Canadian Underwriter

Why Supreme Court of Canada ruled in favour of Lloyd’s

December 2, 2019   by Greg Meckbach

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A $5.6-million court award in favour of Lloyds Underwriters and one of its Quebec-based shipowner clients has been restored by the Supreme Court of Canada.

Desgagnés Transport Inc. v. Wärtsilä Canada Inc., released Nov. 28, means a section of the Quebec Civil Code on warranties and latent defects can essentially quash a limitation-of-liability clause in a contract for ship engine parts.

A result of that ruling is that the warranty section of the Quebec Civil Code – not federal maritime law – applies to a contract between Quebec City-based shipping company Transport Desgagnés and Zwolle-based ship vendor Wärtsilä Nederland BV.

In early 2007, Wärtsilä had installed a reconditioned crankshaft in the cargo vessel Camilla Desgagnés in Halifax. Two years later, the Camilla Desgagnés was damaged to the tune of $5.6 million when the crankshaft failed in the St. Lawrence River.

The ship’s owner – Quebec City-based Transport Desgagnés – sued Wärtsilä Nederland BV and Wärtsilä Canada Inc. in Quebec, alleging that it was a “latent defect” in the parts that caused the failure. Desgagnés had $4.7 million in coverage from its insurers, and Lloyds Underwriters filed a continuation of suit.

Originally in 2015, Justice Marie-Anne Paquette of the Superior Court of Quebec, District of Montreal awarded Desgagnés and its insurers $5.6 million.

Wärtsilä was initially successful on appeal.

In 2017, The Quebec Court of Appeal ruled that Wärtsilä’s damages were only limited to 50,000 euros, about $80,000.

This is because of the following clause in the contract: “In no case shall the Supplier’s liability cover such damages as could not have been foreseeable at the time of the conclusion of the Contract. Notwithstanding any other provision of the Contract, the Supplier’s maximum liability shall never exceed fifty-thousand euros.”

Despite that clause, Desgagnés and Lloyd’s argued that sections of the Quebec Civil Code, on warranties, mean that the limitation of liability clause does not apply in this case.

The warranty section of the Quebec Civil Code stipulates that a seller is bound to warrant the buyer that an item is, at the time of the sale, “free of latent defects which render it unfit for the use for which it was intended.”

Previous court decisions, on how the Civil Code applies, have established that when a buyer sues a seller for a latent defect, the court can assume the seller knew the defect existed. It is up to the seller to convince the court that it did not know the effect existed, Justice Paquette wrote, citing ABB Inc. v. Domtar Inc., released in 2007 by the Supreme Court of Canada.

The majority of the Quebec Court of Appeal judges hearing Wärtsilä’s appeal ruled that federal navigation law – not the Quebec Civil Code – applies in this case and that the limitation of liability clause is valid.

“The repair and supply of engine parts to a ship is intrinsically related to its seaworthiness and therefore directly and integrally connected to navigation and shipping,” Justice Robert Mainville of the Quebec Court of Appeal wrote in the divided ruling.

When Desgagnés and Wärtsilä Canada signed their contract in 2006, they did not stipulate whether federal maritime law or the Quebec Civil Code applied.

On ruling that the Civil Code applies, the Supreme Court of Canada sided with the plaintiff and Lloyd’s, but for different reasons from the trial judge.

The majority of Supreme Court judges hearing the appeal from Lloyds Underwriters and Desgagnés said the sale of marine engine parts, for use on a commercial vessel, is connected to shipping and navigation. But there is a “double aspect” to the circumstances of this case, because the Quebec Civil Code regulates the sale of goods.

Canada has a doctrine of “federal paramountcy.” This means that when valid provincial and federal legislation are incompatible, the federal law prevails and the provincial law is declared inoperative to the extent of the conflict, the Supreme Court of Canada noted in Desgagnés.

But federal maritime law is based mostly on court decisions and custom – not laws written and passed by Parliament.

“Court decisions and custom can’t trump laws created by legislatures, like Quebec’s Civil Code,” the majority wrote.

At trial, Wärtsilä had argued it was not at fault because it was impossible for ship’s engine to have remained in service for as long as it did if the big-end studs of the connecting rod of a cylinder unit had not been properly assembled and torqued in the first place. But based on evidence from expert witnesses, Justice Paquette ruled that  improper torque of the nut of the big stud was in fact present at the time of the sale.

Section 1729 of the Quebec Civil Code stipulates: “In a sale by a professional seller, a defect is presumed to have existed at the time of the sale if the property malfunctions or deteriorates prematurely in comparison with identical property or property of the same type; such a presumption is rebutted if the defect is due to improper use of the property by the buyer.”

Section 1733 stipulates that  “A seller may not exclude or limit his liability unless he has disclosed the defects of which he was aware or could not have been unaware and which affect the right of ownership or the quality of the property.

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