Syncrude Canada Ltd. et al. v. Hunter Engineering Co. and Allis-Chalmers Canada Ltd. et al., (1989) 92 N.R. 1 (SCC)

• Judge: Dickson, C.J.C., Estey, McIntyre, Wilson, Le Dain, La Forest and L'Heureux-Dubé, JJ.
• Court: Supreme Court (Canada)
• Case Date: March 23, 1989
• Jurisdiction: Canada (Federal)
• Citations: (1989), 92 N.R. 1 (SCC);[1989] 1 SCR 426;1989 CanLII 129 (SCC);57 DLR (4th) 321;35 BCLR (2d) 145;[1989] 3 WWR 385;[1989] SCJ No 23 (QL);92 NR 1;JE 89-571;14 ACWS (3d) 277;[1989] ACS no 23

Syncrude Can. v. Hunter Eng. Co. (1989), 92 N.R. 1 (SCC)

MLB headnote and full text

[French language version follows English language version]

[La version française vient à la suite de la version anglaise]

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Hunter Engineering Company Inc., Hunter Engineering Company Inc., carrying on business as Hunter Machinery Canada Ltd., Integrated Metal Systems Canada Ltd. and Allis-Chalmers Canada Ltd. (appellants) v. Syncrude Canada Ltd., Canada-Cities Service Ltd., Esso Resources Canada Limited, Petro-Canada Exploration Inc., Gulf Canada Resources Inc., Pan-Canadian Petroleum Limited, Province of Alberta, Alberta Energy Company Limited, Hudson's Bay Oil and Gas Limited and Petrofina Canada Ltd. (respondents)

(19773, 19950)

Indexed As: Syncrude Canada Ltd. et al. v. Hunter Engineering Co. and Allis-Chalmers Canada Ltd. et al.

Supreme Court of Canada

Dickson, C.J.C., Estey, McIntyre, Wilson, Le Dain, La Forest and L'Heureux-Dubé, JJ.

March 23, 1989.

Summary:

In 1975 Syncrude contracted with Hunter U.S. for 32 "mining gearboxes", which were manufactured by ACO Sales and Engineering (subcontractor). Syncrude also contracted with Allis-Chalmers for a $4.1 Million extraction conveyor system, which included four "extraction gearboxes", which were also built by ACO according to the same design as the "mining gearboxes". In 1977 Syncrude contracted with Hunter Canada for 11 more "mining gearboxes". Hunter Canada fraudulently claimed to be the Canadian arm of Hunter U.S., when in fact it was incorporated by Hunter U.S. employees without the knowledge of Hunter U.S. Hunter U.S. discovered the deception and commenced a "passing off" action against Hunter Canada. Syncrude contracted directly with ACO at the Hunter Canada contract price and obtained a waiver from Hunter Canada of its rights under the contract. Syncrude unilaterally established a trust fund into which it paid the money due under the Hunter Canada contract. Hunter U.S. refused to become a party to the trust agreement. The trust agreement provided in part that (1) ACO was to be paid when the gearboxes were complete; (2) the trustee was to hold the balance of funds pending the outcome of the Hunter U.S.-Hunter Canada litigation and (3) the successful litigant was entitled to the balance if it agreed to assume the service and warranty obligations under the Hunter Canada contract. Hunter U.S. was successful, but refused to assume the obligations. In 1979 defects were discovered in both the mining and extraction gearboxes. Syncrude repaired them. Hunter U.S. and Allis-Chalmers both disclaimed liability on the ground that their respective contractual warranty periods had expired. Syncrude and others sued Hunter U.S. and Allis-Chalmers for the repair costs. Allis-Chalmers, by third party notice, claimed contribution or indemnity from Hunter U.S. on the ground that the defects were caused by Hunter U.S.'s faulty design.

