ABB Inc. v. Domtar Inc.

ABB Inc. v. Domtar Inc.
Collection
Supreme Court Judgments
Date
2007-11-22
Neutral citation
2007 SCC 50
Report
[2007] 3 SCR 461
Case number
31174, 31176, 31177
Judges
McLachlin, Beverley; Bastarache, Michel; Binnie, William Ian Corneil; LeBel, Louis; Deschamps, Marie; Fish, Morris J.; Abella, Rosalie Silberman; Charron, Louise; Rothstein, Marshall
On appeal from
Quebec
Subjects
Sale
Notes
SCC Case Information: 31177, 31174, 31176
Decision Content
SUPREME COURT OF CANADA
Citation: ABB Inc. v. Domtar Inc., [2007] 3 S.C.R. 461, 2007 SCC 50
Date: 20071122
Docket: 31176, 31177, 31174
Between:
ABB Inc. and Alstom Canada Inc.
Appellants
and
Domtar Inc.
Respondent
and between:
Chubb Insurance Company of Canada
Appellant
and
Domtar Inc.
Respondent
and between:
Domtar Inc.
Appellant
and
Arkwright Mutual Insurance Company
Respondent
Official English Translation
Coram: McLachlin C.J. and Bastarache, Binnie, LeBel, Deschamps, Fish, Abella, Charron and Rothstein JJ.
Joint Reasons for Judgment:
(paras. 1 to 121)
LeBel and Deschamps JJ. (McLachlin C.J. and Bastarache, Binnie, Fish, Abella, Charron and Rothstein JJ. concurring)
______________________________
ABB Inc. v. Domtar Inc., [2007] 3 S.C.R. 461, 2007 SCC 50
ABB Inc. and Alstom Canada Inc. Appellants
v.
Domtar Inc. Respondent
‑ and ‑
Chubb Insurance Company of Canada Appellant
v.
Domtar Inc. Respondent
‑ and ‑
Domtar Inc. Appellant
v.
Arkwright Mutual Insurance Company Respondent
Indexed as: ABB Inc. v. Domtar Inc.
Neutral citation: 2007 SCC 50.
File Nos.: 31176, 31177, 31174.
2006: November 8; 2007: November 22.
Present: McLachlin C.J. and Bastarache, Binnie, LeBel, Deschamps, Fish, Abella, Charron and Rothstein JJ.
on appeal from the court of appeal for quebec
Sale — Latent defect — Limitation of liability — Damages — Purchase of recovery boiler by paper manufacturer — Leaks and cracks in boiler’s superheater caused by tie welds connecting its tubes together — Superheater repaired but subsequently replaced by paper manufacturer with product supplied by another boiler manufacturer — Action in damages for latent defects and for breach of duty to inform buyer — Whether conditions for existence of latent defect are met — Whether clause limiting seller’s liability is applicable where seller knew or is presumed to have known about latent defect — Whether seller breached its duty to inform or buyer its duty to inquire — Whether buyer is entitled to be reimbursed for losses sustained with respect to repairs and to recover costs incurred to replace superheater — Whether insurer was subrogated to buyer’s rights in respect of payment made to buyer, and whether damages awarded to buyer should be reduced proportionally to that payment — Civil Code of Lower Canada, art. 1527.
Sale — Duty to inform — Latent defect — Inclusion of seller’s duty to inform in warranty against latent defects.
Domtar built a new pulp and paper mill in Windsor, Quebec. In December 1984, it purchased a recovery boiler manufactured by C.E. (now ABB and Alstom) for $13,500,000. The contract of sale included a clause limiting the seller’s liability. The boiler’s design included a superheater with “H‑style” tie welds even though, at the time, C.E. was aware of problems resulting from the use of such welds and knew about the technology of hinge‑pin attachments. In March 1989, 18 months after the boiler was put into service, tests by Domtar revealed some leaks and hundreds of cracks in the superheater’s tubes. C.E. replaced a number of H‑style tie welds with hinge‑pin attachments, but there was disagreement as to a permanent solution to the problem. In October 1989, at Domtar’s request, a competitor of C.E. replaced the three banks of the superheater with elements installed using hinge‑pin attachments. Domtar brought an action in damages against C.E. that was based on the warranty against latent defects and the duty to inform. It also sued a number of insurers, including Chubb and Arkwright, the former on the basis of a performance bond granted to C.E. for latent defects, and the latter under an “all risk” insurance policy held by Domtar. However, Domtar discontinued its action against the insurer Lloyd’s pursuant to an agreement that included the payment of $1,578,900.
