Bow Valley Husky (Bermuda) Ltd. v. Saint John Shipbuilding Ltd.

Bow Valley Husky (Bermuda) Ltd. v. Saint John Shipbuilding Ltd.
Collection
Supreme Court Judgments
Date
1997-12-18
Report
[1997] 3 SCR 1210
Case number
24855
Judges
La Forest, Gérard V.; Sopinka, John; Gonthier, Charles Doherty; Cory, Peter deCarteret; McLachlin, Beverley; Iacobucci, Frank; Major, John C.
On appeal from
Newfoundland and Labrador
Subjects
Torts
Notes
SCC Case Information: 24855
Decision Content
Bow Valley Husky (Bermuda) Ltd. v. Saint John Shipbuilding Ltd., [1997] 3 S.C.R. 1210
Husky Oil Operations Ltd. Appellant (Plaintiff)
v.
Saint John Shipbuilding Limited,
Raychem Canada Limited and Raychem
Corporation Respondents (Defendants)
and
Bow Valley Husky (Bermuda) Ltd. and
Bow Valley Industries Ltd. (Plaintiffs)
and between
Bow Valley Industries Ltd. Appellant (Plaintiff)
v.
Saint John Shipbuilding Limited,
Raychem Canada Limited and Raychem
Corporation Respondents (Defendants)
and
Bow Valley Husky (Bermuda) Ltd. and
Husky Oil Operations Ltd. (Plaintiffs)
and by way of cross‑appeal between
Saint John Shipbuilding
Limited Appellant by Cross‑Appeal (Defendant)
v.
Bow Valley Husky (Bermuda) Ltd.,
Husky Oil Operations Ltd. and Bow Valley Industries Ltd. Respondents by Cross‑Appeal (Plaintiffs)
and
Raychem Canada Limited and Raychem
Corporation (Defendants)
and by way of cross‑appeal between
Raychem Canada Limited and Raychem Corporation Appellants by Cross‑Appeal (Defendants)
v.
Bow Valley Husky (Bermuda) Ltd.,
Husky Oil Operations Ltd. and Bow Valley Industries Ltd. Respondents by Cross‑Appeal (Plaintiffs)
and
Saint John Shipbuilding Limited (Defendant)
and by way of cross‑appeal between
Bow Valley Husky (Bermuda) Ltd. Appellant by Cross‑Appeal (Plaintiff)
v.
Saint John Shipbuilding Limited,
Raychem Canada Limited and Raychem Corporation Respondents by Cross‑Appeal (Defendants)
and
Husky Oil Operations Ltd. and Bow Valley Industries Ltd. (Plaintiffs)
Indexed as: Bow Valley Husky (Bermuda) Ltd. v. Saint John Shipbuilding Ltd.
File No.: 24855.
1997: June 19; 1997: December 18.
Present: La Forest, Sopinka,* Gonthier, Cory, McLachlin, Iacobucci and Major JJ.
on appeal from the court of appeal for newfoundland
Torts ‑‑ Duty to warn -- Manufacturer and supplier ‑‑ Fire on oil drilling rig causing major damage requiring extensive repairs ‑‑ Fire started by arcing in heat trace system ‑‑ Whether shipbuilder and system manufacturer had duty to warn rig owner of inflammability of product used in system ‑‑ Whether shipbuilder’s duty to warn excluded by its contract with rig owner ‑‑ Whether manufacturer entitled to rely on learned intermediary defence.
Torts ‑‑ Causation ‑‑ Fire on oil drilling rig causing major damage requiring extensive repairs ‑‑ Fire started by arcing in heat trace system ‑‑ Whether failure to warn rig owner of inflammability of product used in heat trace system caused loss.
Torts ‑‑ Contractual relational economic loss ‑‑ Fire on oil drilling rig causing major damage requiring extensive repairs ‑‑ Whether companies leasing rig can recover economic loss resulting from shutdown of rig for repairs.
Torts ‑‑ Contributory negligence ‑‑ Fire on oil drilling rig causing major damage requiring extensive repairs ‑‑ Fire started by arcing in heat trace system ‑‑ Whether rig owner’s contributory negligence in operating heat trace system without ground fault circuit breaker system bars its claims ‑‑ Whether maritime contributory negligence bar should be eliminated.
