Saturday, January 30, 2016

Sale of a Marine Engine Not Subject to Canadian Maritime Law

A recent decision of the Quebec Superior Court demonstrates that all disputes involving maritime property trigger the application of Canadian maritime law.

In Transport Desgagnes Inc. v. Wartsila Canada Inc.(*1) the defendant supplied a reconditioned crankshaft to a vessel operator. The crankshaft sustained a catastrophic failure while the vessel was on route on the St. Lawrence River near Les Escoumins. The court held that the crankshaft sold was affected by a latent defect at the time of the sale, that the seller was presumably aware of the defect and, as a result, it was liable for all the damages resulting from this failure, which totaled $5,661,830.33.

At issue was whether the civil law of Quebec applied or whether Canadian maritime law applied. The core of the dispute was a six month warranty period provided in the contract (which had expired). The court characterized such a clause as a limitation clause in the contract. Under the Quebec civil law such a limitation clause is not enforceable, but it is under Canadian maritime law.

The judge set out the test at paragraph 24 of the judgment:

The test uniformly applied to determine whether Canadian maritime law applies is the following:

Is the activity at stake so integrally connected to maritime matters such that it is practically necessary for Parliament to have jurisdiction over same, in order to properly exercise its legislative power over navigation and shipping?

[Emphasis added]

The court noted that the test requires an examination of the factual context of the claim. “The single fact that a ship or maritime undertakings is involved does not automatically trigger the application of Canadian maritime law. For Canadian maritime law to apply, the matter, in view of the factual context, must be “integrally connected to maritime matters.” (*2)

The court concluded that the case at bar related to the sale of a marine engine and that the issues relating to the obligations arising from such a contract of sale are not integrally connected to the pith and substance of navigation and shipping, stating (*3):

More particularly, the contract for the sale of a marine engine is not integrally connected, for instance, to issues of safe carriage of goods over the sea, movement of goods on and off a ship (shipping), seaworthiness of a ship or good seamanship (navigation). It is also not integrally connected to applicable admiralty law, rules, principles or practices or international maritime conventions.

Moreover, there is no practical necessity for uniform federal law to prescribe, for instance, the rules governing the seller’s obligations to provide warranty regarding the quality of the product sold. The fact that such rules may vary depending on the applicable provincial law of contracts does no hinder the efficient and coherent conduct of the activities of navigation and shipping.

Neither the extraterritorial use of the good sold nor the fact that the good sold will be used in connection with maritime activities drag such sale out of the ambit of the legislature’s power over Property and Civil Rights. Although related to maritime activities, the current dispute is not integrally connected with same.

The court held that, as the contract for the sale of the crankshaft was formed in Montreal, the laws of Quebec applied to the dispute.

The court then applied the provisions of the Civil Code of Quebec regarding warranty of quality (1726 to 1733) and summarized that the legal warranty against latent defects comes into play if the defect:
            a) was present at the time of sale;
            b) is serious;
            c) was hidden and unknown to the buyer at the time of sale.

For a professional seller, two presumptions come into play, which apply against a manufacturer or distributor of goods. Firstly, the defect is presumed to have existed at the time of the sale (article 1729, C.C.Q.). The first condition stated above is therefore automatically met; unless the seller or the manufacturer proves on the balance of probabilities that the defect is due to improper use by the buyer.

Secondly, the professional seller is presumed to have known the existence of the defect at the time of the sale and is deemed to be of bad faith.

The court noted that the presumption of knowledge and of bad faith against the professional seller and the manufacturer has a two-fold determinative impact.

a) Firstly, it extends the scope of the seller’s liability beyond the price of the good sold. In addition to their obligation to reimburse the price of the goods sold, they are bound to pay for the damages, which the buyer sustained as a result of the latent defect.

b) Secondly, the professional seller and the manufacturer cannot rely on a limitation of liability clause, unless they rebut the presumption of knowledge and bad faith. As they are presumed to be of bad faith and to be aware of the existence of the defect, allowing them to contractually exclude or limit their liability for such defect would amount to an endorsement of a fraudulent behavior.

The court summarized that only a narrow range of defences are available to the professional seller and the manufacturer if they want to rebut the presumption of knowledge and bad faith against them, and avoid the resulting legal consequences of such presumption.

Evidence of their good faith, of their ignorance of the defect or of their honest belief in the adequacy of the product sold is not enough.

The buyer’s expertise also does not nullify the presumption of knowledge and bad faith that applies against professional sellers and manufacturers. Such expertise is only relevant to assess whether the defect was apparent or not.

The evidence before the court was that the crankshaft was sold by a “professional seller” and that there was a presumption that the defect existed at the time of the sale. The big end stud of the connecting rod of a unit was insufficiently tightened at the time of the sale. This presumably occurred while the defendant employees mounted the crankshaft assembly at their facility.

The court rejected the defendant’s contention that the improper tightening resulted from maintenance work performed by the vessel operator after delivery of the crankshaft assembly. There was contradictory evidence on this issue and the judge concluded that rebutting the presumption of article 1729 C.C.Q. requires more than raising doubts on the adequacy of the buyer’s use or maintenance of the goods sold. Unless the professional seller or manufacturer shows, on a balance of probabilities, that the defect is due to improper maintenance by the buyer, the presumption that the defect existed at the time of the sale still applies.

The court then dealt with the contractual limitation clauses, which provided that the warranty ran for only six months and limited the seller’s liability to $79,000.00. The court held that the limitation provisions were not enforceable as the seller did not rebut the presumption of knowledge of the existence of the defect.

The court ordered the seller to pay the vessel operator the sum of $5,661,830.33.

(*1) 2015 QCCS 5514
(*2) Ibid, para. 25

(*3) Ibid, paras. 28, 29, 30.


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