Appeal court overturns $5.6 million award

A lower court ruling that awarded $5.6 million to a vessel fleet operator was overturned by the Quebec Court of Appeal after it held that the trial judge erred by applying the Civil Code of Quebec to settle a dispute instead of Canadian maritime law.

In a majority decision, the appeal court held that disputes concerning the repair and supply of engine parts to a ship is subject to Canadian maritime law, and therefore common law rules apply rather than civil law rules of delictual liability. As Canadian maritime law applies, the appeal court reaffirms it is the common law of contract and tort that applies to these cases.

The ruling, met with a sigh of relief by the maritime business world, dispels confusion and uncertainty engendered by the lower court ruling as it reaffirms that Canadian maritime law applies uniformly across Canada and “ousts” the application of provincial law, according to maritime lawyers.

“It’s an important decision because until the end of September it looked like the repair of a ship didn’t come under Canadian maritime law in Quebec which was confusing because in other provinces it was the contrary,” noted John O’Connor, a Quebec City maritime lawyer with Langlois Lawyers LLP. “So there was a bit of confusion.”

Wärtsilä Canada inc, a Dutch-based manufacturer and supplier of marine engines and propulsion systems, sold a bedplate and reconditioned crankshaft on February 2007 to Transport Desgagnés inc. (TDI), which along with Desgagnés Tansarctik Inc. and Navigation Desgagnés Inc., forms part of a large Canadian merchant shipping conglomerate that principally operates in Eastern Canadian and Arctic waters. Some two and a half years later on October 2009, the cargo ship’s main engine suffered a major failure after it had been in operation for approximately 13,600 hours. TDI sued Wärtsilä for recovery of its damages and profit loss while the ship was out of service.

Quebec Superior Court Justice Marie-Anne Paquette ordered Wärtsilä to pay $5.6 million after she found that Canadian maritime law did not apply because the sale of a marine engine is not integrally connected to marine matters. She also held that since the contract for the sale of the engine and bedplate was formed in Montreal, Quebec civil law applied which in turn had a “determinative” consequence to the resolution of the factual and legal dispute.

In the case of a sale by a professional seller, the latent defect is presumed to have existed at the time of the sale unless the seller or manufacturer proves on the balance of probabilities that the defect is due to improper use by the buyer, under articles 1726 to 1730 of the Civil Code. Moreover, the seller is presumed to have known the existence of the defect at the time of the sale. As well, the professional seller or manufacturer cannot rely on a limitation of liability clause unless it rebuts the presumption that it knew of the existence of the defect at the time of the sale.

Both parties agreed that the damages sustained by TDI was about $5.6 million. Wärtsilä also admitted that the cause of the breakdown was insufficient tightening of a bolt on a connecting rod of one of the pistons attached to the crankshaft. According to TDI, this “insufficiency” was caused by Wärtsilä’s plant employees at the time of assembly but Wärtsilä countered that it was the result of subsequent actions carried out by the TDI’s employees. Wärtsilä also invoked clauses limiting the contractual warranty to six months and limiting their liability in the case of latent defects, which TDI argued are not enforceable under Quebec civil law. The trial judge held Wärtsilä liable for the defect in the crankshaft and bedplate assembly and ordered it to pay TDI $5,661,830.

But the appeal court overturned the decision after it was “self-evident” that the repair and supply of engine parts is “intrinsically related to its seaworthiness and therefore directly and integrally connected to navigation and shipping.” Informed by the Supreme Court of Canada’s seminal decision in ITO-Int’l Terminal Operators v. Miida Electronics, [1986] 1 SCR 752, 1986, the appeal court noted that Canadian maritime law is defined in the Federal Courts Act (Act). Any claim with respect to goods, materials or services wherever supplied to a ship for its operation or maintenance or any claim arising out of a contract relating to the construction, repair or equipping of a ship “clearly” falls within the scope of paragraphs 22 (2)(m) and (n) of the Act, added appeal court Justice Robert Mainville in Wärtsilä Canada inc. c. Transport Desgagnés inc., 2017 QCCA 1471.

The trial judge however did not refer to the Act, and analyzed the issue of the applicability of Canadian maritime law in a “statutory vacuum,” said Justice Mainville in reasons that Justice Patrick Healy concurred with. Her “conclusions not only run counter to the clear language of section 22 of the Federal Courts Act, they are also at odds with general principles of maritime law as well as the unbroken jurisprudence of the Supreme Court of Canada and of the Federal Courts,” added Justice Mainville.

According to George Pollack, a Montreal commercial litigator who successfully plead the case, Justice Mainville “applied well-settled principles” that repairs to a ship is an activity “intimately” related to shipping and navigation and “therefore attracts the application of common law.”

“He also makes it very clear that Canadian maritime law is not the law of each province; it is a uniform body of law applicable across the country that ousts the application of provincial law and that’s a pretty significant statement of law,” added Pollack of Davies Ward Phillips & Vineberg LLP.

Unlike Quebec’s civil law, under common law a latent defect must affect an essential characteristic of the good and make the good unfit for its intended use. Also, under 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. In the case at hand, the appeal court deferred to the factual findings of the trial judge and concluded that TDI met their burden of proving that the goods supplied by Wärtsilä had a latent defect affecting an “essential characteristic,” making it unfit for its intended use. But, added Justice Mainville, there is “no doubt” that the limitations of liability terms apply.

“TDI bargained for what it got and clearly accepted the allocation of risks set out under the contract terms,” said Justice Mainville. “It cannot rely on the courts to reallocate those risks in its favour. Between commercial parties, pricing and costs (notably insurance costs) are driven in part by the allocation of risks, and it is not the function of the courts to transfer such risks from one commercial party to the other when they have themselves allocated it.” Wärtsilä was ordered to pay jointly to TDI and its insurer $78,900.

According to Darren McGuire, national leader of the maritime law group at Borden Ladner Gervais LLP, the decision is a “good one” because it underscores the importance of having uniformity of laws throughout the country and it fosters certainty for business in terms of contractual obligations for sophisticated and international players.

“What business is looking for is certainty in contracts, especially in the international context,” said McGuire. “They don’t want to be in a situation where they may be subjected to different rules in different provinces or countries.”

Appeal court Justice Paul Vézina however would have dismissed the appeal because Wärtsilä limited the warranty against latent defects without discharging their obligation to repair the damages caused to others by their fault. In his view, Quebec civil law should apply.

Jean-François Bilodeau, a Montreal maritime lawyer with Robinson Sheppard Shapiro, believes that the SCC should proffer new guidance on these matters if TDI decides to lodge an appeal. Bilodeau points out that Justice Mainville makes a distinction between the sale of a ship, which falls under provincial jurisdiction, and the repair and supply of engine parts to a ship, which is subject to Canadian maritime law.

“I’m not quite in agreement with the distinction,” said Bilodeau. “Put yourself in the place of a shipbuilder. A shipyard sells and repairs ships. When he sells a ship, it falls under provincial jurisdiction, and when he repairs, federal. And when the buyer purchases a part he is subjected to federal law and when he buys a boat or ship, provincial. In my opinion, that is a shaky distinction.”

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