Husky Oil Operations Ltd. (“HOOL”) and Bow Valley Industries Ltd. (“BVI”) made arrangements to have an oil drilling rig constructed by Saint John Shipbuilding Limited (“SJSL”). In order to take advantage of government financing, HOOL and BVI incorporated an offshore company, Bow Valley Husky (Bermuda) Ltd. (“BVHB”). Before construction began, ownership of the rig and the construction contract with SJSL were transferred to BVHB. HOOL and BVI entered into contracts with BVHB for the hire of the rig to conduct drilling operations at sites chosen by HOOL and BVI. These contracts provided that HOOL and BVI would continue to pay day rates to BVHB in the event that the rig was out of service. A heat trace system was required in order to prevent the rig’s pipes from freezing during the winter. BVHB chose the Raychem system, which used Thermaclad wrap to keep moisture from the insulation and heat trace wire. The specifications for the Raychem heat trace system required the installation of a ground fault circuit breaker system to cut off the power in the event of an electrical fault, to prevent arcing of the heat trace wire. A functioning system was not installed until after a fire broke out on the rig, causing damage to a tray of electrical and communications cables. As a result of the damage, the rig had to be towed to port for repairs and was out of service for several months. BVHB, HOOL and BVI commenced an action against SJSL alleging breach of contract and negligence, and an action against Raychem for negligence. BVHB claimed both for the cost of the repairs to the rig and for the revenue lost as a result of the rig being out of service for several months. HOOL and BVI sought to recover the day rates that they were contractually required to pay to BVHB during the period the rig was out of service, as well as expenses they incurred for supplies to the rig, including food, drilling mud and additional equipment.
The trial judge held that the defendant SJSL was liable in contract and tort for failing to provide certificates of approval for the Thermaclad, and in tort for breach of duty to warn of the inflammability of Thermaclad. He also held that the defendant Raychem was liable in tort for breach of its duty to warn. The trial judge went on to hold that the major fault lay with BVHB for its operation of the heat trace system without a functioning ground fault circuit breaker system. Moreover, it kept the heat trace system on, even when it might not have been required, despite incidents of arcing on the heat trace wires. He apportioned the fault 60 percent to BVHB and 40 percent to SJSL and Raychem. He did not award damages for breach of contract. The trial judge dismissed the plaintiffs’ claim, however, on the ground that the case arose out of negligence at sea and was governed by Canadian maritime law, which precluded application of the Newfoundland Contributory Negligence Act and made contributory negligence a bar to recovery.
The Court of Appeal held that because the loss suffered by HOOL and BVI was economic in nature, it was not recoverable. It agreed with the trial judge that maritime law applied, but held that provincial negligence legislation applied to maritime cases in some situations, including this case. Alternatively, if the Newfoundland Contributory Negligence Act did not apply, the court held that maritime law no longer made contributory negligence a bar to recovery. In the result, BVHB was held entitled to recover 40 percent of its loss from SJSL and Raychem.
Held (La Forest and McLachlin JJ. dissenting on SJSL’s cross-appeal): The appeal should be dismissed. The cross‑appeal of SJSL with regard to the duty to warn should be allowed. The other cross‑appeals should be dismissed.
Per Gonthier, Cory, Iacobucci and Major JJ.: BVHB was not entitled to claim against SJSL based on the tort duty to warn. In clause 907 of the contract between them, which states that “Builder’s liability with respect to the Owner Directed Supply shall extend only to installation thereof”, the parties have chosen to specify the only ground of builder liability related to the use of Thermaclad, namely, negligence in the installation thereof. By expressly limiting liability to only these circumstances, the parties have by necessary implication excluded all other grounds of builder liability, including the duty to warn. This reading of clause 907 is reinforced by the fact that Thermaclad is “owner directed supply”. Where, as here, the owner specifies a particular product to be used, it is generally the owner and not the builder who, unless otherwise specified in the contract, should bear the losses that flow from the risk associated with that product’s use. The placement of clauses within a contract, while a factor to be considered, is not determinative. Rather, the contract as a whole should be examined with a view to searching for the intention of the parties by recognizing the natural meaning that flows from the language chosen. By the wording of clause 905, SJSL is relieved of any liability arising from defects. Clause 907 states that SJSL’s liability shall extend only to installation of owner‑directed supply and that in all other instances, BVHB bears the risk and responsibility for these products. The natural meaning of these clauses thus indicates that the only head of liability upon which these clauses can bite is negligence in installation. Based on the authority of Miida Electronics, SJSL should thus be relieved of any liability for failing to warn BVHB of the dangers associated with the use of Thermaclad. It is not open to Raychem to seek contribution from SJSL, as a contractor which has protected itself against liability cannot be said to have contributed to any actionable loss suffered by the plaintiff. Consequently, Raychem is liable for the entire 40 percent quantum found by the trial judge.
In all other respects, McLachlin J.’s analysis was agreed with.