The Superior Court rejected the latent defect claim, but found that C.E. had not discharged its duty to inform as regards the risks associated with tie welds. It condemned C.E. to pay $13,366,583 in damages, less the $1,578,900 paid by Lloyd’s, on the basis that Lloyd’s was, as a result of that payment, subrogated to Domtar’s rights. Given that there was no latent defect, the court dismissed the action against Chubb; it also dismissed the claim against Arkwright on the basis that the cost of replacing the superheater was not insured. The Court of Appeal ruled that C.E. was liable on the basis of both the legal warranty against latent defects and the duty to inform. It held that the amount paid by Lloyd’s should not be deducted. It condemned the insurer Chubb, solidarily with C.E., to pay Domtar the amount provided for in the performance bond. It affirmed the decision to dismiss Domtar’s action against Arkwright.
Held: The appeals should be dismissed.
Given that all the facts alleged in support of Domtar’s action occurred before 1994, and in light of ss. 83 and 85 of the Act respecting the implementation of the reform of the Civil Code, the issues relating to the warranty against latent defects must be resolved by applying the Civil Code of Lower Canada (“C.C.L.C.”). [30]
In intervening, the Court of Appeal did not reassess the evidence in the record, but relied on the trial judge’s findings of fact to arrive at a different conclusion of law regarding the nature of the defect. That conclusion is therefore not inconsistent with the principle of deference for a trial judge’s assessment of the facts. Rather, the issue here is one of legal characterization. [37]
Article 1527 C.C.L.C. provides that any seller who knows or is legally presumed to know about the defects of the thing is obliged to pay for all damage suffered by the buyer. In Quebec civil law, manufacturers are considered to be the ultimate experts with respect to goods because they have control over the labour and materials used to produce them. Consequently, they are subject to the strongest presumption of knowledge and to the most exacting obligation to disclose latent defects. The buyer’s expertise is also relevant as it serves to assess whether the defect is latent or apparent. The more knowledge a buyer has of a good being purchased, the more likely it is that a defect in that good will be considered apparent. Buyers therefore have an obligation to inform themselves by carrying out a reasonable inspection of the good. The test is whether a reasonable buyer in the same circumstances could have detected the defect at the time of the sale. However, the buyer’s expertise does not nullify the presumption applicable to the manufacturer. The manufacturer will be unable to rely on a limitation of liability clause unless it can rebut the presumption of knowledge of the defect. [39] [41‑42] [44]
Regardless of whether the defect is a material defect, a functional defect or a conventional defect, it must have four characteristics, all of which are essential to the warranty: it must be latent, must be sufficiently serious, must have existed at the time of the sale and must have been unknown to the buyer. All these conditions are met in the case at bar. The trial judge erred in concluding that the cracking of the tubes was a design feature rather than a design defect. First, he limited the definition of a defect to a problem preventing the good from being used at all and, second, he confused the sale of a lower‑performance version of a good with the sale of a defective one. A defect will be considered to be serious if it renders the good unfit for its intended use or so diminishes its usefulness that the buyer would not have bought it at the price paid. Domtar would not have bought a boiler with H‑style tie welds if it had been informed of the risks associated with this type of attachment. C.E. used these attachments without having independent analyses conducted to determine whether they could withstand the stress placed on the tubes by the circulation of steam at high temperatures. It chose to rely on its customers’ assessments and delayed the adoption of hinge‑pin attachments in order to maintain its competitive position. Domtar was unaware of the defect at the time of the sale because C.E. had not shared the information it possessed on this subject with Domtar. Even though Domtar was described as a sophisticated operator, and however expert it was at using boilers, it cannot be characterized as a professional “of identical expertise” to C.E. Nor is the defect apparent simply because Domtar was assisted by an expert. The cause of the excessive cracking was unknown to both Domtar and its expert. [45] [50] [86‑88] [91] [93] [97] [99] [101]
