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07 February 2008
The Supreme Court of Canada recently rendered a landmark decision on sellers’ and manufacturers’ liability in Quebec. In ABB Inc v Domtar Inc the court upheld Domtar’s action against ABB Inc and Alstom Canada Inc for nearly C$39 million (capital and interest).(1)This judgment is of the utmost importance to all manufacturers and other professional vendors selling in Quebec. It confirms the difficulty they will have relying on exclusion or limitation of liability clauses to escape liability for the consequences of latent defects in their products, even when they are dealing with sophisticated buyers. Manufacturers in particular will rarely be able to rely on such clauses, even though they are commonly included in contracts of sale.
In the mid-1980s Domtar purchased a chemical recovery boiler for its new Windsor, Quebec pulp and paper mill from Combustion Engineering Canada Ltd (CE). Just 18 months after the boiler was put into service, Domtar had to shut it down for an unscheduled inspection after detecting a leak in the boiler’s superheater (a major component of the boiler). The inspection revealed several leaks and hundreds of cracks. Domtar repaired the superheater and, at its next scheduled shutdown, replaced it entirely.
Domtar instituted an action against CE (which later became ABB Inc and Alstom Canada Inc), alleging that the boiler had a latent defect. CE initially contended that the cracking was due to the way Domtar had operated the boiler.
Domtar won its case before the superior court and the court of appeal. At the Supreme Court, ABB and Alstom no longer argued that the cracking was caused by Domtar’s operations. Instead, relying on conclusions of the trial judge, it argued that the cracks were a “feature” of the design, but not a defect. It also relied heavily on clauses in CE’s contract with Domtar which:
The Supreme Court began by remarking that the:
“development of Quebec’s law of obligations has been marked by efforts to strike a proper balance between, on the one hand, the individual’s freedom of contract and, on the other, adherence by contracting parties to the principle of good faith in their mutual relations.”(2)
The principle of good faith in contractual relations has taken on increasing importance in Quebec law. The court cautioned that parties to a contract of sale should consider this in the exercise of their rights and in the performance of their obligations.
The court reaffirmed that every professional seller in Quebec is presumed by law to know of defects in the products it sells. A seller can rebut the presumption, but only by showing that a reasonable seller in the same circumstances would have been unable to detect the defect at the time of sale.(3)
Therefore, the strength of the presumption varies depending on the seller’s expertise.
A seller which knew, or which is presumed to have known, of a defect cannot rely on an exclusion or limitation of liability clause to escape liability for the consequences of that defect.
A manufacturer will have great difficulty rebutting the presumption that it knew or could have known of a defect. A manufacturer has special knowledge of the products it manufactures. It can rebut the presumption only by showing:
“that it did not know about the defect [and] … that it could not have discovered the defect even if it had taken every precaution that the buyer would be entitled to expect a reasonable seller to take in the same circumstances.”(4)
It is no defence for a manufacturer to prove that it did not know of a defect; the very failure to know is itself considered bad faith, disentitling the manufacturer from relying on a limitation of liability clause. Manufacturers will be able to escape liability only if they prove that the prejudice complained of was caused by the buyer’s or a third party’s fault or by a “superior force” (ie, a force majeure or act of God), or that it would have been impossible for them to have detected the defect given the state of scientific and technical knowledge at the time the good was put on the market.(5)
The court cautioned that buyers cannot blindly purchase a product; they are required “to inform themselves by carrying out a reasonable inspection of the goods”.(6) However, unlike professional sellers, they are presumed to be in good faith and a manufacturer which wishes to claim that a buyer knew of a defect at the time of purchase bears the burden of proving that claim.(7)
The court acknowledged that the law in Quebec differs from the common law and even, to some extent, from French law. However, it concluded that the rules of these other systems “cannot easily be grafted on to Quebec civil law”.(8)
Professional sellers in Quebec must realize that a buyer need not prove the cause of a defect in order to be successful. A defect is any characteristic of a product which seriously impinges on a buyer’s ability to make practical and economical use of the product:(9)
“[A] defect does not have to render the good completely unusable but simply has to reduce its usefulness significantly in relation to the legitimate expectations of a prudent and diligent buyer.”(10)
To allege successfully a latent defect a buyer need only show that the goods it bought substantially failed to perform in accordance with its reasonable and legitimate expectations. Once a buyer proves that goods are defective, the seller, if it is a professional vendor of such goods, will bear the heavy burden of proving that it could not reasonably have known of the defect. Manufacturers in particular will find that only in truly exceptional cases will they be able to prove this. In addition, unless they rebut the presumption, their limitation or exclusion of liability clauses will be of no avail to them.
Therefore, professional sellers, particularly manufacturers, must know that in most cases they will be unable to rely on exclusionary clauses to escape liability for latent defects in their products. This is true whether they are selling to ordinary consumers or to sophisticated corporations assisted by teams of engineers and lawyers.
In short, 'manufacturer beware' is probably a more apt description of the law in Quebec than 'buyer beware'.
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