MANAGING THE RISK IN A CODIFIED LEGAL SYSTEM - … Handouts/RIMS 16/GRM012/GRM012... · MANAGING...

MANAGING THE RISK

IN A CODIFIED

LEGAL SYSTEMGRM012

Speakers:

Stéphane Cossette, Senior Director, Risk Management

Quebecor Média Inc. Moderator

Michel Turcotte, Senior Director, Risk Management and Insurance

Ivanhoé Cambridge Risk manager

Ian Rose, Partner

Lavery, de Billy LLP. Lawyer

1

Learning Objectives

At the end of this session you will be able to:

Recognize the challenges of doing business in a codified legal

system

Appreciate the differences and similarities of the two major legal

systems

2

Introduction

Legal systems : variety and nuances

It is an error to believe that there are only two major systems: a

codified and a non-codified

There are numerous versions of the two including mixed

systems

As Risk Managers you should familiarize yourself with the legal

system of each country where you do business

It would also be wise to consult with local experts

3

Legal systems

Legal systems : What are they? Where are they?

What is a « legal system? »

The set of laws of a country and the ways in which they

are interpreted and enforced

The main legal systems of the world are: civil law,

common law, customary law, religious law (ex. Islamic

law) and mixed systems

The two systems of law most widely used in the world are

the civil law and the common law

5

Legal systems: Variety and

nuances

© University of Ottawa

6

Overview: civil law and

common law

Civil law

Fundamental rights and

duties are codified

(Constitution, Codes,

Statutes)

Judges must establish the

facts and apply the law

Judges are bound by

legislation

Common law

Generally non-codified

Case law (rule of

precedent)

The law evolves on a

case by case basis

« Judge made law »

7

Origins and development

Civil law

A legal system that draws its origins from Roman Law

(Justinian’s Corpus Juris Civilis, circa 500 A.D.); and even

before (e.g. Code of Hammurabi, circa 1750 B.C.)

The French Civil Code (Napoleonic Code, 1804) inspired many

other versions outside of France in the 19th century

Codified civil law (e.g. France, Québec) and non-codified (e.g.

Scotland)

8

Origins and development

Common law

Local customs used for resolving differences

Norman Conquest of 1066 – development of the common law

William Blackstone, « Commentaries on the Laws of England »

9

Main differences: sources of

law

Civil law

The legislation is enacted by

the legislator

Doctrine (scholarly work)

interprets it

Case law (application of

general principles of law)

Common law

Case law (judicial decisions)

is the main source

Case law has precedence

over doctrine

Scholars summarize andcomment on case law

10

Main differences: case law

Civil law

Case law applies general legal

principles

Case law enforces the

legislation enacted by the

legislator

It is a secondary source of

statutory intepretation

Common law

Case law establishes a new

rule for a new set of specific

facts

Case law constitutes the main

source of law

11

Main differences: Legal

methodology

Civil law

The rule of prececent is at

best persuasive

Deductive reasoning

Common law

Stare decisis

Case law

Inductive reasoning

12

Main differences : Legislative

approach

Civil law

Codes and statutes are

concise, definitions are often

absent and state general legal

principles

Focuses on the rights and

duties (the Court must choose

or create the remedy)

Common law

Statutes contain specific

definitions and lists in detail

every application of the stated

rule

The emphasis is put on

remedies

13

Main differences: how the law

evolves

Civil law

The law is created in a rational

and systematic manner

Legal principles are crystallized

in legislation and enforced by

Courts

However, reforms occur

periodically

Common law

Common law develops

incrementally

Legal rules may change,

subject to the rule of stare

decisis

14

Main differences : how the law

evolves (cont’d)

Civil law

A Civil Code aims to be as

comprehensive as possible,

but it can not consider every

imaginable situation

The idea is that the Code

provides general abstract

rules which will later be

applied specifically to the set

of facts at hand

Common law

There may be situations of

legal void if the disputed

matter has not been

addressed by the Courts in

the past

However, « judge-made law »

allows innovative solutions

when confronted with a new

situation

15

Why does it matter?

Jurisdiction, applicable law

and other private international law considerations

16

Jurisdiction

Which state or territory will have authority to

resolve the issues?

