• Supreme Court of Canada Weighs in on Conduct Barring Limitation
  • May 2, 2014 | Authors: Jean-Marie Fontaine; Graham Walker
  • Law Firms: Borden Ladner Gervais LLP - Montreal Office ; Borden Ladner Gervais LLP - Vancouver Office
  • Peracomo Inc. V. Telus Communications Co. 2014 SCC 29

    The difference between intentionally or recklessly causing a loss and willful misconduct.

    In a much awaited decision, the Supreme Court of Canada examined the standard of fault constituting conduct barring limitation under Article 4 of the Convention on Limitation of Liability for Maritime Claims, 1976 (“Limitation Convention”) and whether the same behavior constitutes wilful misconduct voiding insurance coverage under the Marine Insurance Act.

    Mr. Vallée is a crab fisherman from the lower St-Lawrence River. A fibre-optic submarine cable became entangled with his fishing gear. He raised the cable to the deck of his ship and proceeded to cut the cable with a chain saw. He was under the mistaken belief that the fibre-optic cable was not in use. That belief was based on a handwritten note on some sort of map that he had briefly seen in a museum. The marine charts of the area indicated the presence of a live cable. The result was $1 million of damage. As the trial judge put it, Mr. Vallée was a good man who did a very stupid thing.

    The Marine Liability Act gives force of law in Canada to the Limitation Convention. It also provides that the limitation of liability of ships with less than 300 gross tonnage, such as this fishing boat, is of CAD $500,000.

    The cable owner argued that the fisherman was not entitled to limit his liability. Intentionally cutting the submarine cable constituted conduct barring limitation under Article 4 of the Limitation Convention as it was done recklessly with knowledge that the loss would probably result. To compound Mr. Vallée’s problems, his insurers claimed that the same behavior also constituted willful misconduct which voids the insurer’s obligation to indemnify. Both issues turned on the fisherman’s degree of fault.

    All the Justices agreed that the behaviour in question did not meet the threshold of conduct barring limitation under the Limitation Convention. It was insufficient that the person liable intended to perform the act, namely cutting the cable. Rather, in order to break limitation, it must be proven that the person intended to cause the loss that actually resulted or had knowledge that the loss would probably occur, namely stopping fiber-optic traffic.

    The Court examined a number of decisions interpreting the Limitation Convention, including the “Leerort”, as well as the Warsaw Convention on carriage by air which inspired Article 4. The Court pointed out that Article 4 focuses on an intention to cause the loss while the right to limit under the Convention relates more generally to the claim. The limitation is expressed in broad and generic terms while the intention required to break the limitation relates to specific consequences of the conduct of the person liable.

    The fisherman held the sincere, though mistaken, belief that the cable was useless. Although that belief was based on inadequate information, in cutting the cable, he did
    not intend to cause a loss, nor did he know the probable consequences of his actions.

    On the other hand, the majority of the Court held that the standard under sec. 53 of the Marine Insurance Act of “willful misconduct” was a lower benchmark. A clear distinction was drawn between the purpose and text of Article 4 of the Limitation Convention and sec. 53 of the Marine Insurance Act. The standard of fault is not the same.

    The fisherman clearly had a duty to be aware of the cable and he failed miserably in that regard. His acts were so far outside the range of conduct to be expected in the circumstances as to constitute misconduct. The issue was whether that misconduct was willful.

    For the majority of the Court, willful misconduct includes not only intentional wrongdoing but also conduct exhibiting reckless indifference in the face of a duty to know. The fisherman’s misconduct was willful in that he knew he was cutting the submarine cable. It is not necessary to also demonstrate that he knew that the harm would occur. It is sufficient that he ran an unreasonable risk with subjective knowledge of that risk and indifference as to the consequences. To hold otherwise is to “conflate recklessness with intention”. As the Court put it, those “who take unreasonable risks of which they are subjectively aware often wrongly believe that the risk which they decide to take will not result in harm”. That is the essence of recklessness.

    For insurance purposes, the fact that the fisherman believed that the cable was not in use is beside the point. He knew that he was cutting a submarine cable. He adverted to the risk that it could be in use but failed to make further inquiries in order to confirm or dispel his belief that the cable was abandoned. Willful misconduct does not require either intention to cause a loss or subjective knowledge that the loss would probably occur.

    One of the Justices of the Supreme Court dissented on the issue of willful misconduct. Justice Wagner focused on the word “willful”. In his view, the fact that a reasonable person ought to have known or that a person had a duty to know, does not suffice to characterize the misconduct as willful. It is also necessary to establish that the person intended to cause a loss, or to prove gross negligence or misconduct in which there is a very marked departure from the conduct of a reasonable person.

    The decision reaffirms the almost unbreakable nature of the limitations under the Convention while distinguishing between conduct barring limitation and willful misconduct in a marine insurance context.

    It will be of interest to P&I Clubs and other marine insurers. Even if the behaviour of the insured is not so egregious as to meet the fault standard of Article 4 of the Limitation Convention, it may nevertheless constitute willful misconduct allowing the insurer to deny coverage. Conversely, this decision may cause concern to ship owners who, much like this fisherman, may find themselves able to limit liability but unable to look to their insurers to constitute that limitation fund.