Court of Appeal for Ontario

Date: 2019-06-05

Docket: C65560

Judges: Feldman, MacPherson and Simmons JJ.A.

Between

1004335 Ontario Ltd. c.o.b. A.D. Metro Plaintiff/Defendant by Counterclaim (Appellant)

and

DW Digital Wireless LP Defendant/Plaintiff by Counterclaim (Respondent)

Counsel

For the Appellant: Christopher Rootham and Andrew Ferguson

For the Respondent: Kiran Patel and Rebecca Torrance

Heard: May 28, 2019

On appeal from: The judgment of Justice H.J. Williams of the Superior Court of Justice, dated May 24, 2018.

Reasons for Decision

Background

[1] The appellant 1004335 Ontario Ltd. c.o.b. A.D. Metro ("ADM") is a manufacturer and supplier of touchscreens. From 2008 to 2012, ADM supplied more than 17,000 touchscreens to the respondent DW Digital Wireless LP ("DW"), a designer and manufacturer of mobile display terminals ("MDTs") used in taxis and buses.

[2] After several years of a good relationship, in 2011 DW noticed a spike in customer complaints about its MDTs. ADM and DW communicated with each other over a period of several months but were unable to agree on the cause of the problem or an appropriate way of resolving it. In early 2012, their relationship ended and DW moved its business to a new supplier.

[3] ADM commenced an action seeking payment for two outstanding invoices totalling $36,981. DW counterclaimed, seeking $704,068 for breach of contract.

[4] At trial, the parties agreed that the counterclaim would be tried first.

[5] The trial judge found that, based on s. 15 of the Sale of Goods Act, R.S.O. 1990, c. S.1, the touchscreens were sold under an implied condition of fitness for DW's purpose of manufacturing as MDTs, because ADM was aware of that purpose. In addition, since the touchscreens were purchased by description, there was an implied condition of merchantability. Based on the parties' pre-litigation efforts at finding the cause of the touchscreen issues and the expert evidence provided at trial, the trial judge found that some of the touchscreens were defective and, therefore, were sold in breach of both conditions.

[6] On the liability issue, the trial judge preferred the evidence of DW's expert to the extent that it differed from the opinion of ADM's expert, whose examination of the defective products was less thorough. Both experts agreed that there was a problem with the touchscreens' lamination. ADM's expert theorized that the problem could have been caused by post-manufacture exposure to high temperatures where the touchscreens were being used (i.e. no fault).

[7] The trial judge observed that this theory did not explain why the faulty touchscreens appeared to be manufactured at the same times. Instead, the trial judge found that the defect affected six "bad batches" which all turned out to have been supplied by one of ADM's subcontractors, Abon TouchSystems. The trial judge concluded:

I accept Mr. Phares' [DW's expert] opinion that the touchscreen failures were caused by cover sheets that collapsed as a result of poor lamination on one of the edges of the touchscreens. I also accept Mr. Phares' opinion that all of the defective touchscreens were manufactured by Abon TouchSystems and that the poor lamination was caused by a design and/or manufacturing issue.

[8] In awarding damages, the trial judge awarded replacement costs, including labour and shipping costs as consequential damages. She also agreed that DW's decision to replace all 6,000 touchscreens from the "bad batches", whether they had failed or not, for two customers who were threatening to discontinue their business with DW (or the related company it supplied) was reasonable in the circumstances. The trial judge set off these amounts against the amounts DW owed ADM under the invoices. In the result, the final award was $355,193.49 in favour of DW.

[9] ADM appeals the trial judge's conclusions on both liability and damages.

Liability

[10] On the liability issue, ADM makes a single argument: the trial judge made a palpable and overriding error in the inference-drawing process. The error, says ADM, is in three paragraphs of the trial judge's reasons forming part of her conclusions on liability:

I accept Mr. Phares' opinion that the touchscreen failures were caused by cover sheets that collapsed as a result of poor lamination on one of the edges of the touchscreens. I also accept Mr. Phares' opinion that all of the defective touchscreens were manufactured by Abon TouchSystems and that poor lamination was caused by a design and/or manufacturing issue.

My finding that this defect affected the six "bad batches" is based on the evidence touchscreen failure distribution by manufacturing date set out in the table and graph marked as Exhibit 3 combined with Mr. Phares' evidence that Luxe began to receive touchscreens from a new supplier, Abon TouchSystems at the start of the high failure rate period.

