





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



DATE: 20110506



DOCKET: C51518



COURT OF APPEAL FOR ONTARIO



Rosenberg, Feldman and Juriansz JJ.A.



BETWEEN



Muskoka Fuels



Plaintiff (Respondent)



And



Hassan Steel Fabricators Limited



Defendant (Appellant)



Shannon Puddister and Louise Moher, for the appellant



David Zuber and Karim Hirani, for the respondent



Heard: February 1, 2011



On appeal from the judgment of
          Justice Susan E. Healey of the Superior Court of Justice dated December 11,
          2009, with reasons reported at 2009 CanLII 78887 (ON S.C.).



Juriansz J.A.:



[1]

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

[2]

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

[3]

I would dismiss the appeal and allow the cross-appeal.

Facts

[4]

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

[5]

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

[6]

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

[7]

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

The Trial Decision

Limitations Defence

[8]

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

[9]

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

Sale of Goods Act

[10]

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

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

[11]

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

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

[12]

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

(1)

the course of the sellers business;

(2)

knowledge on the part of the
    seller of the purpose of the goods; and

(3)

reliance
on the sellers skill or judgment.

[13]

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

Negligence

[14]

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

[15]

Accordingly, the trial judge granted judgment for the
    respondent.

Analysis

[16]

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

[17]

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

[18]

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

[19]

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

[20]

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

[21]

On this analysis of the
Sale of Goods Act
, and not on the trial judges analyses of
    negligence and the
Sale of Goods Act
,
    I would dismiss the appeal.

[22]

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

[23]

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

R.G. Juriansz J.A.

I agree M. Rosenberg
    J.A.

I agree K. Feldman
    J.A.

RELEASED: May 6, 2011


