The Little Engine that Couldn’t: SCC Rules on Limitation of Liability for Sale of Ship Engine Parts

The Supreme Court of Canada (SCC) recently rendered an important decision on the division of powers between the federal and provincial governments. While that decision was made in the context of Canadian maritime law, it has potentially far-reaching implications for contracts and disputes involving the transportation of goods across borders and the construction of projects under federal jurisdiction.

BACKGROUND

In October 2006, Desgagnés Transport Inc. (TDI) purchased engine parts for TDI’s ship, MV Camilla Desgagnés (Camilla) from Wärtsilä Canada Inc. and Wärtsilä Netherlands B.V. (Wartsila). The contract included a limited warranty and limited Wartsila’s liability to €50,000. The choice of law clause stated that the contract would be governed pursuant to the laws in force at the office of Wartsila, which was Montréal, Quebec.

In October 2009, the Camilla was forced out of service due to a latent defect in the engine parts that Wartsila supplied. TDI incurred damages of over C$5.6-million. TDI sued for that amount, arguing that provisions in the Civil Code of Québec (CCQ) precluded the limited warranty and the limitation of liability in the contract. Under articles 1729 and 1733 of the CCQ, a “professional seller” cannot exclude or limit its liability regarding the quality of the property unless it discloses the property’s defects. Moreover, 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.

Since Canadian maritime law does not prohibit limited warranties and limited liabilities, Wartsila argued that only Canadian maritime law, not Quebec law, governs the contract.

The issue before the courts was whether the dispute fell within the federal government’s authority over navigation and shipping, Quebec’s authority to legislate on issues of property and civil rights, or both.

SCC DECISION

In Desgagnés Transport Inc. v. Wärtsilä Canada Inc., the SCC held that the CCQ applied, thereby precluding Wartsila from limiting the duration of its warranty and its liability. The majority and the minority came to that result for different reasons.

The minority of three justices held that, while the sale of ship engine parts is maritime-related, the pith and substance of the contract is property and civil rights. Therefore, the contract is governed solely by the CCQ.

The majority of six justices took a more nuanced approach and invoked the doctrine of flexible federalism. The majority revisited the content and scope of Canadian maritime law, but readopted the “integral connection test” for determining whether a matter falls within Parliament’s jurisdiction over navigation and shipping.

Applying the integral connection test, the majority held that the sale of engine parts for a commercial vessel is governed by Canadian maritime law. However, the majority further held that nothing prevented the concurrent applicability of provincial laws. Since there is no conflicting federal legislation, doctrines such as paramountcy and interjurisdiction immunity do not apply. As a result, “provincial laws of general application are applicable and operative with respect to the sale of ships (or marine engine parts)”.

IMPLICATIONS

The right to limit liability is a hallmark of Canadian maritime law, and limitations of liability are common in other modes of international and interprovincial transportation as well. The SCC’s decision means that limitation clauses can be vitiated by provincial legislation if there is no conflicting federal legislation.  

The SCC’s decision also departs from the policy emphasized in previous decisions that Canadian maritime law should be consistent throughout Canada. The minority suggests that uniformity applies to maritime torts but not maritime-related contracts. The majority relies on the uniformity principle in finding that Canadian maritime law applies, but does not reconcile that principle when holding that the CCQ also applies. Therefore, as the majority implies, there is increasingly room for provincial legislation to apply to contracts in industries otherwise governed by federal law.

The most pressing implication of this decision is with respect to choice of law clauses. Such clauses often state that the laws of Canada and a particular province will govern as applicable on the assumption that federal law solely governs some aspects of the contract. Contracting parties will need to consider those clauses even more carefully. For example, if contracting parties intend to limit liability, they will need to consider whether provincial law permits the agreed limitations and tailor the choice of law clause accordingly.

For further information, please contact:

Charles Kazaz                            514-982-4002
Ian Breneman                            403-260-9715

or any other member of our Litigation & Dispute Resolution group.

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We would be pleased to provide additional details or advice about specific situations if desired.

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