Per La Forest and McLachlin JJ. (dissenting on SJSL’s cross-appeal with regard to the duty to warn): Manufacturers and suppliers are required to warn all those who may reasonably be affected by potentially dangerous products. This duty extends even to those persons who are not party to the contract of sale. The potential user must be reasonably foreseeable to the manufacturer or supplier. BVHB was clearly within the class of persons that SJSL and Raychem ought to have known might reasonably be affected by the use of Thermaclad. SJSL was in a contractual relationship with BVHB, and Raychem had directly approached BVHB’s predecessor (a subsidiary of BVI) to encourage the use of its products in the construction of the rig. The manufacturer or supplier remains liable unless the consumer’s knowledge negates reasonable reliance. This occurs where the consumer has so much knowledge that a reasonable person would conclude that the consumer fully appreciated and willingly assumed the risk posed by use of the product. Here BVHB did not have the degree of knowledge necessary to negate reliance on SJSL and Raychem. SJSL and Raychem did not demonstrate that BVHB accepted the risk of using Thermaclad. It follows that both SJSL and Raychem owed BVHB a duty to warn, subject to the special defences raised.
SJSL’s duty to warn was not excluded by its contract with BVHB. While BVHB’s claim sounds in tort, the contract remains relevant to determining whether a tort duty arises, and if so, its scope, since parties are free to contract to limit or waive the duties which the common law would impose on them for negligence. In order to determine the extent to which the parties’ planned obligations affect their tort liabilities, it is necessary to ascertain the intention of the parties with respect to the particular issue from the contract documents as a whole. In doing so, it must be kept in mind that generally limitation and exclusion clauses are strictly construed against the party seeking to invoke the clause. The provisions of the contract relied on by SJSL do not directly address responsibility for negligence or duty to warn. While the absence of a term expressly excluding tort liability is not determinative, the contract provisions, considered as a whole, relate to the finding of and responsibility for defects. They function, as the heading states, as a “warranty” of workmanship and materials. More specifically, clauses 702, 905 and 907, taken in combination, provide that in situations of “owner directed supply”, SJSL bears the responsibility for installation while BVHB bears the responsibility for defects. Warranties usually relate to the quality of goods and workmanship and do not relate to warnings about the risks associated with the use of products. BVHB’s claim against SJSL is not for negligence relating to the choice of, installation of, or defects in, the Thermaclad or other materials, but for failure to warn of the inflammability of Thermaclad. SJSL’s duty to warn arose independently of the contract, through its greater knowledge of the inflammability characteristics of Thermaclad. Clause 907, which excludes liability for owner‑directed supply, must be narrowly construed. It applies to defects in materials or their installation and workmanship and does not exclude liability for breach of duty to warn.
Raychem is not entitled to rely on the learned intermediary defence, which is an exception to the general rule requiring manufacturers to provide a warning to the ultimate consumers of their product. The learned intermediary defence will generally only apply either where the product is highly technical and is to be used with expert supervision, or where the nature of the product is such that it is unrealistic for the consumer to receive a warning directly from the manufacturer. Thermaclad was not a highly technical product, and its use and application did not require expert supervision. Nor was it unrealistic to expect Raychem to have warned BVHB, the ultimate consumer, directly. Raychem had both the opportunity and the duty to warn BVHB directly and therefore its duty to warn the plaintiffs was not discharged through its communications with SJSL.
Causation is established, on either a subjective or an objective standard. A reasonable plaintiff or BVHB itself would have either declined to use Thermaclad or taken steps to deal with its inflammability had it been warned. The equal apportionment of fault between SJSL and Raychem should not be interfered with. While SJSL might have had less knowledge of the specific characteristics of Thermaclad, its knowledge of the general regulatory requirements was arguably greater, and it had greater contact with BVHB.
The contractual relational economic loss suffered by HOOL and BVI is not recoverable. The defendants owed a prima facie duty of care to BVI and HOOL. They knew of the existence of these plaintiffs and others like them and knew or ought to have known that they stood to lose money if the drilling rig was shut down. However, this prima facie duty of care is negatived by policy considerations. The most serious problem is that of indeterminate liability. If the defendants owed a duty to warn the plaintiffs, it is difficult to see why they would not owe a similar duty to a host of other persons who would foreseeably lose money if the rig was shut down as a result of being damaged. Moreover, the facts of this case do not support liability to BVI and HOOL as an additional deterrent against negligence. Since BVHB, the owner of the drilling rig, suffered a significant amount of property damage, it is not apparent that increasing the defendants’ potential liability would have led to different behaviour and avoidance of the loss. Nor was this a case where the plaintiff’s ability to allocate the risk to the property owner by contract is slight, either because of the type of transaction or inequality of bargaining power. BVI and HOOL not only had the ability to allocate their risks, but did just that.
BVHB was contributorily negligent, as found by the courts below. The trial judge apportioned the majority of the fault to BVHB on the ground that its negligence in continuing to operate the heat trace system, even when unnecessary, outweighed the defendants’ negligence. Since there was no demonstrable error in the trial judge’s appreciation of the facts or applicable legal principles, his finding that the liability should be apportioned 60 percent to BVHB and 40 percent to the defendants Raychem and SJSL should not be disturbed.
