COURT FILE NO.: 12-54537

DATE: 2018/05/24

SUPERIOR COURT OF JUSTICE - ONTARIO

RE: 1004335 Ontario Ltd. c.o.b. A.D. Metro

AND

DW Digital Wireless LP

BEFORE: Madam Justice H. J. Williams

COUNSEL: Andrew D. Ferguson, counsel for the plaintiff; defendant by counterclaim

Kiran Patel, counsel for the defendant; plaintiff by counterclaim

HEARD: September 5, 6, 7, 8, 11, 12, 13, 14, 15 and 19, 2017

REASONS FOR DECISION

BACKGROUND

[1] ADM (1004335 Ontario Ltd. c.o.b. A.D. Metro) is an Ottawa-based manufacturer and supplier of touchscreens.

[2] From 2008 until early 2012, ADM supplied touchscreens to DW (DW Digital Wireless LP), a designer and manufacturer of MDTs (mobile display terminals) used in taxis and buses. DW’s Canadian base is in Richmond, British Columbia.

[3] The touchscreens DW purchased from ADM were a key component in the MDTs DW sold to its customers, which were located around the world.

[4] The DW MDTs were known as the Vector 8000 and the Vector 9000.

[5] DW purchased more than 17,000 touchscreens from ADM.

[6] In 2011, DW’s repair centres noticed a spike in the number of customer complaints about MDTs, all of which appeared to relate to the touchscreens.

[7] DW reported the problem to ADM and returned a number of touchscreens to ADM for testing. DW suspected that the touchscreens were defective.

[8] ADM tested the touchscreens itself and also asked Luxe (Luxe Printing) to investigate. Without informing DW, ADM had hired Luxe to manufacture the touchscreens ADM had supplied to DW.

[9] Without informing ADM, Luxe had hired two other companies to manufacture the touchscreens; this did not come to light until years after the litigation began.

[10] In the months following the spike in customer complaints about the DW MDTs, complaints continued to pour into DW’s repair centres. DW replaced the defective touchscreens and pressed ADM for answers about what was causing the problems.

[11] Through its own investigation, DW concluded that defective touchscreens came from six “batches” of touchscreens, which had been purchased from ADM under two purchase orders, one dated March 3, 2010 and another dated September 9, 2010. DW believed that 1000 of the touchscreens ordered on March 3, 2010 and 5000 of the touchscreens ordered on September 9, 2010 were from the “bad batches.”

[12] DW eventually concluded that the six “bad batches” of 1000 touchscreens had failure rates of 30.6 per cent to 74.7 per cent.

[13] In early 2012, dissatisfied with ADM’s response to its complaints about the touchscreens, and faced with escalating customer complaints, DW lost confidence in ADM’s touchscreens and began to look for alternatives. DW switched to another touchscreen supplier, Dawar (Dawar Technologies Inc.) in February of 2012.

[14] Also in February of 2012, DW informed its customers that it would replace the 6000 touchscreens it had identified as being from the “bad batches” with touchscreens purchased from its new supplier. DW conducted field testing of the Dawar touchscreens for three months and then in May 2012 informed customers that it was ready to begin its retrofit program.

[15] Also in May 2012, this litigation began. On May 7, 2012, ADM demanded that DW pay two outstanding invoices. Three days later, a lawyer’s letter sent to ADM on behalf of DW proposed a resolution of the touchscreen issue. On May 30, 2012, ADM started a legal action against DW for $36,981.00 U.S.[^1], representing the amount of the two unpaid invoices. DW counterclaimed, initially for $704,068.00 U.S. plus $493,330.00 Canadian, representing the cost of replacing the touchscreens in the bad batches plus labour, engineering and freight costs.

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

THE ISSUES

[17] The issues at trial were the following:

Issue #1: Did ADM breach any obligations it owed to DW?

Issue #2: If so, what are DW’s damages?

Issue #3: Is DW liable to ADM for the two unpaid invoices?

[18] In its closing submissions, ADM raised two additional and related issues when it argued, for the first time, that some of DW’s evidence at trial should be excluded because DW, on ADM’s theory, had failed to answer a question at its examination for discovery. ADM also argued that DW had intentionally destroyed evidence and that the appropriate remedy would be the application of a presumption that the evidence would not have assisted DW’s position.

[19] As the determination of these issues will have a significant bearing on how the other issues are decided, I will call them the “preliminary issues” and deal with them first.

Preliminary issues: Should any of DW’s evidence be excluded and should a presumption be applied?

[20] In its closing submissions, ADM argued that the evidence of three of DW’s witnesses, including its expert witness, relating to why the MDTs failed, should be excluded, on the basis of Rule 31.07(2) of the Rules of Civil Procedure, which deals with a party’s failure to answer a question at its examination for discovery.

[21] ADM argued that DW had stated on discovery that certain evidence requested by ADM was not available at the time it was requested. ADM argued that it was not until the second day of the trial that ADM discovered that the evidence had in fact been available at the time it had been requested, and was also available subsequently, but was no longer available.

[22] ADM also argued that, on the basis of spoliation, a rebuttable presumption should be imposed to the effect that the lost evidence would not assist or would “tell against” DW’s case.

[23] In support of both its Rule 31.07(2) argument and its spoliation argument, ADM submitted that when DW’s general manager, Darren Ho, was examined for discovery on March 18, 2014, ADM’s lawyer had requested production of a “faulty” DW MDT.

[24] The lawyer representing DW at the time informed ADM’s lawyer that no such MDTs existed at the time, that the ADM touchscreens in all MDTs returned to DW by DW’s customers had been replaced with screens from DW’s new supplier and that the MDTs had then all been returned to the customers.

[25] Mr. Ho gave an undertaking to confirm that no MDT containing a defective ADM sensor [touchscreen] existed. He was asked to produce such an MDT, i.e. an MDT with a defective ADM touchscreen if one did exist; this question was taken under advisement.

[26] When DW answered its undertakings on October 29, 2014, in response to Mr. Ho’s undertaking, it informed ADM that “[t]here are no MDTs that DW presently has that include a defective Metro sensor. All defective units returned by DW customers were immediately replaced with touchscreens from DW’s new supplier.” In response to the question that had been taken under advisement, DW stated: “No such MDT is in DW’s control or possession.”

[27] When DW answered its undertakings on October 29, 2014, DW produced a repair database, several thousand pages in length, which tracked the repairs to the defective MDTs.

[28] The DW repair database indicated that, at the time of Mr. Ho’s examination for discovery on March 18, 2014, DW actually had three defective MDTs in its possession, which had been returned to DW by customers for repair that day. On cross-examination at trial, Mr. Ho agreed that this was the case. Mr. Ho also agreed that, according to the repair database, DW would have had some defective MDTs in its possession at the time DW’s undertakings were answered in late October 2014, because defective MDTs were continuing to be returned by customers and repaired at that time.

[29] On cross-examination at trial, Mr. Ho said that, when he was asked on discovery to produce a defective MDT, he had not thought to ask DW’s repair centres if they had any on hand. Mr. Ho agreed that if DW did not provide ADM with a defective MDT, ADM would not have had an opportunity to examine one.

[30] ADM argued that the repair database indicated that DW had had thousands of defective MDTs in its possession since the litigation began and at least 100 after the March 18, 2014 examination for discovery.

ADM’s Rule 31.07(2) argument

[31] ADM argued that by failing to provide ADM with a defective MDT, DW had effectively failed to answer a proper question.

[32] Rule 31.07(2) provides that if a party refuses to answer a question, the party may not introduce at trial the information that was not provided, except with leave of the trial judge.

[33] ADM argued that, in this case, DW had provided misinformation and that the correct information, which would have resulted in the production of a defective MDT, would have been crucial to ADM’s case. ADM argued that the sanction under Rule 31.07(2) should be applied and DW should not be permitted to rely on any evidence that was introduced at trial that related to the misinformation.

[34] ADM argued that the result is that DW should be precluded from relying on any evidence relating to the suspected causes of the failures of the MDTs.

ADM’s spoliation argument

[35] ADM also argued that DW had intentionally destroyed relevant evidence.

[36] The basis for ADM’s spoliation argument is similar to the basis for its argument under Rule 31.07(2); ADM argued that since the litigation between ADM and DW began, thousands of MDTs had passed through DW’s corporate hands for touchscreen replacements, at least 600 of them after ADM made its first request for an MDT with a defective touchscreen in a letter dated May 3, 2013.

[37] ADM argued that both Mr. Ho and DW’s hardware manager, Dominic Fung, had testified that in order to figure out why an MDT had stopped functioning, it would be necessary to test the MDT and not just the touchscreen.

[38] ADM argued that the reason it had requested an MDT with a defective touchscreen was so that it could conduct temperature testing. It argued that because the MDTs had an internal thermocouple, which is a device for measuring temperature, it would not have been difficult to determine whether high temperatures (rather than defective touchscreens) were causing the MDTs to fail.

[39] ADM argued that DW should not be permitted to argue at trial that there is no evidence that high temperatures caused the MDTs to fail when DW had prevented ADM from conducting temperature testing by failing to provide ADM with an MDT that ADM could test.

[40] ADM argued that DW had destroyed evidence by replacing the ADM touchscreens in its customers’ MDTs with the new Dawar touchscreens and then returning the MDTs to the customers. ADM argued that, although it was not alleging that DW had a “nefarious purpose” for destroying evidence in this manner, the destruction of the evidence was nonetheless intentional or DW had been willfully blind to what it was doing.

[41] ADM argued that DW could have introduced evidence at trial to rebut the presumption that an MDT with a defective ADM touchscreen would not have assisted DW’s case by re-examining Mr. Ho on the issue but that DW had failed to do so.

DW’s response to ADM’s Rule 31.07(2) and spoliation arguments

[42] DW argued that ADM had no basis for arguing that evidence be excluded or that a presumption be imposed but that if it did, its requests should be denied on the basis that ADM had failed to raise the issues during the trial, at a time when DW would have been better able to respond to them.

[43] The parties had exchanged written closing submissions after closing their cases and before presenting closing arguments orally. DW said that it was taken by surprise when it read ADM’s closing submission and learned, for the first time, that ADM would be asking that some of the evidence of Mr. Ho and Mr. Fung and all of the evidence of DW’s expert witness, Robert Phares, be excluded.

[44] DW characterized the preliminary issues as “trial by ambush”.

[45] DW argued that although ADM had said that it was on the second day of the trial, when Mr. Ho was cross-examined, that it had learned that DW had had defective MDTs in its possession in 2013 and 2014, ADM had not put DW on notice that it would be arguing that any evidence should be excluded and had not objected to the introduction of any of Mr. Fung’s or Mr. Phares’ evidence, although both had testified after Mr. Ho. DW argued that, in fact, ADM had consented to Mr. Phares’ expert’s report being marked as an exhibit.

[46] DW argued that a copy of the repair database ADM relied upon as evidence that DW had defective MDTs in its possession at times when it had told ADM that it did not, had been produced to ADM in 2014. Consequently, while ADM had argued it did not become aware until the second day of the trial that DW had had defective MDTs in its possession in 2013 and 2014, the information had been available to ADM almost three years before the trial started.