Definitions

the "jurisdiction" is the state or territory in which a matter will

be resolved

to « have jurisdiction" means to have authority to hear a

matter (ratione materiae, ratione personae or ratione loci)

Multi-jurisdictional issues

17

Jurisdiction (cont’d)

Some general rules on jurisdiction in Québec

Art. 3148: In personal actions of a patrimonial nature, Québec authorities have jurisdiction in the

following cases:

(1) the defendant has his domicile or his residence in Québec;

(2) the defendant is a legal person, is not domiciled in Québec but has an establishment in Québec,

and the dispute relates to its activities in Québec;

(3) a fault was committed in Québec, injury was suffered in Québec, an injurious act occurred in

Québec or one of the obligations arising from a contract was to be performed in Québec;

(4) the parties have by agreement submitted to them the present or future disputes between

themselves arising out of a specific legal relationship;

(5) the defendant has submitted to their jurisdiction.

However, Québec authorities have no jurisdiction where the parties have chosen by agreement to

submit the present or future disputes between themselves relating to a specific legal relationship to a

foreign authority or to an arbitrator, unless the defendant submits to the jurisdiction of the Québec

authorities.”

Civil Code of Québec

18

Jurisdiction (cont’d)

A specific example in Quebec in insurance matters

Art. 3150: Québec authorities also have jurisdiction to hear an action

based on a contract of insurance where the holder, the insured or the

beneficiary of the contract is domiciled or resident in Québec, the

contract covers an insurable interest situated in Québec or the loss

took place in Québec.

Civil Code of Québec

19

Which law will apply?Observations :

Laws differ from one state/territory to the next

Which set of laws applies to any particular situation?

Example : the situation in Quebec

Art. 3112: If no law is designated in the act or if the law designated invalidates the juridical

act, the courts apply the law of the State with which the act is most closely connected in

view of its nature and the attendant circumstances.

Art. 3119: Notwithstanding any agreement to the contrary, a contract of insurance covering

property or an interest situated in Québec, or that is subscribed in Québec by a person

resident in Québec, is governed by the law of Québec if the policyholder applies for the

insurance in Québec or the insurer signs or delivers the policy in Québec. […]

Civil Code of Quebec

20

Imperative provisions

Mandatory application

No waiver

Closely linked to public order

Suppletive provisions

Fall back rule

Possible waiver

Applicable only if not provided

in agreements

Which provisions have effect?

21

Why is this important?

Legal principles that apply

Common law, civil law or mixed approach

Court process – e.g. jury or not;

Speed of the process: time to judgment / relief

Range of damages

• Different standards of evaluation

• Caps on non-pecuniary

• Punitive awards

• Exemplary awards

Costs and interest awards can vary substantially

Rules as to the execution process

All can be very different from jurisdiction to another for essentially the

same factual situation.

22

Forum shopping and other

practical issues

Quebec law applies to:

Product liability issues - Art.1468 and Art. 1726 C.C.Q.

Negligence – Art. 1457 C.C.Q.

Direct right of action against the B.C. insurer of the B.C.

distributor - Art. 2501 C.C.Q.

23

Example: A British Columbia distributor of a product that was

delivered in Quebec:

Forum shopping and other

practical issues

But, B.C. law applies to:

Insurance coverage issues, especially the interpretation of the

terms of policy issued to the B.C. distributor in B.C.:

Art. 3112: If no law is designated in the act or if the law designated invalidates the

juridical act, the courts apply the law of the State with which the act is most

closely connected in view of its nature and the attendant circumstances.

Art. 3113: A juridical act is presumed to be most closely connected with the law of

the State where the party who is to perform the prestation which is characteristic

of the act has his residence or, if the act is concluded in the ordinary course of

business of an enterprise, has his establishment.

