CITATION: Muskoka Fuels v. Hassan Steel Fabricators Limited, 2011 ONCA 355

DATE: 20110506

DOCKET: C51518

COURT OF APPEAL FOR ONTARIO

BEFORE: Rosenberg, Feldman and Juriansz JJ.A.

BETWEEN

Muskoka Fuels

Plaintiff (Respondent)

And

Hassan Steel Fabricators Limited

Defendant (Appellant)

COUNSEL:

Shannon Puddister and Louise Moher, for the appellant

David Zuber and Karim Hirani, for the respondent

HEARD: February 1, 2011

On appeal from the judgment of Justice Susan E. Healey of the Superior Court of Justice dated December 11, 2009, with reasons reported at 2009 ONSC 78887.

Juriansz J.A.:

[1] The appellant, Hassan Steel, appeals from the judgment of Healey J. awarding the respondent damages of $71,589.34 plus interest and costs for negligence and breach of the implied warranty set out in s. 15(1) the Sale of Goods Act, R.S.O. 1990, c. S.1. The damages resulted from the containment and cleanup of diesel oil that leaked from a fuel oil tank manufactured by Hassan Steel and sold to the respondent, Muskoka Fuels.

[2] The respondent, Muskoka Fuels, cross-appeals the costs award of Healey J. in which she held that each party should bear its own costs, given that the issue in the case was sufficiently novel and that there was a public interest component met by having the standard of care determined by a court.

[3] I would dismiss the appeal and allow the cross-appeal.

Facts

[4] Hassan Steel manufactured and sold to Muskoka Fuels a 2000 L fuel storage tank. The fuel tank had a single wall 2.5 mm thick with an exterior coating and a bare metal interior. The expected life of a tank of this kind was at least ten years in service. The tank was approved by the Underwriters Laboratories of Canada, described by the trial judge as "the provincial fuel tank certification body".

[5] Muskoka Fuels took delivery of the tank in November 1999 but did not put it into service until September 2001. In January 2002, less than five months later, diesel fuel leaked out through a hole approximately 3/16 of an inch in diameter located at the bottom of the tank. The leak caused damage totalling $71,589.34.

[6] The hole in the tank was due to "microbally induced/influenced internal corrosion process" of unknown explanation. However, the trial judge excluded causes that might be attributable to Muskoka Fuels. She found, inter alia, that the tank did not fail due to improper maintenance, had not been damaged during or after installation by some external mechanism, had been properly installed and used only as intended.

[7] Muskoka Fuels commenced an action in negligence in June 2004. Five years later, in April 2009, the court granted it permission to amend its statement of claim to allege a breach of the implied warranties provided in the Sale of Goods Act, but left it open to the appellant to argue at trial that the claim was statute barred.

The Trial Decision

Limitations Defence

[8] The trial judge found that the added claim was not barred by the Limitations Act, R.S.O. 1990, c. L.15 governing this action. She found that the Sale of Goods Act claim in the amendment relied on the same facts as the respondent's negligence claim. The amendment did not add any new material facts, but simply sought a different legal conclusion to be drawn from the set of facts already in the pleading.

[9] The trial judge also found the appellant suffered no prejudice as a result of the amendment. Though the respondent's expert had lost the tank, the respondent had been unable to prove there was any fault in the steel or fabrication of the tank, and the appellant's own expert had been able to conclude that the hole was caused by internal corrosion without needing to analyze the composition of the steel used in the tank's construction.

Sale of Goods Act

[10] The trial judge did not accept the respondent's position that the defect in the tank was the hole itself. There was no evidence that the hole existed at the time of purchase. Instead, the trial judge found that the defect in the tank was the absence of a protective interior coating. Her legal analysis was based on this finding. She found that an implied condition as to merchantability pursuant to s. 15(2) of the Sale of Goods Act could not be made out because the respondent knew about the absence of a protective interior coating when it bought the tank. Section 15(2) provides:

Where goods are bought by description from a seller who deals in goods of that description…there is an implied condition that the goods will be of merchantable quality, but if the buyer has examined the goods, there is no implied condition as regards defects that such examination ought to have revealed. [Emphasis added.]

[11] The trial judge then turned to the application of s. 15(1) that provides:

Where the buyer, expressly or by implication, makes known to the seller the particular purpose for which the goods are required so as to show that the buyer relies on the seller's skill or judgment, and the goods are of a description that it is in the course of the seller's business to supply (whether the seller is the manufacturer or not), there is an implied condition that the goods will be reasonably fit for such purpose, but in the case of a contract for the sale of a specified article under its patent or other trade name there is no implied condition as to its fitness for any particular purpose.