[47] DW argued that in September of 2011, at ADM’s request, Mr. Fung had provided ADM with a defective touchscreen in a DW bezel and had asked ADM to let him know if ADM required anything else. Mr. Fung testified that, at the time, he would have been willing to provide ADM with anything it needed in order to assist ADM with the investigation into the touchscreen failures. Both Mr. Fung and ADM engineer Dominic Zborowski testified that ADM did not make any additional requests of Mr. Fung.

Conclusions

ADM’s Rule 31.07(2) argument

[48] Rule 31.07(2) provides as follows:

If a party, or a person examined for discovery on behalf of or in place of a party, fails to answer a question as described in subrule (1), the party may not introduce at the trial the information that was not provided, except with leave of the trial judge.

[49] This rule does not apply to the situation ADM complains of.

[50] Mr. Ho did not fail to answer a question. He answered the questions he was asked but he did so in a manner that was incorrect or arguably incomplete. ADM was told at Mr. Ho’s examination for discovery and in Mr. Ho’s answers to undertakings that DW did not have any MDTs with defective ADM touchscreens, when in fact, at the time, MDTs with these touchscreens were passing through DW’s repair centre(s). However, the MDTs at the repair centre(s) did not belong to DW; they belonged to DW’s customers. These MDTs were at the repair centre(s) only briefly; customers had been informed that the turnaround time for touchscreen replacements would be two days. Had Mr. Ho thought to make inquiries of the repair centre(s) about whether they had any MDTs with defective ADM touchscreens on hand, a DW customer could have been asked to exchange the MDT it had sent to DW for repair for a new or a different MDT. If the customer agreed, the customer’s MDT, with its defective ADM touchscreen, then could have been produced to ADM. Therefore, on discovery or in response to his undertakings, a correct or complete response to ADM’s request for an MDT with a defective ADM touchscreen would have been to the effect that while DW did not own any MDTs with defective ADM touchscreens it could use its best efforts to obtain such an MDT by communicating with its repair centre(s) and then making a request of one of its customers.

[51] Regardless of whether Mr. Ho’s answer to the request for an MDT with a defective ADM touchscreen was more properly characterized as incomplete than incorrect, Mr. Ho did not correct or complete the answer. Rule 31.09(1) requires that incorrect or incomplete answers given on discovery be corrected forthwith once the party discovers that an answer was incorrect or incomplete. Mr. Ho did not discover that his answers were incorrect or incomplete until he was cross-examined at trial. The result was that, subject to DW’s argument and my comments below with respect to DW’s production of its repair database in October 2014, ADM did not receive an accurate or complete response to its request for a defective MDT until the second day of the trial.

[52] The sanction for non-compliance with Rule 31.09(1) is set out in Rule 31.09(3), which states that if the information subsequently discovered, that is, the basis for the corrected or complete version of the answer, is favourable to the case of the non-compliant party, the party may not introduce the information at trial without leave of the trial judge; if the information is not favourable to the non-compliant party, the court may make such order as is just.

[53] For the following reasons, despite Mr. Ho’s incorrect or incomplete answer, I find no basis for excluding the evidence ADM is seeking to exclude and, if there were grounds for excluding the evidence under Rule 31.09, I would grant leave to DW to introduce it:

(1) Although ADM argued that it was not until the second day of the trial that it learned that DW, despite its assertions to the contrary, had been in possession of MDTs with defective ADM touchscreens, the repair database that revealed that customer MDTs were being processed by DW repair centres in 2013 and 2014 had been produced to ADM on October 29, 2014. In the intervening period of almost three years before the trial began, ADM could have reviewed the database and made further inquiries of DW.

(2) In September 2011, shortly after the DW’s customer complaints began, at ADM’s request, Mr. Fung of DW sent ADM a number of defective touchscreens and a defective touchscreen mounted in the bezel of a DW MDT. In an email exchange with Mr. Zborowski and others from ADM, Mr. Fung then asked ADM to let him know “what else you need from us.”

In this email exchange, Mr. Fung also asked ADM to put pressure on its factory to start an investigation into the touchscreen issue “right away”.

Mr. Fung explained that DW needed to know whether the touchscreen problem was “on-going” or “just a few bad batches.”

Mr. Fung was concerned because although DW was receiving complaints about ADM touchscreens, it was continuing to install ADM touchscreens in the MDTs it was selling to its customers.

Mr. Fung testified that he would have provided ADM with anything it required in order to help ADM identify the problem with the touchscreens.

Mr. Fung and Mr. Zborowski both testified that, at the time, ADM did not request anything further from Mr. Fung.

I find that, at the time, DW was very motivated to assist ADM to figure out why the touchscreens were failing and that if ADM had wanted to test a DW MDT with a defective touchscreen for temperature or for any other reason, DW would have provided ADM with such an MDT.

I also find that before the litigation started, ADM could have requested an MDT with a defective ADM touchscreen from DW, but did not do so.

(3) After the litigation began, on two occasions, DW offered to provide ADM with an MDT into which DW would install a defective ADM touchscreen, but ADM did not accept DW’s offer.

In a letter dated May 3, 2013, the lawyer then representing DW responded to an ADM request for documents and information. In response to a request for “[a] physical MDT unit that your client claims has a faulty touchscreen as well as a physical MDT unit that has been replaced with a new touchscreen”, DW’s lawyer wrote:

No such units exist. The AD Metro touchscreen in all MDT units returned by DW customers were replaced by DW’s repair branch with touchscreens from DW’s new supplier and the entire MDT unit was then re-shipped to the customer. If you wish to receive a faulty AD Metro touchscreen by itself and/or such a touchscreen incorporated into a DW MDT, please advise.

DW repeated its offer to provide ADM with “a faulty AD Metro touchscreen by itself and/or such a touchscreen incorporated into a DW MDT” in an almost identically-worded letter dated September 12, 2013 when its lawyer wrote:

As stated in my letter dated May 3, 2013, no such units exist. The AD Metro touch screens in all MDT units returns by DW customers were replace by DW’s repair branch with touch screens from DW’s new supplier and the entire MDT unit was then re-shipped to the customer. If you wish to receive a faulty AD Metro touch screen by itself and/or such a touch screen incorporated into a DW MDT, please advise.

At trial, ADM argued that DW had not actually offered to produce a faulty touchscreen incorporated into a DW MDT. ADM argued that it would be nonsensical to interpret DW’s letters of May 3, 2013 and September 12, 2013 as having made such an offer because, in those same letters, DW was saying that no units with faulty touchscreens existed. ADM argued that DW was only offering to produce either a faulty ADM touchscreen or a touchscreen from DW’s new supplier.

I find that it is clear from the plain wording of DW’s May 3, 2013 and September 12, 2013 letters that DW had indeed offered to provide ADM with a DW MDT into which a faulty ADM touchscreen had been installed.

To the extent that there is any contradiction between the statement in the letters that “no such units exist” and the offer to produce “a faulty AD Metro touchscreen…incorporated into a DW MDT”, it is explained by the excerpt from the transcript of Mr. Ho’s examination for discovery, which was marked as Exhibit 13. In the exchange on page 75, ADM’s lawyer asked if there was a DW MDT “sitting around somewhere with an A.D. Metro screen in it that has failed?” DW’s lawyer replied that no such units exist and said that ADM’s lawyer was asking him “to kind of create something here.” ADM’s lawyer replied that: “I am not really asking for one to get built, I am just asking for a defective unit.” In his letters of May 3, 2013 and September 12, 2013, DW’s lawyer was effectively confirming that no DW MDTs with faulty ADM touchscreens were “sitting around somewhere” but was offering to build one. To quote directly from these letters, in addition to offering ADM “a faulty AD Metro touchscreen by itself”, DW was also offering “such a touchscreen incorporated into a DW MDT.”

ADM’s lawyer responded to DW’s September 12, 2013 letter on October 23, 2013 but requested only a faulty touchscreen; ADM did not accept DW’s offer of a faulty ADM touchscreen incorporated into a DW MDT.

(4) ADM did not ask that any of Mr. Ho’s, Mr. Fung’s or Mr. Phares’ evidence be excluded at the time they testified and did not raise Rule 31.07(2) or request that any evidence be excluded until after the parties had closed their cases. This deprived DW of the opportunity to respond to ADM’s objections on a question-by-question and/or witness-by-witness basis, to take steps before closing its case to compensate for any evidence that may have been excluded and/or to request an adjournment in order to assemble and provide ADM with the defective MDT it had requested.

(5) The timing of ADM’s argument and exclusion request were not only prejudicial to DW but would have left the trial judge, me, in the very difficult position of having been called upon to identify, after the fact and without specific submissions from counsel, which evidence should be excluded.

ADM’s spoliation argument

[54] In Nova Growth Corp. v. Kepinski, 2014 ONSC 2763 at para. 296, 242 A.C.W.S. (3d) 814, Newbould J. considered McDougall v. Black & Decker Canada Inc., 2008 ABCA 353, 440 A.R. 253, and concluded that a finding of spoliation requires the following four elements to be established on a balance of probabilities:

(1) the missing evidence must be relevant;

(2) the missing evidence must have been destroyed intentionally;

(3) at the time of destruction, litigation must have been ongoing or contemplated; and

(4) it must be reasonable to infer that the evidence was destroyed in order to affect the outcome of the litigation.

[55] Newbould J. also referred to the presumption or inference that may be drawn in conjunction with a finding of spoliation, as described in Spasic Estate v. Imperial Tobacco Ltd. (2000), 2000 17170 (ON CA), 49 O.R. (3d) 699 at para. 10, 135 O.A.C. 126:

The spoliation inference represents a factual inference or a legal presumption that because a litigant destroyed a particular piece of evidence, that evidence would have been damaging to the litigant.

[56] ADM argued that DW had had thousands of MDTs in its possession since the litigation began but that they were effectively destroyed when DW substituted Dawar touchscreens for ADM touchscreens. ADM argued that DW destroyed this evidence intentionally and that the destruction can be presumed to have been intended to affect the litigation. ADM argued that, alternatively, DW was wilfully blind when it destroyed this evidence, in which case the same presumption can be applied.

[57] For the following reasons, I do not accept ADM’s spoliation argument:

(1) DW was replacing the ADM touchscreens in its customers’ MDTs with Dawar touchscreens because it had sold its customers a product that was known to malfunction. There was no evidence that DW’s touchscreen replacement program was intended to eliminate all MDTs with ADM touchscreens so that ADM would be unable to examine such an MDT for purposes of this litigation.

(2) DW did not attempt to conceal its touchscreen replacement program from ADM during the litigation. As noted above, DW produced a copy of its repair database to ADM on October 29, 2014, three years before trial.

(3) Also as noted above, on May 3, 2013 and on September 12, 2013, DW had offered to provide ADM with an MDT with an installed defective ADM touchscreen; ADM did not accept DW’s offer.

[58] For these reasons, I dismiss ADM’s request that I apply a presumption or draw an inference that had DW produced an MDT with an installed ADM touchscreen, and had ADM conducted temperature testing, the result would have been damaging to or “telling against” DW’s position in this litigation.

Issue #1: Did ADM breach any obligations it owed to DW?

The legal relationship between ADM and DW

[59] The claims of both parties are in contract.

[60] DW bought the ADM touchscreens through purchase orders.

[61] ADM issued a series of invoices to DW.

[62] No documents were signed by the parties during the purchasing process.

[63] ADM had a standard set of conditions of sale set out in a document appropriately titled Conditions of Sale.