To rebut the presumption of knowledge of the defect provided for in art. 1527 C.C.L.C., it is never open to a manufacturer to rely on its ignorance of the defect as its sole defence. The manufacturer must show that it did not know about the defect and that its lack of knowledge was justified, that is, 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. To absolve a manufacturer from liability will be justified only if the manufacturer shows that it had full knowledge of the technology in its field at the time the good was designed and that the defect in question cannot be attributed to it. In light of the strength of the presumption of knowledge applicable to it, the manufacturer must meet a high standard of diligence, and the range of defences available to it to rebut the presumption is very narrow. C.E.’s argument is based not on fault on the part of Domtar or a third party, or on superior force or development risk, but on its own good faith throughout its business relations with Domtar. In this case, it can be seen from the evidence that C.E. had known about the problems associated with tie welds since the early 1980s and that a better technology was available to it as of that time. [69‑72] [102] [104]
The duty to inform and the warranty against latent defects are two concepts that overlap, but the former derives from the general principle of good faith, whereas the latter is expressly provided for in the C.C.L.C. and the Civil Code of Québec. Furthermore, the scope of the general duty to inform is much broader than that of the disclosure of a latent defect. The duty to inform is subsumed in the analysis of the seller’s liability for latent defects, and there is no need for the court to conduct a separate analysis on the duty. [107‑109]
Because a clause in the insurance contract between Lloyd’s and Domtar expressly excluded damage resulting from a breakdown of or defect in the recovery boiler, the payment made by Lloyd’s could not have been related to the damages being claimed by Domtar. Lloyd’s was not, therefore, subrogated to Domtar’s rights and the damages claimed by Domtar should not be reduced by the amount of the payment. [113]
Chubb agreed to guarantee the performance of C.E.’s obligations under the contract of sale for the recovery boiler. Since there was a latent defect in the superheater, Chubb is solidarily liable for the amount of its guarantee. [114]
The “all risk” insurance policy issued by Arkwright for Domtar’s property contained a clause excluding damage resulting from latent defects. To accept Domtar’s contention that the welds can be dissociated from the superheater would render the exclusion clause meaningless. [115] [119]
Cases Cited
Applied: Desgagné v. Fabrique de St‑Philippe d’Arvida, [1984] 1 S.C.R. 19; Placement Jacpar Inc. v. Benzakour, [1989] R.J.Q. 2309; Samson & Filion v. Davie Shipbuilding & Repairing Co., [1925] S.C.R. 202; Touchette v. Pizzagalli, [1938] S.C.R. 433; Manac inc./Nortex v. Boiler Inspection and Insurance Co. of Canada, [2006] R.R.A. 879; referred to: Marquis v. Saltsman, J.E. 2002‑1729, SOQUIJ AZ‑50143509; Rousseau v. 2732‑1678 Québec inc., [1999] R.D.I. 565; Société en commandite A.C. enr. v. Wadieh, [1997] R.D.I. 345; Bertrand v. Pelletier, [1997] R.D.I. 321; Poirier v. Martucelli, [1995] R.D.I. 319; Trottier v. Robitaille, [1994] R.D.I. 537; Cloutier v. Létourneau, [1993] R.L. 530; Rousseau v. Gagnon, [1987] R.J.Q. 40; Auto Peliss ltée v. Proulx Pontiac Buick ltée, [2001] R.J.Q. 856; Garage Robert inc. v. 2426‑9888 Québec inc., [2001] R.J.Q. 865; Trois Diamants Autos (1987) ltée v. M.G.B. Auto inc., [2001] R.J.Q. 860; General Motors Products of Canada v. Kravitz, [1979] 1 S.C.R. 790; Oakwood Construction Inc. v. Ratthé, [1993] R.D.I. 181; Blandino v. Colagiacomo, [1989] R.D.I. 148; Oppenheim v. Forestiers R.P.G.M. inc., J.E. 2002‑1197, SOQUIJ AZ‑50133145; London & Lancashire Guarantee & Accident Co. of Canada v. Cie F.X. Drolet, [1944] S.C.R. 82; Civ. 1re, November 24, 1954, J.C.P. 1955.II.8565, obs. H. B.; Civ. 1re, January 19, 1965, D. 1965.389, obs. Cornu; Com., November 6, 1978, J.C.P. 1979.II.19178, obs. Ghestin; Com., October 8, 1973, J.C.P. 1975.II.17927, obs. Ghestin; Civ. 3e, October 30, 1978, J.C.P. 1979.II.19178; Tony’s Broadloom & Floor Covering Ltd. v. NMC Canada Inc. (1995), 22 O.R. (3d) 244, aff’d (1996), 31 O.R. (3d) 481; Jenkins v. Foley (2002), 215 Nfld. & P.E.I.R. 257, 2002 NFCA 46; Parlby Construction Ltd. v. Stewart Equipment Co., [1972] 1 W.W.R. 503; Guarantee Co. of North America v. Gordon Capital Corp., [1999] 3 S.C.R. 423; Hunter Engineering Co. v. Syncrude Canada Ltd., [1989] 1 S.C.R. 426; R. G. McLean Ltd. v. Canadian Vickers Ltd., [1971] 1 O.R. 207; Bank of Montreal v. Bail Ltée, [1992] 2 S.C.R. 554.
Statutes and Regulations Cited
Act respecting the implementation of the reform of the Civil Code, S.Q. 1992, c. 57, ss. 4, 83, 85.
Civil Code of Lower Canada, arts. 1522, 1523, 1524, 1527, 1528, 2202.
Civil Code of Québec, S.Q. 1991, c. 64, arts. 6, 7, 1375, 1473, 1726, 1728, 1729, 1733, 2847.
Code civil (France), arts. 1641, 1642, 1643, 1644, 1645.
