In rendering its decision in ABB Inc. v. Domtar Inc. on November 22, 2007, the Supreme Court of Canada thoroughly reviewed the extent of the manufacturer's responsibility in regards to latent defects in Québec. A brief review of the facts is essential to understanding the significance of this decision.
In 1984, Domtar purchased a recovery boiler manufactured by ABB predecessor, C.E. for the price of $13,500,000. The contract included a limited liability clause in favour of the manufacturer. At the moment of the sale, C.E. was already aware of the problems related to the fasteners used on the boiler. After many malfunctions and breakdowns of the boiler, Domtar instituted proceedings against C.E. on the basis of the manufacturer's guarantee against latent defects and the duty to inform.
In a unanimous decision, the Supreme Court of Canada reminded us that following the principles of the Civil Code of Lower Canada, reinstated in the Civil Code of Québec, a professional seller is presumed to be aware of any latent defects in regards to the sold goods and is responsible for the damages suffered by the buyer. Furthermore, because it controls the workers and materials used in the production of the goods, relative to other professional sellers the manufacturer is held to a more rigorous presumption of knowledge and has a greater obligation to denounce defects.
The buyer's expertise will also be considered to determine if the defect is latent or apparent. The better the buyer knows the products, greater are the chances of the defect to be considered apparent. However, the buyer's expertise does not annul the presumption of knowledge that applies to the manufacturer.
The Court notes that C.E. did not disclose to Domtar the internal information that it held on the problems related to the fasteners used on the boiler and that the defects that affected the boiler were not known by Domtar and its expert. Thus, the Court concluded that the defects were in fact latent.
In the presence of such defects, the Court had to look into the applicability of the limited liability clause in the contract and notes that a manufacturer may not call upon such a clause if it is not able to refute the presumption of knowledge. In the present case, the Supreme Court comes to the conclusion that C.E. knew the defects that affected the sold goods, thus rendering impossible the use of the limited liability clause.
In regards to the duty to inform, the Court did not judge it necessary to extend its analysis further than the presumption of knowledge of the latent defect, because a seller that does not adequately denounce a defect, is obviously not fulfilling its duty to inform.
This decision imposes on the seller a large burden in regards to the information that must be given to the buyer and calls for the best possible transparency towards its contracting partner in disclosing all information that may have an impact on the buyer's decision to enter into a contractual relationship. The buyer's expertise will be considered to evaluate if the defect is latent or apparent, but it will not undermine or reverse the presumption against the seller in regards to the knowledge of the defect.
This decision also confirms the validity in Québec law of a manufacturer's limited liability clause but reminds us that such a clause will only be applicable if the manufacturer meets its heavy burden to prove that it in fact had no knowledge of the defect.
In the present case, C.E. not having been able to prove that it was unaware of the defect, the Supreme Court set aside the limited liability clause and condemned C.E. to pay to Domtar $38,700,000 in damages.