[64] DW had a document titled General Terms and Conditions for Purchase Orders (“General Terms and Conditions.”)

[65] There was no evidence that ADM’s Conditions of Sale document was ever brought to the attention of DW.

[66] There was some but no strong evidence that DW’s General Terms and Conditions may have been provided to ADM.

[67] DW’s General Terms and Conditions included the following paragraph relevant to defective goods:

In supplement of and not by way of substitution for the terms of the specifications or any warranty stipulated or implied by law and notwithstanding prior acceptance by DW Digital Wireless LP, the supplier shall at any time within its standard warranty period, at its own expense replace any goods which are or become defective as a result of faulty or inefficient manufacture, materials or workmanship. The supplier shall state its standard warranty period and related terms and conditions at time of delivery.

[68] I find that nothing turns on whether the DW General Terms and Conditions were provided to ADM; if the DW General Terms and Conditions were found to apply, in this case, they would add nothing to the effect of the provisions of the Sale of Goods Act, R.S.O. 1990, c. S. 1.

[69] Both parties pleaded the Sale of Goods Act. Section 15 of the Sale of Goods Act reads as follows:

15. Subject to this Act and any statute in that behalf, there is no implied warranty or condition as to the quality or fitness for any particular purpose of goods supplied under a contract of sale, except as follows:

16. 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.

17. Where goods are bought by description from a seller who deals in goods of that description (whether the seller is the manufacturer or not), 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.

18. An implied warranty or condition as to quality or fitness for a particular purpose may be annexed by the usage of trade.

19. An express warranty or condition does not negative a warranty or condition implied by this Act unless inconsistent therewith.

[70] With respect to whether s. 15(1) of the Sale of Goods Act applies, there is no doubt that it was in the course of ADM’s business to supply touchscreens. Whether ADM was aware that DW intended to install touchscreens in MDTs that would be used in vehicles was more controversial. DW had previously purchased touchscreens from ADM for this purpose; the previous purchase had involved larger touchscreens that were installed in the backseat of taxis in New York. DW’s Mr. Fung testified that he had discussed how the touchscreens were to be used with both ADM’s sales agent Douglas Broadland and its sales manager Simon Morgan, that both were aware that the touchscreens were to be installed in MDTs that would be used in vehicles and that neither had expressed any reservations about the appropriateness of the ADM touchscreen for the intended purpose. Neither Mr. Broadland nor Mr. Morgan testified at the trial. ADM’s CEO, president and chief technical officer Albert David testified that DW had been secretive about its intended use of the touchscreens but also acknowledged that it was Mr. Morgan who had negotiated the touchscreen sale with DW and not him.

[71] I find that ADM was aware of the particular purpose for which the touchscreens were required and that s. 15(1) of the Sale of Goods Act applies.

[72] In light of the manner in which the touchscreens were described (“Resistive Touchscreen (5 wire)”) in DW’s purchase orders, I find that the touchscreen sale also qualified as a “sale by description”, triggering s. 15(2) of the Sale of Goods Act.

[73] As both s. 15(1) and 15(2) of the Sale of Goods Act apply to the contract of sale between ADM and DW, there were implied conditions in the contract of sale that the touchscreens would be reasonably fit for the purpose for which they were required and that they would be of merchantable quality.

[74] If the touchscreens were defective, ADM would have breached both of these conditions.

Were the ADM touchscreens defective?

[75] In order to determine whether the ADM touchscreens were defective, I considered:

(a) The parties’ pre-litigation efforts to determine the cause of the MDT/touchscreen failures; and

(b) The evidence of the parties’ experts at trial.

[76] I also specifically considered whether exposure to heat and/or a change in gaskets caused the touchscreen failures.

Pre-litigation efforts to determine the “root cause” cause of the MDT/touchscreen failures

[77] As set out in the “Background” section of these reasons, DW began to purchase touchscreens from ADM in 2008. The touchscreens appeared to function properly until the summer of 2011, when DW repair centres began to receive reports that the touchscreens in some MDTs were not working properly after only several months of use.

[78] Customers were reporting, for example, that the MDTs required rebooting because the touchscreens were turning a solid colour, going blank or freezing.

[79] By the fourth week of August 2011, DW had collected about 80 defective touchscreens from two customers, and, based on measurements of resistance readings, suspected that some of the “dots” separating the layers[^2] of the touchscreens had collapsed and the two layers were making permanent contact when they should not have been.

[80] DW also suspected that the problems with the touchscreens were “batch-related”, which meant that it suspected that a manufacturing or other problem had affected all of the touchscreens made at the same time and that were part of the same manufacturing “batch”.

[81] DW noticed that a number of the touchscreens associated with the customer complaints bore the same date codes, indicating that they had been manufactured at the same time.

[82] On August 23, 2011, DW’s Mr. Fung reported to ADM’s sales agent Mr. Broadland that the complaints related to touchscreens made in the 37th, 38th and 45th weeks of 2010.

[83] At ADM’s request, DW sent 12 defective touchscreens to ADM for analysis. At that time, ADM’s sales manager, Mr. Morgan, told DW that ADM would do a “quick root cause analysis.”

[84] In an email dated August 29, 2011, ADM engineer Mr. Zborowski reported back to DW that the 12 screens appeared to be functioning but showed signs of “over-evacuation of the air gap in the switch layer” and that they had “telltale signs” of over-evacuation, including what was described a “Newton ring patterns” and a bumpy or “chicken skin” surface. Mr. Zborowski said that ADM would continue to examine the touchscreens in order to determine what had failed.

[85] Also on August 29, 2011, Mr. Fung informed Mr. Zborowski that the problem touchscreens had worked for a period of time before failing. DW also informed ADM that touchscreens with date codes before and after the problem date codes were not failing.

[86] In early September 2011, DW sent 68 more defective touchscreens to ADM, for a total of 80. By this time, DW had identified problem touchscreens built in the 9th week of 2011, in addition to the three weeks it had previously identified.

[87] In mid-September 2011, DW began to wonder whether the problem could be heat-related. On September 13, 2011, Mr. Fung sent an internal to DW’s general manager Mr. Ho and others, saying that heat damage could be the problem. Mr. Fung explained that, in the summer, the MDTs belonging to a Chicago-based customer that had reported touchscreen problems could easily reach 80 degrees Celsius. (In 2009, ADM had informed DW that it was confident that its touchscreens would operate from minus 20 degrees Celsius to 70 degree Celsius.)

[88] ADM sent the 80 touchscreens DW had sent to it to its supplier, Luxe, for analysis. ADM did not mention Luxe to DW by name but informed DW that it would be sending the touchscreens to “the factory”.

[89] In an email dated September 16, 2011, Mr. Fung reported to ADM that DW was seeing “more and more repairs”. Mr. Fung said that all of the failed touchscreens bore certain date codes and that DW had had an almost zero failure rate with more than 5000 touchscreens with earlier date codes. Mr. Fung informed ADM that DW believed that ADM’s factory must have changed something around the 37th, 38th, 39th and 45th weeks of 2010 and the 9th week of 2011. Mr. Fung asked whether ADM’s factory might have contracted out production around that time because DW had requested some expedited shipments. Mr. Fung said that he wanted to get the attention of ADM’s factory because it had already ordered several thousand more touchscreens and it wanted to make sure that they would not have the same problem.

[90] On September 19, 2011, Mr. Zborowski wrote an email to Luxe and passed on the information Mr. Fung had provided. Mr. Zborowski asked Luxe whether there had been a production change in the 37th week of 2010 and whether Luxe had contracted the touchscreen manufacturing out to other people at that time because of ADM’s request for expedited production.

[91] On September 19, 2011, Mr. Fung informed ADM that in the previous two weeks it had received 200 defective touchscreens from its customers and that the problem was “getting more severe.” The 200 touchscreens were built in the 37th, 38th, 39th and 45th week of 2010 and the 9th week of 2011. Mr. Fung asked ADM to put more pressure on its factory to start its investigation right away. Mr. Fung informed ADM that everyone at DW was very worried because DW was continuing to install ADM touchscreens in its MDTs and it did not know whether the problem related to only a few bad batches of touchscreens or whether it was on-going.

[92] On September 19, 2011, Mr. Zborowski replied that the touchscreens DW had sent to ADM were expected to arrive at ADM’s factory the following day and that ADM had asked the factory to make its analysis of the touchscreens a priority. Mr. Zborowski also requested a failing touchscreen that was installed in a DW bezel, i.e. before it was removed from the mounting. Mr. Zborowski said that this would assist with ADM’s analysis while it consulted with its factory.

[93] On September 21, 2011, in an email to Mr. Zborowski and Mr. Morgan, Mr. Fung confirmed that he had sent ADM the requested bezel and asked ADM to advise if it needed anything else.

[94] Two days later, on September 23, 2011, Mr. Fung emailed Mr. Zborowski to request an update with respect to the bezel evaluation or from the factory. Mr. Fung also reported to Mr. Zborowski about his own testing of approximately 100 failed touchscreens. Mr. Fung said that about 60 had a “dead short” and that dots and lines appeared on the display without any contact with the touchscreen. He said that about 20 had no “dead short” but that customers reported that they needed to be warmed up for 20 to 30 minutes before they would work. He said that about 10 of the touchscreens had no problems.

[95] On September 26, 2011, Mr. Fung reported to ADM in an email that DW thought that the touchscreen problem might be due to heat or high temperatures in the 60 to 70 degree Celsius range, because three of its customers, in Dallas, Waterloo, Ontario and Chicago, were having high failure rates and all of the units had experienced problems after the summer, in August and September. However, Mr. Fung also said that DW had also sent a shipment to Dallas in early 2010 that had had no failure rates. Mr. Fung concluded his email by saying that “it may be just something changed in the material or manufacturing process.”

[96] In his September 26, 2011 email, Mr. Fung had said that it had major customers in Europe that were not reporting any problems. However, four days later, on September 30, 2011, he informed ADM that DW had received reports of significant touchscreen failures from its European offices that very week.

[97] Mr. Fung testified that, by this time, the end of September 2011, DW was alarmed by the touchscreen situation but it still believed that ADM could help DW find the root cause of the problem.

[98] On October 4, 2011, ADM’s Mr. David informed Mr. Fung in an email that ADM believed that a packaging problem had caused the touchscreens to fail and that foam packaging blocks may have been putting too much pressure on the touchscreens, resulting in the screens being “squished.”

[99] The same day, Mr. Fung replied in an email that the packaging theory had “some merit” but questioned why, given that the same packaging method had always been used, the problems had not arisen in the past. At trial, Mr. Fung testified that he did not, in fact, think that the packaging theory had any merit; he said that Mr. David was an expert in the touchscreen industry and that he, Mr. Fung, was not and that he had been trying to say something generic to Mr. David to thank him for providing DW with some information. Mr. Fung said that the packaging theory did not explain why there had been no problem with the first 4000 ADM touchscreens.

[100] On October 5, 2011, Mr. David replied to Mr. Fung’s email of October 4, 2011 but did not respond directly to Mr. Fung’s question about why, if packaging was the issue, problems had not arisen in the past. Mr. David said that if packaging staff are not careful, the foam blocks used to protect the touchscreens can vary in height, which can cause problems. Mr. David said that the packaging system would be changed for future shipments and that the problems with the touchscreens should be solved. Mr. David also suggested that DW convert to what he described as a “double buffer construction”, which would add an additional layer of polyester to the face of the screen and would make the screen more reliable.