BVHB’s right to recover is not barred by its contributory negligence. The issues for resolution in this case are integrally connected with maritime matters, and fall to be resolved under Canadian maritime law. Policy considerations support the conclusion that maritime law governs the plaintiffs’ tort claim, since the application of provincial laws to maritime torts would undercut the uniformity of maritime law. While the federal government has not passed contributory negligence legislation for maritime torts, the common law principles embodied in Canadian maritime law remain applicable in the absence of federal legislation. Although contributory negligence barred recovery at common law, the maritime contributory negligence bar should be removed. This is an appropriate case for this Court to make an incremental change to the common law in compliance with the requirements of justice and fairness. The proposed change falls within the test for judicial reform of the law which has been developed. First, the change is required to keep the maritime common law in step with the dynamic and evolving fabric of our society. Second, removal of the contributory negligence bar will not have unforeseeable or complex ramifications beyond the cognizance of the judiciary. The principle of apportionment for non‑maritime torts is universally accepted in every part of Canada and around the world. Contributory negligence may reduce recovery but does not bar the plaintiff’s claim. The defendants SJSL and Raychem are jointly and severally liable to the plaintiff BVHB for 40 percent of its loss, subject to a right of contribution between defendants.
SJSL is not liable to BVHB in contract since the contractual issues have been settled and are no longer litigable.
Cases Cited
By Iacobucci J.
Applied: ITO‑‑International Terminal Operators Ltd. v. Miida Electronics Inc., [1986] 1 S.C.R. 752; distinguished: Falcon Lumber Ltd. v. Canada Wood Specialty Co. (1978), 95 D.L.R. (3d) 503; referred to: Canadian National Railway Co. v. Norsk Pacific Steamship Co., [1992] 1 S.C.R. 1021; Lamport & Holt Lines Ltd. v. Coubro & Scrutton (M. & I.) Ltd. (The “Raphael”), [1982] 2 Lloyd’s Rep. 42; Upper Lakes Shipping Ltd. v. St. Lawrence Cement Inc. (1992), 89 D.L.R. (4th) 722; Giffels Associates Ltd. v. Eastern Construction Co., [1978] 2 S.C.R. 1346.
By McLachlin J. (dissenting on the cross‑appeal of SJSL)
Distinguished: Giffels Associates Ltd. v. Eastern Construction Co., [1978] 2 S.C.R. 1346; referred to: Lambert v. Lastoplex Chemicals Co., [1972] S.C.R. 569; Hollis v. Dow Corning Corp., [1995] 4 S.C.R. 634; Rivtow Marine Ltd. v. Washington Iron Works, [1974] S.C.R. 1189; BG Checo International Ltd. v. British Columbia Hydro and Power Authority, [1993] 1 S.C.R. 12; London Drugs Ltd. v. Kuehne & Nagel International Ltd., [1992] 3 S.C.R. 299; Central Trust Co. v. Rafuse, [1986] 2 S.C.R. 147; Hunter Engineering Co. v. Syncrude Canada Ltd., [1989] 1 S.C.R. 426; University of Regina v. Pettick (1991), 45 C.L.R. 1; Queen v. Cognos Inc., [1993] 1 S.C.R. 87; D’Amato v. Badger, [1996] 2 S.C.R. 1071; Ultramares Corp. v. Touche, 174 N.E. 441 (1931); Murphy v. Brentwood District Council, [1991] 1 A.C. 398; Canadian National Railway Co. v. Norsk Pacific Steamship Co., [1992] 1 S.C.R. 1021; Anns v. Merton London Borough Council, [1978] A.C. 728; Kamloops (City of) v. Nielsen, [1984] 2 S.C.R. 2; Hercules Managements Ltd. v. Ernst & Young, [1997] 2 S.C.R. 165; Winnipeg Condominium Corporation No. 36 v. Bird Construction Co., [1995] 1 S.C.R. 85; Nance v. British Columbia Electric Railway Co., [1951] A.C. 601; Jones v. Livox Quarries Ld., [1952] 2 Q.B. 608; Snell v. Farrell, [1990] 2 S.C.R. 311; Hughes v. Lord Advocate, [1963] A.C. 837; Overseas Tankship (U.K.) Ltd. v. Miller Steamship Co. Pty., [1967] 1 A.C. 617; Sparks v. Thompson, [1975] 1 S.C.R. 618; Taylor v. Asody, [1975] 2 S.C.R. 414; ITO—International Terminal Operators Ltd. v. Miida Electronics Inc., [1986] 1 S.C.R. 752; Whitbread v. Walley, [1990] 3 S.C.R. 1273; Stein v. The Ship “Kathy K”, [1976] 2 S.C.R. 802; Butterfield v. Forrester (1809), 11 East. 60, 103 E.R. 926; Toronto Transportation Commission v. The King, [1949] S.C.R. 510; The “Sobieski”(1949), 82 Ll.L.R. 370; Gartland Steamship Co. v. The Queen, [1960] S.C.R. 315; Algoma Central & Hudson Bay Railway Co. v. Manitoba Pool Elevators Ltd., [1964] Ex. C.R. 505; Fraser River Harbour Commission v. The “Hiro Maru”, [1974] 1 F.C. 490; Watkins v. Olafson, [1989] 2 S.C.R. 750; R. v. Salituro, [1991] 3 S.C.R. 654; Peters v. A.B.C. Boat Charters Ltd. (1992), 73 B.C.L.R. (2d) 389; The Max Morris, 137 U.S. 1 (1890); Cooper Stevedoring Co. v. Fritz Kopke, Inc., 417 U.S. 106 (1974); United States v. Reliable Transfer Co., 421 U.S. 397 (1975); Edmonds v. Compagnie Générale Transatlantique, 443 U.S. 256 (1979); Merryweather v. Nixan (1799), 8 T.R. 186, 101 E.R. 1337; Sparrows Point v. Greater Vancouver Water District, [1951] S.C.R. 396; British Russian Gazette and Trade Outlook, Ltd. v. Associated Newspapers, Ltd., [1933] 2 K.B. 616.
