolous and not tenable, and therefore the dispute clause does not apply.

[54] The dispute clause in the policy is not an exclusion to coverage; it is a condition precedent. Since it is not an exclusion, the interpretive principle that exclusions to coverage must be narrowly construed does not apply to its interpretation. Moreover, if the dispute clause applies, coverage is not excluded, but only deferred pending the resolution of the dispute: see Banque de Commerce et de Placements, S.A. v. Bissma Pacific Inc., 2015 ONCA 618 at para. 4, aff’g 2015 ONSC 794.

[55] The dispute clause must be interpreted having regard to its purpose, which is to ensure that EDC is subrogated to a clear and non-litigious right. The value of the loss for which indemnity is sought under the policy cannot be established when there is a dispute: see 2964-3277 Québec Inc. c. EDC-Exportation et Développement Canada 2011 QCCS 1372 at paras. 65-68, aff’d 2012 QCCA 2154. This statement of the dispute clause’s purpose was adopted by this court in Bissma, at paras. 30-31 and affirmed by the Court of Appeal at para. 5.

[56] However, not every dispute will engage the dispute clause. If it were otherwise, even the most frivolous denial by a buyer of any indebtedness owing would have the effect of deferring coverage to the insured under the policy. This result would not be commercially reasonable or consistent with the parties’ reasonable expectations. As a result, for coverage to be suspended by reason of the dispute clause, the dispute must be legitimate or tenable. It cannot be frivolous: see Strategic Associates Incorporated v. Export Development Corporation, 2007 ONCA 140 at para. 16; see also the Court of Appeal’s decision in Bissma at para. 2.

[57] In 2964-3277 Québec Inc, the Quebec Superior Court held, at para. 65, that when considering the dispute clause, it was not the court’s role to rule on the underlying dispute or evaluate either party’s chances of success at a trial. Rather, the court’s role is limited to observing whether a tenable dispute exists. If it does, the insurer’s obligation is suspended under the dispute clause until the amount of the loss is established. It is the obligation of the insured to prove the loss and its value. The insurer need not guess at the value of the loss:

Le tribunal, de toute évidence, n’a pas à statuer sur ce désaccord entre Cad et Shaw qui prend fin le 18 janvier 2007 ni à évaluer les chances de succès de l’une ou l’autre des parties en cas de procès. Il se borne à constater qu’un différend existe entre eux, ce qui entraîne l’application de la clause 7 du contrat d’assurance et suspend l’exécution des obligations de l’asseur…Le fardeau d’établir cette perte et sa valeur incombe à l’assuré, que n’a pas à deviner l’assureur.

[58] It follows that the insurer’s obligation, when assessing its coverage position, is to determine only whether a tenable dispute exists. The insurer need not, and most likely cannot, adjudicate the underlying dispute. However, when the insurer is considering whether a tenable dispute exists, it must make that determination in a manner consistent with its obligation to act in good faith. This requires the insurer to act promptly and fairly when investigating, assessing and attempting to resolve claims made by its insured. The duty to act fairly applies to the manner in which the insurer investigates and assesses the alleged dispute and to its decision about whether its obligations are deferred by reason of the dispute clause: see 702535 Ontario Inc. v. Non-Marine Underwriters Members of Lloyd’s London, 2000 CanLII 5684 (ON CA) at paras. 27 and 29.

[59] EDC thus had to assess, in good faith, whether there was a legitimate dispute with respect to the 30% balance that remained unpaid on the partially paid shipments.

[60] BWI argues that the dispute Zhejiang alleges with respect to the outstanding balance is frivolous. It points out that it had a longstanding relationship with Zhejiang, with over 50 prior orders, none of which had any quality problems. BWI argues that it is very suspicious that quality problems would suddenly arise with four different shipments, of three different products, originating in two different countries, shipped from two different countries on four different vessels on four different days, and that this would coincide with the drop in the Chinese market for whey products, and an increase in Zhejiang’s inventory of whey products.

[61] EDC points to the credit notes which Zhejiang appears to have received and which suggest that a credit was granted with respect to the partially paid shipments. It points to the fact that the contracts between BWI and Zhejiang were oral contracts only, such that the documentation around the transactions is lacking.

[62] The question before me is not whether BWI has a strong prima facie case for recovery of the 30% balance. It is not whether Zhejiang owes BWI the 30% balance Zhejiang did not pay. The question I must answer is whether there is a tenable dispute over the receivables such that EDC’s liability under the policy is deferred by virtue of the dispute clause. It is important that I not attempt to adjudicate the issues between BWI and Zhejiang, which is not present in these proceedings.