[101] To his email of October 5, 2011, Mr. David attached a “corrective action report” it had obtained from Luxe but from which Luxe’s logo and any references to Luxe had been deleted. The report described the packaging problem Luxe had identified. Mr. Zborowski testified that the references to Luxe were removed from the report so that DW would not know that ADM was sub-contracting the touchscreen manufacturing to Luxe and would continue to buy its touchscreens from ADM rather than buying them from Luxe directly.

[102] Touchscreen failures continued to be reported to DW’s repair centres in October and November 2011.

[103] On November 24, 2011, Mr. Fung informed ADM in an email that DW had received fewer returns in the previous month and that the situation appeared to be improving. Mr. Fung also provided ADM with a chart listing recent failed touchscreens by their date codes[^3]:

Date code (week/year) Number of returned touchscreens 37/2010 22 38/2010 2 39/2010 33 45/2010 73 9/2011 89 11/2011 2 14/2011 5 19/2011 3 31/2011 2

[104] In the same email, Mr. Fung informed ADM that although ADM’s factory had blamed packaging, DW continued to believe that the failures were caused by something else, either the material used or a change in process. Mr. Fung noted that the distribution of recently-returned touchscreens in his chart peaked at 45/2010 and 9/2011 and ramped down before and after.

[105] Later in November, DW returned 484 touchscreens to ADM. Mr. Fung testified that DW had wanted to impress upon ADM how serious the problem was, in that, at that time, almost 500 touchscreens had been returned in a two-month period.

[106] Mr. Fung testified that DW wanted ADM to devote more resources to investigating the problem and that, by this time, in contrast to how it had felt at the end of September 2011, DW was losing confidence in ADM.

[107] In late November, Mr. Zborowski communicated with Luxe and asked whether, in light of the date distribution of the touchscreen failures, it continued to believe that packaging was responsible.

[108] On December 7, 2011, Luxe informed ADM that it continued to believe that packaging was the problem but that it would investigate further.

[109] In an email dated January 9, 2012, Mr. Fung informed ADM that DW had identified additional problems with touchscreens bearing the 14/2011 and 19/2011 date codes. Mr. Fung asked whether ADM had received any new information from its factory. Mr. Fung also asked ADM whether a manufacturer other than Luxe was making the touchscreens because the name Luxe did not appear on the box of touchscreens DW had received the previous month. Mr. Fung acknowledged that ADM’s factory had changed its packaging method, which DW considered to be positive, but said that DW wanted to know whether the packaging had been identified as the “root cause” of the touchscreen failures.

[110] By January 2012, DW had lost confidence in ADM and had started to look for a new touchscreen supplier.

[111] On January 18, 2012, Luxe provided ADM with a slide presentation from its quality control manager, which described an analysis of 474 touchscreens and concluded that the “top film” had collapsed on many of them.

[112] Mr. Morgan of ADM responded to Luxe by email the same day and said “[t]his is taking too long.” Mr. Morgan said that “[n]obody believes the packaging was the problem or is the root cause” and that ‘[c]learly the air is escaping.” Mr. Morgan said that ADM needed to know if there was a deficiency in the touchscreens, whether the environment was too tough for the touchscreens, whether bad materials had been used or if there had been process changes. Mr. Morgan asked where the air in the touchscreens was escaping from and asked whether a better gasket adhesive would help. Mr. Morgan said that ADM needed to know whether anything could be done to improve the performance of the touchscreens and said that ADM needed to provide “expert responses”.

[113] Also on January 18, 2012, following on Mr. Morgan’s email of the same day, Mr. Zborowski also wrote to Luxe:

On top of what Simon said, we’ve received additional info from the customer. Their largest failure rates are both in northern and southern united states [sic], both where it can get very hot and very cold. It is possible that the temperature can still get very warm in the colder regions (for example, direct sunlight while mounted in a car) but otherwise it appears that temperature is not related.

Something to keep in mind: we have been selling these exact sensors to this exact customer since 2008. They have had, so far, a 1% or less failure rate on sensors made in 2008, 2009 and early 2010. It is only in late 2010 where large failure rates begin to be seen. This tells us that there must have been some change either the sensor construction, packing/shipping method, or bezel mounting on the customer end between early 2010 and late 2010. They confirm that nothing has changed on their end from 2008 until today. Please look into the time around week 37/39 2010 and the batch before that to see if there was any change in the building process, no matter how small it may be.

[114] ADM did not share with DW the Luxe slide presentation it had received on January 18, 2012.

[115] On January 19, 2012, Mr. Morgan wrote to Mr. David and reported that DW was upset that ADM had not been able to determine a root cause of the touchscreen problems and also that DW had “lectured” ADM about how much it was costing them and “what a big deal” it was. In his email, Mr. Morgan said that the evidence was pointing away from temperature being responsible and that no no one believed that packaging was to blame:

From their perspective….they were using this sensor since 2008…with less than 1% failure. Then starting with batches from late 2010 they’re getting all kinds of collapsed top sheet. They are now seeing it in various locations, times of year, and in moderate climates…i.e. it’s looking less like a temperature problem. They of course think something changed in the process or materials around then. Luxe have not been able to identify anything. Except the packaging which no-one believes.

[116] On January 26, 2012, Mr. Zborowski again wrote to Luxe and said: “Again, the general consensus between us and our customer is that there must have been a process change somewhere close to the batch from week 37 2010. Please look into approximately that date.” Mr. Zborowski also forwarded to Luxe a chart prepared by DW which showed the distribution of returned touchscreens by date code.

[117] Mr. Zborowski testified that, at this time, it appeared to him that the problem could be batch-related.

[118] On January 31, 2012, Luxe sent an email to ADM attaching a “corrective action report” which identified “root causes” of the touchscreen failures. The email stated that Luxe had improved its manufacturing process for laminating, testing and packaging “in order to prevent the defect from happening again.”

[119] Under the heading “Root Cause Analysis”, the report identified three issues:

(1) Laminate manufacturing;

(2) That if the space between the “film” and the “glass” is too small a short circuit may result; and

(3) Inappropriate package design.

[120] The report also identified a three-point corrective action plan.

[121] Under the heading “Preventive Action” the report stated: “After improve [sic] the laminating, testing and packaging manufacture process, there is no short circuit problem exist from both shipping department and customers.”

[122] On February 2, 2012, Mr. Zborowski wrote to Luxe in an effort to determine when the fault responsible for the touchscreen failures had been fixed; Mr. Zborowski said that if the fault had persisted “up until recently”, ADM’s customer, DW, might want to return its 2011 touchscreens, which ADM would like to avoid:

In my emails to Vanessa, I had highlighted that based on the data received from the customer, it seems that there was a production/process change approximately around the time where large failure rates were beginning (week 37, 2010 approximately). Have you been able to identify if there was a fault around that time that has been rectified since? Or has the fault persisted up until recently? If it has only been fixed recently, that may indicate that the units our customer currently has from 2011 are all suspect to fail as well and may want to return them, which we’d like to avoid.

[123] On February 7, 2012, Luxe sent a further email to ADM stating that 4000 touchscreens shipped to ADM “may have engaged the fault issues.” Luxe said that it did not believe that the fault issues affected any shipments after November 2, 2010. Luxe apologized to ADM and said that the fault may affect ADM’s customers from 2011. Luxe also asked ADM to keep Luxe informed and to return the defective products to Luxe in the event that there were any customer claims.

[124] Also on February 7, 2012, Mr. Zborowski sent an email to Mr. David, which included a draft email Mr. Zborowski proposed be sent to DW (“draft email #1”). In his email to Mr. David, Mr. Zborowski said that Luxe had not convinced him that touchscreens manufactured in 2011 would not be a problem.

[125] Draft email #1 is reproduced below:

We’ve heard back from our factory and they have some new findings. While the packaging may still be a contributing factor to the fault is (sic) appearing, they have identified an issue with the way the topsheet was being affixed to the spacer adhesive, and the way the spacer was being affixed to the substrate. They have acquired new equipment that can test for insulation resistance of up to 100 M [ohms] so they can monitor for this issue on future builds. They also believe that the fault should not appear in such large numbers after the shipment from Taiwan to Ottawa on November 10th, 2011. I don’t know what week codes those correspond to, but I don’t believe there are any sensors from 2010 with week codes after week 45 2010.

Finally, Albert spoke to Markus about a week ago, and among the topics discussed they talked about the design of your bezel and mounting method. Albert gave some suggestions for improvement, which are described in the attached memo.

[126] Later the same day, February 7, 2012, Mr. Zborowski sent a further email to Mr. David, which included a revised version of draft email #1. I will refer to the revised version of draft email #1 as “draft email #2”. Mr. Zborowski testified that, based on Mr. David’s instructions, he had revised draft email #1 to de-emphasize the causes of the touchscreen failure problem that had been identified by Luxe. In the email to Mr. David, which included draft email #2, Mr. Zborowski wrote: “Please review my response to Andrew [Harlos of DW]—I tried to downplay what I had originally told him on the phone to make it seem like a non issue if the sensor had better mounting.”

[127] Draft email #2 read as follows:

We’ve heard back from our factory and they have some new findings. While the packaging may still be a contributing factor to the fault appearing, they have identified an [sic] minor imperfection with the way the topsheet was being affixed to the spacer adhesive, and the way the spacer was being affixed to the substrate that the gasket was not being completely burnished. They don’t think that the fault should be present in any sensors made in 2011 or onwards.

However, we think that the biggest culprit is the way your sensor is mounted. Even if the adhesion of the gasket was less than perfect, it would have been a non-issue if the front sealing gasket was sufficiently compressed against the sensor. Albert spoke to Andrew about a week ago, and among the topics discussed they talked about this. He gave some suggestions for improvement, which are described in the attached memo. Basically, we think that due to the pegs that held the gasket in place and the thickness/material of the gasket itself, the senor was not having sufficient pressure around the borders to keep the expanding air in the air gap from being pushed out as temperatures increase. With a thicker material that will be able to compress more against the sensor, there will be more force to keep the gasket of the senor flattened against the matting surfaces and keep the air from escaping.

[128] Mr. Zborowski sent draft email #2 to Mr. Fung with copies to Mr. David, Mr. Harlos and others on February 7, 2012.

[129] In his trial testimony, Mr. David confirmed that he had instructed Mr. Zborowski to send DW draft email #2 instead of draft email #1. Mr. David agreed that he had instructed Mr. Zborowski to downplay Luxe’s conclusions with respect to the causes of the touchscreen failures. Mr. David agreed that DW was not given a copy of Luxe’s email of January 31, 2012 or the attached report. He also agreed that he had intentionally withheld from DW Luxe’s opinion that ADM had likely received 4000 defective touchscreens and that 2011 customers might be affected.

[130] Mr. David said that ADM did not share Luxe’s report with DW because he did not consider Luxe’s conclusions or its report to be credible. He said that they did not make sense. Mr. David denied that ADM wanted to avoid replacing thousands of touchscreens. He said that if he had thought that the touchscreens were defective, he would have shipped them back and replaced them, but only if he had believed they were defective. Mr. David said he had no faith in the technical ability of the factory that had built the touchscreens. Mr. David said that ADM was a touchscreen expert while Luxe was just a “screen printer”.

