CITATION: Cimmaster Inc. v. Piccione (Manufacturing Technologies Company), 2011 ONCA 486
DATE: 20110704
DOCKET: C51635
COURT OF APPEAL FOR ONTARIO
Rosenberg, Feldman and Juriansz JJ.A.
BETWEEN
Cimmaster Inc.
Plaintiff/Respondent
and
Lynda J. Piccione c.o.b. as Manufacturing Technologies Company
Defendant/Appellant
Michael G. McQuade, for the appellant
Kevin J. Scullion, for the respondent
Heard: February 2, 2011
On appeal from the order of Justice Douglas K. Gray of the Superior Court of Justice dated January 6, 2010, with reasons reported at 2010 ONSC 96.
Rosenberg J.A.:
[1] The appellant, Lynda Piccione, appeals from the decision of Gray J. dismissing her counterclaim against the respondent, Cimmaster Inc. She also seeks leave to appeal the costs order in respect of the claim and counterclaim. The issue on the appeal concerns the application of s. 30(2) of the Sale of Goods Act, R.S.O. 1990, c. S.1, which deals with contracts for the sale of goods to be delivered by instalments. The appellant submits that because of deficiencies in the first instalment, the respondent should be deemed to have repudiated the contract. Accordingly, the appellant was entitled to compensation for the loss of profit she would have earned from the resale of the goods that were to have been delivered in the second and third instalments.
[2] For the following reasons I would dismiss the appeal with respect to the counterclaim but grant leave to appeal the costs order, and reduce the costs of the trial payable by the appellant to $40,000.
THE FACTS
[3] The appellant is a sole proprietor, who, along with her husband Nicholas Piccione, carries on a business as Manufacturing Technologies Company (MTC). MTC carries on business as a broker of manufactured parts. The parts in issue in this case are known as whistle castings. In the summer of 2003, Rick Purdie of Canadian General Filters Limited (CGF) contacted Mr. Piccione, when he was working for another company, about supplying whistle castings to it. However, CGF wanted a lower price than on prior shipments. Mr. Piccione eventually found a company, Brampton Foundries, that could supply the castings at the required price. He placed an order for 33,000 castings with Brampton Foundries to be supplied to CGF at a cost of $3.05 per piece. Unbeknownst to Mr. Piccione, Brampton Foundries did not produce the part themselves, but rather contracted with the respondent. The castings were supplied as required. Mr. Piccione then had them machined at another shop. There was no problem with this shipment. A short time later, Mr. Piccione left his employer to set up MTC.
[4] In January 2004, Mr. Purdie of CGF again contacted Mr. Piccione about supplying another product called adaptor plates. Mr. Piccione again approached Brampton Foundries about supplying these parts, as he had previously dealt with Brampton Foundries in respect of this product as well. Brampton Foundries told Mr. Piccione that they had obtained these parts from the respondent and he should deal with them directly. Mr. Piccione accordingly contacted Mr. Leung, the respondent’s representative. Mr. Piccione placed the order and received the adaptor plates. Again there was no problem with the shipment.
[5] The problem with Cimmaster began in June 2004, when CGF placed an order with MTC for 90,000 whistle castings to be delivered in 2005. Mr. Piccione again approached Brampton Foundries and was told that the earlier shipment of whistle castings had also been obtained from the respondent and that Mr. Piccione should deal directly with the respondent and Mr. Leung. Based on the price from the respondent, after machining and painting the castings, Mr. Piccione believed he could make a profit of approximately $100,000 on the 90,000 castings. Mr. Piccione told Mr. Leung that he would need the 90,000 parts in three batches with the first batch required by December 1, 2004. CGF placed the order with MTC on July 15, 2004. Mr. Piccione, in turn, placed the order with the respondent on October 4, 2004. The purchase order for 90,000 castings includes these words: “First release 30,000 units required a.s.a.p. (Dec 1/04).” Mr. Piccione and Mr. Leung agreed orally that the second shipment would be ordered after the first shipment was delivered, and the parties were satisfied with the product. The respondent in turn issued a purchase order with its supplier, Shenyang Construction in China.
