On April 23, 2014, the Supreme Court of Canada (the “SCC”) released its decision. Peracomo was entitled to limit its liability but there would still be no insurance coverage for the loss.
Société Telus Communications v. Peracomo Inc. is the first Canadian decision interpreting Article 4 of the Convention on the Limitation of Liability for Maritime Claims, 1976 as amended by the 1996 Protocol (the “Convention”). The decision grappled with whether Article 4 of the Convention barred a liable party from limiting its liability under section 29 of the Marine Liability Act, S.C. 2001, c. 6 (“MLA”).
The Plaintiff Société Telus Communications’ (“Telus”) was the owner of two submarine cables on the bottom of the St. Lawrence River. The Defendant Real Vallée, president and sole shareholder of the Defendant Peracomo Inc., was described by the court as “a good man; a decent man; an honest man – a fisherman [who] did a very stupid thing”(at 1). While crabbing, Mr. Vallee’s crab trap got caught on one of the Plaintiff’s cables. In an effort to free his trap, he cut the cable, which he mistakenly believed was not in use. The loss that occurred was the diminution in value of the cables measured by the cost of repairing them.
Under ordinary circumstances, s. 29 of the MLA and the Convention would have entitled Peracomo to limit its liability to $500,000. However, the trial judge and Court of Appeal found that because the loss resulted from the owner’s personal act or omission, committed with the intent to cause such loss, by virtue of Article 4 of the Convention, its liability could not be limited. The fact that he thought no harm would come from the damage, because he mistakenly believed that the cable was not in use, was irrelevant.
The SCC disagreed with this analysis and was of the view that the analysis provided by the lower courts reduced the intended fault element to break limits. In essence, the Court determined that the person liable for the loss must have intended or envisaged the loss or type of loss that occurred. The SCC went on to say that Mr. Vallée did not intend the type of loss or the very loss that resulted. Mr. Vallée thought the cable he cut was useless and did not think it would be repaired because he thought it had no value. While this was no doubt reckless behaviour it does not constitute either “the intent to cause such loss” or “knowledge that such loss would probably result.”
While the SCC reversed the two lower courts decision that the limit of liability could be broken in this case, they upheld the lower courts’ decision that Mr. Vallée’s action constituted “wilful misconduct” and as such there was no coverage under the policy by virtue of the insurance exclusion at s. 53(2) of the Marine Insurance Act, S.C. 1993, c. 22 (“MIA”).
The SCC first looked at whether the fault standard under Article 4 of the Convention and the insurance exclusion at s. 53(2) of the MIA were the same. The Court noted that although both the limitation of liability and the insurance issues turn on Mr. Vallée’s fault, the threshold test for each is different. While the threshold to break liability under the Convention requires intention or recklessness with knowledge that the loss will probably occur, wilful misconduct under the MIA, in the context of this case, requires misconduct with reckless indifference to the known risk despite a duty to know. Mr. Vallée had a duty to inform himself about the cables and failed miserably in that regard. The mental state required for wilful misconduct includes recklessness as to consequences of his/her actions – that is, actual knowledge of the risk and running it anyway, a different and lower fault standard than is called for by the Convention.
What is noteworthy about this decision is that the SCC concluded that limits had not been broken in this case and, as such, limitation of liability either under Part 3 or Part 4 of the MLA have never been broken in Canada. This case essentially has brought us back to the way in which we viewed the limitation of liability regime prior to the lower courts decision, that it is virtually unbreakable.
The breaking limits argument has always been approached carefully by Plaintiffs in the past due to their concerns that a successful argument to break limits may also be paired with an unwanted finding that the wilful misconduct exclusion at s. 53(2) of the MLA may also apply. Here, the SCC has not only affirmed that what has been previously viewed as a virtually unbreakable right to limit could not be broken in this case, but also found that the wilful misconduct exclusion would apply to deny coverage in circumstances where limitation rights were still enforced. This decision not only deprives a Plaintiff of the right to their full claim, but also makes it more difficult for a Plaintiff to collect, as there is no insurance coverage.