Civil Code of Quebec

24

Example: British Columbia distributor of a product delivered

in Quebec:

Some practical examples

25

Limitation of manufacturer's

liabilityIn Canadian common law

A limitation of liability clause between sophisticated parties is

deemed valid

In Quebec civil law

A limitation of liability clause between sophisticated parties is

not valid, as it contravenes public order provisions of the

Quebec Civil Code

26


liability (cont’d)Hunter Engineering Co. v. Syncrude Canada

Ltd., [1989] 1 SCR 426

These were two sophisticated Canadian commercial entities:

“It is clear, therefore, that the warranty clause excluded liability for the defects

that materialized, and subject to the existence of any unconscionability between

the two parties there can be no liability on the part of Allis-Chalmers. […]

Both Allis-Chalmers and Syncrude are large and commercially sophisticated

companies. Both parties knew or should have known what they were doing and

what they had bargained for when they entered into the contract. There is no

suggestion that Syncrude was pressured in any way to agree to terms to which it

did not wish to assent. I am therefore of the view that the parties should be held

to the terms of their bargain and that the warranty clause freed Allis-Chalmers

from any liability for the defective gearboxes.” (p.464)

27


liability (cont’d)

ABB Inc. v. Domtar Inc., [2007] 3 SCR 461

These were also two sophisticated parties, but the purchaser (Domtar) was in

Quebec

The Supreme Court of Canada, while recognizing the right in other provinces to

limit the warranty against latent defects, refused to consider such possibility in

Quebec, concluding that common law principles cannot be grafted on to

Quebec law

28



Conclusions from ABB inc. v Domtar inc. In Quebec, the possible defences of the manufacturer to rebut the

presumption of knowledge are very limited, being:

• The causal fault on the part of the buyer or a third person, or

superior force, or

• The «development risk» which enables the manufacturer to avoid

liability if only scientific or technological discoveries made after the

good was put on the market will have permitted the defect to be

detected [Supreme Court decision para. 72]

The professional seller and manufacturer - who are presumed to be

aware of a defect – can therefore almost never avoid liability if Quebec

law applies [Supreme Court decision para. 73]

29



Perspective of a Risk Manager

When entering new markets, make sure your “limitation of liability”

clauses will stand in this jurisdiction

Don’t assume the same laws apply everywhere in the country; Canada

is an example where the Civil code applies only in one province

Back to our initial statement – you must get legal advice before entering

new markets

Knowing in advance allows you to adjust your risk financing tools (self-

insurance, reserve, insurance)

30




A similar situation results from Art.1474 C.C.Q. - you can’t limit

your liability for bodily or moral injury

Knowing about Art. 1474 C.C.Q. in advance allows you to adopt

loss prevention measures

For example, if you organize an event or an activity, clearly

stating that participants accept the following list of risks might be

a useful defence in court

31




32


liability (cont’d)Perspective of a Risk Manager

SKYTAG – offers laser tag and trampoline activities for its clientele of all ages.

They state in their warning notice that all participants assume all risk of personal

injury and death resulting from staff, equipment, slipping or falling, collision with fixed

objects or other participants, any jumps, stunts or other maneuvers, physical

condition, difference in weight, multiple participants at the same time, etc. The ticket-

holder or participant agrees that Skytag shall not be liable for any such personal

injury and or possible death.

If the participant is injured because of the bad condition of the facility, you can’t

limit your liability, but if a child falls off a trampoline because of a bad maneuver, bad

physical condition or because of an impact with another participant – Skytag may at

least argue that the child and the parent agreed to assume the risk.

33

Good faith in contractual

relations

In Canadian common law

Good faith is a duty to act honestly only in the performance ofcontractual obligations

In Quebec civil law

Good faith is required generally and a large range ofcircumstances such as duty to inform, and also results from theprinciple of abuse of contractual rights

Good faith applies to all stages of contractual relations(negotiation, formation and performance and extinguishing)

34


relations (cont’d)

Art. 6: Every person is bound to exercise his civil rights in

good faith.

Art. 7: No right may be exercised with the intent of injuring

another or in an excessive and unreasonable manner, and

therefore contrary to the requirements of good faith.

Art.1375: The parties shall conduct themselves in good

faith both at the time the obligation arises and at the time it

is performed or extinguished.

35

Under the Quebec Civil Code



Abuse of contractual rights in Quebec – Houle v.