[6] The first indication of a problem came in late November 2004, when Mr. Leung told Mr. Piccione that there was a problem with the casting machine in China. He asked if the respondent would take half of the order at that time. After speaking to CGF, Mr. Piccione told Mr. Leung that a partial shipment would not suffice. Over December 2004 and January 2005, Mr. Piccione kept calling Mr. Leung to check on the shipment but did not get satisfactory responses. The parts finally arrived in Canada on January 25, 2005 and were delivered to the machine shop, Jroberts Mfg. Inc. (Jroberts), on January 31.
[7] The next problem arose on February 7, 2005, when Jroberts called Mr. Piccione to say that they were having difficulty machining some of the parts. Mr. Piccione called Mr. Leung to complain and to request new castings. Mr. Leung refused, at least until he had spoken to the Chinese company. In the meantime, Jroberts continued to try to machine the parts. Jroberts told Mr. Piccione that it was taking two weeks to machine 2,500 parts; ordinarily they were able to do 2,000 in a day. By March 22, 2005, Jroberts had machined about 8,700 castings but refused to do any more because the machining was damaging its equipment. Mr. Piccione had still not heard back from Mr. Leung. Mr. Piccione was able to find another machine shop to complete the job. This machine shop encountered the same types of problems as did Jroberts. They were having problems with about 50 percent of the castings. By April 20, 2005, MTC was able to deliver a further 6,860 castings to CGF. However, MTC was incurring additional costs of its own because of the arrangement it had been obliged to make with the new machine shop.
[8] Mr. Piccione testified that on April 25, 2005, he finally heard from Mr. Leung who had heard from his supplier in China. According to Mr. Leung, the Chinese supplier said that “half the castings were produced during the day shift and the other half were done during the night shift and at the cooler air at night, and apparently it was during the winter the cooler air at night would have gotten to those castings, chilled … so, okay, now we know…” However, because there were no lot or batch numbers, it was impossible to tell which castings had been manufactured at night and which during the day. On May 2, 2005, Mr. Leung asked for 2000 castings so that he could conduct his own inspection and testing. Mr. Piccione never heard back from Mr. Leung. Two weeks later Mr. Piccione sent some castings to another company to try a different process. This helped somewhat.
[9] A few days later, CGF ordered another 40,000 adaptor plates. Mr. Piccione in turn ordered the parts from the respondent. He thought he might be able use this further order as an incentive to get some movement on the problem with the whistle castings.
[10] By June 24, 2005, MTC had been able to deliver 26,589 castings to CGF. MTC had incurred almost $10,000 in extra costs in order to do so. Throughout this time, MTC had been keeping CGF apprised of the problems. In early July, CGF cancelled the order for the further 60,000 pieces because of the delivery problems. MTC, however, never cancelled the order with the respondent and never paid the balance owing for the 30,000 pieces that had been delivered. It also never placed the order for delivery of the further 60,000 pieces. After the 40,000 adaptor plates were delivered, MTC refused to pay the balance owing on that order as well. The respondent commenced its action for the outstanding balance on the orders for the whistle castings (U.S. $7,623) and the adaptor plates (U.S. $16,132). The appellant counterclaimed for her loss of profit of $70,403.88, being a combination of the loss from the first shipment because of extra costs incurred and the projected loss of profit from the balance of the contract, the 60,000 pieces.
REASONS OF THE TRIAL JUDGE
[11] The trial judge held that resolution of the appellant’s counter-claim turned on s. 30(2) of the Sale of Goods Act, which provides as follows:
(2) Where there is a contract for the sale of goods to be delivered by stated instalments that are to be separately paid for and the seller makes defective deliveries in respect of one or more instalments or fails to deliver one or more instalments or the buyer neglects or refuses to take delivery of or pay for one or more instalments, it is a question in each case depending on the terms of the contract and the circumstances of the case whether the breach of contract is a repudiation of the whole contract or whether it is a severable breach giving rise to a claim for compensation but not to a right to treat the whole contract as repudiated. [Emphasis added.]
[12] The trial judge accepted that there had been a defective delivery in respect of the first instalment but there had not been repudiation of the whole contract by the respondent. In the result, what occurred was a severable breach entitling the appellant only to compensation for the problems with the first instalment but not loss of profit for the balance of the contract. The trial judge applied the test from Maple Flock Co. v. Universal Furniture Products (Wembley) Ltd., [1934] 1 K.B. 148 (C.A.) which had considered the identical United Kingdom legislation. The court in Maple Flock, at p. 156, characterized the issue as to whether the seller had delivered the earlier instalment in such circumstances as to lead to the inference that it “cannot or will not deliver any other kinds of goods in the future”. The trial judge applied the approach outlined at p. 157 of Maple Flock:
With the help of these authorities we deduce that the main tests to be considered in applying the sub-section to the present case are, first, the ratio quantitatively which the breach bears to the contract as a whole, and secondly the degree of probability or improbability that such a breach will be repeated.
