An important and much awaited decision with respect to limitation of liability for maritime claims and wilful misconduct under a marine insurance contract has been rendered by the Supreme Court of Canada this week. In Peracomo Inc. et al v. Telus Communications Company et al., the Supreme Court reversed the lower Courts' decisions and held that Peracomo was entitled to limit its liability for a million dollar claim to $500,000 under the 1976 Convention on Limitation of Liability for Maritime Claims. At the same time, the Supreme Court upheld the lower Courts' findings that  that although the misdeeds of Peracomo's representative were insufficient to break limitation, they still constituted wilful misconduct and that the vessel's marine insurance underwriters could deny coverage for the incident.

In June 2006, Mr. Vallée, the principal of Peracomo Inc., was fishing on the company's vessel, the "REALICE", in the St. Lawrence River. Its trap line anchors became caught in a submarine fibre optic cable on the bottom of the river. The cable was co-owned by Telus and Hydro-Quebec and also used by Bell Canada. Mr. Vallée mistakenly believed that the cable was not operational and had been abandoned. He used an electric circular saw to cut the cable to free his lines. A few days later, his lines snagged the same cable and he cut it a second time. Regretfully, the cable was active and plaintiffs incurred a loss of approximately $980,000.00 to repair it.

Telus, Hydro-Quebec and Bell sued the "REALICE", its owner Peracomo Inc. and Mr. Vallée in the Federal Court of Canada for damages arising from the cut cable. At trial, the Federal Court found the Defendants should have been aware of the existence of the cable, which was marked on nautical charts and cited in a Notice to Mariners, and held the Defendants liable for the loss.

Section 29 of the Marine Liability Act, S.C. 2001, c. 6 and the 1976 Convention would normally have allowed Peracomo and Mr. Vallee to limit their collective liability to Cdn, $500,000.00. However, the trial judge found that because the loss resulted from the vessel owner's personal act or omission, committed with the intent to cause such loss, by virtue of Article 4 of the 1976 Convention, they lost the ability to limit their liability. In this case, Mr. Vallee was the sole officer and director of Peracomo so his actions were interchangeable with the company. If Mr. Vallée been only an employee of Peracomo, as is the case with many commercial marine operations, then the company may have been able to limit.

The Court also held that Mr. Vallée's conduct amounted to "wilful misconduct" thereby allowing Peracomo's underwriters to deny coverage pursuant to Section 53(2) of the Marine Insurance Act. That section states that "an insurer is not liable for any loss attributable to the wilful misconduct of the insured".

The trial decision was upheld by the Federal Court of Appeal.

The Supreme Court of Canada allowed the appeal in part. The Court found that the 1976 Convention's purpose was to establish a virtually unbreakable right to limit liability and must be interpreted with that purpose in mind.

The Court held that it was not that Mr. Vallée knew he was cutting a cable (thereby causing damage to it) that was the relevant factor in determining whether he could claim limitation, but rather whether he knowingly damaged a live cable as opposed to an abandoned one. As the trial Judge had found that Mr. Vallée honestly thought the cable was abandoned and non-operational, the Supreme Court held that he did not have the requisite knowledge that "such loss" would occur i.e. damage requiring repair to an active cable., He did not intend  to cause "such loss" that actually occurred. Without that specific knowledge, limitation could not be broken.

The decision of the Supreme Court of Canada makes it clear that in Canada limitation will be almost impossible to break. It will be necessary to show either intent to cause the loss that actually occurred, or recklessness with the knowledge that the loss that occurred would probably result. As the result in Peracomo shows, proving just intent or recklessness in and of itself is not sufficient.

The Supreme Court also held that the principle of "wilful misconduct" as is used in the Marine Insurance Act is not the same as "intent to cause damage" as is used in the 1976 Convention. While recklessness was not sufficient to break limitation, it was sufficient in the circumstances of this case to amount to wilful misconduct such that underwriters were entitled to deny Peracomo's claim for insurance coverage for the incident. The Court found that Mr. Vallée's acts were "so far outside the range of conduct" to be expected in the circumstances as to constitute misconduct. It was his duty to be aware of the cable and he "failed miserably in that regard". There is no doubt that his cutting of the cable was wilful in the sense that is exactly what he intended to do. For the purposes of establishing wilful misconduct under the Marine Insurance Act it was not necessary to show that Mr. Vallee had subjective knowledge of the damage that would occur.

The Court explained that while conduct which is egregious enough to break limitation of liability should not be insurable, the reverse was not necessarily true. Even if the misconduct does not constitute grounds to break limitation, it may still be sufficient to breach the terms of a policy of marine insurance.

Though most coverage disputes tend to be very fact based, the Court has provided important guidance as to what may constitute "wilful misconduct" that would breach a  marine insurance policy which will assist both insurers and insureds moving forward. Even more useful with respect to  bringing certainty to Canadian law, the Court has emphatically confirmed that  maritime limitation of liability in Canada remains virtually unbreakable.

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.