Fraser River Pile & Dredge Ltd. v. Can-Dive Services Ltd.

This was an action by the owners and underwriters of the derrick barge "Sceptre Squamish" against the charterer of the barge. The "Sceptre Squamish" was lost in the Strait of Georgia when it was left by the charterer unattended in heavy weather. The charterer defended the action alleging that the loss of the barge was due to the negligence of the owner, that there was an agreement that the owner would insure the barge for the benefit of the charter, and that the action, which was a subrogated action by hull underwriters, was barred by reason of a waiver of subrogation and "additional insureds" clause in the hull policy. The waiver of subrogation clause waived subrogation against charterers. The "additional insureds" clause gave the owner permission to charter and made the charterer an additional insured under the policy. The owners and underwriters argued that the charterer was not entitled to rely on these terms because it was not a party to the policy and because the owners and underwriters had executed an agreement following the loss in which they agreed to proceed with legal action against the charterer and in which the owner waived any rights it had under the waiver of subrogation clause. At trial (reported at (1995), 9 B.C.L.R. (3d) 260), the court held that the loss of the barge was due to the negligence of the charter, that there was not sufficient evidence of an agreement to insure, and that the doctrine of privity applied to prevent the charterer from relying upon the waiver of subrogation and "additional insureds" clauses. On appeal (reported at (1997), 39 B.C.L.R. (3d) 187), the British Columbia Court of Appeal upheld that part of the trial judgement holding that there was no agreement to insure. The Court of Appeal then embarked on a lengthy analysis of the doctrine of privity and concluded that the doctrine of privity no longer applied to prevent a third party from taking the benefit of a waiver of subrogation clause. The Court of Appeal further held that the agreement entered into between underwriters and owners following the loss was ineffective as the charterers rights had crystallized upon the happening of the loss. On further appeal to the Supreme Court of Canada, the Supreme Court upheld the decision of the Court of Appeal. The Supreme Court held that new exceptions to the doctrine of privity must meet a two part test: 1. the parties to the contract must intend to extend the benefit to the third party seeking to rely on the contractual provision; and 2. the activities performed by the third party must be the very activities contemplated as coming within the scope of the contract in general, or the provision in particular, as determined by reference to the intentions of the parties. Applying this two part test, the court found that there could be no question that owners and underwriters intended to extend the benefit of the waiver of subrogation clause to a class of third parties (charterers) that included the charterer and that the relevant activities arose in the context of the charter relationship, the very activity anticipated in the waiver of subrogation clause. With respect to the agreement entered into between underwriters and owners following the loss, the Supreme Court agreed with the Court of Appeal that the happening of the loss crystallized the charterer’s rights and that the waiver of subrogation clause could thereafter not be amended without the agreement of the charterer.