[13] The trial judge held that the defective delivery of the first instalment did not reasonably give rise to an inference that similar breaches would occur with respect to the other two instalments. He relied on the following circumstances:
The respondent had supplied satisfactory goods in the past, including a previous order of this same part.
Time was not of the essence of the contract; the timing of the second and third instalments was left entirely open; even with the delay of the first instalment, the goods were accepted.
The cause of the problem that one-half of the units had been cast at night was discovered by April 25, 2005; once the nature of the problem was discovered, it could not be assumed that the difficulty would be repeated in subsequent deliveries, particularly because there had been the previous satisfactory delivery.
[14] The trial judge also noted that MTC never actually took the position with the respondent that the contract was repudiated. As he said at para. 66:
I also note that MTC did not actually take the position, with Cimmaster, that the contract was repudiated as a result of the defective delivery of the first instalment. In my view, there is a strong argument to be made that it is incumbent on a party in the position of MTC to notify the other party that the contract was repudiated. In this case, MTC said nothing. Accordingly, for that reason alone I think it is doubtful that MTC can now take the position that the contract is repudiated, notwithstanding that it never advised Cimmaster that it took that position. However, in view of my conclusion that there was no repudiation in any event, I need not consider that issue further.
[15] The trial judge awarded the respondent U.S. $16,132 that was owing for the adapter plates. He dismissed the respondent’s claim for the balance owing for the whistle castings and allowed the appellant’s counterclaim to the extent of $5,454.60 and U.S. $2,148.93, being extra expenses for machining the defective parts and an overpayment for 3,411 units that were never delivered. The counterclaim for lost profit was dismissed.
ANALYSIS
Repudiation of the contract
[16] Counsel for the appellant submitted that the trial judge erred in law in finding that there had been no repudiation of the entire contract by Cimmaster by reason of the defective delivery of the first instalment. He submitted that there was no evidence to give rise to an inference that similar breaches would not occur with respect to the other two instalments. I do not accept that submission. There was a body of evidence upon which the trial judge could find that there was no repudiation.
[17] The real question is whether, in applying the Maple Flock test, the trial judge made palpable and overriding errors of fact. It also became apparent in the course of oral argument that the appellant’s main complaint was that the trial judge relied upon the contents of the conversation of April 25, when Mr. Leung relayed the information that he had received from China as to the cause of the problem.
[18] The evidence about the April 25 call was adduced by the appellant during the testimony of Mr. Piccione as part of the narrative of his dealings with the respondent. The information relayed by Mr. Leung to Mr. Piccione about what the people in China said about the problem was obviously hearsay; in fact, it was double hearsay. Nevertheless, it is apparent that Mr. Piccione accepted the statement as true. This is what he said in his examination in chief:
Q. Okay. So take your time, be clear. What does Mr. Leung tell you at that point in time?
A. He tells me that half the castings are hard and half the castings are soft.
Q. How does he know that?
A. Well, he says that the China factory reported back that half the castings were produced during the day shift and the other half were done during the night shift and at the cooler air at night, and apparently it was during the winter the cooler air at night would have gotten to those castings, chilled them, and that you know, so, okay, now we know.
Q. You know what?
A. We know that half the batch is hard. Now, then I say okay, half the batch is hard is there anyway, any information on the boxes that we can identify any kind of batch marking, traceability and he says that say no, there’s no traceability. The castings are all mixed together and we have no idea. So, at that point I realize castings, from Arthur’s source are six weeks away. For me for another source they’re five months away. If we look at the time that it took Arthur to produce the parts for BMP Metal on the first order it took five months from July through to November to produce the orders, so I know I’ve got nowhere to go, yet. So I asked Arthur well okay now you know they’re hard. You know you sent me half garbage, but its more than half garbage really because it’s all mixed together. If we could separate the parts and know we could take this box out take that box out these are good okay then we can work with that, but as we all know these are all mixed together so potentially if they’re perfectly mixed every second one with a break an insert every second one would be hard. So I asked him to get me some more castings that these obviously you bought crap, you sold me crap, please get me some casings. Arthur says ‘look they may be hard, but they can still be machined. I can machine them’.
