The Supreme Court of Canada’s recent judgment in the case of ABB Inc. v. Domtar Inc.[1] represents a landmark decision on sellers’ and manufacturers’ liability in Quebec.

The Court maintained Domtar’s action against ABB for damages arising from a latent defect in equipment Domtar purchased from ABB, the equipment’s designer and manufacturer. ABB was held liable even though the parties’ contract of sale included a limitation of liability clause that, on its face, would exclude liability.

The Court reaffirms the classic civil law position that a professional seller is presumed by law to know of defects in the product it sells. It can only rebut the presumption by showing that a reasonable seller in the same circumstances would have been unable to detect the defect at the time of the sale. The strength of the presumption, therefore, varies depending on the seller’s expertise. A manufacturer has special knowledge of the characteristics of the products it manufactures. Therefore, only in truly exceptional circumstances will a manufacturer be able to rebut the presumption that it knew of the defect in its product.

The legal implications for a seller of having knowledge of a defect or being presumed to have such knowledge are serious. A seller who knows of a defect, in fact or by presumption, is not entitled to rely on a limitation or exclusion of liability clause in its contract of sale to avoid paying for damages resulting from the defect.

The novelty of the ABB v. Domtar decision is that it confirms that these classic rules of civil law apply even where the buyer is a sophisticated party. Accordingly, professional sellers, especially manufacturers, must be aware that, under Quebec law, they will not in most cases be able to rely on exclusionary clauses to escape liability for latent defects in their products. This is the case whether they are selling to ordinary consumers or to sophisticated corporations assisted by teams of engineers and lawyers.

The Supreme Court noted that common law rules differ significantly from the applicable rules of Quebec law. At common law, a limitation of liability clause in a contract between two merchants will be valid unless it is declared to be unenforceable either for unconscionability or because failure to discharge the obligation to which it applies would amount to a fundamental breach of contract.

Domtar was represented in this case before all courts by Ogilvy Renault. Olivier F. Kott was lead counsel, assisted by Gregory B. Bordan. To learn more, please see our recent information bulletin on this case or contact Olivier F. Kott or Gregory Bordan.