On 7 November 1980, a moored ship, the Rhône, owned by the respondent, Vinalmar SA (Vinalmar), was struck by a barge, the Peter AB Widener (Widener), at the Port of Montréal. The Rhône sustained damages in the agreed amount of CAD 88,357.89, while the damages to the Widener were set at CAD 49,200. The Widener, owned by the respondent, North Central Maritime Corp (North Central), is a 'dumb' barge, so-called because it relies on tug boats for its movements. At the time of the casualty, the Widener was commanded by Captain Lyons and was being towed by four tugs. Two of these, the South Carolina and the Ohio, were owned by the appellant, Great Lakes Towing Co (Great Lakes). Two others, the Ste Marie II and the Rival were owned by the respondent North Central, and McAllister Towing & Salvage Ltd respectively. The towage of the Widener had been arranged through an oral contract between North Central and Great Lakes and involved its towage from Duluth, Minnesota to the Port of Montréal. Captain Kelch, master of the Great Lakes' tug Ohio, acted as de facto master of the flotilla. Owing to navigational errors made by Captain Kelch, the Widener collided with the Rhône.

As a result of this mishap, two actions were commenced. In the first, the owners of the Rhône, the respondent Vinalmar, sued everyone involved - the barge owner and tug owners - for damaging its ship. In the second, the owners of the Widener, the respondent North Central, sued the appellant Great Lakes for breach of its contract of towage. Great Lakes denied liability in both actions and counterclaimed for limitation of liability pursuant to s 647(2) of the Canada Shipping Act, RSC 1970, c S‑9 (the Act).

The two actions were joined for trial. In the action commenced by the owners of the Rhône, Denault J apportioned 80 per cent of the liability to Great Lakes, based on the negligence of the South Carolina and the Ohio, and 20 per cent to the respondent, North Central, based on the negligence of Captain Lyons, captain of the Widener, for failing to drop the Widener's own anchor to stop its slide into the Rhône. In the action instituted by North Central, Denault J ordered Great Lakes to pay all of the damages incurred by the Widener. Great Lakes' counterclaims for limitation of liability in both actions were dismissed.

Great Lakes appealed both decisions. North Central, the owners of the Widener, also cross‑appealed the trial Judge's finding of fault against the Widener. Although the Federal Court of Appeal disagreed with certain findings made by Denault J, it nevertheless maintained his overall finding with respect to both the negligence and the apportionment of liability as between Great Lakes and North Central. It agreed with Denault J that Captain Kelch was a directing mind of Great Lakes, at least for the purpose of carrying out Great Lakes' obligations in relation to the tow of the Widener. As such, it found Great Lakes was not entitled to limit its liability since the damage did not occur 'without [its] actual fault or privity'.

Great Lakes appealed to the Supreme Court, challenging the denial of its counterclaims to limit its liability under s 647(2) of the Act and submitting that Captain Kelch was not a directing mind of the company. It therefore contended that it should be entitled to limit its liability on the basis of the tonnage of the tug Ohio. However, if this Court found that the Courts below erred in holding the resulting damage to the Widener and Rhône did not occur 'without [the] actual fault or privity' of Great Lakes, the respondents submitted that s 647(2) of the Act was of no avail to Great Lakes in any event or, alternatively, that liability should be limited according to the combined tonnage of its tugs, the Ohio and the South Carolina.

Held (by the majority of La Forest, Sopinka, Gonthier, Cory, Iacobucci JJ): Both appeals are allowed and the judgment of the Federal Court of Appeal, in so far as it relates to the Great Lakes' inability to limit its liability under s 647(2) (now s 575(1)) of the Act, is set aside. The unit of limitation for purposes of s 647(2) should be the tug Ohio. Pursuant to s 649(2), the appellant's liability in both actions with respect to all the losses and damages resulting from the collision of the Rhône and the Widener is limited to the tonnage of the Ohio.

Captain Kelch was admittedly the master of the Ohio at the time of the collision. As noted above, navigational errors committed by a ship's master, in the course of his or her duties, do not in themselves give rise to actual fault or privity on the part of the shipowner in the absence of a breach of its duty to supervise the management and navigation of its vessel which is causally linked to the resulting damage. However, it is alleged that Captain Kelch also performed exceptional duties on behalf of his employer which rendered him not just a master but more importantly a directing mind of Great Lakes such that his fault was that of the company. In particular, the Courts below emphasised that Kelch was de facto commodore of the flotilla and in this capacity he gave instructions to the other vessels in the flotilla and could elect to bring in additional tugs if he deemed it necessary for safe navigation. Furthermore, reference was made to the fact that Kelch was described as being part of management, a salaried employee, a fleet captain, a 'trouble shooter' and the person responsible for breaking in new captains. The Courts below also placed weight on the fact that Kelch was responsible for ensuring that the paperwork was in order for all of the tugs in Great Lakes' fleet.