[63] I conclude that the dispute with respect to the 30% balance outstanding is a tenable dispute. The delivery to Zhejiang of four credit notes is consistent with a credit of 30% being given to Zhejiang, whether to prompt payment of the 70%, or for another reason. In addition, the fact that BWI claims to track its receivables by way of credit note is unusual and would have reasonably added to EDC’s concern about the validity of the dispute between Zhejiang and BWI.

[64] I therefore find that the dispute clause applies to defer EDC’s liability with respect to the balance outstanding on the partially paid shipments.

Does the dispute clause apply to the Unreleased Shipments?

[65] EDC also relies on the dispute clause with respect to the unreleased shipments. These were two shipments of two different whey products that shipped about six weeks apart in the spring of 2014. By the time they arrived in port in China in June and August 2014, BWI was already having trouble collecting its receivables from Zhejiang. Mr. Walker deposes that during his visit to China in September 2014, he raised the issue of the unreleased shipments with Zhejiang, which did not deny ordering them but instead sought a discount with respect to those shipments. BWI refused to release the shipments to Zhejiang. BWI sought and found a third party buyer, and sold the products at a steep discount. Until BWI was able to arrange the sale, the shipments collected demurrage.

[66] As I noted, in October 2014, EDC sent a demand letter to Zhejiang demanding payment in respect of the partially paid and completely unpaid shipments and advising that Zhejiang would be held responsible for any loss resulting from the resale of the unreleased shipments.

[67] Zhejiang responded, alleging it was not BWI’s buyer, but only BWI’s agent, and raising product quality concerns in respect of the partially paid and completely unpaid shipments. However, it was silent on the unreleased shipments.

[68] Mr. Walker then wrote to Zhejiang about the partially unpaid, the completely unpaid and the unreleased shipments. In response to Mr. Walker, Zhejiang, for the first time, denied any knowledge of the unreleased shipments.

[69] BWI argues that this series of problems – first Zhejiang refusing to pay the full amount owing in the case of the partially unpaid shipments, then Zhejiang refusing to pay anything for the completely unpaid shipments, and finally Zhejiang denying knowledge of the unreleased shipments – is explained in totality by the decline in the Chinese market for whey products and the fact that Zhejiang had too much inventory. It says that Zhejiang was trying to avoid its obligations to BWI due to the change in market conditions. With respect to the unreleased shipments, it says that it would not have taken a foolhardy risk by sending valuable product to China without a buyer.

[70] EDC points to the fact that BWI’s documentation around the unreleased shipments is different than its documentation for every other transaction. BWI admits that its contracts with Zhejiang were oral only. However, each transaction is supported by an internal sales confirmation form, an invoice, a bill of lading and a Chinese form that shows the date the product was warehoused in China.

[71] The documents for the transactions that are not in question – the partially paid and the totally unpaid shipments – are consistent. In these transactions, the sales confirmation form sets out an estimated delivery period that is a range of dates. For all the partially paid and completely unpaid shipments, with the exception of one for which I do not have full information, the documentation shows that the warehousing of product occurs during the delivery date range identified in the sales confirmation forms.

[72] The sales confirmation forms also match the invoice and the bill of lading in terms of quantity of product, type of product, and payment terms. Payment terms are always 90 days after delivery.

[73] In contrast, the documents with respect to the unreleased shipments are not consistent, either internally or with the documentation that is before me relating to the previous transactions.

[74] For unreleased BWI shipment 16246, there are three confirmation forms. Only one has a date range for the anticipated delivery. This form is consistent with the quantity of product that was shipped and bears the most recent date. I infer BWI shipped the product under this sales confirmation form. However, the delivery date on the sales confirmation form shows a range of dates in October, when the product actually arrived in China in August. Moreover, the payment terms of this sales confirmation are 90 days from bill of lading, inconsistent with the parties’ usual terms.

[75] With respect to unreleased BWI shipment 17604, there are two sales confirmation forms bearing the same date, February 4, 2014. One shows anticipated delivery of the product within two and half weeks, a timeline that is not realistic, given the need to process the order, and then load and ship the product from Argentina (where it originated) to China. No other transaction for which there is paperwork in evidence before me showed delivery dates in such proximity to order dates. This sales confirmation form discloses payment terms of 90 days from bill of lading, which match the relevant invoice, but not the history of dealings between the parties.