Statutes and Regulations Cited
Bill C‑73, An Act to amend the Canada Shipping Act and other Acts as a consequence, 2nd Sess., 35th Parl., 1996.
Canada Shipping Act, R.S.C., 1985, c. S‑9, ss. 565(1) , 566 .
Civil Code of Québec, S.Q. 1991, c. 64, arts. 1478, 1523, 1526, 1536.
Constitution Act, 1867, s. 92 .
Contributory Negligence Act, R.S.N. 1990, c. C‑33.
Maritime Conventions Act, 1914, S.C. 1914, c. 13.
Authors Cited
Baudouin, Jean‑Louis. La responsabilité civile, 4e éd. Cowansville, Qué.: Yvon Blais, 1994.
Baudouin, Jean‑Louis. Les obligations, 4e éd. Cowansville, Qué.: Yvon Blais, 1993.
Canada. Department of Justice. Admiralty and Maritime Law Section. Eliminating Outmoded Common Law Defences in Maritime Torts: A Discussion Paper.
Cane, Peter. Tort Law and Economic Interests. Oxford: Clarendon Press, 1991.
Daly, Warren B., and George H. Falter. “Contribution and Indemnity in Maritime Actions”. In Benedict on Admiralty, vol. 2, 7th ed. New York: M. Bender, 1995 (loose‑leaf updated June 1997, release 73).
Fleming, John. “Tort in a Contractual Matrix” (1993), 5 Canterbury L. Rev. 269.
Klar, Lewis. “Contributory Negligence and Contribution Between Tortfeasors”. In Lewis Klar, ed., Studies in Canadian Tort Law. Toronto: Butterworths, 1977.
Salmond and Heuston on the Law of Torts, 21st ed. By R. F. V. Heuston and R. A. Buckley. London: Sweet & Maxwell, 1996.
Tetley, William. “A Definition of Canadian Maritime Law” (1996), 30 U.B.C. L. Rev. 137.
Williams, Glanville. Joint Torts and Contributory Negligence: A Study of Concurrent Fault in Great Britain, Ireland and the Common‑Law Dominions. London: Stevens & Sons, 1951.
APPEAL and CROSS‑APPEALS from a judgment of the Newfoundland Court of Appeal (1995), 130 Nfld. & P.E.I.R. 92, 405 A.P.R. 92, 126 D.L.R. (4th) 1, 21 B.L.R. (2d) 265, [1995] N.J. No. 150 (QL), reversing a decision of the Newfoundland Supreme Court, Trial Division (1994), 118 Nfld. & P.E.I.R. 271, 369 A.P.R. 271, [1994] N.J. No. 121 (QL), and (1994), 120 Nfld. & P.E.I.R. 228, 373 A.P.R. 228, dismissing the plaintiffs’ claim. Appeal and cross‑appeals other than that of SJSL dismissed. Cross‑appeal of SJSL allowed, La Forest and McLachlin JJ. dissenting.
Anthony J. Jordan, Q.C., Eric P. Groody and Susan M. Purcell, for Husky Oil Operations Ltd.
W. Ian C. Binnie, Q.C., Harry Underwood, Bonita Croft and Camille A. Nelson, for Bow Valley Industries Ltd.
Michael F. Harrington, Q.C., and Colm St. R. Seviour, for Bow Valley Husky (Bermuda) Ltd.