[131] Mr. Zborowski, on the other hand, testified that Luxe was in a better position than ADM to determine the root cause of the touchscreen failures.

[132] Mr. David testified that he remained firmly convinced that heat was responsible for the touchscreen failures. Mr. David agreed that there was no mention of heat in either Luxe’s email of January 31, 2012 or the attached report. Mr. David said that this was not surprising because Luxe did not know what the touchscreens were being used for or where.

[133] Mr. David said that he did not pass Luxe’s conclusions on to DW because he did not want to confuse or upset DW with information that he did not consider to be reliable.

[134] In reply to Mr. Zborowski’s February 7, 2012 email, Mr. Fung of DW wrote that he believed that “the factory” was on the right track. Mr. Fung said that DW’s repair centres in Europe and the U.S. were continuing to return units with faulty touchscreens but he expressed optimism that returns were trailing off. Mr. Fung said that DW did not accept ADM’s suggestion about changing the manner in which the touchscreens were mounted in the MDTs. Mr. Fung said that, before the touchscreen problems that came to light in August of 2011, DW had shipped more than 4000 MDTs using the same mounting system without any problems.

[135] DW announced its touchscreen replacement program in a product bulletin dated February 15, 2012.

[136] Mr. Ho and Mr. Fung both testified that no problems were reported with the Dawar touchscreens DW used to replace the ADM touchscreens, even though the mounting system used by DW was the same system DW had used for the ADM touchscreens and which ADM had identified, in its email of February 7, 2012, as the “biggest culprit” responsible for the ADM touchscreen failures and which ADM had recommended DW change.

[137] As noted in the “Introduction” section of these reasons, above, on May 7, 2012, Mr. David demanded that DW pay two outstanding invoices for touchscreens.

[138] On May 10, 2012, DW’s general counsel sent a letter to ADM with a proposed resolution to the touchscreen issue.

[139] Later that same day, Mr. David sent an email to several ADM employees advising that he would be “moving forward legally”. Mr. David’s email stated that there should be no further discussions with DW “and, most importantly, DO NOT ACCEPT ANY RETURNED PRODUCT SHIPMENTS FROM THEM.”

[140] ADM’s statement of claim was issued on May 30, 2012.

The expert evidence

[141] Both parties called expert witnesses at trial. The parties agreed that the reports of the experts would be marked as exhibits and that the experts’ evidence would consist of both the experts’ oral testimony and their reports.

DW’s expert Robert C. Phares

[142] DW’s expert was Robert C. Phares.

[143] Mr. Phares was an engineer who had worked in that capacity for more than 40 years and spent much of his career in the touchscreen industry. Mr. Phares had worked closely with the team that designed the five-wire resistive touchscreen, which is the type of touchscreen at the heart of this litigation. Mr. Phares had worked as a consultant since 2006.

[144] Mr. Phares was qualified at trial as an expert in the area of resistive touchscreen technology.

[145] In order to prepare his opinion, Mr. Phares examined more than 200 ADM touchscreens. Mr. Phares testified that he tested the touchscreens for “open circuit resistance”, which is the electrical resistance between the upper or front cover sheet and the lower or back glass layer. Mr. Phares also tested for visual appearance and touch function.

[146] Mr. Phares examined touchscreens from batches with both low and high failure rates. He examined 11 from what he described as “early” batches with low failure rates, 96 which were known to be defective and were from batches with high failure rates, 109 which were not known to be defective but which were from batches known to have high failures rates and 10 from the new supplier, Dawar, to which DW had switched in early 2012.

[147] The 96 touchscreens examined by Mr. Phares that were known to be defective bore date codes from 37/38/39-2010 to 19-2011.

[148] Mr. Phares found that the 11 “early” touchscreens had a zero per cent failure rate, the 96 were already known to be defective (and therefore had a failure rate of 100 per cent) and of the 109 that were not known to be defective but that were from batches known to have high failure rates, 47 per cent were defective. The 10 Dawar screens were all “good.”

[149] Mr. Phares found that all of the touchscreens that had failed had the same defect, a collapsed cover sheet.

[150] He said that although all of the ADM touchscreens he examined met the same specifications, it was clear that there had been more than one manufacturer because the good screens and the bad screens had different part numbers.

[151] Mr. Phares said that the ADM touchscreens had not been manufactured by Luxe. Mr. Phares said that he was familiar with both of the Taiwan-based manufacturers that had made the ADM touchscreens, Higgstec, Inc. and Abon TouchSystems. Mr. Phares said that he had worked with both manufacturers in the past.

[152] Mr. Phares said that the 96 touchscreens that were known to be defective and the 109 from batches known to have high failure rates, 47 per cent of which were defective, had all been manufactured by Abon TouchSystems.

[153] When Mr. Phares was shown Exhibit 3, which included a graph showing the number of touchscreens that had been returned to DW for replacement and their corresponding date code, he said that it was clear to him that ADM’s supplier, Luxe, had started to receive touchscreens from a new supplier at the start of the high failure rate period, which was in the 37th, 38th and 39th weeks of 2010.

[154] Mr. Phares said that he would guess that the supplier had both a design and a manufacturing issue and that it did not do a good job of manufacturing the touchscreens for a considerable period of time.

[155] Mr. Phares’ evidence included the following opinions:

• The “early” touchscreens that DW purchased from ADM had been manufactured by Higgstec, Inc. and had worked well;

• The touchscreens in the six 1000-unit batches that are at issue (with dates codes 37/38/39-2010 to 19-2011) were defective;

• The nature and cause of the defect was consistent and common and caused by a combination of design and manufacturing;

• The defect was a collapsed cover sheet;

• The cover sheet collapse was caused by inconsistent lamination on one side of the touchscreen;

• The inconsistent lamination was caused by an error in the layout of the touchscreens’ cover sheet ring; and

• The manufacturer of all of the defective touchscreens was Abon TouchSystems.

[156] Mr. Phares said that he found no evidence to show that the touchscreens had failed because of excessive temperature. He said that he did not believe that packaging would have been responsible for the touchscreen failures reported by DW’s customers. Mr. Phares also ruled out gasket-related issues. He said that he did not have enough information to say whether burnishing was an issue.

[157] Mr. Phares was asked whether resistive touchscreens are appropriately deployed in cars. He said that he would agree with ADM’s expert, Daniel Scharff, to a certain extent in that he believed that there are products that work better in cars than resistive touchscreens. However, he said that tens of millions of such touchscreens have been incorporated into cars in the past six to 10 years.

[158] ADM argued that Mr. Phares “conceded during cross examination that there has to be some mechanical pressure or heat that will create the collapsed cover sheet.” This is a slight overstatement of Mr. Phares’ evidence. On cross-examination, ADM’s lawyer had said to Mr. Phares that “in order to have a collapsed cover sheet I’ll suggest to you it can happen in one of two ways, there can be one, some sort of mechanical pressure or two, there can be heat. Do you agree with that?” Mr. Phares’ reply was, “It could be those things”. Mr. Phares was not asked if it “had to be” those things or what else, if anything, might have happened to cause the cover sheets to collapse.

[159] ADM also argued that Mr. Phares said that nine “new” Abon TouchSystems touchscreens he had examined “must have had something happen to them in order to make them not functional.” This is, again, a slight overstatement. On cross-examination, Mr. Phares was describing units with collapsed cover sheets and was asked whether something had happened to them. He chuckled and said, “something happened to them, right”. It was not clear whether he was saying that what had happened to them was that their cover sheets had collapsed or that something else had happened to them and he did not say that it was necessary for something had to have happened to them in order for their cover sheets to collapse. Earlier in his testimony, Mr. Phares had said that unless DW had misrepresented the conditions in which the screens had been stored, they had, in fact, just collapsed on their own over time.

ADM’s expert Daniel H. Scharff

[160] ADM’s expert, Daniel Scharff had a Master’s degree in mechanical engineering from Stanford University and had worked as a designer and principal engineer in the touchscreen industry for 23 years. Mr. Scharff had obtained 13 patents, including one relating to touchscreens. Mr. Scharff, like Mr. Phares, was qualified at trial as an expert in the field of resistive touchscreen technology.

[161] Mr. Scharff had been asked by ADM to review Mr. Phares’ report.

[162] Mr. Scharff also examined 13 touchscreens, some old and some new.

[163] Mr. Scharff did not dispute many of Mr. Phares’ conclusions and agreed that the quality of the seal between the cover sheet and the glass in the border area of the touchscreens he examined was inadequate. However, Mr. Scharff concluded that the ADM touchscreens had been exposed to high temperatures. He found that the high temperatures caused the internal air to expand and escape and then, when the touchscreens cooled, a vacuum was created, causing the cover sheet to collapse.

[164] Mr. Scharff testified that a poor seal between the cover sheet and the glass bottom layer of the touchscreen, on its own, would not cause the cover sheet to collapse; either force or a high temperature would be required.

[165] Mr. Scharff agreed on cross-examination that he had not provided and could not provide an opinion with respect to how high a temperature would be required to cause a cover sheet to collapse.

[166] Mr. Scharff agreed that high temperature may not have been a problem for the touchscreens if the seal had not also been poor. He agreed that, on his theory, the poor seal was at least in part to blame for the collapse of the touchscreen cover sheets.

[167] Mr. Scharff agreed that it is the two factors working together, the strength of the seal and the temperature, that may make a seal fail, cause air to escape and create a vacuum effect, which causes the cover sheet to collapse. He said that a poor seal could fail at a temperature that is lower than would be required to force a better seal to fail; he agreed with the proposition that a poor seal may fail at even a “modest” temperature.

[168] Mr. Scharff said that he did not know whether a seal could fail at 40, 50, 60 or 70 degrees Celsius. He said that if a seal is poor enough, it is possible that it could fail at the relatively low temperature of 30 or 40 degrees Celsius.

[169] DW had been told by ADM that ADM touchscreens would operate from minus 20 degrees Celsius to 70 degrees Celsius.

Exposure to heat

[170] ADM argued that high temperatures were responsible for the touchscreen failures and that, alternatively, any damages to be awarded to DW should be reduced because DW was contributorily negligent by exposing the MDTs to high temperatures.

[171] As was mentioned above, Mr. David testified that the reason he did not give DW the Luxe “corrective action report” ADM received on January 31, 2012 was that he firmly believed that heat was the cause of the touchscreens failures and not the causes Luxe had identified.

[172] There was some evidence at trial in support of ADM’s heat theory:

• The touchscreen failures were initially reported in the summer of 2011 in North American locations where the summers can be hot.

• Initially, both ADM and DW were investigating whether heat was responsible for the touchscreen failures.

• DW’s product specifications stated that the Vector 9000 would operate at up to 80 degrees Celsius when ADM had given DW assurances only that it would operate at up to 70 degrees Celsius.

• In an email dated September 13, 2011, Mr. Fung had said that in Chicago, the internal temperature of the MDTs could reach 80 degrees Celsius.

• Mr. Ho testified that it was not recommended that the MDTs be in direct sunlight or in front of heating and air conditioning vents. ADM introduced into evidence numerous photographs showing MDTs mounted in cars in front of heating and air conditioning vents and where they could be exposed to direct sunlight.

• Mr. David’s evidence included a video he had made of a temperature test he had conducted. Mr. David had put a touchscreen inside a car on a sunny day and showed that the temperature had reached 77 degrees Celsius. (As I will explain below, I placed no weight on this video.)