Authors Cited
Barreau du Québec. Cours de la formation professionnelle 1988‑1989. Droit civil et procédure civile, vol. 3, Contrats et vente. “La vente 1” par Jacques Deslauriers. Cowansville, Qué.: Yvon Blais, 1988, 51.
Barret, Olivier. “Vente”, dans P. Raynaud, dir., Répertoire de droit civil, t. X, 2e éd. Paris: Dalloz, 1979 (mise à jour 2007).
Bénabent, Alain. Droit civil: Les contrats spéciaux civils et commerciaux, 5e éd. Paris: Montchrestien, 2001.
Cornu, Gérard. Observation sous Civ. 1re, 19 janvier 1965, Rev. trim. dr. civ. 1965.665.
Cornu, Gérard. Observation sous Com.,6 novembre 1978 et Civ. 3e, 30 octobre 1978, Rev. trim. dr. civ. 1979.392.
Côté, Pierre‑André, et Daniel Jutras. Le droit transitoire civil: Sources annotées. Cowansville, Qué.: Yvon Blais, 1994 (mise à jour février 2006, envoi no 17).
Edwards, Jeffrey. La garantie de qualité du vendeur en droit québécois. Montréal: Wilson & Lafleur, 1998.
Fridman, G. H. L. The Law of Contract in Canada, 5th ed. Toronto: Thomson/Carswell, 2006.
Huet, Jérôme. Les principaux contrats spéciaux, 2e éd. Paris: L.G.D.J., 2001.
Jobin, Pierre‑Gabriel. “Précis on sale”, in Reform of the Civil Code, vol. 3A, Sale. Texts written for the Barreau du Québec and the Chambre des notaires du Québec. Translated from the French by J. Daniel Phelan with assistance from Susan Altschul. Montréal: Barreau du Québec, 1993.
Lamontagne, Denys‑Claude. Droit de la vente, Cowansville, Qué.: Yvon Blais, 1995.
Langelier, F. Cours de droit civil de la province de Québec, t. V. Montréal: Wilson & Lafleur, 1909.
le Tourneau, Philippe. La responsabilité civile, 3e éd. Paris: Dalloz, 1982.
Mignault, P.-B. Le droit civil canadien, t. VII. Montréal: Wilson & Lafleur, 1906.
Pothier, Robert Joseph. Œuvres de Pothier, t. II. Nouvelle édition publiée par M. Dupin. Paris: Béchet Ainé, 1823.
Pourcelet, Michel. La vente, 5e éd. Montréal: Thémis, 1987.
Québec. Ministère de la Justice. Commentaires du ministre de la Justice — Le Code civil du Québec: Un mouvement de société, t. I et III. Québec: Publications du Québec, 1993.
Rousseau‑Houle, Thérèse. Précis du droit de la vente et du louage, 2e éd. Québec: Presses de l’Université Laval, 1986.
Traité de droit civil du Québec, t. 11, par Léon Faribault. Montréal: Wilson & Lafleur, 1961.
APPEAL from a judgment of the Quebec Court of Appeal (Forget, Rochette and Bich JJ.A.), [2005] R.J.Q. 2267, [2005] Q.J. No. 11604 (QL), 2005 QCCA 733, setting aside in part a judgment of Hilton J., [2003] R.J.Q. 2194, SOQUIJ AZ‑50181950, [2003] Q.J. No. 9442 (QL). Appeal dismissed.
APPEAL from a judgment of the Quebec Court of Appeal (Forget, Rochette and Bich JJ.A.), [2005] Q.J. No. 11601 (QL), 2005 QCCA 730, setting aside a judgment of Hilton J., [2003] R.J.Q. 2194, SOQUIJ AZ‑50181950, [2003] Q.J. No. 9442 (QL). Appeal dismissed.
APPEAL from a judgment of the Quebec Court of Appeal (Forget, Rochette and Bich JJ.A.), [2005] R.R.A. 1046, [2005] Q.J. No. 11603 (QL), 2005 QCCA 732, affirming a judgment of Hilton J., SOQUIJ AZ‑50181803, [2003] Q.J. No. 13846 (QL). Appeal dismissed.
Éric Mongeau, Patrick Girard and Charles Nadeau, for the appellants ABB Inc., Alstom Canada Inc. and Chubb Insurance Company of Canada.
Olivier F. Kott, Gregory B. Bordan, André Legrand and Emmanuelle Demers, for the appellant/respondent Domtar Inc.
Gordon Kugler and Stuart Kugler, for the respondent Arkwright Mutual Insurance Company.
English version of the judgment of the Court delivered by
1 LeBel and Deschamps JJ. — 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. This trend in the law of obligations has had a profound influence on the choices made by the Quebec legislature and on the decisions of our courts. It should of course inform the approach of parties to a contract of sale to the exercise of their rights and the performance of their obligations.
