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I enjoyed an excellent presentation last week at the ATLP Annual Meeting in Boston given by Ian MacKay, one of our Canadian colleagues who focuses his practice on the rail sector. Ian gave us some insight into the Safe and Accountable Rail Act adopted in Canada last month and to become effective in June of 2016. This new law is aimed at preventing the Canadian and provincial governments from getting stuck holding the bag on clean-up costs, and victims from being left without recourse in the event of another disaster like Lac Megantic, but has much deeper ramifications for both railroads and the shippers of crude oil. Canadian laws have always required railroads to carry a certain modest level of insurance in order to obtain their Certificate of Authority to operate, but this new law significantly increases the level of the limits to be required. For example, Class I railroads carrying significant amounts of crude oil or TIH materials may be required to carry $1 Billion in insurance coverage. The law also creates a new strict liability standard for rails carrying these substances, so that at any time there is an accident associated with the operation of a train carrying crude or TIH, the railway may be held strictly liable for damages, regardless of any fault or negligence. The law provides that the liability of the railway for any strict liability claim will be capped at its statutorily mandated level of insurance, but does not preclude or cap any other fault based claims. In addition, the law limits the ability of railroads to limit their liability for the carrying of these types of goods by tariff, requiring the carriers to separately negotiate these issues with the individual shippers.

Notwithstanding these new rules, the common carrier obligation of the railroads remains unchanged. Railways in Canada, like those in the US, must transport the goods that are tendered to them for shipment, regardless of the risks associated with the transportation of those goods or the cost of carrying the necessary insurance to comply with the regulations related to it. As a result of the new law, the railroads lost a powerful means to shift the risk associated with transporting crude and TIH back to the shippers tendering the commodities. None of this makes it any easier for railroads to do business in Canada (see Globe and Mail).

Shippers were not spared in this new legislation either. The law creates a new tax on the shipment of crude oil which is intended to create a compensation fund for environmental and other losses in excess of the railroad provided insurance coverage in the event of a disaster. In this way, the Canadian government hopes to ensure that it will not be left with another huge clean-up bill in the event of another disaster.

Canadian and US regulators have been working in tandem, adopting similar rules in response to this tragedy. For the most part, the US railroads have welcomed this type of parallel regulation as it helps to smooth the cross border flow of commodities. This time, the railroads are hoping the US will not be quick to adopt the new Canadian standards.

For additional information on this blog posting, please click here and here.