In the recent decision of Wärtsilä Canada Inc. v. Transport Desgagnés Inc., 2017 QCCA 1471, the Quebec Court of Appeal decided that the trial judge had erred in law by determining that the contract between the parties was governed by the Quebec Civil Code as opposed to Canadian maritime law and as such, reduced the damages to be awarded from $5,661,830.33 to $78,900, based on the enforceability of the warranty and limitation of liability terms contained therein.
The facts of Wärtsilä pertain to a dispute between a Canadian merchant shipping corporation and its marine insurers against a Dutch manufacturer and supplier of marine propulsion systems with respect to damages incurred by a cargo vessel, the MV Camilla Desgangés, following the failure of the ship’s main engine in 2009. It should be noted that the facts of the case were not in dispute, nor were the damages sustained by the respondents which were admitted as being $5,661,830.33. It was also admitted that the cause of the breakdown was the insufficient tightening of a bolt on a connecting rod of one of the pistons attached to the crankshaft.
The parties diverged, however, on whether the insufficiency of the tightening was caused by the appellant’s plant employees during assembly or if it resulted from subsequent actions carried out by the respondents’ employees. In this regard, the Court of Appeal found that the trial judge had not erred in concluding that the goods supplied by the appellant contained a latent defect rending them unfit for their intended purpose.
In addition, the parties also diverged on whether the contract in question should be governed by civil law or by Canadian maritime law and accordingly, the enforceability of certain clauses contained therein which limited the contractual warranty to six months as well as liability.
The application of Quebec civil law had a determinative impact on the case at bar, given that in Quebec, the Civil Code imposes a statutory warranty of quality on the vendor in such a way that the vendor is bound to warrant the buyer that the property and its accessories are free of latent defects. In order to come into play, the Civil Code states that the defect in question must be present at the time of the sale, serious and hidden or unknown to the buyer at the time of the sale.
Moreover, in cases involving what is referred to in the Quebec Civil Code as being a “professional seller”, as well as manufacturers and distributors, there are two important legal presumptions that apply. First, the defect is presumed to have existed at the time of the sale and second, the professional seller or manufacturer is presumed to have known of the existence of the defect at the time of the sale.
In addition to this, a seller may not exclude or limit its liability contractually unless he has disclosed to the buyer the defects of which he was aware or legally presumed to be aware of. Accordingly, when coupled with the aforementioned presumptions, an exclusionary or limitation of liability clause will not protect a professional seller or manufacturer from liability unless they are able to rebut said presumptions.
On the contrary, these rules are markedly different from those applicable under common law should Canadian maritime law govern the dispute given that, in common law the onus is on the buyer to prove that the latent defect was known to the seller, or that the seller showed reckless disregard for what it should have known. Furthermore, there are no special rules for professional sellers, as is the case in Quebec, and a contractual limitation of liability between two merchants will be valid unless it is deemed unconscionable or because failure to discharge the obligation to which it applies would amount to fundamental breach.
At the trial level, the judge had found that issues relating to the obligations arising from the sale of a marine engine were not to be integrally connected to maritime matters. As such, the contract in question was simply a contract of sale formed in Montreal, meaning that it should be governed by the rules of the Civil Code.
The Court of Appeal, however, saw it differently, citing paragraphs 22(2)(m) and (n) of the Federal Courts Act, which set out that any claim in respect of goods, materials or services wherever supplied to a ship for its operations or maintenance, as well as any claim arising out of a contract relating to the construction, repair or equipping of a ship fall within the Federal Court’s jurisdiction under Canadian maritime law. According to the Court of Appeal, having failed to reference these paragraphs was tantamount to analyzing the issue of the applicability of maritime law in a “statutory vacuum”, and thus an error of law.
By deciding to set aside the Quebec Civil Code in favour of Canadian maritime law, the limitation of liability clause found application, and Wärtsilä’s liability was thus, as per the terms of said clause, limited to the amount of €50,000.00 which, when converted into Canadian Dollars, amounted to $78,900.00. Had Canadian maritime law not found application in the present case and, in fact, there was one dissenting judge who did not think it to be the case, the trial judge’s decision would have been considered completely valid and, despite a limitation of liability clause having been included in the contract, the appellant would have been forced to pay the full amount of damages.
This staggering difference in the amount awarded exemplifies a fundamental difference between the common law and civil law rules regarding the contractual limitation of liability and how important this element can be.