• Mr. Scharff’s evidence that the cover sheets collapsed because a vacuum was created by exposure to high temperatures.

[173] After considering all of the evidence, including the experts’ opinions, I find that although heat may have contributed to the collapse of the cover sheets and consequently the failure of the touchscreens, there was no evidence that exposure to a temperature higher than 70 degrees Celsius[^4] was necessary for this phenomenon to occur and no evidence that it would have occurred if there had been an adequate seal between the two layers of the touchscreens.

[174] In his email of September 13, 2011, Mr. Fung had said that in Chicago the internal temperature of the MDTs could reach 80 degrees Celsius and, initially, DW suspected that heat was causing the touchscreen failures. DW discounted the heat theory as the months wore on because the evidence did not support it. As noted above, touchscreen failures were reported in one batch of touchscreens that had been deployed in Dallas but not another batch. Also, Scandinavian cities, not known for high temperatures, reported failures in late 2011, after the summer, which was not typically hot in those cities in any event, was obviously over.

[175] As noted above, in early 2012, ADM’s Mr. Morgan stated in an email that because the failures were being seen “in various locations, times of years, and in moderate climates” it was looking “less like a temperature problem.”

[176] ADM’s heat theory does not explain the distribution of the touchscreen failures; in other words, why complaints about the touchscreens began suddenly when touchscreens manufactured in the 37th week of 2010 were installed and declined after touchscreens manufactured after the 19th week of 2011 were installed.

[177] Significantly, ADM’s expert witness Mr. Scharff testified that heat was a factor that worked in combination with the strength of the laminate, and, if the lamination were appropriate, higher temperatures would not cause a problem. As noted above, Mr. Scharff agreed on cross-examination that if the seal between the layers of a touchscreen were poor, the top layer could collapse at temperatures well below 70 degrees Celsius, the temperature up to which ADM had told DW the ADM touchscreens would operate.

[178] I note also that although Mr. Scharff testified that he believed that the ADM touchscreens were likely exposed to high temperatures, he did not conduct any temperature tests himself. Mr. Scharff also did not comment on the temperature test in Mr. David’s video.

[179] I place no weight on Mr. David’s video. It was prepared for the purpose of this litigation and I find that it was self-serving. In order for the temperature test depicted in Mr. David’s video to have had any probative value, evidence about the test conditions and methodology would have been required. This evidence only could have come from an independent and qualified expert witness. Expert witnesses must certify that their opinions are fair, objective and non-partisan. Mr. David’s video had no such safeguards attached.

Gaskets

[180] ADM argued that the gaskets used on the MDTs caused the touchscreen failures.

[181] ADM argued that DW may have made a change to its gasket at the same time as it started to install the touchscreens it alleged to be defective.

[182] As with the heat theory, the gasket theory does not explain why complaints about the touchscreens declined once touchscreens manufactured after the 19th week of 2011 were installed.

[183] Further, Mr. David’s evidence at his examination for discovery, which was read into the record at trial, was that the gasket is not a problem under specified operating conditions, although it will help to mitigate a failure in an overheating situation. Mr. David said even without a gasket, the touchscreens should have operated properly under 70 degrees Celsius.

Conclusion

[184] I find that there was a defect in some of the touchscreens supplied by ADM to DW.

[185] I find that this defect affected the six “bad batches”, i.e. those touchscreens manufactured beginning in the 37th week of 2010 until and including the 19th week of 2011.

[186] That ADM’s touchscreen supplier, Luxe, informed ADM on January 31, 2012 that there was a defect in some touchscreens is obviously compelling evidence in support of a finding that there was a defect.

[187] Luxe’s conclusion that lamination was a problem was confirmed by both parties’ expert witnesses.

[188] Although Mr. Scharff gave the opinion that exposure to a high temperature was necessary in order for the cover sheet of a touchscreens to collapse, he gave no opinion about the temperature that was necessary in order for this to happen. Mr. Scharff said that it could happen at temperatures of less than 70 degrees Celsius.

[189] To the extent that the opinions of Mr. Scharff and DW’s expert Mr. Phares differed, for several reasons, I preferred the evidence of Mr. Phares.

[190] Mr. Scharff examined only 13 touchscreens compared to Mr. Phares’ more than 200.

[191] Mr. Phares actually opened the touchscreens and examined their components while Mr. Scharff did not.

[192] Perhaps most significantly, however, although Mr. Scharff had been asked to respond to Mr. Phares’ report, Mr. Scharff did not address the touchscreen failure distribution by manufacturing date that was clearly set out in Mr. Phares’ report. Mr. Phares’ report included the table and graph marked at trial as Exhibit 3 that showed that the failures began with touchscreens with the date codes 37/38/39-2010 and had dropped off significantly by the time touchscreens with date codes of 24-2011 were manufactured. Mr. Scharff did not attempt to reconcile his theory that the touchscreens were likely exposed to high temperatures with Mr. Phares’ information that showed that DW’s customers were not complaining about touchscreens supplied by ADM in the periods before or after the manufacturing dates of the “bad batches.” Mr. Scharff did not mention the manufacturing date of the touchscreens in his report. On cross-examination Mr. Scarff admitted that although he had noticed that the chart in Mr. Phares’ report showed that certain date codes had higher failure rates than others, he simply accepted Mr. Phares’ conclusion on that point and that he “totally missed” that there was a date code on the touchscreens he examined.

[193] 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 the poor lamination was caused by a design and/or manufacturing issue.

[194] My finding that this defect affected the six “bad batches” is based on the evidence of the 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.

[195] 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 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.

[196] Having found that the touchscreens in the six “bad batches” were defective, I find that ADM breached the implied conditions in the contract between ADM and DW that the touchscreens would be reasonably fit for the purpose for which they were required and that they would be of merchantable quality.

ISSUE #2: DAMAGES

[197] In its counterclaim, DW claimed the following damages:

Damages Amount 1. The replacement cost of 6,000 touchscreens (the touchscreens in the six “bad batches”) $168,000.00 2. Labour costs associated with the replacement of the touchscreens $234,192.00[^5] 3. Freight costs associated with the replacement of the touchscreens $114,240.00 4. The cost of on-site technicians who assisted with the replacement of the touchscreens $2,886.89 5. The cost of the fleet-wide replacement of ADM touchscreens not from the six “bad batches” but replaced due to customer demands $139,374.00[^6] 6. Engineering and project management costs associated with the touchscreens $45,375.00[^7]

[198] What is sought to be accomplished in awarding damages in a breach of contract case is to put the plaintiff in the same position it would have been in if the contract had been performed, bearing in mind the obligation of the plaintiff to mitigate its damages. The plaintiff may also recover what might be considered consequential losses, subject to the principle that these losses must have been reasonably foreseeable by the defendant at the time the contract was entered into. (Freedhoff v. Pomalift Industries Ltd. (1971), 1971 474 (ON CA), [1971] 2 O.R. 773, 19 D.L.R. (3d) 153 (C.A.); McCamus, The Law of Contracts (2nd ed.) (Toronto: Irwin Law Inc., 2012) at pp. 874-875.)

[199] DW characterized this as a reimbursement case and not a loss of profits case. It asked to be compensated for the cost of its investigation into the touchscreen failures and the replacement of the touchscreens. DW argued that it should be put back in the position it would have been in if the conditions in its contract with ADM had not be breached.

[200] The expenses claimed by DW may be characterized in this manner, as damages for losses suffered as a consequence of ADM’s provision of defective touchscreens. However, some of the damages claimed by DW are more properly characterized as expenses that were incurred in order to mitigate damages; these were expenses incurred by DW to comply with its contractual obligations to its customers, to avoid losing customers and to avoid lawsuits by customers.

[201] While this observation about mitigation-related expenses does not give DW carte blanche to request unreasonable amounts from ADM, it does trigger the well-settled principle that “it does not lie in the mouth of the defendant to be over-critical of good faith attempts by the plaintiff to avoid difficulty caused by the defendant’s wrong.” (Davy Estate v. Egan, 2009 ONCA 763 at para. 25, 97 O.R. (3d) 401.)

1. Replacement of touchscreens

[202] DW claims $168,000.00 representing the cost of replacing 6000 ADM touchscreens with screens purchased from Dawar at a unit cost of $28.00.

[203] DW argued that at least 6000 ADM touchscreens were replaced. Mr. Ho had testified that 5740 had been hand-counted and that this number did not include another 535 that were replaced but not returned to DW because some customers had replaced touchscreens themselves and did not return the defective touchscreens to DW.

[204] DW argued that, while not all of the touchscreens it replaced had failed, in the circumstances, it was entirely appropriate for DW to have replaced touchscreens from the bad batches “proactively” and that, in fact, it was obliged to do so to avoid a greater loss if its customers’ touchscreens continued to fail in the field.

[205] DW argued that to the extent that any touchscreens were replaced beyond a customer’s warranty period, it was appropriate for DW to do so in light of DW’s obligation to have provided customers with products that were of merchantable quality in the first place.

ADM’s position

[206] ADM argued that DW paid too much for the Dawar touchscreens it used to replace the defective ADM touchscreens. ADM noted that for a July 2012 order, instead of $28.00 per touchscreen, DW had paid only $24.90 per touchscreen. ADM argued that, in order to properly mitigate it damages, DW should have paid only $24.90 for the replacement touchscreens as well.

[207] ADM also noted that Mr. Ho testified that some of the ADM touchscreens were replaced with the $24.90 Dawar touchscreens and not the $28.00 Dawar touchscreens but that this was not tracked.

[208] ADM argued that it was not reasonable for DW to have replaced all 6000 touchscreens. It argued that DW replaced touchscreens that had not failed and also touchscreens that its agreements or warranties with customers did not oblige it to replace.

[209] ADM argued that Mr. Ho had agreed that there are likely some touchscreens from the bad batches that are still installed in operational MDTs. ADM says that, consequently, DW cannot say that all 6000 “bad batch” touchscreens were replaced.

[210] ADM also argued that it could not have foreseen at the time it agreed to supply touchscreens to DW that such a sweeping touchscreen replacement would be undertaken by DW. It also argued that it was not DW itself but related business units which made the decision to replace all of the touchscreens. For these reasons, ADM argued that the damages relating to the replacement of all 6000 touchscreens in the “bad batches” are too remote.

Conclusion

[211] For the reasons that follow:

• I find that DW’s decision to replace all 6000 touchscreens, whether they had failed or not, was reasonable in the circumstances; and

• I do not accept ADM’s argument that DW was obliged to negotiate a lower purchase price for the 6000 Dawar touchscreens.

[212] By early 2012, when DW began to purchase the replacement screens, it had been dealing with complaints from angry customers with failing MDTs for some time. By that time, more than four months after it had first reported the touchscreen failures to ADM, it had not received any information from ADM about the cause of the failures that it felt it could rely on.

[213] Richard Abrahams, the European Operations Manager of the DW affiliate Digital Dispatch, testified about the impact the defective touchscreens had had on the taxi operations of several customers, including major customers in Paris, Dusseldorf, Stockholm and Helsinki. Mr. Abrahams testified that had DW not taken swift action, customers would have terminated their contracts, taken legal action or both.

