COURT FILE NO.: 451/05

DATE: 20070115

ONTARIO

SUPERIOR COURT OF JUSTICE

DIVISIONAL COURT

MATLOW, SWINTON AND MURRAY JJ.

B E T W E E N:

JAMES TETAKA

Plaintiff (Respondent)

• and -

BMW CANADA INC.

Defendant (Appellant)

Mark I. Wainberg, for the Plaintiff (Respondent)

Michael A. Penny and Alisse Houweling, for the Defendant (Appellant)

HEARD at Toronto: November 27, 2006

SWINTON J.:

1BMW Canada Inc. appeals from the order of T. Ducharme J. dated October 21, 2005, in which he held BMW liable for breach of warranty in the amount of $3,854.65. The issue in this appeal is whether the trial judge erred in his interpretation of BMW’s new vehicle warranty.

Background Facts

2The respondent is the lessee of a 2000 BMW M5 automobile. Shortly after leasing the vehicle in May 2002, the respondent had extensive modifications carried out on it which were not approved or installed by BMW. The modifications cost more than $20,000.00 and included, in the words of the trial judge, “the installation of a stereo and a D.V.D. system, an in-dash television, a multi-function remote control and a variety of other items intended to enhance the performance of the vehicle” (Reasons, p. 1).

3On August 6, 2002, the driver’s side airbag and the driver’s side impact head protection airbag deployed while the respondent was driving. There was no evidence of a collision. When he took the car to BMW for repairs, BMW refused to replace the airbags under the warranty, based on its conclusion that the modifications to the vehicle may have contributed to the improper deployment of the airbags.

4The warranty for the vehicle is composed of a series of paragraphs including a general coverage provision and a number of exclusionary paragraphs. Under the heading “Warrantor”, is the following clause:

BMW Canada Inc. (BMW Canada) warrants to the first retail purchaser, and each subsequent purchaser, of Canadian specification vehicles imported by BMW Canada, or sold through the BMW Canada European Delivery Program to be free of defects in material or workmanship.

5The general coverage provision of the warranty states:

To obtain coverage under this warranty, the vehicle must be brought, upon discovery of a defect in material or workmanship, to the workshop of any authorized BMW dealer, during normal business hours. The dealer will, without charge for parts or labour, either repair or replace the defective part(s) using new or authorized remanufactured parts…

6The warranty also includes a number of exclusions. They provide, in part,

This warranty does not apply to the following:

Damage which results from negligence, improper operation of the vehicle, improper repair, lack of or improper maintenance, environmental influences, flood, accident or fire damage, road salt corrosion, use of improper or contaminated fuel. [paragraph one]

Modifications of the vehicle or installation of any performance accessories or components attached to the vehicle which alters the original engineering and/or operating specifications or which results or may result in damage to the other original components, electrical interference, electrical short, radio static, water leaks and wind noise. [paragraph four]

BMW Canada will not accept any liability for any parts and accessories not approved by BMW Canada. [paragraph eight; bolding in the original warranty]

7The respondent launched an action claiming damages for negligence and breach of warranty. The trial judge dismissed the negligence claim, and that part of the decision has not been appealed.

8The trial judge held that there had been a breach of warranty and ordered BMW to pay the cost of the airbag repairs. In reaching his decision, he accepted the evidence of Eric Leport, the appellant’s expert, that the modifications to the vehicle may well have contributed to the improper deployment of the airbags.

9The trial judge expressed the view that the exclusion in paragraph four of the warranty was poorly drafted. He then found it to be ambiguous by comparing it with paragraph one of the exclusions, which referred to damage. He concluded that paragraph four could reasonably be taken to have one of two interpretations: that the warranty does not apply to the modification of the vehicle, or that it does not apply to the performance accessories or components that have been installed or attached to the vehicle. Having determined that the paragraph was ambiguous, he applied the contra proferentem principle and concluded that paragraph four excluded coverage for accessories or components added to the vehicle that were not approved by BMW. Therefore, he held that the paragraph did not apply to exclude the airbag repairs from warranty coverage.

10The trial judge went on to conclude that there was a defect within the terms of the warranty, given the airbags’ deployment. He concluded that the warranty covered defects without any limitation on how they were caused, unless they were otherwise excluded by the liability exclusion clause.

Issues on Appeal

11There are two issues in this appeal:

1. Did the trial judge err in law in holding that the deployment of the airbags constituted a defect within the meaning in the warranty?

2. Did the trial judge err in law in concluding that the exclusionary paragraph was ambiguous and did not exclude the respondent’s claim?