I do not accept ADM's argument that Mr. Phares' evidence is undermined by the fact that touchscreens manufactured after the 19th week of 2011 did not fail even though Abon TouchSystems supplied Luxe [another subcontractor] with touchscreens manufactured at least until the 39th week of 2011. ADM's suggestion was that if a design and/or manufacturing problem attributable to Abon TouchSystems had caused the touchscreens to fail, the failures would have continued for as long as Abon TouchSystems supplied touchscreens to Luxe. I find that a simple, alternative explanation is that sometime after the 19th week of 2011 and even before Luxe had started to make inquiries, Abon TouchSystems had fixed its problem. [Emphasis added.]

[11] ADM asserts that the inference that the timing of the defects shows that Abon TouchSystems caused the defects was refuted by the fact that Abon TouchSystems produced "good" batches as well as "bad" batches and there is nothing to support the trial judge's inference in the final sentence of this passage.

[12] We are not persuaded by this argument. The trial judge dedicated 121 paragraphs of her reasons to reviewing the evidence concerning the cause of the touchscreen failures and explaining the basis of her acceptance of Mr. Phares' opinion. Additional evidence supported the inference created by the timing of the touchscreen failures. Having accepted Mr. Phares' opinion, the trial judge was not required to explain how or why Abon TouchSystems produced some "good" batches following the six "bad" batches. The trial judge's statement in the final paragraph of her reasons is expressly described as a potential "alternative explanation" in response to ADM's argument that the fact that Abon TouchSystems subsequently manufactured good touchscreens after the six "bad" batches somehow undermined Mr. Phares' opinion. Regardless of the explanation for why these subsequent touchscreens did not fail, it does not displace or undermine the trial judge's factual findings regarding why the six "bad" batches of the touchscreens did fail. The fact that the problem may have gone away does not detract from the fact that there was a serious problem and that its cause was as described by DW's expert, whose opinion the trial judge was entitled to accept.

Damages

[13] ADM advances four arguments on this component of its appeal.

[14] First, ADM contends that the trial judge erred by awarding damages for the cost of replacing certain touchscreens that were not defective. The challenged amount is $62,309.46. ADM does not appeal the award of $168,000 for the cost of replacing touchscreens from the six defective batches of touchscreens. The basis of the appellant's argument is that the trial judge erred in law by failing to consider whether these damages were too remote to be compensable.

[15] We do not accept ADM's submission. This head of damages relates to touchscreens provided to two of DW's major European customers – Taxi Stockholm and HDT Helsinki. The trial judge concluded that DW's decision to provide replacement touchscreens to these two major customers, who were "clearly exasperated by the touchscreen failures" and had made "threats of contract cancellation and litigation", constituted reasonable mitigation damages in the circumstances. She stated that because she found they were reasonable, she did not have to separately address remoteness. We understand that to mean that because the damages were reasonable, they were not too remote to be compensable. We see no error in that finding. We note that the trial judge was careful on this issue. Her award was $62,309.46, not the $115,967 sought by DW.

[16] Second, ADM submits that the trial judge erred by awarding direct labour costs totalling $92,698.14 for repairing touchscreens. ADM says that there should be no recovery on this issue because all the repairs were done in-house by current DW employees. These employees would have to work on something, so it may as well be repairing defective touchscreens.

[17] We disagree. In an appropriate case, there is no reason not to compensate for the actual cost of repairs, even if they are performed by in-house employees and not as an overtime expense: see Skyway Equipment Co. v. Guardian Insurance Co. of Canada, 2005, at 263; and Waddams, The Law of Damages (Toronto: Canada Law Book, 2008), at para. 15.310. Again, we observe that the quantum of damages awarded under this heading was modest – less than half the amount sought.

[18] Third, ADM asserts that the trial judge erred by awarding shipping costs at $51,280 as damages. ADM says that there was insufficient evidence to support this claim – no receipts, no invoices, no bills of lading.

[19] We do not accept this submission. The trial judge accepted the evidence of DW's principal witness on this issue, based on an example shipping invoice. She was entitled to do so. She was careful in her scrutiny of DW's claim – she awarded only about 40 per cent of the amount sought.

[20] Fourth, ADM asserts that although DW suffered the damages claimed, it did not directly supply the screens and therefore was not the proper claimant on the counterclaim. We also reject this submission. Whatever pass-through arrangements were in place, it was DW that was legally responsible to make good on the defective screens that it supplied.

Disposition

[21] The appeal is dismissed. The respondent is entitled to its costs of the appeal fixed at $40,000, inclusive of disbursements and HST.

"K. Feldman J.A."

"J.C. MacPherson J.A."

"Janet Simmons J.A."