With respect, this Court cannot agree with the conclusion reached by the Courts below as to the status of Captain Kelch as a directing mind of Great Lakes. The facts of this case do not merely put it at 'the outer margins of the application of the doctrine of corporate identification', but outside those margins. The Courts below overemphasised the significance of sub‑delegation in this case. The key factor which distinguishes directing minds from normal employees is the capacity to exercise decision-making authority on matters of corporate policy, rather than merely to give effect to such policy on an operational basis, whether at head office or across the sea. While Captain Kelch no doubt had certain decision-making authority on navigational matters as an incident of his role as master of the tug Ohio and was given important operational duties, governing authority over the management and operation of Great Lakes' tugs lay elsewhere. Therefore, the Courts below erred in holding that Captain Kelch was part of the directing mind and will of Great Lakes. As a result, the collision between the Rhône and the Widener did not occur with the actual fault or privity of Great Lakes.

Because the Courts below erred in finding Captain Kelch a directing mind of Great Lakes, it is necessary to consider the respondents' alternative argument that s 647(2) does not extend to limit Great Lakes' liability for Captain Kelch's direction of other vessels within the flotilla not owned by it. Accepting for the sake of argument that the cause of the collision must be attributed to Captain Kelch's navigation not only of the Ohio but also the other vessels within the flotilla not owned by Great Lakes, the respondents' argument nonetheless fails on the clear words of s 647(2)(d)(ii). This provision provides that Great Lakes, as owner of the Ohio, may limit its liability for damage caused to another vessel through 'any other act or omission of any person on board [that] ship'. Therefore, Great Lakes may limit its liability since the cause of the collision consisted of acts or omissions of Captain Kelch on board the Ohio. The principle underlying limitation of liability is that the wrongdoer should be liable according to the value of his ship and no more. A small tug has comparatively small value and it should have a correspondingly low measure of liability, even though it is towing a great liner and does great damage. There is not much room for justice in this rule; but limitation of liability is not a matter of justice. It is a rule of public policy which has its origin in history and its justification in convenience. Accordingly, Great Lakes is not precluded from limiting its liability under s 647(2) under the respondents' alternative argument.

Great Lakes submits that, in the event that it is found able to limit its liability under s 647(2), its limitation should be restricted to the tonnage of the tug Ohio. The respondents, however, contend that the proper unit of limitation is the combined tonnage of the two tugs owned by the appellant, the Ohio and South Carolina. They submit that the collision was caused in part by the combined navigation of both these tugs by the same servant of the appellant. Therefore, they argue that liability should be calculated according to the aggregate tonnage of the 'wrongdoing mass'. It would be stretching the principles of causation beyond their proper limits to hold a vessel not physically causing the impugned damage nor responsible for the navigation of the vessel which in fact physically caused the damage to be part of the 'wrongdoing mass'. While it may appear to be unjust to limit a shipowner's liability to only one vessel when it has a second vessel which may be used to satisfy a plaintiff's loss, we must remember that the rationale for limitation of liability rests on public policy concerns and not necessarily on considerations of justice. The purpose of these limitation provisions generally is to promote international trade and merchant shipping by giving shipowners the protection of limited liability. It would be counter to the intent of these limitation of liability provisions to include within the unit of limitation a helper tug not committing a fault of its own or otherwise physically causing the damage. Therefore, liability should be limited only to the tonnage of the Ohio.

L'Heureux-Dubé and McLachlin JJ (dissenting in part): We agree that the limitation on liability found in s 647(2) of the Act applies in this case, and would likewise reject the argument that the appellant cannot claim the benefit of the limitation of liability because Captain Kelch was its directing mind. We would also reject the argument that the limitation of liability does not apply where some of the vessels in a flotilla are not owned by the party responsible in law for a shipping accident.

The only remaining question is what vessels must be taken into account into determining the extent of the liability. On this point, we respectfully differ from our colleagues. In our view, the wording of the section, the jurisprudence, the rationale for the limitation, and the practical implications of the alternative rulings, all point to the conclusion that both tugs owned by the appellant, the Ohio and the South Carolina, should be considered in determining the extent of the liability.