Issue 1: Did the trial judge err in law in holding that the deployment of the airbags constituted a defect within the meaning in the warranty?

12Before answering this question, I must determine the proper standard of review. The Court of Appeal, in the recent case of McDougall v. McDougall (2005), 2005 44676 (ON CA), 262 D.L.R. (4th) 120, discussed, in detail, the standard of review on an appeal of a decision involving contract interpretation. Failure to apply the proper principles of statutory interpretation is an error of law that attracts review on the standard of correctness (at para. 30). However, where the trial judge determines the meaning of the contract on the basis of extrinsic evidence or evidence of the factual context, more deference is accorded, as the trial judge is making findings of fact or drawing inferences from a finding of fact (at para. 31). Therefore, the task of the appellate court is to determine the nature of the issue on appeal as a question of fact, law or mixed fact or law in order to determine the standard of review.

13In this case, the trial judge interpreted the language of the warranty without making factual findings about the surrounding circumstances. He considered only the language of the agreement, and the errors alleged by the appellant are errors of law. In my view, the decision is reviewable on a standard of correctness.

14BMW submitted at trial that it was not liable to the respondent because he had failed to prove a defect in BMW’s material and workmanship. The trial judge employed a dictionary definition of “defect” to conclude that it meant a shortcoming or failing of the airbags. He concluded that there was a defect because the airbags had not worked as they should. He then went on to say the following:

I am able to reach this conclusion because this warranty covers defects unless excluded by the liability exclusion clause. Put another way, the warranty covers defects without any limitation on how they were caused unless they are otherwise excluded by the liability exclusion clause. (Reasons, pp. 11-12)

15With respect, the trial judge has erred in his interpretation of the defects covered by the warranty. The opening paragraph of the warranty makes it clear that BMW warrants defects in its workmanship and materials. Therefore, the cause of a defect is an issue in a warranty claim, and the onus is on the plaintiff to prove a defect in BMW’s workmanship or materials.

16It is not always necessary to prove such as defect through the use of expert evidence. In some circumstances, a court may infer that the defect was caused by the manufacturer – for example, because of the newness of the product or its failure during ordinary use. In Schreiber Brothers Ltd. v. Currie Products Ltd., 1980 11 (SCC), [1980] 2 S.C.R. 78 at 86, the Supreme Court of Canada held that the installer of a product, suing for damages for breach of the implied condition of merchantable quality, must prove on a balance of probabilities that its own workmanship was not a probable cause of the defect. See also Stedelbauer Chevrolet Oldsmobile (1975) Ltd. v. 527353 Alberta Ltd., 2001 ABQB 909, [2001] A.J. No. 1377 (Q.B.) at paras. 18, 23 and 24, where the Court held that the consumer must lead evidence to show that its conduct was not the probable cause of the defect.

17In this case, the trial judge erred in failing to consider the issue of the cause of the defect, as he was required to do by the language of the warranty. The respondent had the burden of proof to demonstrate that the vehicle was defective, and that it was improbable that the defect was caused by the modifications to the wiring. In addressing the issue of negligence, the trial judge held that the onus was on the respondent, and the appellant did not have to prove that the added components caused the deployment of the airbags (Reasons, p. 16). Similarly, the respondent had an onus to prove that the added components were not a probable cause of the defect for purposes of the warranty claim.

Issue No. 2: Did the trial judge err in law in concluding that the exclusionary paragraph was ambiguous and did not exclude the respondent’s claim?

18It is a basic principle of contract interpretation that a clause be interpreted in the context of the contract as a whole in an effort to determine the parties’ intention at the time they entered the contract (McDougall, supra at para. 20). While I agree with the trial judge that the language of paragraph four could be clearer, it is not ambiguous when the paragraph is considered as a whole and in the context of the other parts of the warranty.

19The opening paragraph of BMW’s warranty makes it clear that BMW provides a warranty to cover defects in its workmanship and materials. The warranty then goes on to set out a number of exclusions. In interpreting paragraph four, the trial judge appears to have looked only at the first part of that paragraph – the reference to modifications – and not to the remaining words “which alters the original engineering and/or operating specifications or which results or may result in damage to the other original components, electrical interference, electrical short, radio static, water leaks and wind noise”. When paragraph four is read as a whole, it applies to modifications or performance accessories “which may result in damage to the other original components”.

20The trial judge should also have interpreted paragraph four within the context of the entire warranty. He interpreted paragraph four only to exclude repairs on non-BMW after-market accessories that are not approved, manufactured or installed by BMW. However, paragraph eight expressly excludes warranty coverage for parts and accessories not approved by BMW. Therefore, the trial judge’s interpretation would result in the redundancy of another provision of the warranty.