2 There are three appeals before the Court. The main case involves a claim concerning a latent defect and pits two major industrial concerns against one another. The other two cases involve incidental claims against insurance companies. This judgment deals with all three of these cases, but we will first discuss the main case, its origins and the issues it raises with regard to the nature and application of certain aspects of the legal framework of contracts of sale in Quebec civil law.
3 Our analysis will focus on the legal warranty against latent defects. We will discuss, inter alia, the effect of the parties’ level of expertise on their mutual obligations, and the nature of the civil law presumptions regarding knowledge of certain defects. As part of this discussion, we will consider the right of sellers to set limitation of liability clauses up against buyers. Thus, after reviewing the facts and the judicial history, we will discuss the relevant principles and how they apply to the facts of the case at bar.
1. Facts
1.1 Acquisition of a Recovery Boiler by Domtar
4 Domtar Inc. is a Canadian paper manufacturer whose principal activities consist of the production of pulp and paper and of related by‑products. In 1984, it decided to build a new pulp and paper mill in Windsor, Quebec. It retained H.A. Simons and Sandwell & Company Limited (“Simons‑Sandwell”) as consultants for all aspects of the construction of the mill, including the acquisition of a recovery boiler.
5 Combustion Engineering Canada Inc. (“C.E.”) (now ABB Inc. and Alstom Canada Inc.) was an international company in the business of manufacturing and installing industrial equipment. It was the largest producer of recovery boilers in Canada. In August 1984, it offered to sell Domtar a recovery boiler with rigid “H‑style” tie welds for $13,500,000. Domtar accepted C.E.’s offer on December 31, 1984, and the boiler was put into service on September 21, 1987.
6 The recovery boiler purchased by Domtar was a complex and massive piece of equipment. Its upper portion was equipped with a superheater divided into three banks: the Low Temperature Superheater (“LTSH”), the Intermediate Temperature Superheater (“ITSH”) and the High Temperature Superheater (“HTSH”). These banks consisted of 75 miles of tubes, which were connected together by approximately 48,000 tie welds. A recovery boiler, whose purpose is the recovery of black liquor, is designed to be in continuous use, apart from scheduled maintenance periods.
1.2 Appearance of Cracks in and Leaks from the Superheater’s Tubes
7 In the 1970s, C.E. had noted that the design of the “A‑style” tie welds it was then using was causing cracks to form. To remedy this, it adopted a new design in 1977: the H‑style tie weld. Believing that it had in so doing solved the cracking problem, C.E. did not conduct a stress analysis of the new H‑style welds. Instead, it waited for comments from its buyers. Between January 1983 and the end of 1986, a number of internal memoranda were circulated at C.E., and at its parent company, regarding problems with the use of H‑style tie welds and the resulting dissatisfaction of their customers in the United States and Canada. Furthermore, C.E. had also been using flexible hinge‑pin attachments since the early 1980s, and these were recommended to one customer in 1985.
8 Nevertheless, the technical specifications set out in the tender prepared by C.E. for Domtar in August 1984 did not propose a specific type of attachment. Only one discussion on this subject has been mentioned, and it took place during a meeting in October 1984. At that meeting, Domtar’s project manager asked C.E. if it would be possible to obtain hinge‑pin attachments instead of tie welds. C.E.’s answer was limited to confirming that this was possible and mentioning that this solution would cost an additional $500,000. Domtar did not pursue the matter further.
9 According to Hilton J., the trial judge, it was mentioned in an internal C.E. memorandum in May 1987 that most of the proposals C.E. was submitting to customers involved the use of hinge pins. The author of the memorandum added that for C.E.’s engineering branch, which was responsible for preparing its proposals, hinge‑pin attachments had become the new standard. C.E. accordingly began offering hinge‑pin attachments in 1988, but to keep its prices competitive, it proposed them only where there were problems with the tie welds or if a buyer specifically requested hinge pins. It did not actually adopt hinge‑pin attachments as its standard until the following year. C.E. did not cease entirely to use H‑style tie welds, as it still uses them to this day for certain new boilers and for repairs to existing boilers that were delivered with tie welds.
10 On March 24, 1989, 18 months after the boiler was put into service, Domtar shut it down for an unscheduled inspection after the superheater began making an unusual noise. Standard tests revealed 6 leaks and 97 cracks in the ITSH; another 667 cracks were detected in the HTSH. Domtar asked C.E. to make the necessary repairs. During this shutdown, only 20 percent of the welds were inspected in detail. C.E. replaced 99 tie welds in the ITSH and 690 in the HTSH with hinge‑pin attachments. The recovery boiler was not returned to service until April 6, 1989.
1.3 Decision to Replace the Superheater
11 After the boiler was returned to service, the parties held discussions with a view to finding a permanent solution to the problem. Domtar asked C.E. to repair the superheater, but C.E. refused. It proposed to Domtar that the HTSH section be replaced with a new one using more hinge‑pin attachments, and that all tie welds in the LTSH and ITSH sections be inspected. Domtar instead decided to replace the entire superheater.
