An important decision in Product Liability and the obligation of Diligence and Transparency
The Court of Appeal recently rendered a decision in CCI Thermal Technologies Inc. c. AXA XL (XL Catlin), 2023 QCCA 231, concerning the liability of the manufacturer and the apportionment of liability between the parties. This case involved twenty separate fires caused by the failure of heating elements manufactured by CCI and incorporated in heaters manufactured by three different manufacturers (the “Manufacturers”) and sold to third parties.
CCI, the Manufacturers and their insurers had agreed to first indemnify third parties who suffered damages in the fires, and to later debate on the apportionment of liability between them. The Manufacturers’ insurers argued that CCI and its insurers should be responsible for 100% of the indemnity paid to third parties, and CCI and its insurers argued the same against the Manufacturers’ insurers.
The Manufacturers’ insurers won the case in Superior Court, having convinced the Judge that CCI and its insurers should assume full responsibility for the damages paid to third parties.
The Court of Appeal adds some interesting nuances and concludes that the Manufacturers’ liability, although less triggered than CCI’s, cannot be completely dismissed.
Relevant Facts
In order to fully understand the Court of Appeal’s conclusions, it is necessary to summarize certain facts:
- The first fires caused by the failure of the heating elements manufactured by CCI and integrated into the Manufacturers’ heaters occurred on January 25, March 11 and April 13, 2007;
- On November 14, 2007, a meeting was held between representatives of the Canadian Standards Association (“CSA”), CCI and the Manufacturers to try to identify the origin of the fires. The problem with the heating element was then identified as a critical element requiring an in-depth analysis;
- However, the evidence established that CCI had known about the problem for several years and had not revealed it;
- In December 2008, CSA issued a press release offering advice on how to avoid the failure and in January 2009, it amended its standard for electric heaters;
- Several other fires occurred, until 2015.
Analysis of the Court of Appeal
Referring to ABB inc. c. Domtar Inc, 2007 SCC 50 and CNH Industrial Canada Ltd. c. Promutuel Verchères, société mutuelle d’assurances générales, 2017 QCCA 154, the Court recalls the general principles applicable to the warranty against latent defects. First, it rejects the arguments put forward by CCI to the effect that the heating elements were not affected by a latent defect at the time of sale to the Manufacturers. In addition to the evidence in this regard, the Court recalls that since CCI is the manufacturer and professional seller of the heating elements, the existence of the defect at the time of the sale is presumed. The Court also points out that the manufacturer is the ultimate expert on its product, that it is subject to the most rigorous presumption of knowledge and to the most demanding obligation to denounce the defect, and that it can only rebut its presumption of knowledge by establishing that it was unaware of the defect and that this ignorance was justified. The Manufacturers were justified in assuming that the products manufactured and sold by CCI met the applicable standards.
Another argument put forward by CCI was that the fires resulted from the faulty design of the heaters by the three Manufacturers, given their failure to incorporate a mechanism to prevent the occurrence of a short circuit in the heating element. The Court considers that since the Manufacturers were unaware that the heating element was defective, they could not be at fault for not having designed a thermal protection mechanism to avoid catastrophic failure. Until 2007, the design of the heaters was reasonable and prudent given the expected quality and compliance of the heaters acquired from CCI.
What about the period after 2007? CCI argued that the failure of the Manufacturers to notify the public of the danger when it was brought to their attention would constitute a novus actus interveniens or, at the very least, a contributory fault.
The Court refuses to consider the Manufacturers’ omission as a novus actus interveniens, which would imply a complete break in the causal link between the defect affecting the elements manufactured by CCI and the fires. However, the Court considers that there is a contributory fault justifying the attribution of a portion of liability to the Manufacturers. The main principles that emerge from its analysis may be summarized as follows:
- When they became aware of the defect, the Manufacturers could not simply contact their distributors to try to recover the inventory of problematic heaters in their possession;
- A public recall, or other measures to try to warn third party purchasers of the danger (for example, media communications), were required;
- The Manufacturers had to act with diligence. An undue delay between knowledge of the defect and the issuance of a public notice results in the Manufacturer being liable for fires that occur during that period.
Decision
In application of these principles, the Court holds the Manufacturers liable for the fires related to their heaters that occurred between 2007 (date of knowledge of the defect) and 2009 (issuance of the public notices). They are not responsible for fires that occurred before they knew of the defect or after the public notices were issued.
The Court nevertheless states that CCI’s liability must prevail, given the seriousness of the defect and its failure to disclose it to the Manufacturers, even though it had known about it for many years. It must assume 100% of the liability for fires that occurred before 2007 and after 2009, and 80% for fires for which the Manufacturers’ contributory fault is identified. The Manufacturers’ share of liability is therefore set at 20% for that period.
This decision is a reminder of the heavy burden placed on the manufacturer and the importance of being proactive following knowledge of the defect.