The British Columbia Supreme Court, in a judgment reported 27 B.L.R. 59, held that (1) the defects resulted from faulty design by Hunter U.S.; (2) the contractual liability of both Hunter U.S. and Allis-Chalmers was excluded by the expiration of the contractual warranty periods; (3) Hunter U.S. was liable for breach of the Ontario Sale of Goods Act statutory warranty that the gearboxes were reasonably fit for the purpose (i.e., the Hunter U.S. contract did not exclude application of statutory warranties); (4) Allis-Chalmers' contract expressly excluded the application of statutory warranties and there was no fundamental breach to negate the clause excluding statutory warranties; and (5) Hunter U.S. was not entitled to the trust fund under the doctrines of constructive trust or unjust enrichment. Syncrude appealed the finding that there was no fundamental breach; Hunter U.S. and Allis-Chalmers cross- appealed the other findings by the trial judge.

The British Columbia Court of Appeal, in a judgment reported 68 B.C.L.R. 367, affirmed that Hunter U.S. was liable for breach of the statutory warranty. The Court of Appeal reversed the trial judge and held that Allis-Chalmers committed fundamental breach and that liability for fundamental breach was not excluded. The Court of Appeal also held that Hunter U.S. was entitled to the trust fund on the basis of unjust enrichment. Hunter U.S. and Allis-Chalmers appealed and Syncrude cross-appealed the award of the trust fund to Hunter U.S.

The Supreme Court of Canada allowed Allis-Chalmers' appeal and Syncrude's cross-appeal and dismissed Hunter U.S.'s appeal. The court affirmed that Hunter U.S. was liable under the Sale of Goods Act for the design defects which caused the gearboxes to fail; the exclusion clause in the Hunter U.S. contract was not sufficient to preclude the application of statutory warranties; Allis-Chalmers did not commit fundamental breach and the warranty in the Allis-Chalmers' contract clearly excluded liability; and there was no basis for finding that Hunter U.S. was entitled to the trust fund.

Building Contracts - Topic 3428

Liability of builder - Defective workmanship or design - Design - Syncrude contracted with Hunter U.S. for "mining gearboxes" - The gearboxes failed because of design defects - Hunter U.S. claimed it was not responsible, because it merely constructed the gearboxes according to specifications provided by Syncrude's agent - The Supreme Court of Canada affirmed that "design" was Hunter U.S.'s responsibility - The specifications merely stated what the gearboxes were required to do and the conditions under which they would operate - It was up to Hunter U.S. to determine how to construct the gearboxes and what materials to use - The court noted that the purchase order clearly put the responsibility of "correct and adequate design" on Hunter U.S. - See paragraphs 23 to 26, 79 to 88.

Contracts - Topic 3730

Performance or breach - Fundamental breach - What constitutes - Syncrude contracted with Allis-Chalmers for a $4.1 Million extraction conveyor system, which included four "extraction gearboxes" to be used in conjunction with four of the 14 conveyor systems - The gearboxes were defective and were repaired - The repair costs totalled 85% of the original cost of the gearboxes, but only a small portion of the total contract price - The gearboxes were not fit for the purpose, but did last for 15 months of their 10 year life expectancy and were repairable - Syncrude claimed the defects amounted to a fundamental breach of the contract - The Supreme Court of Canada held that there was no fundamental breach, because Syncrude was not denied "substantially the whole benefit" of the contract - See paragraphs 32 to 37.

Contracts - Topic 3735

Performance or breach - Fundamental breach - Exclusionary clause - Effect of - The Supreme Court of Canada discussed when liability of a contracting party for fundamental breach was excluded by a contractual warranty - Wilson, J. (L'Heureux-Dube, J., concurring) and Dickson, C.J.C. (La Forest, J., concurring), agreed that there was no longer a rule that fundamental breach of contract automatically precluded the contract breaker from relying on a contractual exclusionary clause to exclude liability for the fundamental breach - Wilson, J., preferred the approach whereby the court would determine, after a breach occurred, whether it was fair and reasonable to enforce the exclusionary clause - Wilson, J., did not wish to dispense with the doctrine of fundamental breach and rely solely on the principle of unconscionability - Dickson, C.J.C., disagreed with Wilson, J. - Dickson, C.J.C., stated that the courts should not assess the reasonableness of enforcing contract terms after having already determined the meaning of the contract based on the ordinary principles of contract interpretation - Dickson, C.J.C., stated that the doctrine of fundamental breach, as far as it related to enforcement of exclusionary clauses, should be abandoned and exclusionary clauses bargained for should be enforced unless they were unconscionable - See paragraphs 38 to 58, 107 to 127.

