Library:
Liability for Latent Defect
Published in the December 2007 issue of Transportation Notes - View Article
On November 22nd the Supreme Court of Canada released an important decision which may have particular impact on participants in the aeronautics industry, although the underlying dispute arose in the very different context of manufacturing of newsprint. The case affirms that the law of the province of Québec, which province is of course a very significant source of Canadian aeronautical products, is indeed significantly different from that of the common law provinces with respect to the liability of a manufacturer. The particular issue addressed by the Court is the right of a manufacturer to contract out of liability for latent defects.
Combustion Engineering Canada (“C.E.”), which is now a part of the ABB group and Alstrom Canada, manufactured a recovery boiler for Domtar, a Canadian paper company, in the period between 1985 and 1987. The boiler, designed to recover a toxic product of the pulping process, was a massive piece of equipment which included three superheaters. Within these heaters were some 75 miles of tubing held together by approximately 48,000 tie welds. The problem which led to the litigation was the adequacy of the tie welds used by C.E.
The welds in question are described as “H-style tie welds”. C.E. began using these in 1977, having noted some problems associated with the “A-style” welds it used previously. In introducing the new welds, C.E. did not do a stress analysis. In the early 1980’s, and certainly before the contract between C.E. and Domtar, C.E. came into possession of information which cast doubt on the performance of the “H-style” welds and furthermore was aware of a superior hinge-pin system of attachment.
In the discussions between C.E. and Domtar, Domtar asked whether hinge-pin attachments could be used instead of tie welds. C.E. confirmed this was a possibility and that the use of hinge-pins would add $500,000 to the purchase price. The matter was not pursued further.
The boiler was put into service in September, 1987 and problems began to become apparent 18 months later. In the course of an inspection a number of leaks and cracks were discovered in the tubing. Repairs were made and the boiler was returned to service some 2 weeks later. However, Domtar was apparently of the view that it could not rely upon the boiler in its present condition and demanded that C.E. make more thorough repairs. C.E. refused and Domtar decided to replace the boiler entirely. It did so and commenced legal action against C.E.
The main issues which occupied the attention of the courts were: Was there a design defect? If so, which of the contracting parties knew of the defect and which should be taken to know of it? In any event, what is the relevance of such knowledge (or imputed knowledge)? In the event there was a defect, was C.E. entitled to avoid any responsibility by a contractual term purporting to exclude its liability?
The trial judge would have cut the discussion short with a finding that there was no defect at all (although he also found C.E. was in breach of a duty to inform) and this could have been an end to the discussion. However, the Court of Appeal for Québec found it was able to replace the judge’s finding on this issue with its own. In both the Court of Appeal and the Supreme Court, the matter proceeded on the basis of a finding that there was indeed a defect.
The Court conducted its analysis on the basis that the rights of the parties would be determined by the Civil Code of Lower Canada (the predecessor of the current Civil Code of Québec) which stipulates that a seller is obliged to provide a warranty against certain latent defects. C.E. attempted to avoid the consequences of this statute by the proposition that the warranty against latent defects should not be absolute but should require a consideration of the expertise of the seller and buyer. A buyer with expertise should not be able to hold a seller to a strict warranty in the face of a contract which appears to exclude liability. While the Court agreed that expertise is an important consideration, the consequences of expertise differ as between the seller and buyer. A manufacturer will be presumed to have the highest level of expertise and knowledge with respect to his products and will, subject to other conditions discussed below, be required to make good any damage resulting from a defective product. Now, the first condition is that the defect be “latent” and the expertise of the buyer is relevant to this question. If the buyer detected the defect at the time of sale (or if he should have detected it), the defect is not latent and the statutory warranty is not applicable.
Assuming the buyer does not know, and is not deemed to know, of the defect, the next issue to be addressed is the nature of the loss of use which results from the defect. The loss must be sufficiently serious. This does not mean that the good must be rendered completely unusable, but the loss must be such as would have affected the purchaser’s willingness to buy, had he known of the defect. If such a defect exists at the time of sale and is not known to the buyer, the seller’s liability under the statutory warranty is engaged.
The next question is whether the seller can avoid that liability by a contractual exclusion clause. After a lengthy consideration of Québec precedents and French antecedents, the Supreme Court concluded that a manufacturer will rarely be able to rely upon a contractual limitation clause once its liability has been engaged. A manufacturer will be presumed to know of the latent defect. This presumption is rebuttable, but a heavy onus rests upon the manufacturer and it would appear unlikely that a manufacturer will often succeed in rebutting the presumption. By way of contrast, it will be recalled that if the buyer has knowledge of the defect the liability of the seller is not engaged at all. However, there is no presumption that a buyer, even a sophisticated buyer, has the requisite knowledge and the onus of proving that knowledge rests on the seller.
Thus a manufacturer subject to the law of Québec may be subject to an action for breach of the statutory warranty even in the face of the most clearly written exclusion clause and this without any proof that the sales transaction was unconscionable. By contrast, in the common law world, a manufacturer will generally be entitled to rely upon a clearly worded exclusionary provision unless there is a showing of unconscionability
On the facts of the present case, the Court found that all the elements were in place to support a finding that C.E. was liable under the warranty and was not able to exclude that liability by contract. The defect was sufficiently serious, it existed at the time of sale and Domtar was not aware of it. C.E. may have had an honest belief in the adequacy of its product, but this was not sufficient to rebut the presumption of knowledge. To do so, it would have been necessary to show that it could not reasonably have obtained knowledge of the defect.
ABB Inc v. Domtar
2007 SCC 50