J. Edgar Sexton, Q.C., John F. Rook, Q.C., Stephen J. May and Donald D. Hanna, for Saint John Shipbuilding Limited.
W. Wylie Spicer, Q.C., and Aidan J. Meade, for Raychem Canada Limited and Raychem Corporation.
//McLachlin J.//
The reasons of La Forest and McLachlin JJ. were delivered by
McLachlin J. (dissenting in part) --
I. Introduction
1 On April 21, 1987, a fire broke out on the Bow Drill III, which was drilling for oil on the Grand Banks of Newfoundland. The Bow Drill III suffered major damage. Extensive repairs were required and the companies which had contracted for the lease of the rig suffered financial loss while it was out of commission. At issue in this appeal is the legal responsibility for the damages and the extent of the damages recoverable. Among the more interesting legal issues are the applicability of contributory negligence principles under Canadian maritime law and the recovery of damages for contractual relational economic loss.
II. Facts
2 In the early 1980s, Husky Oil Operations Ltd. (“HOOL”) and Bow Valley Industries Ltd. (“BVI”) decided to take advantage of a drilling opportunity off the east coast of Canada. They purchased one oil rig and made arrangements to have two others constructed. To this end, a subsidiary of BVI contracted with Saint John Shipbuilding Limited (“SJSL”) for the construction of the drilling rig Bow Drill III.
3 In order to take advantage of Export Development Corporation financing, HOOL and BVI incorporated an offshore company, Bow Valley Husky (Bermuda) Ltd. (“BVHB”). Before construction of Bow Drill III began, ownership of the rig was transferred to BVHB, and the contract with SJSL for the construction of the rig was assigned to BVHB. HOOL and BVI entered into contracts with BVHB for the hire of Bow Drill III to conduct drilling operations at sites chosen by HOOL and BVI. These contracts were for four years (with an optional extension for a further year), and provided that HOOL and BVI would continue to pay day rates to BVHB in the event that the rig was out of service.
4 A heat trace system was required in order to prepare the rig for winter operation. The purpose of a heat trace system is to prevent the rig’s pipes or “mud lines” from freezing. The heat trace system SJSL originally started to install was changed to the Raychem system at the owner’s request. BVHB chose the Raychem system after consultation with Raychem representatives because it had a self-regulating heater. Raychem’s heat trace system used Thermaclad wrap to keep moisture from the insulation and heat trace wire. The specifications for the Raychem heat trace system required the installation of a ground fault circuit breaker (“GFCB”) system. The purpose of the GFCB system was to cut off the power in the event of an electrical fault, to prevent arcing of the heat trace wire. The GFCB system initially installed by SJSL was unsuitable. A functioning GFCB system was not installed on the rig until after the incident that forms the basis of this case.
5 On April 21, 1987, during the drilling of an exploratory well on the Grand Banks of Newfoundland, a fire broke out on Bow Drill III. The fire caused damage to a tray of cables that held in excess of 300 electrical and communications cables. As a result, the rig had to be towed to port for repairs and was out of service for several months.
6 BVHB, HOOL and BVI commenced an action against SJSL alleging breach of contract and negligence, and an action against Raychem for negligence. BVHB claimed both for the cost of the repairs to the rig and for the revenue lost as a result of the rig being out of service for several months. HOOL and BVI sought to recover the day rates that they were contractually required to pay to BVHB during the period the rig was out of service, as well as expenses they incurred for supplies to the rig, including food, drilling mud and additional equipment.
III. Judgments Below
A. Supreme Court of Newfoundland, Trial Division
7 At trial (1994), 118 Nfld. & P.E.I.R. 271, Riche J. held that the fire started when an electrical fault occurred in the heat trace wire, causing an arc in the heat trace system. The arcing occurred because no GFCB system was being used at that time. Riche J. held that it was likely the Thermaclad caught fire, which then caused an oily residue on the cables to catch fire. He concluded that as the fire spread much more than would be expected with Thermaclad alone, the fire must have been assisted by residue in the cable tray. Riche J. determined that the plaintiffs had not proven that the heat tracing and wrap on the pipe had been installed by SJSL or Raychem.
8 Riche J. found that BVHB had assumed responsibility for the installation of a functioning GFCB system, and that BVHB was negligent: in continuing to operate the heat tracing system without ground fault protection; in allowing the cables to accumulate the oily residue; and, in the absence of evidence that the fault for the arcing rested on someone else, for the defects in the wire or junction box that had caused the arc. Riche J. found that HOOL and BVI shared in the contributory negligence of BVHB as they were informed during construction of the need for ground fault protection. Alternatively, had HOOL and BVI not known of the need for ground fault protection, Riche J. would have found them negligent on the ground that BVHB, HOOL and BVI were involved in a joint venture.