[19] When Mr. Leung testified in examination in chief, he too related the contents of his call with Mr. Piccione on April 25. There was no objection to the admissibility of this evidence. The only objection from counsel for the appellant was earlier in Mr. Leung’s evidence when he attempted to relay the results of tests that his own staff had done of the castings. The following dialogue occurred:
MR. MCQUADE: Sorry, to interrupt. I don’t know who the witness knows, is it something that was told to him?
THE COURT: Well go ahead. There was plenty of equivalent hearsay in your evidence, your friend didn’t object.
MR. MCQUADE: I understand, but I want to understand what this gentleman knows that he saw or heard. We called other witnesses to collaborate what my client said I’m wondering if they will be calling people to testify on this evidence.
MR. SCULLION: No, I’m not and I will go past this. If the objection is to hearsay coming from him, I’ll leave that topic alone.
THE COURT: Okay.
[20] Counsel for the appellant returned to the April 25 conversation in cross-examination of Mr. Leung:
Q. And then you told us about a conversation you had with Mr. Piccione on April 25th. Do you remember this conversation ...
A. Yes.
Q. ...this where you report that you tell Mr. Piccione that you’ve learned information from China that 50 percent are hard, 50 percent are soft – they were run some were run in the evening, some were run in the daytime kind of thing. Do you remember that, telling us about that conversation?
A. Yes.
Q. And what if anything did you tell Mr. – propose Mr. Piccione do to deal with this problem that you discussed on April – you never told him that you think the problem is they were hard and soft because of the cool of the evening. What if anything did you propose that Mr. Piccione do during the conversation on April 25th to address this problem?
A. I proposed to him again that to resolve his problem I would do the machining for $1.00; the same price he would have given to other machine shop.
Q. You’re now, in addition to what I asked you a moment ago, you’ve now been told that 15,000 of these parts are hard – you know there’s a problem. Is this part of your normal business practice then? Is that what we understand?
A. Having problem is very often in the manufacturing business. Dealing with the problem is therefore – its just normal to – in a normal business relationship would have quality – non-conformance issues, whether it is non-conformance to the strictest term is yet to be decided; um so the, in the manufacturing industries, problem occurs. Under normal business relationship, we find the root cause; we try to find a solution, to work through it under normal business relationship. Just like what Mr. Neil Andrews have referred to in his testimony.
Q. So between April 25th when you were told by China of this problem and the May 3rd email from Mr. Piccione, what investigation if any did you your company, what did you guys do?
A. Actually, before we got um the answer from China we were doing our due diligence and agreed to that we would look into the problem, so we do whatever we could on our side including try to measure the hardness.
Q. No, I asked you once you’re told by China the problem is 15,000 hard and 15,000 soft, what investigation did you do?
A. About which?
Q. Any investigation. You now know where the problem – what’s causing the problem. Correct? China finally comes back to you on April 25th and says here’s what’s causing the problem. What do you do at that stage? Do you do any investigation of your own to try and see what you can do to solve the problem?
A. No, understanding that, there is [not] much we could do at this end other than you know sort them out and identify it in the hard and the soft, because even at that time we did not know the – how high the hardness. We did the testing; it was not as high as if were were in hard machining, so knowing that there isn’t all that much we could do further, we know that there were hardness issue, so the annealing that was proposed would have one of very few solutions if any.
Q. Can I ask you one more time, sir? You told me a moment ago, once you were advised by China of this 15,000 hard, 15,000 soft problem, you said, “There is not much we could do at this end”, except you suggested for Mr. Piccione and you discussed annealing. Correct?
A. I said it with the reason I gave you.
[21] The evidence about the April 25 conversation was admissible as part of the narrative to explain the unfolding of the events that led to the eventual cancellation by CGF of the balance of the contract. In my view, in the circumstances of this case, it was also open to the trial judge to use Mr. Leung’s statement to Mr. Piccione for the truth of its contents. In other words, the trial judge could take as a fact that the reason for the problem had been discovered. I say that because all the parties proceeded on that basis at the trial, as is apparent from the testimony and from the appellant’s counsel’s opening statement to the trial judge:
MR. MCQUADE: Basically what happens, and it’s not really disputed in this case, in fact, it’s admitted by the defendant. We don’t find out until much, much later. What happened in this when these parts were manufactured in China, admitted half of them were ...