Canadian National Bank, [1990] 3 SCR 122

The context:

The bank liquidated a company’s assets three hours after

demanding payment of loan

The bank knew there were ongoing negotiations to sell the shares

36



Houle v. NBC (cont’d)

The decision of the Supreme Court of Canada:

37

To summarize, then, it appears indisputable that the doctrine of abuse

of contractual rights is now part of Quebec law. The standard with

which to measure such abuse has expanded from the stringent test of

malice or bad faith, and now includes reasonableness, as expressed

by reference to the conduct of a prudent and diligent individual. […]

If this implicit obligation is breached, then contractual liability is

engaged with regard to the other contracting party. (p.164)

When exercising the right provided for in the contract, the bank

acted abusively, without consideration of the consequences for

its customer


relations (cont’d)Duty to inform in contractual and pre-contractual

phase in Quebec – Bank of Montreal v. Bail Ltée,

[1992] 2 SCR 554

The context:

The owner Hydro-Quebec failed to disclose to the

contractor/subcontractor a crucial geotechnical report

Costly changes were required to the contract, and they sued

Hydro-Quebec for damages

38



Bank of Montreal v. Bail (cont’d)


The Supreme Court of Canada condemned Hydro-Quebec, finding

that it should have disclosed report, holding that duty to inform

exists before and during contract:

39

We should then ask whether we may generalize from all these individual cases. I

believe that it is possible to outline a general theory of the obligation to inform, based

on the duty of good faith in the realm of contracts […]

In the case at bar, for reasons which will become apparent later, I do not believe that

we must strictly distinguish between the pre-contractual and contractual phases of the

relationship between Bail/Sotrim and Hydro-Québec. (p. 586)



Canadian common law limited to the duty of honest

performance – Bhasin v. Hrynew, [2014] 3 SCR 494

The context:

Bhasin was a case about a renewal of a contract between a company

marketing education savings plans and its agent and the company’s

right to terminate the contract in accordance with the clause in the

contract

40



Bhasin v. Hrynew (cont’d)


41

The company had the right to terminate the contract, but acted dishonestly

when it:

Mislead the agent about a future merger with a competing business

Tried to have the agent’s company audited by its competitor


relations (cont’d)Bhasin v. Hrynew (cont’d)


42

[93] A summary of the principles is in order:

(1) There is a general organizing principle of good faith that underlies many facets

of contract law.

(2) In general, the particular implications of the broad principle for particular cases

are determined by resorting to the body of doctrine that has developed which gives

effect to aspects of that principle in particular types of situations and relationships.

(3) It is appropriate to recognize a new common law duty that applies to all

contracts as a manifestation of the general organizing principle of good faith: a duty

of honest performance, which requires the parties to be honest with each other in

relation to the performance of their contractual obligations.



43


This time, knowing about this notion of “Good Faith” would allow you to

work on the loss prevention aspect of your Risk Management program

Knowing that having the right to do something is not enough, you need to

pay attention on the “how” you do it; this would allow risk managers to

ensure that appropriate precautions are taken when it is time to act

As Risk Managers, we often hear that the most dangerous risks are the

ones we don’t know. Not knowing how the legal system works in the

markets where we do business is one of those risks

Interest and defence costs

above limits

Art: 2414: Any clause in a non-marine insurance contract which grants the client, the

insured, the participant, the beneficiary or the policyholder fewer rights than are granted

by the provisions of this chapter is null.

Any stipulation which derogates from the rules on insurable interest or, in liability

insurance, from those protecting the rights of injured third persons is also null.

44

Art 2503: The insurer is bound to take up the interest of any person entitled to the

benefit of the insurance and assume his defence in any action brought against him.

Costs and expenses resulting from actions against the insured, including those of the

defence, and interest on the proceeds of the insurance are borne by the insurer over

and above the proceeds of the insurance.

In Quebec, the Civil Code requires that costs and expenses, as

well as interest, be paid over and above the limits:

Castor Holdings Case – The context:

The accountants Coopers & Lybrand had a complex, multi-layer insurance tower with limits of some $175M

The program had been structured in London and in New York with the participation of over 60 insurers from around the globe

The policies had been issued from many countries around the globe, but were all gathered by the broker in Montreal, Quebec, and then forwarded as a package to the New York head office of the insured

The question was whether this was sufficient to result in the application of the Quebec Civil Code

45


above limits (cont’d)

Castor Holdings Case – the Policy wording:

Section 1.2 “Claim” shall mean one claim or series of claims arising

out of one occurrence or circumstance or a series of occurrences or

circumstances consequent upon or attributable to one source or

original cause and shall include all “Costs and Expenses” incurred in

connection therewith.

