Facts: The respondent purchased a new bedplate and reconditioned crankshaft from the appellant for installation in one of its vessels. The appellant assembled and installed the bedplate and crankshaft at Halifax in February 2007. On 27 October 2009, after 13,653 running hours, the new crankshaft suffered a catastrophic failure. The respondent commenced this proceeding in the Quebec Superior Court for damages in excess of $5.6 million. It was undisputed that the failure was caused by insufficient tightening of a connecting rod. The respondent alleged that the crankshaft was defective when delivered whereas the appellant alleged the respondent was responsible for the improper tightening during routine maintenance. The appellant also relied upon the terms of the sale contract between the parties which: provided for the repair or replacement of any defect discovered within six months; excluded all other warranties; and, limited the appellant’s liability to €50,000. The validity of the limited warranty and limitation depended on whether the transaction was governed by Canadian Maritime law or the law of Quebec.
At first instance the Trial Judge held that the transaction related to the sale of a marine engine and that this was not something integrally connected to the pith and substance of Parliament’s jurisdiction over navigation and shipping. Therefore, the dispute was not governed by Canadian maritime law but by the law of Quebec. Applying the Civil Code, the trial Judge held that the defect was presumed to have existed and to have been known to the seller at the time of sale and that any exclusion or limitation clause in the contract was invalid. Accordingly, judgment was rendered in favour of the plaintiff/respondent. The appellant appealed.
Decision: Appeal allowed in part.
Held: There are three issues on the appeal namely:
(1) Does Canadian maritime law or Quebec law apply to the sale transaction?
(2) If Canadian maritime law applies, are the appellants liable? and
(3) If the appellants are liable, do the contractual terms apply to exclude or limit that liability?
(1) The first issue is whether Canadian maritime law or Quebec law applies to the transaction. It is undisputable that the contract in issue is one relating to repair or equipping of a ship within the meaning of s. 22(2) (m) and (n) of the Federal Courts Act. In the absence of a constitutional challenge, these provisions are dispositive and Canadian maritime law applies. The trial Judge failed to consider these provisions which was an error in law. Her conclusions are counter to the clear language of s. 22 of the Federal Courts Act and are at odds with the unbroken jurisprudence of the Supreme Court of Canada and the Federal Courts, which have recognized time and again that construction, repair or equipping of a ship are integrally connected to shipping and navigation. Therefore, Canadian maritime law applies to the exclusion of the law of Quebec.
(2) The second issue is whether the appellants are liable under Canadian maritime law. Canadian maritime law includes the (UK) Sales of Goods Act, 1893, 56-57 Vict., c. 71 and the implied warranty of fitness therein. Under that law, the onus is on the buyer to prove a latent defect that was known to the seller or that the seller showed reckless disregard for what it should have known. Based upon the findings of fact of the trial Judge, the respondent met this onus and the appellant is liable.
(3) The final issue is whether the appellant can rely upon the limited warranty and limitation clause in the contract. Under Canadian maritime law a limitation of liability clause is valid and the implied warranties can be excluded by contract. There is nothing inherently unreasonable about exculpatory clauses and they should be applied unless unconscionable when made or there is otherwise some paramount consideration of public policy that outweighs the very strong public interest in the enforcement of contracts. The contract between the parties does exclude the implied warranties and does limit the liability of the appellant. Accordingly, the appellant is entitled to limit its liability under the contract to €50,000.
Comment: Given that (1) the limited warranty under the contract was for a six month period, (2) the defect was discovered well outside the limited warranty period and (3) any other implied warranties had been excluded by the contract, it is not clear to the writer why the appellant was found liable to the respondent at all. )