9 Riche J. found that all parties were aware of the inflammability of the Thermaclad. He held that the defendant SJSL was liable in contract and tort for failing to provide certificates of approval for the Thermaclad, and in tort for breach of duty to warn of the inflammability of Thermaclad. He also held that the defendant Raychem was liable in tort for breach of its duty to warn. He found that the contract between SJSL and BVHB did not negate BVHB’s right to sue for negligence or breach of contract for failure to provide certificates of approval for Thermaclad, or for negligent failure to warn. Riche J. went on to hold that the major fault lay with BVHB for its operation of the heat trace system without a functioning GFCB system. It knew that arcing could occur and that it could cause fires. Moreover, it kept the heat trace system on, even when it might not have been required, despite incidents of arcing on the heat trace wires. In the result, Riche J. apportioned the fault 60 percent to the plaintiffs and 40 percent to SJSL and Raychem. He did not award damages for breach of contract.
10 However, Riche J. dismissed the plaintiffs’ claim on the ground that the case arose out of negligence at sea and was governed by Canadian maritime law, which precluded application of the Newfoundland Contributory Negligence Act, R.S.N. 1990, c. C-33, and made contributory negligence a bar to recovery. In supplementary reasons, (1994), 120 Nfld. & P.E.I.R. 228, Riche J. held that if the Newfoundland Contributory Negligence Act did apply, he would have apportioned the liability of Raychem and SJSL equally, making each 20 percent responsible.
B. Newfoundland Court of Appeal
11 The Newfoundland Court of Appeal, (1995), 130 Nfld. & P.E.I.R. 92, per Cameron J.A., began by finding that the trial judge’s conclusions with respect to the origins of the fire should not be disturbed. However, it rejected the trial judge’s conclusion that there was a joint venture between HOOL and BVI with respect to the Bow Drill III, and held further there was no basis for lifting the corporate veil and denying the separate legal identities of the three corporations.
12 Cameron J.A. upheld the trial judge’s finding that BVHB had been contributorily negligent, although she rejected Riche J.’s finding that BVHB was negligent with respect to the existence of the oily residue on the cables. She held that the damage suffered by BVHB was a reasonably foreseeable consequence of BVHB’s failure to use a GFCB system.
13 With respect to SJSL’s failure to provide certificates of approval, Cameron J.A. held that through an exchange of letters and cheques in November 1985, the parties had reached an accord and satisfaction disposing of their respective rights under the contract. Therefore, BVHB had no basis for a claim of breach of contract. Cameron J.A. declined to disturb the trial judge’s finding that BVHB’s representatives made the decision to use the Raychem system, including the Thermaclad. It followed that Thermaclad was “owner directed supply” for which the contract excluded recovery. Cameron J.A. further held that SJSL’s provision of Thermaclad was not a negligent act.
14 Cameron J.A. confirmed that both Raychem and SJSL had a duty to warn BVHB about the inflammability of Thermaclad, and that the duty had not been discharged. She rejected Raychem’s argument that it could rely on the learned intermediary exception. Although Raychem and SJSL had no duty to warn HOOL or BVI, SJSL and Raychem owed HOOL and BVI a duty of care that was breached by their failure to warn BVHB. However, because the loss suffered by HOOL and BVI was economic in nature, it was not recoverable.
15 Despite reversing some of the trial judge’s findings with respect to liability, the Court of Appeal did not consider it necessary to change his apportionment of liability.
16 The Court of Appeal agreed with Riche J. that maritime law applied. Nevertheless it held that provincial negligence legislation applied to maritime cases in some situations, including this case. Alternatively, if the Newfoundland Contributory Negligence Act did not apply, the court held that maritime law no longer made contributory negligence a bar to recovery. In the result, BVHB was held entitled to recover 40 percent of its loss from SJSL and Raychem.
IV. Issues
17 (1) Are the defendants liable to the plaintiffs in tort?
(a) Did the circumstances impose on SJSL and Raychem a duty to warn BVHB of the risks associated with using Thermaclad?
(b) Was SJSL’s duty to warn excluded by its contract with BVHB?
(c) Is Raychem entitled to rely on the “learned intermediary” defence?
(d) Is causation established?
(e) How should fault be allocated between SJSL and Raychem?
(f) Did SJSL and Raychem owe BVI and HOOL a duty to warn?
(Recovery of contractual relational economic loss)
(g) Was BVHB contributorily negligent?
(h) Does BVHB’s contributory negligence bar its claims?
(2) Is SJSL liable to BVHB in contract?
V. Are the Defendants Liable to the Plaintiffs in Tort?
A. Did the Circumstances Impose on SJSL and Raychem a Duty to Warn BVHB of the Risks Associated With Using Thermaclad?
18 SJSL and Raychem submit that the Court of Appeal erred in finding that they were under a duty to warn BVHB of the dangers of Thermaclad. SJSL argues that in order for a duty to warn to arise, there must be an “informational imbalance” between the manufacturer or supplier and the party who is owed the warning. SJSL submits that the plaintiff BVHB knew as much about the inflammability of the Thermaclad as it did.
