Imagine the following scenario: a local distributor sells a commonly used product that shortly thereafter causes a major house fire. The purchaser submits a claim with his home insurer, which indemnifies him and then naturally wants to exercise its rights against the responsible party to recover the indemnity paid. The local distributor finds itself sued by the home insurer because of its involvement in the sale of the allegedly defective product.
In such context, the local distributor might be consoled by the thought that it may easily transfer blame to the manufacturer of the product at issue, and that, in any event, it cannot be held liable for any damage whatsoever, because it had no role in the design or manufacture of the product. Clearly, the contrary would be unfair.
Yet this premise is far from accurate if we consider the rules applicable to professional sellers in Quebec. In fact, the local distributor (and its liability insurer) could find themselves alone to indemnify the victim for the damages caused by the product, even if all the distributor did was put the product on its shelf.
The Civil Code of Québec sets out a regime governing sale intended to indemnify victims who have purchased products affected by hidden defects. In a recent judgment, the Court of Appeal reiterated the particularly harsh regime imposed by article 1729 of the Civil Code of Québec. It also specified that the regime set out in this provision [translation] "has the practical effect of implementing not just a double, but a triple presumption in favour of the purchaser" that:
- there is a defect,
- the defect existed prior to the sale of the product, and
- the damage is the direct result of the malfunction or deterioration of the product.
Under Quebec law, these three presumptions are directly applicable against professional sellers and all other parties involved in the distribution chain, from the local distributor to the manufacturer of the product. Victims may therefore bring proceedings seeking damages against one or all them to obtain full compensation.
The problem for the local distributor, who merely put the product on its shelf and therefore wants to transfer liability to the manufacturer of the product, is that it is not always possible to identify the manufacturer and get it to accept liability. The global economy in which we live entails risks for the various parties involved in the distribution chain, who are often scattered all over the world. In that context, it can prove difficult to bring the manufacturer, located in a country with legal rules that are different than Quebec's, into legal proceedings concerning a defective product that caused damages. The local distributor therefore runs the risk of having to bear the total cost alone, despite its limited role in the supply chain and its lack of involvement in manufacturing the product.
In these circumstances, and aware of the existence of the legal regime in its favour in Quebec, the victim may be tempted to limit its proceedings to the local distributor located in Quebec. It will therefore be up to the local distributor to institute what are often complex and costly proceedings to bring the party actually at fault, the manufacturer of the product affected by a defect, into the matter.
In sum, for those in the insurance industry, it is important to note the following:
- With respect to underwriting: when insuring a local distributor, it may be appropriate to ask a few additional questions concerning the supply network.
- With respect to indemnification: if you are defending a local distributor and the other parties in the supply chain are located in other countries, the actual possibility of bringing an action in warranty is not always clear-cut.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