Section 1.3 “Costs and Expenses” shall mean:

(a) All investigation adjustment and legal expenses of the Assured.

[…]

(c) All interest accruing with respect to any Claim.

[…]

46



Castor Holdings Case

The value of the coverage as per policy wordings ≈ $175M

Under the terms of the policy wordings, those limits of coverage

were exhausted in defense and to a much lesser degree, by

some settlements

If Quebec law applied, only the amounts paid in settlements

depleted the limits; all remaining limits ($125M ±) plus interest

since the suit had been filed (≈175%) ≈ US$345M were still

available and payable

47



German Insurance Contract Act, Section 101

(1) The insurance shall also cover the judicial and extra-judicial costs

arising from claims asserted by a third party insofar as the

circumstances necessitate the expenditure. Further, the insurance covers

expenses incurred on the instruction of the insurer by defence counsel in

criminal proceedings initiated on the basis of an act which could result in

the policyholder becoming liable vis-à-vis a third party. At the

policyholder's request the insurer shall advance the costs.

(2) If a sum insured has been determined, the insurer shall also reimburse

the costs of a legal dispute conducted at his instigation and the costs for

defence counsel in accordance with subsection (1), second sentence,

insofar as they exceed the sum insured plus the insurer's expenses for

indemnifying the policyholder. This shall also apply to interest payments

which the policyholder owes the third party as a result of a delay in

satisfying the third party occasioned by the insurer.

48




The Castor Holdings case illustrates the impact on the insurers;

but as Risk Managers, it is also important to know the issues

The Quebec Civil Code (and some others) offer a significant

advantage for the insured, but to take advantage of it, Risk

Managers need to make sure the law of those jurisdictions apply

In the Castor Holdings case, the place where the policies were

delivered would have had an impact. If you do business in

different areas of the world, not only do you need to know the law

there to avoid unexpected loss, you also need to know it to be

able to take advantage of some opportunities

49



Some specific other

examples from Quebec

Minimum employment rights -

Quebec

Art. 3118: The choice by the parties of the law applicable to a contract

of employment cannot result in depriving the worker of the protection

afforded to him by the mandatory rules of the law of the State where the

worker habitually carries out his work, even if he is on temporary

assignment in another State or, if the worker does not habitually carry

out his work in any one State, of the law of the State where his

employer has his domicile or establishment.

In the absence of a designation by the parties, the law of the State

where the worker habitually carries out his work or the law of the State

where his employer has his domicile or establishment is, in the same

circumstances, applicable to the contract of employment.

51

Restriction of bodily injury

liability limitation clause -

Quebec

Art. 1474: A person may not exclude or limit his liability for

material injury caused to another through an intentional or

gross fault; a gross fault is a fault which shows gross

recklessness, gross carelessness or gross negligence.

He may not in any way exclude or limit his liability for

bodily or moral injury caused to another.

52

Direct right of action - Quebec

Art. 2501: An injured third person may bring an action

directly against the insured or against the insurer, or

against both.

The option chosen in that regard by the injured third

person does not deprive him of his other recourses.

53

Liability of Builders and

Construction Professionals -

QuebecArt. 2118: Unless they can be relieved from liability, the contractor, the architect

and the engineer who, as the case may be, directed or supervised the work, and

the subcontractor with respect to work performed by him, are solidarily liable for

the loss of the work occurring within five years after the work was completed,

whether the loss results from faulty design, construction or production of the work,

or defects in the ground.

Art. 2120: The contractor, the architect and the engineer, for the work they directed

or supervised, and, where applicable, the subcontractor, for the work he

performed, are jointly bound to warrant the work for one year against poor

workmanship existing at the time of acceptance or discovered within one year

after acceptance.

Art. 2121: An architect or an engineer who does not direct or supervise work is

liable only for the loss occasioned by a defect or error in the plans or in the expert

opinions he supplied.

54

Raw materials originating from

Quebec

Art. 3129: The application of the rules of this Code is

mandatory with respect to civil liability for any injury

suffered in or outside Québec as a result of exposure to

or the use of raw materials, whether processed or not,

originating in Québec.

55

Conclusion

Be careful when dealing in a foreign jurisdiction -

unforeseen consequences may result in greater

risk!

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Questions?

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