In Basque vs. Alpha, Compagnie d’assurances Inc. et al. rendered on April 20, 2009, the Court of Appeal ruled on an important issue: The obligation to compensate for loss resulting from a latent defect affecting part of an immoveable.

The Court of Appeal was seized of three appeals raising the same question relating to successive sales of a house containing a defective fireplace. Essentially, the first owner purchased the house in October 1975 and had a fireplace installed in November 1975. In 1985 the house was sold to a second buyer and in 1988 the second buyer sold it to a third buyer, the defendant. In June 1999, plaintiff’s insured purchased the immoveable from the defendant. All of the sellers involved were in good faith and were not aware of any defects.

In November 2000, a fire destroyed a large portion of the immoveable as well as the contents contained therein. The cause of the fire was a defect in the construction of the chimney.

The Plaintiff indemnified its insured for the sum of $94,584.15 and instituted recovery proceedings against the three previous owners as well as the presumed installers of the fireplace. Several recourses in warranty were also instituted. The parties admitted that the vendors were all in good faith and, as such, damages could not be claimed thus, the portion representing damages to the contents and living expenses was deducted and the quantum was admitted at $72,185.66 ($70,615.44, representing damages to the immoveable and $1,570.22, representing repairs to the fireplace).

The Superior Court granted the motion condemning defendants (the successive sellers) to pay to plaintiff $72,185.66 and concluded as follows:

  • The action against the fireplace installers was dismissed given that the parties had not established on the balance of probabilities that the defendants were in fact the installers of the defective fireplace.
  • The purpose of the warranty of quality is to insure the use of the property purchased and, if the property perishes as a result of a latent defect, the purchaser can claim for a reduction in the sale price.
  • The damages resulting from the fire are reasonably foreseeable as per article 1613 C.C.Q. consequently, if at the date of sale the fireplace was defective then it was reasonably foreseeable that the entire immoveable could be damaged by fire. As such, plaintiff was entitled to claim for the entirety of the damages to the house.
  • Plaintiff was legally and conventionally subrogated into the rights of its insured and, since defendants were third parties to the insurance contract concluded between plaintiff and its insured, defendants could not invoke that plaintiff was not bound to indemnify its insured for the prejudice resulting from a defect in the property insured.

In appeal, the sellers argued that article 1727 C.C.Q. obliges a seller to remit to its buyer the cost to remedy the defect, in this case, the cost to repair the fireplace. Appellants argued that the warranty of quality did not extend to the use of the immoveable and was limited to the fireplace.

The Court of appeal concluded that the fireplace was an accessory to the house in accordance with article 1726 C.C.Q. and that both the principle object of the sale as well as its accessories are covered by the warranty of quality. This does not imply that there exists a distinct warranty of quality for each accessory; there is one warranty for the entire house. As such, if the accessory of the house is stricken with a latent defect which hinders the use of the house then, the seller must indemnify the buyer for this loss of use and not only for the loss of use of the accessory.

The Court of Appeal concluded that article 1727 C.C.Q. applies whether or not there is good or bad faith on the part of the seller. The depreciation of the property caused by the defect must be taken into consideration but the indemnity must be inferior to the sale price.

As regards the cost to repair the defective fireplace, the Court of Appeal concluded that appellants were not entitled to recover these costs given that in virtue of article 2465 C.C.Q. there is no coverage for “losses sustained by the property arising from an inherent defect in or the nature of the property”. As such, there was no legal subrogation.

With respect to the argument of conventional subrogation, article 1654 C.C.Q. provides that it must be consented to by the creditor at the same time that the payment is received. In this case, the insured received payment before having signed the conventional subrogation. The Court of appeal added that although the formalities required for a conventional subrogation are strict the Courts take into consideration the intention of the parties at the time the payment is made. In this case, the Court of Appeal stated that there was no indication in the file to allow it to conclude that the Plaintiff’s insured had the intention of subrogating it into its rights when the payment was received. Consequently, the payment made for the repairs to the fireplace was not opposable to defendants and was subtracted from the admitted quantum.

The Court of appeal then analyzed the successive purchase prices for the house as well as the amount of the insurance coverage provided for in virtue of plaintiff’s policy and concluded that the sum of $70,615.44 was reasonable.