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Law Column

June 2009 Law Column

Warranty against latent defects

What is your obligation in the event that the property you just sold in good faith is damaged following a fire, which originated from a latent defect in the fire place? Is your liability limited to the cost of the repairs of the fireplace or does it extend to all the damages caused to the residence by this event?

 

The Court of Appeal responded to this issue in the case of Basque v. Alpha, Insurance Company Inc., 2009 QCCA 739 (CanLII).

Indeed, the Court addresses the issue of the scope of the warranty of quality of the property where the property perishes due to latent defect which existed at the time of the sale.

 

In this case, a fire had destroyed, for the most part, the residence of the Gagné family and its contents. The Gagné family was insured with Alpha, Insurance Company. The origin of the fire was due to a latent defect in the chimney.

 

The Gagnés had acquired a house from Mr. Basque who had acquired it from Mr. Caron. Mr. Caron, in turn, had acquired it from Mr. Pellerin who, prior to that sale, had decided to refurbish the fireplace. The latent defect in relation to the chimney therefore was present throughout each and every one of these sales. Notwithstanding the foregoing, no sellers were aware of the existence of this latent defect.

 

Having been subrogated in the rights of its insured, Alpha Insurance Company decided to institute a recourse for latent defects against Mr. Basque, as well as against both prior sellers, that is Mr. Caron and Mr. Pellerin.

 

The argument of the sellers was to the effect that their liability should be limited to an amount required to repair the latent defect of the chimney which caused the loss of the residence.

 

The Court of Appeal instead followed the opinion of the insurance company and that of other doctrinal authors and jurists and condemned the sellers to pay to the purchasers the amount the latter were required to disburse to re-acquire the normal use of their residence.

 

The Court of Appeal specified that the warranty of quality applied to the entire residence and not just to whatever feature of the residence was subject to a latent defect. If that were not the case, this would be an improper interpretation of the nature as it involved the sale of a residence as opposed to simply the sale of a fireplace.

 

The Court further provided additional explanations concerning the applicable principle where there is a partial loss of an asset regardless of the good or bad faith of the seller. The partial depreciation of a given asset caused by a latent defect must be indemnified by the seller. In view of the fact that it was not a total loss, the compensation would be reduced to an amount lower than the sale price of the residence. The indemnity must be reasonable in relation to the importance of the loss and proportional to the last value of the house.

 

In the case of a seller in bad faith who knew at the time of the sale that the residence had certain latent defects, the purchaser could also claim from the seller any and all damages which are not directly relating to the asset, for example, loss of salary or loss of enjoyment. In this case, there was no evidence indicating that any of the sellers were acting in bad faith. The Court therefore condemned the sellers to indemnify the purchaser uniquely for the direct damages to the residence. In view of the above principles, the Court of Appeal condemned the three vendors to pay to the Gagné family the sum of $70,615.44 to indemnify them for the destruction of the residence, which was considerable.

 

The Court of Appeal therefore clarified this issue which has raised many questions in the course of the past few years and which remained, until now, uncertain. This judgment has therefore provided us with better clarity on how to obtain adequate remedy in the event of latent defects.