[214] If the cost of the replacement touchscreen is characterized as damages, I find that it was foreseeable at the time ADM agreed to supply DW with touchscreens that if ADM supplied DW with touchscreens with defects that appeared to DW to be batch-related, and if ADM could not provide DW with assurances that the defects were not batch-related, DW would conclude that it was obliged to replace all of the touchscreens from the “bad batches” that were installed in MDTs it had sold to customers.

[215] If the cost of the replacement touchscreens is characterized as an expense incurred to mitigate damages, I accept DW’s submission that had it not decided to replace all 6000 touchscreens “proactively” and had instead waited for customers’ touchscreens to fail before replacing them, the loss to DW attributable to the defective touchscreens had the potential to be much higher than it ultimately was. DW’s decision to replace all 6000 touchscreens was, therefore, an appropriate step taken in mitigation of the damages it ultimately would have claimed from ADM.

[216] I do not accept ADM’s argument that DW should have driven a harder bargain with Dawar, even though the evidence showed that DW was in fact able to drive a better bargain with Dawar at a later date, when it purchased a large order of 7500 touchscreens. In early 2012, DW was under pressure to address customer complaints quickly; it decided to replace all of the “bad batch” touchscreens and, in February of 2012, it told its customers that it would so. DW needed replacement touchscreens and it needed them quickly. DW later learned that in January, 2012, ADM’s touchscreen supplier, Luxe, had identified a defect in the touchscreens that ADM had supplied to DW, had apologized, had asked ADM to return the defective touchscreens if there were customer complaints and had also offered further assistance. ADM did not pass on any of this information to DW. Given this backdrop, ADM’s suggestion that DW had acted unreasonably by replacing all 6000 touchscreens in the “bad batches” and that it should have insisted on paying $24.90 instead of $28.00 for replacement touchscreens is a brave but untenable position.

[217] I find on the evidence that at least 6000 ADM touchscreens were in fact replaced.[^8]

[218] I award DW $168,000.00 for replacement touchscreens, representing 6000 touchscreens at $28.00 per touchscreen. (I will deal with the parties’ set-off arguments, below.)

2. Labour costs

[219] DW claims $191,757.00 in labour costs, representing 4677 touchscreen replacements, requiring one hour of labour at $41.00/hour, which it estimated to be its standard hourly rate for maintenance work in 2012.

[220] From a record of touchscreen replacements on a per-customer basis, DW confirmed 5,712 touchscreen replacements but then subtracted 1,035 that had been carried out by DW customers and not by DW itself.

[221] Mr. Ho testified that DW’s repair records showed an average of 42 minutes for each repair. Mr. Ho said that DW estimated that an additional 18 minutes per unit were required for packaging, paperwork and coordination of the process.

ADM’s position

[222] ADM argued DW is not entitled to any damages for labour costs because its employees are paid regardless of how they are deployed and employee salaries are a fixed overhead cost. ADM argued that DW had suffered no out-of-pocket loss relating to labour.

[223] ADM argued that the number of touchscreens DW said had been replaced by its employees was only an estimate and not a hard number and that the one hour per repair estimate was really only a guess. ADM argued that the replacements required less time than 42 minutes, particularly in cases in which no diagnosis of why the MDT was failing was required and all that was involved was the replacement of a used touchscreen with a new one.

[224] ADM argued that the 18 minutes attributable to touchscreen replacement-related administration had not been measured and was a number chosen to bring the total repair time to one hour, which was the minimum repair charge in a service pricing document and that the administrative work would have been carried out by employees who worked at an hourly rate of less than $41.00.

[225] ADM argued that any award of damages to DW for labour costs would be a windfall for DW.

Conclusion

[226] I find that DW’s claim for the damages for the cost of labour associated with the touchscreen replacements is an appropriate claim. As with the claim for damages representing the replacement cost of the touchscreens, I find the claim for the cost of labour to be appropriate whether it is characterized as a loss suffered as a consequence of the provision of defective touchscreens or, as could argued particularly in the case of touchscreens that were replaced although they were not known to be defective, as an expense incurred to mitigate damages.

[227] DW referred me to several cases in which internal costs, including labour costs and office and overhead expenses were awarded (Canadian Pacific Railway v. Fumagalli (1962), 1962 438 (BC CA), 38 D.L.R. (2d) 110, [1962] B.C.J. No. 176 (C.A.); Ontario (Hydro-Electric Power Commission) v. Mather (1954), [1954] O.W.N. 382, [1954] O.J. No. 79 (C.A.); British Columbia Telephone Co. v. Shell Can Ltd. (1987), 1987 2777 (BC SC), 13 B.C.L.R. (2d) 210, 5 A.C.W.S. (3d) 106 (S.C.). These cases supported the proposition that these damages are recoverable, provided that they flow naturally from the act complained of; they must also be reasonable.

[228] The case relied upon by ADM in which the court rejected a claim for damages for the cost of internal labour (PCM Technologies v. O’Toole, 2012 ONSC 2534, 217 A.C.W.S. (3d) 581) turned on its facts and I did not find it to be of assistance.

[229] Having accepted that damages for labour costs are recoverable, I turn to the evidence in support of DW’s claim. I accept that DW’s claim under this heading is based on estimates and I do not consider that to be fatal to the claim. I do, however, take issue with the amount claimed.

[230] On cross-examination, Mr. Ho admitted that the repair times in the database DW relied on to calculate its 42-minute average repair time included some unrelated repairs in addition to the touchscreen replacement. Also on cross-examination, Mr. Ho was shown a document DW had produced in 2013, which provided an estimate of 15 minutes for each touchscreen replacement. Mr. Ho could not explain the 15-minute estimate but agreed that it would have been accurate at the time. Mr. Ho agreed that the 18-minute estimate for packaging and administration was just that, an estimate, and that it had not been measured. There was some evidence that 18 minutes was likely chosen because when added to the 42 minutes the total was one hour.

[231] With respect to the $41.00 per hour rate, Mr. Ho agreed that the employees who would have done the packaging and administration would have been paid less than the repair technicians but he could not say how much less.

[232] I accept Mr. Ho’s evidence with respect to the estimated number of touchscreen replacements made by DW employees (4,677). I also accept that $41.00 per hour is an appropriate hourly rate for the repair work. Based on Mr. Ho’s evidence on cross-examination, however, I do not accept the 42-minute estimate for the repair. Although the 18-minute estimate for packaging and administration appears to have been chosen only because it brought the 42 minutes up to an hour, it did not strike me as an unreasonable amount of time for the work involved. That said, I do not accept that $41.00 per hour should be applied to time for packaging and administration.

[233] I find the document DW produced in 2013 that referred to 15 minutes per repair to be persuasive, although I also find that both the early touchscreen replacements that would have required a diagnosis of the reason for the MDT failure before the touchscreen was replaced and also any replacement that was not entirely routine would have taken longer. To also account for these situations, instead of 15 minutes, I will allocate 20 minutes for each touchscreen replacement.

[234] Although there was no evidence about the standard labour rate for employees who did packaging and administrative work, I find that $20.50, representing half of the rate for the repair technicians, is reasonable.

[235] I award DW damages for labour costs in the amount of $92,698.14. This represents 4,677 touchscreen replacements at a cost of $19.82/touchscreen. The $19.82 represents 20 minutes of repair technician time at $41.00/hour, or $13.67 per touchscreen, plus 18 minutes of packaging and administration at $20.50/hour, or $6.15 per touchscreen.

3. Shipping costs

[236] DW claims the cost of shipping the MDTs to its repair centres to have their touchscreens replaced and the cost of returning the MDTs to its customers.

[237] Based on an estimate from FedEx of the cost of shipping a 10-kilogram package from Richmond, B.C. to Inglewood, California, DW estimated that it cost roughly $10.00 to ship each MDT each way.

[238] DW said that it is relying on estimates rather than receipts because it has thousands of shipping receipts on file and it could not determine which receipts applied to shipping related to the touchscreen repairs.

[239] DW claims $114,240.00, representing 5,712 touchscreens multiplied by $20.00.

ADM’s position

[240] ADM argued that because 1035 of the 5,712 touchscreen replacements were “self-repairs”, meaning that they were replaced by DW’s customers and not at DW repair centres, in these cases, MDTs would not have been shipped to and from DW repair centres.

[241] ADM argued that the evidence showed that the 1035 “self-repairs” were made by the following DW customers: SCR (170), G7 (700) AreaSat (75) and Yellow Cab Milwaukee (90).

[242] ADM argued that in addition to the 1035 “self-repairs”, touchscreen replacements carried out in Stockholm (999), Helsinki (690) and Dusseldorf (424) were carried out on-site and, again, MDT shipment would not have been necessary.

[243] ADM argued that, in total, 3,148 (1,035 + 999 + 690 + 424) of the 5,712 touchscreens that were replaced were replaced without an MDT being shipped to and from a DW repair centre.

[244] ADM argued that because DW was relying on estimates instead of receipts, there was no evidence of where MDTs were being shipped or how many MDT shipments DW actually paid for.

[245] ADM also argued that Mr. Ho had testified that, typically, a customer would pay for 50 per cent of the shipping cost.

Conclusion

[246] While, as acknowledged by DW, it would be preferable to have receipts in support of DW’s shipping costs, I accept Mr. Ho’s evidence that DW incurred expenses relating to MDT shipments that were necessary in order to replace defective touchscreens.

[247] While the amount DW is claiming, $10.00 per MDT in each direction, is based on a shipment between Richmond, B.C. and Ingleside, California and is therefore just an estimate of what the typical shipment cost might be, given the relative locations of DW’s repair centres and its customers, some of which are located close to repair centres but some of which are scattered around the world, I consider the $10.00 unit costs to be reasonable.

[248] I do not accept DW’s claim that 5,712 MDTs were shipped. As ADM argued, the evidence showed that DW customers in Stockholm, Helsinki and Dusseldorf had their MDTs repaired on-site or nearby. (In the case of Taxi Stockholm, for example, both the customer’s garage and the repair centre were located in Stockholm.) For repairs conducted on-site, replacement touchscreens would have been shipped to these locations, but MDTs were not. There was no evidence at trial with respect to the cost of shipping touchscreens.

[249] I do not accept ADM’s argument that in a situation such as this a customer should be required to pay 50 per cent of the shipping cost.

[250] I will reduce the number of MDTs DW argued the shipping fee should apply to (5,712) by 3,148 and multiply the remainder of 2,564 by $20.00.

[251] I award DW $51,280.00 for shipping costs.

4. Cost of on-site technicians

[252] DW claimed $2,886.89, representing the travel costs of two repair technicians who were dispatched to customer locations in Chicago and Dusseldorf respectively to do on-site touchscreen replacements. Both customers had experienced a high rate of touchscreen failures.

[253] ADM argued that these damages are too remote in that it could not have known at the time it entered into its contract with DW that it might be called upon to pay for flights for repair technicians. ADM also argued that the documents DW relied on to support the amount claimed do not confirm that DW suffered a loss.

Conclusion

[254] I accept DW’s evidence that the amount claimed was incurred in order to respond to the needs of two customers with high touchscreen failure rates.

[255] If the expenses are characterized as damages, I do not consider them to be too remote in the circumstances. I also consider them to be reasonable expenses incurred in mitigation of damages.

[256] If in arguing that there is no evidence that DW incurred these expenses, ADM is suggesting that, because the invoices and credit card statements are in the names of employees, rather than in DW’s name, the employees must have paid for these expenses themselves rather than requesting reimbursement from DW, I do not accept this argument.