21In BG Checo International Ltd. v. British Columbia Hydro and Power Authority, 1993 145 (SCC), [1993] 1 S.C.R. 12, the Supreme Court of Canada instructed courts that where there appear to be inconsistencies between terms of a contract, they should strive for an interpretation that can reasonably give meaning to both terms of the contract (at p. 24). In this case, paragraphs four and eight of the warranty can both be given effect if paragraph four is interpreted, in accordance with its language, to exclude coverage for modifications which result or may result in damage to the original components.

22In interpreting a contract governing a commercial transaction, a court should avoid a commercially unreasonable result (Consolidated-Bathurst Export Limited v. Mutual Boiler and Machinery Insurance Company, 1979 10 (SCC), [1980] 1 S.C.R. 888 at 901). The interpretation of the trial judge would require BMW to warrant damages which are caused and which may have been caused by the workmanship of other companies over which it has no control. However, courts have considered it commercially unreasonable to hold manufacturers liable for damages that may result from an alteration to the original product after it has left the control of the manufacturer, if that alteration was not reasonably foreseeable (L.G. Theall et al. Product Liability Canadian Law and Practice (Aurora, Ont.: Canada Law Book, 2006) at L6-5).

23When paragraph four is interpreted in the context of the warranty as a whole, there is no ambiguity in the language. It excludes damage to the vehicle from modifications after the vehicle’s sale that have caused or may have caused damage to the original components.

24In this case, the respondent installed $20,000 worth of modifications. Mr. Leport, the appellant’s expert, gave evidence of the extensive changes to the electrical wiring in the car, the quality of the wiring, and the problems it could cause with the electrical system of the vehicle. While he could not conclude that the modifications had caused the airbags to deploy, he was of the view that the modifications may well have contributed to the deployment of the airbags. Indeed, the trial judge accepted Mr. Leport’s evidence that the modifications “may result in damage to other original components” (Reasons, p. 7). He went on to state that if he was incorrect in his interpretation of paragraph four, based on his finding with respect to Mr. Leport, paragraph four would apply (Reasons, p. 15).

25Given that finding, the exclusion in the warranty applies to exclude BMW from liability to the respondent for the repair of the airbags.

26The respondent submitted that the exclusion clause should not be applied, relying on the line of cases where courts have refused to apply an onerous limitation clause in a standard form contract based on the inadequate notice of the clause (see, for example, Trigg v. MI Movers International Transport Services Ltd. (1991), 1991 7363 (ON CA), 4 O.R. (3d) 562 (C.A.) at 565-67).

27This defense was not pleaded in the Statement of Defence. In any event, this is not a case where an onerous limitation clause was buried in fine print on the back of a form.

Conclusion

28Given that the exclusion clause in paragraph four of the warranty applies, the appeal is allowed. The judgment of the trial judge is varied to dismiss the action against the appellant BMW in its entirety. If the parties cannot agree on costs, they may provide brief written submissions within 30 days of the release of this decision.

Swinton J.

Murray J.

MATLOW, J. (Dissenting):

29With respect, I disagree with the disposition of the majority. I would dismiss the appeal but for reasons somewhat different from those of the learned trial judge.

30The defendant’s warranty provided that the subject vehicle was “free of defects in material or workmanship”.

31The trial judge adopted the definition of “defect” from the Complete Oxford Dictionary, second edition, 1989, which is as follows:

a shortcoming or failing, a fault, blemish, flaw, imperfection (in a person or thing)

32He then went on to find that the deployment of the airbag at a time when it should not have deployed by itself revealed a defect in the airbag within the meaning attributed to “defect’ in the defendant’s warranty. He then went on to consider whether any of the exclusion provisions applied to exclude this occurrence from the scope of the warranty and concluded that they did not.

33To this point, it is my view that the first part of the trial judge’s analysis was entirely correct.

34The trial judge then went on to consider the language and application of the exclusion provisions and concluded that they did not apply to this case to exclude the defect from the scope of the warranty. On this issue, although it is my view that he was correct in the result, I respectfully disagree with the reasoning that led him there and offer the following reasoning instead.

35I do agree with his view that the contra proferentem rule is applicable to the interpretation of the exclusion provisions but it is not really necessary to apply it on my analysis.

36There are at least two types of exclusion provisions that can be used in warranties and I have given a name to each of them. A true exclusion provision is one which excludes from the scope of a warranty something that would otherwise be included. A for certainty exclusion provision is one that refers to something that already falls outside the scope of a warranty but, as a matter of abundant caution, it confirms that very fact.

