Damages limited but not covered in Telus v Peracomo

The odyssey of Peracomo Inc. v. TELUS Communications has finally come to an end with the release of a Supreme Court of Canada decision partially reversing the lower court findings.

Readers may recall that this case began when Réal Vallée, a fisher and the sole shareholder of Peracomo Inc., found his fishing nets entangled with a submarine cable. Apparently believing the cable was not in use, he cut the cable to free his gear. His belief was wrong: the cable was owned by TELUS Communications and was very much in use, and the cutting of the cable resulted in an alleged $1 million loss to Telus.

Two key issues worked their way up to the Supreme Court:

  • Was Vallée’s conduct “committed with the intent to cause such loss, or recklessly and with knowledge that such loss would probably result”, thus breaking the $500,000 limitation under the Convention on limitation of liability for maritime claims, 1976, 1456 U.N.T.S. 221 (“the London Convention”), as adopted under Par III of the Marine Liability Act S.C. 2001, c. 6 (“MLA”)?
  • Was Vallée’s conduct “willful misconduct” of the insured disentitling him to coverage for the loss under s.53(2) of the Marine Insurance ActSC 1993 c. 22 (“MIA”)?

The decision, written by Justice Cromwell, focused on the difference in the standards in the two laws: The London Convention requires that the person has subjective knowledge that a loss is probable, while the MIA requires only that it is “willful” misconduct.

In the result, the Court found that Vallée’s conduct was willful and reckless, but accepted his subjective belief that the cable was not in use and cutting it would not result in damage. Accordingly, he was personally responsible for the loss and not entitled to insurance coverage, but because he did not subjectively believe a loss was ‘probable’ he is entitled to limit his damages under the London Convention.

Justice Wagner, dissenting, was of the opinion that the MIA and MLA must be read “harmoniously” and therefore he found that the insurance coverage should follow the convention limit, and accordingly would have entitled the plaintiff both to limitation of liability and to coverage for the loss.

I note that the subjective standard of belief is a very high standard; the decision therefore strengthens the London Convention limitations on damages and reduces the scope for the willful or reckless exception. And while the plain language interpretation of the two provisions reveals the distinction on which the Court relied, I have to agree with Justice Wagner that formalizing a legal difference between the two provisions is likely to have commercial implications and, perhaps, to increase litigation between marine insurers and their insureds.

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