[257] I award DW the $2,886.89 for the cost of the on-site technicians.

5. Fleet-wide replacement of touchscreens for two customers

[258] DW claims $115,967.00 representing the cost of replacing all ADM touchscreens, and not just the touchscreens from the “bad batches”, supplied to two of its major European customers, Taxi Stockholm and HTD Helsinki.

[259] In addition to replacing touchscreens from the “bad batches”, DW replaced an additional 523 ADM touchscreens for Taxi Stockholm and 780 ADM touchscreens for HTD Helsinki.

[260] The amount claimed by DW includes the cost of the replacement touchscreens. It also includes labour costs calculated on the same basis as it calculated labour costs associated with the replacement of the “bad batch” touchscreens, i.e., at $41.00 per hour and one hour per touchscreen. It also includes shipping at $20.00 per replacement.

[261] DW argued that given the importance to DW of these customers, the fleet-wide replacement of the touchscreens was reasonable.

ADM’s position

[262] ADM argued that DW’s decision to replace all of Taxi Stockholm and HTD Helsinki’s touchscreens was influenced by other problems these customers were having. ADM argued that Taxi Stockholm had been having problems with emergency calls and other communications issues and that HTD Helsinki had requested replacement of its modems.

[263] ADM argued that the decision to replace all of the ADM touchscreens for these two customers was not made by DW but rather by related business units, which were a separate legal entity.

[264] ADM argued that damages related to the fleet-wide touchscreen replacements are too remote because ADM could not reasonably have foreseen that touchscreens that were not defective would be replaced.

[265] ADM also argued that because a separate legal entity made the decision to replace all of the touchscreens of these two customers, that all customer touchscreens would be replaced, and not just defective customer touchscreens, could not reasonably have been contemplated by ADM at the time ADM entered into its contract with DW.

Conclusion

[266] Based on all of the evidence and particularly the evidence of DDS European Operations Manager Richard Abrahams, I find that the replacement of all of the Taxi Stockholm and HDT Helsinki touchscreens was a reasonable step for DW to have taken to mitigate the damages suffered as a result of the defective touchscreens. Consequently, I will not specifically address ADM’s remoteness argument.

[267] Taxi Stockholm and HDT Helsinki were both major customers of DW.

[268] By May of 2012, Taxi Stockholm was clearly exasperated by the touchscreen failures, which were negatively affecting its business. In a strongly-worded letter dated May 14, 2012, Taxi Stockholm demanded that all ADM touchscreens be replaced. Taxi Stockholm also threatened to cancel its purchase agreement with DW, which Mr. Abrahams testified was worth approximately 900,000 Euros per year.

[269] Mr. Abrahams testified that, because of the high touchscreen failure rate, HTD Helsinki had also demanded that all ADM touchscreens be replaced and had threatened legal action.

[270] If DW had refused to replace all of Taxi Stockholm’s and HDT Helsinki’s touchscreens, and these customers had canceled their contracts and/or started legal actions against DW, it would have been open to DW to look to ADM for damages for the lost contracts and for legal expenses. “The supply of defective goods often involves the plaintiff in liability to sub-buyers, and it has been frequently held that the plaintiff is entitled to recover compensation for such losses, and for the costs of reasonably defending legal proceedings.”[^9]

[271] I accept ADM’s argument that there was evidence that both customers were having other issues with the operation of the MDTs, in addition to the touchscreen failures. However, there was also ample evidence that it was the problems with the touchscreens that prompted the threats of contract cancellation and litigation.

[272] I also find that if, in February of 2012 or at any time before DW agreed to replace all of the Taxi Stockholm and HTD Helsinki touchscreens, ADM had shared with DW the information ADM had received from Luxe identifying the root causes of the touchscreen failure, DW might have been able to convince Taxi Stockholm and/or HTD Helsinki that they had no reason to be concerned about the quality of touchscreens pre-dating those in the “bad batches.” ADM chose not to share this information with DW and, to quote once again from Davy Estate v. Egan, supra, “it does not lie in the mouth of” ADM to complain about the steps DW took in order “to avoid difficulty” caused by the defective product supplied by ADM.

[273] I award DW the cost of replacing 523 additional Taxi Stockholm touchscreens and 780 additional HDT Helsinki touchscreens at a cost of $28.00/touchscreen. I also award DW labour costs at a rate of $19.82/touchscreen. I award no shipping costs as there was evidence both customers replaced touchscreens either on-site or locally. The total award for the fleet-wide replacement is $62,309.46.

6. Costs associated with internal engineering and project management resources

[274] DW claimed $19,992.00 for costs associated with engineering and project management.

[275] These costs relate to DW’s investigation into the touchscreen problem, including finding a suitable replacement touchscreen, organizing and putting into place the retrofit program and communicating with management and customers.

[276] DW is claiming 357 hours of employee time at DW’s standard labour rate for research and development, which DW estimated to be $56.00/hour.

ADM’s position

[277] ADM argued that there is no reliable foundation for this claim. ADM argued that Mr. Ho admitted on cross-examination that the spreadsheet used to support this claim was prepared in 2013 based on reconstructed information and that no contemporaneously-prepared documents were prepared to support this spreadsheet.

[278] ADM also argued, as it did for the labour cost damages claimed by DW, that DW suffered no out-of-pocket loss in respect of these costs and that an award under this head of damages would represent a windfall.

Conclusion

[279] I accept DW’s claim for costs associated with engineering and project management on the same basis as its claim for labour costs. However, I question the reliability of the spreadsheet relied upon as evidence in support of this claim because, while it appears to be a detailed breakdown of tasks performed by date, employee and time spent, Mr. Ho admitted that it was a reconstruction created one year after the date of its last entry.

[280] I will discount DW’s claim by a modest amount to account for my concern about the reliability of the spreadsheet and award DW $15,000.00 for engineering and project management costs.

Issue #3: Is DW liable to ADM for the two unpaid invoices?

[281] In its action, ADM claims $36,981.00 representing invoices dated December 20, 2011 and January 16, 2012[^10], each in the amount of $18,490.50, which were sent to DW and remain unpaid.

[282] That ADM’s invoices of December 20, 2011 and January 16, 2012 each related to 1000 touchscreens, that each was in the amount of $18,490.50 and that both remain unpaid is not in dispute.

[283] I find that the two invoices totaling $36,981.00 for which the plaintiff seeks payment in its claim were not paid and that the plaintiff is entitled to this amount.

[284] The $36,981.00 shall be set off against the amount awarded to DW for the cost of replacing the touchscreens.

[285] Although DW was credited, on paper, for $8,920.00 for 484 touchscreens it returned under RMA (“Return Material Authorization”) 202-008, it was never actually reimbursed for this amount nor was it reimbursed for the 80 touchscreens it returned under RMA 2011-090. However, as I have awarded DW compensation for 6000 replacement touchscreens, to also award it the amount owed under the two RMAs, would represent double recovery. This was acknowledged by DW which was not claiming both amounts.

FINAL DISPOSITION

[286] In conclusion, I find that ADM is liable to DW for damages in the following amounts:

Damages Amount 1. The replacement cost of 6,000 touchscreens (the touchscreens in the six “bad batches”): $168,000.00 LESS The amount of ADM’s two unpaid invoices: $36,981.00 $131,019.00 2. Labour costs associated with the replacement of the touchscreens $92,698.14 3. Freight costs associated with the replacement of the touchscreens $51,280.00 4. The cost of on-site technicians who assisted with the replacement of the touchscreens $2,886.89 5. The cost of the fleet-wide replacement of ADM touchscreens not from the six “bad batches” but replaced due to customer demands $62,309.46 6. Engineering and project management costs associated with the touchscreens $15,000.00 TOTAL $355,193.49

PREJUDGMENT INTEREST AND COSTS

[287] The issues of prejudgment interest and costs remain outstanding.

[288] If the parties cannot agree on these issues:

• The defendant/plaintiff by counterclaim may deliver written submissions of no more than six pages in length within 14 days of the date of this decision;

• The plaintiff/defendant by counterclaim may deliver written submissions in response of no more than six pages in length within 14 days of the date of receipt of the defendant/plaintiff by counterclaim’s submissions; and

• The defendant/plaintiff by counterclaim may deliver any reply submissions of no more than three pages in length within seven days of the date of receipt of the plaintiff/defendant by counterclaim’s submissions.

[289] At my request, following the trial, the parties exchanged cost outlines and provided me with their outlines in sealed envelopes, which I have not yet opened. I will consider these outlines in conjunction with the parties’ written submissions.

[290] The parties’ submissions may be filed by sending them to me, care of the trial coordinator.

[291] If the parties agree that oral submissions with respect to prejudgment interest and costs either would be preferable to written submissions or should be made in addition to their written submissions, they may contact the trial coordinator to request an appointment.

Madam Justice H. J. Williams

Date: 2018/05/24

COURT FILE NO.: 12-54537

DATE: 2018/05/24

SUPERIOR COURT OF JUSTICE - ONTARIO

RE: 1004335 Ontario Ltd. c.o.b. A.D. Metro

AND

DW Digital Wireless LP

BEFORE: Madam Justice H. J. Williams

COUNSEL: Andrew D. Ferguson, counsel for the plaintiff; defendant by counterclaim

Kiran Patel, counsel for the defendant; plaintiff by counterclaim

HEARD: September 5, 6, 7, 8, 11, 12, 13, 14, 15 and 19, 2017

REASONS FOR DECISION

Madam Justice H. J. Williams

Released: 2018/05/24

[^1]: Although the parties referred to U.S. and Canadian currency in their pleadings, in a post-trial letter dated September 22, 2017, they confirmed that in light of the exchange rate at the relevant time, they had agreed that all amounts sought by the parties would be in Canadian dollars.

[^2]: The parties’ experts described the touchscreens as having a “top” or “front” plastic layer known as a “cover sheet” and a “bottom”, “base” or “back” glass layer which they described as “the glass”.

[^3]: DW eventually identified six “bad batches” with the following date codes: 37/38/39-2010; 45-2010; 09-2011; 11-2011; 14-2011 and 19-2011.

[^4]: As noted above, 70 degrees Celsius was the temperature up to which ADM had assured DW the touchscreens would operate.

[^5]: At trial, DW reduced this claim to $191,757.00.

[^6]: At trial, DW reduced this claim to $115,967.00.

[^7]: At trial, DW reduced this claim to $19,992.00.

[^8]: I had also understood that it had been agreed by the parties that 6,000 touchscreens had been replaced. Paragraph 40 of the parties’ Statement of Agreed Facts reads as follows: “DW implemented a program in which it replaced the 6,000 touchscreens sourced from the six alleged faulty batches with new touchscreens that it purchased from a different supplier.”

[^9]: Waddams, The Law of Damages, Looseleaf Edition (Toronto: Thomson Reuters Canada Limited, 2017) at 1.2720

[^10]: The plaintiff’s amended statement of claim refers to invoices dated January 16, 2012 and February 15, 2012 instead of December 20, 2011 and January 16, 2012. However, the invoice dates in the parties’ statement of agreed facts and the invoices appended to the statement of agreed facts are December 20, 2011 and January 16, 2012. It is agreed by the parties that two invoices adding up to $36,981.00 remain unpaid.