[76] The other sales confirmation form for BWI shipment 17604 shows payment terms 90 days from delivery, consistent with the parties’ history of dealings, but it anticipates delivery of product over a range of dates in October 2014.

[77] BWI shipment 17604 actually arrived in China in June 2014.

[78] In considering whether EDC’s liability under the policy with respect to the unreleased shipments is deferred due to a dispute, I am not adjudicating the underlying issues between Zhejiang and BWI. I must consider only whether there is a tenable dispute between them. EDC argues that the documentation supporting the unreleased shipments is inconsistent and suggests that there could have been a mistake made.

[79] I agree with EDC that there is a tenable dispute with respect to the unreleased shipments. It is of course possible that Zhejiang did not want the product in view of the declining market for whey products and its high inventory levels. However, it is tenable that Zhejiang ordered product to be delivered in October 2014 and did not want it, and was not expecting it, in the summer of 2014, or that there were other mistakes made with respect to these orders.

[80] Thus, EDC’s liability under the policy for the unreleased shipments is deferred pending resolution of the dispute between BWI and Zhejiang.

Is EDC estopped from relying on the dispute clause?

[81] BWI also argues that EDC is estopped from relying on the dispute clause. It argues that EDC represented that it would pursue Zhejiang for the indebtedness owing, but it has not done so promptly or diligently. Because EDC holds the sole right to pursue the debt, BWI argues that EDC has, by its conduct, turned the dispute clause into an exclusion.

[82] BWI points to the letter that accompanied the proposed recovery agreement, in which EDC referred to the full amount of the debt BWI claims Zhejiang owes it, of which EDC indemnified only a portion (that related to the completely unpaid shipments). BWI argues that it signed the recovery agreement in reliance on that representation. It submits that, having taken the right to pursue the entirety of the debt including the unindemnified amounts, EDC, by its own inaction, has precluded any resolution of the dispute. EDC then relies on the dispute to deny coverage. BWI argues this is inequitable[^5], and that EDC should be estopped from relying on the dispute clause.

[83] EDC argues that its position on coverage was clear and known to BWI well in advance of BWI signing the recovery agreement. EDC states that under the terms of the policy, it could have declined to pay any portion of BWI’s claim, including the amounts relating to the completely unpaid shipments, because of the dispute with Zhejiang. EDC thus argues that its treatment of the loss was to BWI’s benefit. EDC indemnified BWI for the totally unpaid shipments. The evidence before me indicates that when EDC did so, EDC believed that BWI was waiving its claim for indemnity in respect of the partially unpaid and unreleased shipments.

[84] The evidence also indicates that EDC was wrong in that belief. BWI’s evidence demonstrates that it had not waived its claim. However, by the terms of the policy, once EDC indemnified BWI for even part of its loss, EDC was subrogated to the whole of the loss.

[85] EDC argues it has not refused to take steps to collect the debt from Zhejiang, but rather, it has not pursued Zhejiang while its interests with BWI are unaligned. EDC argues it would be difficult to pursue Zhejiang because to do so would require cooperation with BWI, and that cooperation would be difficult given this litigation.

[86] I do not accept EDC’s argument that it could not have pursued Zhejiang. BWI’s and EDC’s interests are aligned with respect to Zhejiang and there is nothing in evidence before me to suggest BWI would not cooperate to advance those interests.

[87] However, I cannot find that EDC is estopped from relying on the dispute clause. Estoppel by representation is described in Ryan v. Moore, 2005 SCC 38, [2005] 2 S.C.R. 53 at para. 5, as requiring:

a positive representation made by the party whom it is sought to bind, with the intention that it shall be acted on by the party with whom he or she is dealing, the latter having so acted upon it as to make it inequitable that the party making the representation should be permitted to dispute its truth, or do anything inconsistent with it…

[88] The letter that accompanied the proposed recovery agreement is consistent with the subrogation rights in s. 27 of the policy. The letter says that EDC is fully subrogated to all BWI’s recovery rights in respect of the full amount of the loss even if BWI has not been fully indemnified. The letter seeks to have BWI enter into a separate recovery agreement. Such an agreement is contemplated by s. 28(2) and (3) of the policy.

[89] BWI argues that, under the recovery agreement, the decision whether to pursue the debt is in EDC’s sole discretion. The subrogation provision of the policy provides that, once EDC is fully subrogated to BWI’s loss, it “may institute legal proceedings” for the purposes of exercising its subrogated rights. In contrast, under s. 28, the insured has mandatory recovery obligations, as directed by the insurer, to recover the amounts of the loss. The recovery agreement, and EDC’s discretion, is thus consistent with the terms of the policy.

