Provincial Law Voids Limitations of Liability in Contract for Ship’s Engine Parts

David Constantine and Joe Thorne

In the recent Supreme Court of Canada decision in Desgagnés Transport Inc v Wärtsilä Canada Inc, 2019 SCC 58, the court examined how provincial statutes and the federal maritime law apply to purchase and sale contracts in the marine industry. The lengthy deliberation, with over 100 cases cited by the majority alone, centres on the constitutional division of powers between Canada’s federal and provincial governments. The decision will have practical implications for many players operating in marine industries in Canada.

Facts – Failed engine replacement parts, contract limiting seller liability

Desgagnés had an issue with the engine on one of their vessels, and purchased refurbished replacement parts from Wärtsilä. The purchase contract had a limitation of liability of € 50,000, a six month limited warranty, and an unfortunately ambiguous choice of law clause. After the warranty expired, the engine failed due to a defect in either refurbishment or installation. Desgagnés sued Wärtsilä for roughly $5.6 million in repair costs and lost profits.

From Wärtsilä’s perspective, they were clearly protected under the limitation of liability and expired warranty in the purchase contract. However, Desgagnés tried to rely on Québec’s civil code to invalidate both the limitation of liability and limited warranty clauses. Wärtsilä argued that federal maritime common law (ie: judicial precedent) should govern the contract. The court was forced to decide which legal regime could and would govern the contract. Desgagnés was successful at trial. The Québec Court of Appeal overturned that decision, upholding the contract’s limited warranty and limitation of liability clauses. The Supreme Court of Canada split 6-3 in their decision, but both majority and minority came to the same conclusion; that Québec’s civil code applied to the contract dispute, and that Wärtsilä owed Desgagnés $5.6 million.

Supreme Court of Canada decision – Québec law governs contract

Majority: Both Québec and federal maritime law can govern purchase contract

The majority concluded that the claim at hand, a dispute over the sale of parts for a marine vessel, presented a “double aspect”, falling under control of both heads of government. The “integral connection” would determine whether the claim fell within federal jurisdiction over navigation and shipping. They concluded that the purchase and sale of marine engine parts was “integrally connected with maritime matters”, so that maritime law would apply to the contract. However, they concluded that Québec’s provincial legislation also applies to this purchase agreement, as the selling of goods within a province fell within provincial jurisdiction over property and civil rights.

You may ask – if both Québec and federal maritime law apply, and there’s a conflict about how they treat warranties and limitations of liability, how does that get resolved? The question is more complicated than one would hope.

Neither interjurisdictional immunity nor paramountcy doctrines apply

Interjurisdictional immunity prevents one head of government from regulating matters that fall within the core of the other’s jurisdiction. Because the subject of this dispute, the purchase of marine engine parts, did not go to the core of navigation and shipping, it is not immune from regulation by Québec. Federal paramountcy provides that where there is a conflict between valid federal and provincial laws, the federal law prevails. In this case, because the provincial law in question was a statute, and the federal law was judge-made common law, the doctrine did not apply. The court reasoned that allowing judges to rule over statutes in areas that legislatures can validly regulate would be an affront to the role of our courts and elected governments. So, to answer how conflicts are resolved, the court seems to have ruled that Québec’s statutory law trumps the federal common law, and therefore the statute would govern in the case of a conflict.

Minority: maritime law has no role in sale of goods

The minority of the court also concluded that Québec law governed the purchase. They followed the “pith and substance” test, characterizing the matter as fundamentally a claim in “sale of goods in the maritime context”. They found that the sale of goods, whether in the maritime context or otherwise, is a matter falling squarely within provincial jurisdiction over property and civil rights. They pointed out that, even if they were convinced of federal jurisdiction, neither Wärtsilä nor the majority could point to or prove the existence of a body of “federal contract rules” within Canadian maritime law that could govern this dispute.

Implications of the decision

It is easy to get lost in constitutional deliberation, but the practical implications of this decision are significant. This case itself is a prime example: Wärtsila’s liability went from zero or, at worst € 50,000, to $5.6 million because of nuances about manufacturer liability in Québec’s civil code. Had that purchase agreement been governed by the laws of any other province, the outcome might have been entirely different.

This decision will affect a wide variety of participants in marine industries – from a provincially based software or equipment supplier, to a multinational shipbuilding or design company. Participants have to be aware of their obligations under federal, provincial, and territorial legislation wherever they operate, or even supply to.

For those supplying the marine industry with equipment, services or anything necessary for marine operations, and for those in the industry purchasing them, careful attention must be given to relevant legislation in provinces where they operate or transact. Additionally, careful structuring of contracts, and particularly choice of law provisions, may help to avoid risk of unfortunate surprises in both renewed and future agreements.

This update is intended for general information only. If you have questions about the above, please contact a member of our Maritime & Transportation group.

Click here to subscribe to Stewart McKelvey Thought Leadership.