12 Because of the disagreement, Domtar initiated legal proceedings against C.E. It also sued a number of insurers, including Underwriters at Lloyd’s (“Lloyd’s”), in respect of the damage resulting from the purchase of the boiler from C.E. On June 12, 2001, in an agreement entitled “Confidential Settlement Agreement and Release”, Domtar agreed to waive a series of insurance claims against Lloyd’s in exchange for a total payment of US$10,500,000, including US$1,000,000 expressly identified as being for the settlement “of all past, present and future claims of any and all other types” (Domtar inc. v. A.B.B. inc., [2003] R.J.Q. 2194 (Sup. Ct.) (“Domtar”), at para. 228). In accordance with the agreement, it discontinued its action against Lloyd’s.
13 Domtar also claimed the enforcement of a performance bond under which Chubb Insurance Company of Canada (“Chubb”) stood surety for C.E. in respect of its obligations to Domtar. In a second case, Domtar sued Arkwright Mutual Insurance Company (“Arkwright”) under an all risk insurance policy issued to it.
14 In October 1989, Babcock & Wilcox (“B. & W.”), another recovery boiler manufacturer, replaced the three banks of the C.E. superheater with elements installed using hinge‑pin attachments. After this, a comprehensive analysis of the C.E. superheater revealed three new leaks and a tube failure in the ITSH, as well as 272 cracks in the HTSH, 463 in the ITSH and 124 in the LTSH. The depth of some of the cracks in the ITSH exceeded 50 percent of the thickness of one of the tubes. Domtar used the B. & W. superheater for 10 years without any reported leaks or unscheduled shutdowns because of leaks. This superheater was replaced in 1999.
2. Judicial History
2.1 Quebec Superior Court
15 According to Hilton J., the cracks and leaks related to the use of tie welds did not constitute a design defect, but rather a design feature of the superheater, since the superheater could be used for its intended purpose despite the cracks. However, he found that C.E. had not discharged its duty to inform, since it had not given Domtar the information it possessed about the respective characteristics of tie welds and hinge‑pin attachments. The judge was satisfied that Domtar would have opted for hinge‑pin attachments had it received this information from C.E. He also felt that while it might have been open to C.E. to set up the limitation of liability clause against a latent defect claim, C.E. could not invoke the clause in the instant case to defend against the consequences of the breach of its duty to inform Domtar. The trial judge condemned C.E. to pay the damages agreed upon by the parties, less the $1,578,900 (US$1,000,000) paid by Lloyd’s, on the basis that Lloyd’s was, as a result of that payment, subrogated to Domtar’s rights.
16 Finally, because he had found that there was no latent defect, the trial judge dismissed the action against Chubb relating to the performance bond: [2003] R.J.Q. 2194. In a separate judgment, he also dismissed Domtar’s claim against its other insurer, Arkwright, on the basis that the damage connected with the superheater did not constitute an insured loss: SOQUIJ AZ‑50181803.
2.2 Quebec Court of Appeal
17 Although it did not question the trial judge’s findings of fact, the Court of Appeal ruled that C.E. was liable on the basis of the legal warranty against latent defects. According to the Court of Appeal, the evidence clearly established that Domtar was looking for a reliable boiler that would operate without interruption, and that C.E. was aware of this. Domtar would not have purchased this boiler had it known that the tie welds would cause unscheduled shutdowns. The Court of Appeal then considered C.E.’s duty to inform. Like the trial judge, it held that C.E. had breached its duty to inform Domtar. Since C.E. knew or was presumed to have known about the defect, it could not rely on the limitation of liability clause. In the Court of Appeal’s opinion, Domtar was accordingly entitled to replace the entire superheater at C.E.’s expense. However, the Court of Appeal disagreed with the trial judge on deducting the $1,578,900 paid by Lloyd’s. It therefore allowed Domtar’s cross‑appeal and increased the quantum of the order against C.E. accordingly: [2005] R.J.Q. 2267, 2005 QCCA 733.
18 The Court of Appeal condemned the insurer Chubb, solidarily with C.E., to pay Domtar $725,938.90 based on the performance bond: [2005] Q.J. No. 11601 (QL), 2005 QCCA 730. Finally, in the action against the insurer Arkwright, the Court of Appeal dismissed Domtar’s appeal on the basis of the clause excluding from coverage losses resulting from latent defects: [2005] R.R.A. 1046, 2005 QCCA 732.