[90] The letter also indicates that EDC intends on taking certain actions against Zhejiang. Approximately two months after the letter was sent, EDC advised BWI that it was starting the process of pursuing Zhejiang for the full debt. It advised that if, through that process, Zhejiang acknowledged the debt, and the debt remained unpaid, EDC would revisit its coverage decision.

[91] Given these facts, I cannot conclude that the representations EDC made at the time the recovery agreement was signed were incorrect. Nor can I conclude that BWI signed the recovery agreement in reliance on the representation that EDC would pursue Zhejiang for the full indebtedness. I cannot conclude that EDC will not pursue Zhejiang for the indebtedness. Finally, I cannot conclude that it is inequitable to allow EDC to rely on the dispute clause.

[92] The essential matter about which BWI complains – that EDC has the sole right to pursue the debt and by failing to do so, turns the dispute clause into an exclusion – flows from the terms of the policy itself, and the fact that BWI accepted partial indemnification of its loss from EDC, thus subrogating EDC to its right to recover the full loss under the terms of the policy.

[93] An insured who does not accept indemnification for only a part of its loss retains the right to pursue the buyer for the whole of the indebtedness. If the debt is acknowledged in the course of that process, the insured retains the right to claim indemnification for the whole of the amount from EDC. Thus, the position in which BWI is now – relying on EDC to settle the dispute which operates as a deferral of EDC’s liability under the policy – could have been avoided by BWI’s own actions. Although BWI accepted partial indemnification under the policy without waiving the rest of its claim, as I have noted, the terms of the policy make clear that once EDC has partially indemnified an insured for a loss, it is subrogated to the whole of the loss, and is entitled to require the insured to transfer all right, title and interest in the indebtedness to EDC.

[94] I thus conclude that estoppel by representation does not apply. EDC may rely on the dispute clause.

Demurrage

[95] Even if I had allowed BWI’s claims under the policy, I would have rejected its claim for demurrage.

[96] Section 19 of the policy is clear. The computation of “Loss” under the policy excludes demurrage.

[97] Moreover, EDC never represented that it would pay demurrage. BWI eventually made EDC aware of the fact that it was incurring demurrage in relation to the unreleased shipments. EDC did not tell BWI that it would not pay those costs. It did not have to. That demurrage is not covered is apparent on the face of the policy.

[98] Demurrage was a cost of BWI’s attempts to mitigate its loss. It is required to mitigate its loss under the policy – the same policy that excludes demurrage. The policy places the risk of certain costs incurred in mitigation of loss, including demurrage, on BWI, not on EDC.

[99] Finally, that EDC may have paid some demurrage in another claim made by BWI under the policy, for reasons that are not apparent on the record before me, is not relevant to whether the claim for demurrage in this claim is warranted. By the clear and unambiguous terms of the policy, it is not.

Costs

[100] Given my decision, EDC is entitled to its costs of the motion and the action. The parties agreed on costs of the action, including costs of the motion, disbursements and HST, in the amount of $71,000. BWI therefore owes this amount to EDC.

[101] Finally, I thank counsel for their helpful and able submissions.

The Honourable Madam Justice J. T. Akbarali

Released: January 27, 2017

2017 ONSC 618

COURT FILE NO.: CV-15-532849

DATE: 20170127

ONTARIO

SUPERIOR COURT OF JUSTICE

BETWEEN:

Bassett & Walker International Incorporated

v.

Export Development Canada

REASONS FOR JUDGMENT

Akbarali

Released: January 27, 2017.

[^1]: Two of these shipments were of whey 90%, one of whey 70% and one of sweet whey. [^2]: Two of these shipments were of whey 90%, and one was of sweet whey. [^3]: In the case of one completely unpaid shipment, bearing the identifier BWI 18133, there is no evidence as to the warehousing date. [^4]: One of these shipments was of whey 90%, while the other was of whey 70%. [^5]: BWI has not argued that EDC is in breach of its duty of good faith, that it is has failed to exercise the discretion afforded to it under the contract in good faith, or that it is in breach of contract because it has acted in a manner that undermines the intentions of the contracting parties. Nor did BWI argue that the recovery agreement fails for want of consideration, or that EDC’s conduct or representations warrant setting aside the recovery agreement, or that BWI has suffered damages as a result of EDC’s conduct or representations.