Peracomo Inc. v. Telus Communications

In Collisions and Ships on (Updated )

Précis: The Supreme Court of Canada overturned a decision of the Federal Court of Appeal in which a vessel operator was held to be disentitled to the benefit of limitation of liability. The Supreme Court of Canada held that limitation of liability was available to the operator who had intentionally cut a submarine cable. However, the operator’s conduct did constitute “wilful misconduct” within the meaning of the Marine Insurance Act and, as a consequence, the loss was excluded from the insurance coverage.

Facts: The respondent was the owner of two submarine cables on the bottom of the St. Lawrence River. The appellants were the corporate owner and operator of a fishing vessel. The operator snagged one of the submarine cables belonging to the respondent while fishing. The operator cut the cable with a saw believing that it was not in use. A few days later he snagged the cable a second time and did the same thing. The respondent commenced these proceedings alleging negligence and damages of approximately $1 million to repair the cable. The appellants denied liability saying insufficient notice had been given of the location of the cables and that, in any event, the cables should have been buried. The appellants further disputed the damages and claimed the right to limit liability. A further issue was whether the appellants’ insurance coverage was jeopardized by reason of “wilful misconduct” on the part of the appellants.

At trial (reported at 2011 FC 494), the trial Judge found that the cables were included in notices to mariners and were shown on navigation charts and that it was the duty of the appellants to be aware of them. The trial Judge further found that it was not practical to bury the cables and held that the sole cause of the loss was the intentional and deliberate act of the appellant operator. With respect to damages, the trial Judge held that the respondent was entitled to damages in the nature of superintendence and overhead and allowed 10% for this. The trial Judge then turned to limitation of liability and noted that to avoid limitation the respondent had to prove a personal act or omission of the appellants committed either “with intent to cause such loss” or “recklessly and with knowledge that such loss would probably result”. The trial Judge held, for the first time in Canada, that this test had been met and the appellants were not entitled to limit liability. The trial Judge said that the operator had intentionally cut the cable and that the loss was the diminution in value of the cable, not the cost of repair. The trial Judge said the operator intended the very damage that occurred but just did not think the cable would be repaired. The trial Judge further held that the operator was “reckless in the extreme” and that the loss was a certainty. Turning to the insurance issue, the trial Judge referred to authorities that established wilful misconduct “implies either a deliberate act intended to cause the harm, or such blind and uncaring conduct that one could say that the person was heedless of the consequences”. The trial Judge had little difficulty in concluding this test had been met and the insurance coverage void.

On appeal (reported at 2012 FCA 199), the Federal Court of Appeal agreed with the trial Judge on the issue of liability finding, among other things, that the appellants ought to have used up-to-date charts which disclosed the existence of the cable. A liability issue raised on appeal that does not appear to have been raised at trial was whether the operator could be jointly and severally liable with the corporate appellant. The operator argued that he should not be liable as his acts were those of the corporation. However, the Court of Appeal said that employees, officers and directors are personally liable for their tortious conduct causing property damage even when their actions are pursuant to their duties to the corporation. Concerning the limitation issue, the Court of Appeal also agreed with the trial Judge that the appellants intended to physically damage the cable and that it did not matter whether they were aware of the actual loss that would result. Finally, on the insurance issue, the Court of Appeal was not persuaded the trial Judge had made an error in concluding that the conduct of the appellants was "a marked departure from the norm and thus misconduct". Further, the Court of Appeal agreed that this misconduct was the proximate cause of the loss. The appellants appealed to the Supreme Court of Canada. There were three issues on the appeal:
1. Is the operator personally liable?
2. Are the appellants entitled to limit their liability?
3. Was the loss caused by wilful misconduct such that it is excluded from coverage under the insurance policy?

Decision: Appeal allowed, in part. The appellants were entitled to limit liability but the loss is excluded from the insurance coverage.

(1) The Federal Court of Appeal correctly held that the operator was personally liable even though he was carrying out his corporate duties.

(2) The Federal Court of Appeal took too narrow a view of the intent requirement under art. 4 of the Convention on Limitation of Liability for Maritime Claims. The Federal Court of Appeal held that if the operator knew he was cutting a cable that the intent requirement is satisfied. This undermines the Convention’s purpose to establish a virtually unbreakable limit on liability and does not accord with its text. The conduct barring limitation is expressed in restrictive language. The person is entitled to limit liability unless it is proved that “the loss resulted from his personal act or omission, committed with the intent to cause such loss, or recklessly and with knowledge that such loss would probably result”. There is some dispute in the authorities as to how specifically the loss must have been intended. Some authorities say the “very loss” intended must have resulted. Other authorities say it is sufficient if the resulting loss was the “type of loss” intended. We do not have to take a firm position on this issue as, on either view, the appellants are entitled to limit their liability. The trial Judge found as a fact that the operator thought the cable was useless. The operator did not think his actions would damage someone’s property or necessitate the repair of the cable. Therefore, there was neither “the intent to cause such loss” or “knowledge that such loss would probably result”.

(3) The policy of insurance covered the appellants in respect of their liability for damage to any fixed or movable object arising from an accident or occurrence. The policy was subject to s.53(2) of the Marine Insurance Act which excludes coverage for any loss attributable to the “wilful misconduct” of the assured. The standard of fault under s. 53(2) is not the same as the standard under the Convention. Both the purposes and the texts are different. The essence of wilful misconduct includes not only intentional wrongdoing but also conduct exhibiting reckless indifference in the face of a duty to know. The findings of fact by the trial judge make it clear that the operator’s conduct constituted wilful misconduct. He had a duty to be aware of the cable and “he failed miserably in that regard”. His conduct exhibited a “lack of elementary prudence”. His actions were “far outside” the range of conduct expected of a person in his position. He was aware he was cutting a submarine cable and had knowledge of the risk that he could be cutting a live cable. His conduct is consistent with indifference to the risk in the face of his duty to know. The fact he believed the cable was not in use is beside the point. “To hold otherwise is to conflate recklessness with intention.” Wilful misconduct does not require either intention to cause the loss or subjective knowledge that the loss will probably occur. “It requires simply misconduct with reckless indifference to the known risk despite a duty to know.”

Comment: This is obviously a critically important case on limitation of liability and what is required to actually break limitation. The decision confirms that limitation under the LLMC convention 1976 is virtually unbreakable.