37I would characterize paragraphs one, four and eight of the exclusion provisions, set out above, as exclusion provisions of the second type.

38It is not in dispute that the defendant’s warranty applied only to “defects in material or workmanship”. That must be the starting point in the analysis of this case. The analysis must then go on to inquire whether there is a true exclusion provision which excludes the plaintiff’s claim from the scope of the warranty or a for certainty provision which makes it clear that it was never included.

39Paragraph one of the exclusion provisions, set out above, by its explicit language, does not apply to defects at all but to various types of damage (emphasis added) that can occur to a motor vehicle by reason of causes totally different from deficient material or workmanship provided by the defendant. Accordingly, it cannot be a true exclusion provision and it cannot remove anything from the scope of the warranty as the warranty is described. Nor can it reasonably serve any purpose as a for certainty exclusion provision in the circumstances of this case.

40Paragraph four of the exclusion provisions, set out above, by its explicit language also does not apply to defects but to “modifications…which results or may result in damage…” (emphasis added). Accordingly, it too cannot be a true exclusion provision and it cannot removes anything from the scope of the warranty as the warranty is described. Nor can it reasonably serve any purpose as a for certainty exclusion provision in the circumstances of this case.

41However, the message that I suspect this provision was intended to communicate (but does not) is akin to what a properly drafted for certainty provision might have communicated, namely, that if the problem complained of is not a defect in material or workmanship but, rather, a problem brought on by the owner of the vehicle by reason of modifications or installations made by him, it is not covered by the warranty. This interpretation of paragraph four would accord with its language and the context in which it is to be understood. As well, it is reasonable and would be in accordance with the expectations of persons who buy vehicles from the defendant and the defendant too.

42Paragraph eight of the exclusion provisions, set out above, by its explicit language also does not apply to defects but to “parts and accessories not approved by BMW Canada” (emphasis added) and states that the defendant will not “accept any liability” (emphasis added) for such parts and accessories. Why the defendant would accept liability for such parts and accessories, whatever that may refer to, in the absence of this provision is not at all clear. Accordingly, this provision also cannot be a true exclusion provision and it cannot remove anything from the scope of the warranty as it is described. Nor can it reasonably serve any purpose as a for certainty exclusion provision in the circumstances of this case.

43It follows that, with or without the exclusion provisions in paragraphs one, four and eight, the defendant would have been able to absolve itself of any liability for breach of warranty by persuading the trial judge that the plaintiff had not met the burden of proof of establishing that the deployment of the airbag did result from a defect in materials or workmanship on its part. And, in attempting to do so, the defendant was entitled to tender evidence, as it did, that the modification and installations made by the plaintiff “may result in damage to other original components, etc.” However, on a reasonable interpretation of each of these provisions, none should have any impact on the final outcome of this case.

44The reasons and judgment of the trial judge clearly reveal that, despite the evidence tendered by the defendant, he was ultimately satisfied, on all of the evidence before him, that the deployment of the airbag was caused by a defect which fell within the scope of the warranty. There was ample evidence before him on which he was entitled to make that finding and I would give deference to him and not interfere with his decision. I disagree with the statement of the majority set out in paragraph 17 above that trial judge reversed the usual burden of proof that rested on the plaintiff and failed to exclude “that it was improbable that the defect was caused by the modifications to the wiring”. In my view, the trial judge held only that the defendant’s evidence that the deployment of the airbag “may” result in damage did not displace the burden of proof that the plaintiff had already satisfied.

45In the alternative, I also disagree with the statement of the majority in paragraph 23 of their reasons that paragraph four of the exclusion provisions which “excludes damage to the vehicle from modifications after the vehicle’s sale that have caused or may have caused damage to the original components” ought to be applied to defeat the plaintiff’s claim. If paragraph four is to be interpreted so that the mere possibility that the modification and installations caused the deployment of the airbag is sufficient to defeat the plaintiff’s claim, the warranty was of a much different quality than a reasonable vehicle purchaser would expect and of much less value. To construe the provision as the majority have done gives it a commercially unreasonable meaning which violates the principle set out in paragraph 22 above. Accordingly, even if the interpretation of the majority is correct, I would not give effect to the provision in paragraph four in the absence of evidence that this interpretation was clearly brought to the plaintiff’s attention at the time he purchased the vehicle.

Matlow, J.

Released: January 15, 2007

COURT FILE NO.: 451/05

DATE: 20070115

ONTARIO

SUPERIOR COURT OF JUSTICE

DIVISIONAL COURT