THE COURT: When you say defendant, you mean defendant by counter claim?
MR. MCQUADE: I’m sorry, defendant by counter claim, yes.
THE COURT: All right.
MR. MCQUADE: Thank you. By Cimmaster.
THE COURT: Yes.
MR. MCQUADE: They come back then and say what happened was half of the parts were manufactured during the day at one temperature. Half of them are manufactured at night by a different temperature. And you’ll hear evidence in this case – what happens is when you cool these things down too quickly ...
THE COURT: Yes.
MR. MCQUADE: ...the term that you heard from my friend is its apparently its not a technical term but they all use is glass hard.
THE COURT: Yes.
MR. MCQUADE: Basically what happens it’s almost like it...
THE COURT: It becomes brittle?
MR. MCQUADE: ...correct.
MR. MCQUADE: So, again he follows up with Cimmaster saying listen what’s going on? I need an answer. April 25th, they finally got back to him to tell him they found out the problem. Half of them were made in the day in China, half of them were made in the night. And this is what we believe is causing the hardness problem. But that’s from, you know they were delivered February, he doesn’t get this information until April 25th. [Emphasis added.]
[22] The issue at trial was not the truth of the explanation but whether, even accepting the explanation, the contract had been repudiated by Cimmaster because of the delays and the nature of the defects. Having accepted that the explanation was accurate and not having objected to the admissibility of this evidence, in my view, it is not now open to the appellant to object on appeal. Had the appellant objected to the admissibility or use of the evidence at the time, the respondent could at least have considered whether to adduce other evidence about the cause of the problem with the pieces. See S. Schiff, Evidence in the Litigation Process, 4th ed. (Scarborough: Carswell, 1993) vol. 1 at pp. 178-79.
[23] Accordingly, I would dismiss the appeal with respect to the counterclaim. There was evidence to support the finding that Cimmaster did not repudiate the entire contract based on the defective delivery of the first instalment and the trial judge did not err in relying on the contents of the April 25 conversation.
The costs appeal
[24] The trial judge awarded $60,000 in costs to the respondent. In doing so, the trial judge held that the respondent was entitled to costs on a partial indemnity basis to the date of its offer to settle, and substantial indemnity costs thereafter. On appeal, the appellant submits that the trial judge erred in awarding substantial indemnity costs because the offer to settle did not contain an element of compromise. Following oral argument the court requested further submissions with respect to Rule 49 and in particular whether the trial judge had erred in acting under rule 49.10(1), rather than rules 49.10(2) and 49.14.
[25] The respondent served an offer to settle which called for the appellant to pay $8,000, plus interests and costs. The trial judge noted that after setting off the appellant’s modest success on her counterclaim, the respondent obtained a judgment of just over $9,000, slightly in excess of the respondent’s offer to settle. The trial judge rejected the appellant’s submission that there should be no order for costs. He noted that the significant issue at trial and the issue that required the bulk of the trial time concerned the appellant’s counterclaim for the lost profit. He characterized the other issues in the case as relatively insignificant.
[26] He then considered the question of the application of Rule 49 as follows:
In my view, there is insufficient reason to depart from the plain terms of Rule 49.10. I do not agree that Cimmaster’s Offer to Settle did not contain a real element of compromise. Cimmaster proposed a real compromise, consisting of a proposal that MTC abandon the major portion of its counterclaim, and make a modest payment to resolve the remaining claims. Had MTC accepted the offer, six days of trial would have been avoided. The Celanese case, relied on by MTC, is not analogous. In that case, the successful party had made an offer that was 3% less than the total amount claimed in the action. That is not this case.
In the result, Cimmaster is entitled to costs on a partial indemnity basis to the date of its Offer to Settle, and substantial indemnity costs thereafter.
[27] The trial judge then awarded the respondent $60,000 in costs, slightly less than the approximately $67,000 sought by the respondent.