[12] In determining whether there is an implied warranty as to fitness for a particular purpose, the trial judge set out the following three factors that have to be considered:

(1) the course of the seller's business;

(2) knowledge on the part of the seller of the purpose of the goods; and

(3) reliance on the seller's skill or judgment.

[13] The trial judge held that the first two requirements were easily met in this case. The appellant was in the business of manufacturing and selling fuel tanks and it knew the purpose for which the tank would be employed. The trial judge found that the third requirement was met as well. She found that information about the phenomenon of internal corrosion was circulating within the industry. The information directly impacted the appellant's business and the appellant should have been diligent enough to put itself in a position to acquire it. Accordingly, she found that s. 15(1) of the Sale of Goods Act had been met since the appellant warranted that the tank was fit for the purpose of storing fuel oil, and that warranty had been breached.

Negligence

[14] The trial judge went on to make a ruling on the respondent's claim in negligence "in the hope that this judgment will find its way into the hands of the regulators of this industry given the potential for environmental harm if the specifications for such tanks are not changed to better guard against corrosion". She found that "the standard of care to which this defendant and all like manufacturers must be held is to produce a tank which is capable both of containing fuel and withstanding the vagaries of corrosion for at least ten years." The appellant breached the standard of care by failing to provide an interior protective coating for the tank, which caused the respondent's losses.

[15] Accordingly, the trial judge granted judgment for the respondent.

Analysis

[16] I would not interfere with the trial judge's finding that the amendment to the respondent's statement of claim to rely on the Sale of Goods Act did not raise a new cause of action. It simply pleaded an alternative basis of relief on the same facts already pled.

[17] However, using a different analysis from that of the trial judge, I would conclude that s. 15(2) of the Sale of Goods Act has been breached in this case. I would not identify the lack of an interior protective coating in the tank as the defect. In my view, the finding that it was the defect was based on a misapprehension of the evidence. The tank as designed, without the interior protective coating, was approved by the regulatory authority and was capable of storing fuel for at least ten years without corrosion. The trial judge noted that "[u]nrefuted testimony was heard from several witnesses for both the plaintiff and the defendant that the expected life of a tank of this kind was at least ten years in service." What is pertinent in my view is the fact, as the trial judge noted, that the expert witnesses were unable to identify what caused the internal corrosion that led to the tank's failure.

[18] The Supreme Court of Canada has indicated that s. 15(2) of the Sale of Goods Act may apply in circumstances where the cause of the defect cannot be established. In Schreiber Brothers Ltd. v. Currie Products Ltd., 1980 SCC 11, [1980] 2 S.C.R. 78, Laskin C.J., writing for the court, held that while the buyer bears the onus of proving the existence of a defect on a balance of probabilities, the actual cause of the defect need not be proven. In that case, the plaintiff roofing contractor purchased asphalt from the defendant, which was manufactured by a third party. The plaintiff installed a roof which then failed due to a previously unencountered type of blistering that could not be explained. The trial judge had allowed the plaintiff's claim for damages, concluding that on the balance of probabilities, there were no possible causes of the failure of the roof, other than a latent defect in the asphalt. The Court of Appeal set aside the trial judgment, holding that the plaintiff had failed to show that the defect existed when the asphalt left the manufacturer's plant.

[19] In restoring the trial judgment, the Supreme Court did not agree with the Court of Appeal that "there must be a credible theory to account for the defect". Once other probable causes had been excluded, the court was left "with the fact of a defect in respect of a product emanating from the [defendants]." Once the buyer proved that the defect of the asphalt was not attributable to anything that he did or failed to do, an inference could be drawn from the evidence as a whole that the defect existed at the time the product was delivered to him.

[20] The circumstances of this case are much the same. The trial judge found that the tank was only used as intended, that it was properly installed, that it was not damaged during or after installation by some external mechanism, that it did not fail due to a problem with a weld and that it did not fail due to improper maintenance. The trial judge also noted that the evidence was inconclusive on the ultimate explanation for the internal corrosion that caused the tank's failure. The examination of the tank at the time of its purchase would not have revealed the unknown defect. As such, I conclude on the findings of the trial judge that the implied condition of merchantability under s. 15(2) of the Sale of Goods Act was breached.

[21] On this analysis of the Sale of Goods Act, and not on the trial judge's analyses of negligence and the Sale of Goods Act, I would dismiss the appeal.

[22] Accordingly, there is no reason why costs at trial should not follow the event. The cross appeal is allowed. The respondent is entitled to its partial indemnity costs to the date of its rule 49 offer to settle and substantial indemnity costs thereafter.

[23] If the parties are unable to agree upon the costs of the trial and of these appeals, they may make submissions in writing to be exchanged and filed within 30 days of the date of this decision.

"R.G. Juriansz J.A."

"I agree M. Rosenberg J.A."

"I agree K. Feldman J.A."

RELEASED: May 6, 2011