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DIVISION OF POWERS - Navigation and shipping - Property and civil rights - Determination of jurisdiction

Thursday, November 28, 2019 @ 2:08 PM  

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Appeal from a judgment of the Quebec Court of Appeal holding the defendants Wärtsilä Nederland B.V. and its Canadian division, Wärtsilä Canada Inc. (“Wartsila”) liable for latent defects in ship engine parts sold to the plaintiff Transport Desgagnés Inc. (“TDI”), but limiting its liability to €50,000 pursuant to a limitation of liability clause in the contract. TDI, a shipping company, suffered damage to the crankshaft and bedplate of the main engine of one of its ships as a result of an accident. It purchased a reconditioned crankshaft from Wartsila. The contract of sale, which was formed in Montreal, Wartsila’s place of business, provided a six-month warranty and limited the Wartsila’s liability to €50,000. The choice of law clause stipulated that the contract was governed by the laws in force at the office of the supplier. After expiration of the warranty, the ship’s main engine suffered a major failure. The trial judge held that the failure was caused by a latent defect in the crankshaft sold by Wartsila, and further held that the dispute was governed by the Civil Code of Quebec (C.C.Q) rather than Canadian maritime law. As a result, the limitation of liability clause was unenforceable, and Wartsila was liable for the full amount of damages, approximately CAN$5.6 million. On appeal, the majority of the Court of Appeal held that Canadian maritime law applied to the dispute and that consequently Wartsila could rely on the limitation of liability clause to restrict its liability to €50,000.

HELD: Appeal allowed. To determine whether Canadian maritime law or the C.C.Q. applied, it was necessary to determine whether the matter fell within the federal power over navigation and shipping, or the provincial power over property and civil rights, or both, through a division of powers analysis, which required: (1) characterizing the relevant matter; and (2) classifying it according to the heads of legislative power enumerated in the Constitution Act, 1867. The Canadian maritime law at issue was non-statutory. As a result, a modified pith and substance test applied at the characterization stage: one that looked at the substantive law at issue and to the particular fact situation, rather than to purpose and effect. For a dispute purportedly governed by Canadian maritime law, courts were to determine on a case-by-case basis whether Canadian maritime law could validly extend to that dispute. Where the dispute was one in contract, what mattered was the nature of the agreement as understood in light of the terms and purpose of the contract, and the circumstances in which it was formed. The nature and circumstances of the contractual breach were not determinative, because the parties to a contract must be able to determine the governing law from the moment they negotiated it. In the present case, the matter at issue was characterized as the sale of marine engine parts intended for use on a commercial vessel. At the classification stage, the integral connection test was the proper method for determining whether the matter was subject to the federal power over navigation and shipping enumerated at s. 91(10) of the Constitution Act, 1867. Courts had interpreted the federal power over navigation and shipping generously in recognition of the national importance of the maritime industry. Whether a particular activity was integral to the exercise of a federal head of legislative power, or was sufficiently linked to validate federal regulation, was essentially a factual inquiry. In the present case, the sale of marine engine parts intended for use on a commercial vessel was integrally connected to navigation and shipping so as to come within federal legislative authority. Consequently, Canadian maritime law extended to the matter. That did not mean, however, that provincial law could not also validly govern the sale. The Court of Appeal erred when it disposed of this case after concluding that the matter at issue was integrally connected to navigation and shipping. A finding that Canadian maritime law could validly regulate a dispute did not end the analysis in the presence of an overlapping provincial rule. The contractual issues raised by TDI’s claim did not engage the core of the federal competence over navigation and shipping so as to trigger the doctrine of interjurisdictional immunity. Nor did the case present a conflict between a provincial and a federal legislative enactment so as to trigger the doctrine of federal paramountcy. It would run contrary to the purpose of the federal paramountcy doctrine to declare that the non-statutory rules of Canadian maritime law, created by courts with admiralty jurisdiction, could prevail over valid provincial legislation. Consequently, art. 1733 C.C.Q. was applicable and operative to govern the dispute between TDI and Wartsila, and it prevailed over Canadian non-statutory maritime law following the principle of the primacy of a legislative enactment. The judgment of the Quebec Court of Appeal was set aside and the conclusions of the trial judge holding the limitation of liability clause unenforceable were restored.

Transport Desgagnés Inc. v. Wärtsilä Canada Inc., [2019] S.C.J. No. 58, Supreme Court of Canada, R. Wagner C.J. and R.S. Abella, M.J. Moldaver, A. Karakatsanis, C. Gascon, S. Côté, R. Brown, M. Rowe and S. Martin, November 28, 2019, Digest No. TLD-November252019012-SCC