[28] I agree with the trial judge that the offer to settle contained a real element of compromise. In determining whether the offer contains a real element of compromise, as referred to in this court’s decision in Celanese Canada Inc. v. Canadian National Railway Co. (2005), 2005 CanLII 8663 (ON CA), 196 O.A.C. 60, leave to appeal refused, [2005] S.C.C.A. No, 245, the comparison is with the amount of the claim, not between the amount of the offer and the amount of the judgment. In this case, the respondent’s claim was for U.S. $16,132.00 for the amount owing on the adapter plates and U.S. $7,623.00 for the amount owing on the whistle castings. An offer to settle this claim of over U.S $23,000.00 for U.S. $8,000.00 had a real element of compromise within the meaning of Celanese.
[29] The more difficult issue is how to apply the cost consequences of this offer to settle given the prominence of the counterclaim. While technically the respondent was the plaintiff, in reality this trial was about the counterclaim and the appellant was the plaintiff in the counterclaim. The appellant never disputed that she owed the respondent money for the adaptor plates. In these circumstances, some consideration had to be given to rule 49.14, which provides as follows:
Rules 49.01 to 49.13 apply, with necessary modifications, to counterclaims, crossclaims and third party claims.
[30] On the counterclaim, the appellant was in the position of plaintiff and the respondent was in the position of defendant. Viewed in that way, rule 49.10(1) had limited application to this case. That rule provides as follows:
(1) Where an offer to settle,
(a) is made by a plaintiff at least seven days before the commencement of the hearing;
(b) is not withdrawn and does not expire before the commencement of the hearing; and
(c) is not accepted by the defendant,
and the plaintiff obtains a judgment as favourable as or more favourable than the terms of the offer to settle, the plaintiff is entitled to partial indemnity costs to the date the offer to settle was served and substantial indemnity costs from that date, unless the court orders otherwise.
[31] The rule with somewhat greater application was rule 49.10(2), dealing with offers to settle from a defendant:
(2) Where an offer to settle,
(a) is made by a defendant at least seven days before the commencement of the hearing;
(b) is not withdrawn and does not expire before the commencement of the hearing; and
(c) is not accepted by the plaintiff,
and the plaintiff obtains a judgment as favourable as or less favourable than the terms of the offer to settle, the plaintiff is entitled to partial indemnity costs to the date the offer was served and the defendant is entitled to partial indemnity costs from that date, unless the court orders otherwise.
[32] I recognize that the circumstances in which the court should exercise its discretion not to award costs in accordance with rule 49.10(1) are narrow. On the other hand, there is no defined set of circumstances as to when the court should order otherwise. As this court said in Niagara Structural Steel (St. Catharines) Ltd. v. W.D. LaFlamme Ltd. (1987), 1987 CanLII 4149 (ON CA), 58 O.R. (2d) 773 (C.A.), at p. 777 :
As far as the occasions for resort to the exception are concerned, if the framers of the rules could have expressed the relevant bases or factors with any degree of comprehensive detail it may be assumed that this would have been done. Accordingly, it would be wrong, for several reasons, to attempt to do so by judicial declaration. Keeping the matter on a general plane, it can be said that resort should only be had to the exception where, after giving proper weight to the policy of the general rule, and the importance of reasonable predictability and the even application of the rule, the interests of justice require a departure.
[33] In my view, an important consideration in this case was the prominence of the counterclaim and accordingly the quite different cost implications flowing through the combined effect of rules 49.14 and 49.10(2). In theory, applying rule 49.10(1), the respondent might be entitled to those costs of the trial on a substantial indemnity basis attributable to the claim. However, the claim was never in dispute and occupied little time at trial as is apparent from the trial judge’s reasons and the transcript of evidence. In my view, given these circumstances, this was not a case for substantial indemnity costs and I would reduce the costs order at trial to $40,000 inclusive of disbursements and applicable taxes.
DISPOSITION
[34] Accordingly, I would dismiss the appeal with respect to the counterclaim. I would grant leave to appeal the costs order and reduce the costs to $40,000 inclusive of disbursements and applicable taxes. In view of the divided success, I would give the respondent its costs of the appeal fixed in the amount of $6,000 inclusive of disbursements and applicable taxes.
Signature: “M. Rosenberg J.A.”
“I agree K. Feldman J.A.”
“I agree R. G. Juriansz J.A.”
RELEASED: “MR” JULY 4, 2011