3. Analysis
3.1 Issues
19 In the main case, the parties put five questions to this Court. First, was there a latent defect in the superheater? Second, did C.E. breach its duty to inform or Domtar its duty to inquire? Third, in what circumstances may a limitation of liability clause be set up against a buyer? Fourth, is Domtar entitled to recover the costs it incurred to replace the superheater? Fifth, was Lloyd’s subrogated to Domtar’s rights in respect of the payment it made to Domtar?
20 In the two incidental cases, the parties ask the Court to decide whether Domtar may require Chubb to execute its performance bond and whether the replacement of the superheater is a loss covered by Arkwright’s all risk insurance policy.
21 We will begin by summarizing the parties’ arguments and reviewing the most important of the relevant statutory provisions. We will then turn to the questions of law raised in the three cases.
3.2 Arguments of the Parties in the Main Case
22 C.E. has changed its arguments since the case began. At first, one of its main submissions was that the problems were due to improper use of the superheater. This defence has been abandoned. C.E. now submits that the rigidity of the attachments or the cracking inside the superheater does not constitute a latent defect. It argues that Domtar, as an informed user of recovery boilers, cannot claim to have been unaware of the characteristics of tie welds and hinge‑pin attachments and that Domtar breached its own duty to inquire.
23 C.E. also submits that it was protected by a limitation of liability clause because Domtar had a power of negotiation equal to its own. In C.E.’s view, the voluntary agreement of the parties must therefore prevail. Finally, C.E. argues that Domtar failed to mitigate its damages and that the $1,578,900 payment by Lloyd’s to Domtar should reduce Domtar’s claim against C.E. accordingly.
24 Domtar defends the Court of Appeal’s conclusion that there was a latent defect in the superheater. According to Domtar, C.E. knew or should have known at the time of the sale about the problem with the type of attachments to be used and should have proposed hinge‑pin attachments to Domtar. It therefore breached its duty to inform with regard to the likelihood of leaks and cracks associated with the use of tie welds. The decision to replace the superheater was reasonable in light of the information disclosed by C.E.
25 Before turning to the merits of the case, we must resolve two preliminary questions. First, in light of the date and nature of the claim, is it the Civil Code of Lower Canada (“C.C.L.C.”) or the Civil Code of Québec, S.Q. 1991, c. 64 (“C.C.Q.”), that applies under the transitional law rules? Second, did the Court of Appeal have jurisdiction to interfere with the trial judge’s conclusion that there was no latent defect?
3.3 Transitional Law
26 The main case concerns a contract of sale signed by the parties on December 31, 1984. As mentioned above, the parties’ arguments require that this Court determine whether there was a latent defect in the superheater and, if so, whether C.E. may rely on a limitation of liability clause.
27 Section 83 of the Act respecting the implementation of the reform of the Civil Code, S.Q. 1992, c. 57 (“A.I.R.C.C.”), provides that the rules of the C.C.L.C. governing legal and conventional warranties continue to apply to a contract entered into before 1994. It reads as follows:
83. In any contract made before 1 January 1994, the former legislation continues to apply to the warranties, both legal or conventional, to which the contracting parties are obliged between themselves or in respect of their heirs or successors by particular title.
This provision represents a specific application of the general rule in s. 4 A.I.R.C.C. that the former supplementary legislation subsists for the purpose of determining the extent and scope of the parties’ rights and obligations and the effects of the contract: Commentaires du ministre de la Justice (1993), vol. 3, at p. 71.
28 Section 83 A.I.R.C.C. is complemented in civil liability matters by s. 85 A.I.R.C.C. which reads as follows:
85. The conditions of civil liability are governed by the legislation in force at the time of the fault or act which causes the injury.
In his commentary on this provision (at p. 72), the Minister of Justice took care to specify
[translation] that since the conditions of civil liability are thus governed by the legislation in force at the time of the injurious fault or act, the grounds for exemption from liability, which are necessarily tied to the conditions of that liability, will also be governed by that same legislation . . . .
29 Sections 83 and 85 A.I.R.C.C. belong to the chapter setting out special provisions (ss. 11 to 170). In the event of conflict, they take precedence over the Act’s general provisions (ss. 2 to 10): P.‑A. Côté and D. Jutras, Le droit transitoire civil: Sources annotées (loose‑leaf), at pp. I/3‑1 et seq.
30 In the case at bar, Domtar has brought against C.E. an action in contract for damages that is based on the warranty against latent defects. All the facts alleged in support of this action occurred before 1994. In light of ss. 83 and 85 A.I.R.C.C., we conclude that in this case, the issues relating to the warranty against latent defects must be resolved by applying the C.C.L.C.
31 This being said, whether it is the C.C.L.C. or the C.C.Q. that is applied will have no impact on the outcome of the case, since the C.C.Q. essentially reproduces the C.C.L.C.’s rules where the warranty against latent defects in issue here is concerned, despite certain changes in the wording of the provisions relating to the issues of this case. The relevant provisions are reproduced in the Appendix.
