The Québec Court of Appeal holds that contracts for the supply of equipment to ships are governed by maritime law and that contractual limits of liability are enforceable.
In a decision rendered on September 29, 2017 in Transport Desgagnes Inc. v. Wartsila Canada Inc., 2017 QCCA 1471, the Québec Court of Appeal reaffirmed that contracts for the supply of equipment installed on a vessel fall squarely within maritime law. As a consequence, common law principles of tort and contract apply to the resolution of any disputes, including allegations of latent defects. The Court upheld a limitation of liability clause in a contract for the supply of a Wärtsilä engine notwithstanding the finding that that engine had suffered from a latent defect.
Transport Desgagnés Inc. ("Desgagnés") owns and operates the vessel "Camilla".
In 2007, Wärtsilä installed on the vessel a reconditioned crankshaft assembled on a new bedplate, together with related equipment and new marine style connecting rods. It offered Desgagnés a limited 12-month warranty. Section 6.3 of its standard terms and conditions also included a limitation of liability of €50,000 (CAD$79,000).
Two and a half years later on October 27, 2009, after operating for over 13,000 hours, the M/V Camilla's main engine suffered a major failure.
Desgagnés and its underwriters commenced suit in the Superior Court of Québec claiming over CAD$5,660,000 and alleging that the crankshaft suffered from a latent defect for which Wärtsilä was liable.
The trial judge concluded that the supply of the engine parts was not subject to maritime law but rather to the Civil Code of Québec, which imposes a presumption that a latent defect existed at the time of sale unless the manufacturer proves that the defect resulted from improper use by the buyer. Moreover, the Civil Code of Québec provides that the professional seller or manufacturer cannot rely on contractual limits of liability unless it proves that it did not know of the existence of the defect at the time of sale. The trial judge concluded that Wärtsilä had not rebutted the presumption that the defect existed at the time of sale and also held that Wärtsilä could not rely on the limitation of liability.
On appeal, two out of three judges of the Québec Court of Appeal concluded that maritime law applied to this claim. The majority made the point that the supply and repair of engine parts to a ship is intrinsically related to its seaworthiness and therefore directly and integrally connected to navigation and shipping. Moreover, the definition of maritime jurisdiction in the Federal Courts Act includes any "contract relating to the construction, repair or equipping of a ship" as well as "any claim in respect of goods, materials or services wherever supplied to a ship for the operation or maintenance of the ship".
After having concluded that maritime law applies to dispute, the Court then explored what effect that would have on Wärtsilä warranty obligations and contractual limit of liability.
In contrast to civil law, the common law puts the onus on the buyer, Desgagnés in this case, 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, the common law will consider that a limitation liability is valid in a warranty contract, unless it is deemed unconscionable or that the failure to discharge the obligation amounts to fundamental breach.
The trial judge had concluded, as a matter of fact that the improper torque of the nut of the big stud on the unit 5L was present at the time of the sale and the Court of Appeal felt it was not its place to revisit findings of fact. Hence, the latent defect was known by Wärtsilä.
However, as a question of law, the majority concluded that the limit of liability set out in the terms and conditions of Wärtsilä, which limits of liability to €50,000, was enforceable. There was sufficiently clear and unambiguous language in the contract to oust the implied warranty of fitness.
The policy behind the approach is to recognize the importance of respecting negotiated risk allocation in commercial contracts between business entities. As Mainville JA put it, Desgagnés bargained for what it got and clearly accepted the allocation of risks set out under the contract terms. It cannot now rely on the courts to reallocate those risks in its favour. The allocation of risks and commercial contracts is a matter best dealt with through negotiation and insurance rather than litigation.
Impact of Decision
This judgment will be of interest to all manufacturers and suppliers of equipment for vessels, ship owners and operators as well as hull insurers and their brokers.
This case serves as a warning to ship owners and operators to carefully review and negotiate the scope and duration of warranties against latent defects and/or workmanship whenever equipment is installed on a vessel or work is performed on it. Terms imposing limits of liability must also be carefully examined as they are likely to be enforceable.
If a negotiation of the warranty terms is not possible, adequate hull & machinery insurance would be crucial.
Insurers must be aware when underwriting these risks that their ability to be successful in a subrogation claim against a supplier, manufacturer or ship builder could be severely limited by applicable contractual terms to which its insured agreed.