19 The law may be simply stated. Manufacturers and suppliers are required to warn all those who may reasonably be affected by potentially dangerous products: Lambert v. Lastoplex Chemicals Co., [1972] S.C.R. 569, and Hollis v. Dow Corning Corp., [1995] 4 S.C.R. 634. This duty extends even to those persons who are not party to the contract of sale: Rivtow Marine Ltd. v. Washington Iron Works, [1974] S.C.R. 1189. The potential user must be reasonably foreseeable to the manufacturer or supplier — manufacturers and suppliers (including a builder-supplier like SJSL) do not have the duty to warn the entire world about every danger that can result from improper use of their product.
20 The plaintiff BVHB was clearly within the class of persons that SJSL and Raychem ought to have known might reasonably be affected by the use of Thermaclad. SJSL was in a contractual relationship with BVHB, and Raychem had directly approached BVHB’s predecessor (a subsidiary of BVI) to encourage the use of its products in the construction of the rig.
21 The defendant SJSL submits that there is an additional requirement for a duty to warn: a knowledge imbalance between the manufacturer or supplier and the consumer. It goes on to argue that since BVHB knew about the inflammability of Thermaclad no duty to warn arose. The Court of Appeal held that knowledge may be a defence, but only where the plaintiff can be viewed as accepting the risk (volenti non fit injuria).
22 I agree with the Court of Appeal that knowledge that there may be a risk in some circumstances does not negate a duty to warn. Liability for failure to warn is based not merely on a knowledge imbalance. If that were so every person with knowledge would be under a duty to warn. It is based primarily on the manufacture or supply of products intended for the use of others and the reliance that consumers reasonably place on the manufacturer and supplier. Unless the consumer’s knowledge negates reasonable reliance, the manufacturer or supplier remains liable. This occurs where the consumer has so much knowledge that a reasonable person would conclude that the consumer fully appreciated and willingly assumed the risk posed by use of the product, making the maxim volenti non fit injuria applicable: Lambert, supra.
23 The evidence establishes that the plaintiff BVHB knew that Thermaclad would burn under some circumstances. The defendants SJSL and Raychem, however, had much more detailed knowledge of the specific inflammability characteristics of the Thermaclad. Raychem gained this knowledge through its own testing as manufacturer. SJSL gained it through its request to Raychem for information on Thermaclad’s inflammability. BVHB did not have the degree of knowledge necessary to negate reliance on SJSL and Raychem. SJSL and Raychem did not demonstrate that BVHB accepted the risk of using Thermaclad. It follows that both SJSL and Raychem owed BVHB a duty to warn, subject to the special defences raised by SJSL and Raychem, to which I now turn.
B. Was SJSL’s Duty to Warn Excluded by Its Contract With BVHB?
24 SJSL argues that any duty to warn BVHB which might otherwise arise from the circumstances is negatived by the contract between them. The trial judge rejected this submission, as did the Court of Appeal, on the ground that the contract provisions did not deal with or impact on SJSL’s duty to warn. I agree.
25 SJSL relies on clauses 702, 905 and 907 of its contract with BVHB. Clause 702, under Article VII (Inspection), stipulates that upon delivery SJSL’s “sole obligation with respect to the Vessel shall be as specified in Article IX” (Warranties). Clause 905 excludes claims for defects except as provided in the warranty provision:
905. The remedies provided in this Article are exclusive, and Builder shall have no liability whatever for any consequential loss, damage or expense arising from any defects.
Finally, clause 907 excludes liability for “owner directed supply”:
907. Builder’s liability with respect to the Owner Directed Supply shall extend only to installation thereof in accordance with the certified equipment drawings and manuals furnished by the supplier in those instances where such equipment is actually installed by Builder. In all other instances, the sole risk and responsibility for Owner Directed Supply shall, as between Builder and Owner, be borne by Owner.
26 While BVHB’s claim sounds in tort, the contract remains relevant to determining whether a tort duty arises, and if so, its scope. As this Court stated in BG Checo International Ltd. v. British Columbia Hydro and Power Authority, [1993] 1 S.C.R. 12, per La Forest and McLachlin JJ., parties are free to contract “to limit or waive the duties which the common law would impose on them for negligence” (pp. 26-27). However, “[i]n so far as the tort duty is not contradicted by the contract, it remains intact and may be sued upon” (p. 27).
27 To borrow the language of La Forest J. in London Drugs Ltd. v. Kuehne & Nagel International Ltd., [1992] 3 S.C.R. 299, at p. 327, tort liability in a case such as this falls to be assessed in a contractual matrix. The parties’ planned obligations must be given appropriate pre-eminence. Where those planned obligations negate tort liability, contract “trumps” tort: see J. Fleming, “Tort in a Contractual Matrix” (1993), 5 Canterbury L. Rev. 269, at p. 270, citing P. Cane, Tort Law and Economic Interests (1991), at p. 293. It follows