32 Finally, the issue of subrogation in respect of the payment made by Lloyd’s and the incidental actions involving Chubb and Arkwright do not raise any special problems of transitional law. The answers to these questions depend essentially on a review of the stipulations in the contracts between the parties.
33 At this point, it will be necessary to consider whether the Court of Appeal had the authority to interfere with the trial judge’s finding that there was no latent defect. C.E. contests the legitimacy of the Court of Appeal’s recharacterization of the defects as latent defects, which it sees as improper interference with the trial judge’s assessment of the facts.
3.4 Standard for Intervention by the Court of Appeal
34 In discussing the Court of Appeal’s position, it is important to clearly understand the nature of its intervention with regard to the facts. Some fundamental distinctions must be drawn. In Desgagné v. Fabrique de St‑Philippe d’Arvida, [1984] 1 S.C.R. 19, this Court distinguished the simple assessment of facts from the legal characterization of those facts. Thus, an appellate court has the power, in exercising its jurisdiction, to reach its own legal characterization of the facts even though it accepts the trial judge’s assessment of them. Beetz J. stated the following (at p. 31):
Counsel for the respondents and appellant Lauréanne Harvey Desgagné argued that the gradual appearance of the construction defects is a question of fact which is within the exclusive province of the trial judge. That is not my view. Rather, I think it is a question of characterization and so considerably more than a simple question of fact. It is necessary to apply to the facts the legal concept of gradual emergence under art. 2259, just as, for example, in a civil liability case the Court has to decide whether a person’s act or omission should be characterized as fault within the meaning of art. 1053. This requires making an essentially normative judgment. It therefore does not entail substituting my own view of the evidence for that of the trial judge, but drawing conclusions in law based on the facts which she herself considered to have been established. When an appellate court accepts all the conclusions of fact as such made by the trial judge, as I do, it is in as good a position as he is to characterize those facts.
35 A few years later, in Placement Jacpar Inc. v. Benzakour, [1989] R.J.Q. 2309, at p. 2318, the Court of Appeal confirmed that the legal nature of the distinction between a latent defect and an apparent defect is also a question of law:
[translation] To [Benzakour], the characterization of a latent defect is essentially a question of fact. With respect for the opinion expressed in Lafontaine v. Audet, in which this question was seen primarily as one coming within the trier of fact’s power of assessment [p. 8 of the reasons of Monet J.A.], this Court’s position appears instead to be that this is a legal characterization issue. This Court is in as good a position as the trial judge to rule on it once the trial judge has established the facts on which the conclusions are based.
See to the same effect: Marquis v. Saltsman, J.E. 2002‑1729 (C.A.), SOQUIJ AZ‑50143509, at para. 51; Rousseau v. 2732‑1678 Québec inc., [1999] R.D.I. 565 (C.A.), at pp. 568‑69; Société en commandite A.C. enr. v. Wadieh, [1997] R.D.I. 345 (C.A.), at p. 348; Bertrand v. Pelletier, [1997] R.D.I. 321 (C.A.), at p. 325; Poirier v. Martucelli, [1995] R.D.I. 319 (C.A.), at p. 320; Trottier v. Robitaille, [1994] R.D.I. 537 (C.A.), at p. 538; Cloutier v. Létourneau, [1993] R.L. 530 (C.A.), at p. 531; Rousseau v. Gagnon, [1987] R.J.Q. 40 (C.A.), at p. 46.
36 In the instant case, the Court of Appeal began by noting that the parties were not contesting the trial judge’s findings of fact ([2005] R.J.Q. 2267, at para. 42). Thus, because tie welds were used, it was inevitable that cracks would develop, and probable that leaks would occur (paras. 100‑101). According to the Court of Appeal, the trial judge had not attached enough importance to Domtar’s intention to keep the recovery boiler in continuous use. It noted that the trial judge had found even so that Domtar would not have purchased the boiler had it known that the tie welds were likely to cause unscheduled shutdowns. Because the unscheduled shutdowns of the boiler resulted in an inability to use it, the Court of Appeal characterized this defect as a latent defect.
37 In intervening, the Court of Appeal did not reassess the evidence in the record. Rather, it relied directly on the trial judge’s findings of fact to arrive at a different conclusion of law regarding the nature of the defect (at para. 99):
[translation] The trial judge did not find that there was a latent defect in the equipment sold. With respect, we are of the opinion that his findings of fact should have led him to an affirmative conclusion on this point. [Emphasis added.]
This conclusion is not inconsistent with the principle of deference for a trial judge’s assessment of the facts. Rather, the issue here is one of legal characterization, and therefore a question of law. Consequently, the Court of Appeal had the power to vary the trial judge’s finding on the existence of a latent defect. Now that these preliminary issues have been settled, we will turn to the issue of t