Contracts - Topic 3735

Performance or breach - Fundamental breach - Exclusionary clause - Effect of - Syncrude contracted with Allis-Chalmers for "extraction gearboxes" - The gearboxes failed for design defects after 15 months - The time limited warranty negotiated between Syncrude and Allis-Chalmers expired after 12 months - The Supreme Court of Canada stated that assuming the gearbox defects constituted a fundamental breach, the exclusionary clause should be enforced to exclude liability - The court noted that both parties were large and commercially sophisticated companies under no pressure in negotiating their contract - The court stated that both parties knew or should have known what they were bargaining for and should accordingly be held to the terms of their contract - There was no "unconscionability" or "unfairness" or "unreasonableness" in enforcing the exclusionary clause excluding liability for fundamental breach.

Sale of Goods - Topic 4106

Conditions and warranties - Implied or statutory terms as to quality or fitness - Fitness or suitability of goods - Syncrude contracted with Hunter U.S. for "mining gearboxes" to drive conveyor belts - The gearboxes were expected to last 10 years before needing to be overhauled, but lasted only 15 months at 60% of their intended workload - Repair costs totalled $400,000, compared with the original purchase price of $464,300 - Hunter U.S. knew the purpose for which the gearboxes were required; Syncrude relied on Hunter U.S.'s expertise and the gearboxes were "goods ... which it is in the course of the seller's business to supply" - The Supreme Court of Canada affirmed that the gearboxes were not "reasonably fit" for the purpose as required under s. 15(1) of the Ontario Sale of Goods Act - See paragraphs 30 to 31.

Sale of Goods - Topic 4117

Conditions and warranties - Implied or statutory terms as to quality or fitness - Exclusionary clause - Validity of - Syncrude and Hunter U.S. contracted for "mining gearboxes" - The gearboxes failed because of design defects, which were Hunter U.S.'s responsibility - The contractual warranty period had expired - The contract was to be governed by Ontario law - The issue was whether the Ontario Sale of Goods Act statutory implied warranty of fitness for purpose applied or whether the application of statutory warranties was excluded under the contract - The Supreme Court of Canada stated that exclusionary clauses were to be strictly construed against the party invoking them and clear and unambiguous language was required to oust an implied statutory warranty - The court stated that the Hunter U.S. contract contained no such explicit exclusion of statutory warranties, therefore Hunter U.S. was bound by the statutory warranty as to fitness - See paragraphs 27 to 31.

Sale of Goods - Topic 4117

Conditions and warranties - Implied or statutory terms as to quality or fitness - Exclusionary clause - Validity of - Syncrude contracted with Allis-Chalmers for "extraction gearboxes" - The gearboxes failed because of design defects and the contractual warranty period had expired - The contract was to be governed by Ontario law - The issue was whether the Ontario Sale of Goods Act implied statutory warranty respecting fitness of goods applied or whether statutory warranties were expressly excluded by the contract - The contract stated that "no other warranty or conditions, statutory or otherwise shall be implied" - The Supreme Court of Canada stated that the explicit exclusion of statutory warranties precluded the application of the Sale of Goods Act to the contract - See paragraph 29.

Trusts - Topic 2346

Constructive trusts - Basis for imposition - Unjust enrichment - Syncrude contracted with Hunter Canada for certain goods - Hunter Canada fraudulently claimed to be the Canadian arm of Hunter U.S. - Hunter U.S. sued Hunter Canada - Pending determination of the action Syncrude contracted directly with the subcontractor who was to manufacture the goods and agreed to pay it the price to be paid by Hunter Canada - Syncrude voluntarily paid the profit Hunter Canada would have received into a trust fund - The trust agreement stated, inter alia, that the successful litigant would be entitled to the fund on the condition that it assumed the service and warranty obligations under the Hunter Canada contract - Hunter U.S. was successful in its action and claimed the trust fund on the basis of constructive trust, but refused to assume the warranty obligations - The Supreme Court of Canada held that Hunter U.S. was not entitled to the trust fund, because it failed to perform the condition to entitlement and there was no unjust enrichment and therefore no possibility of a constructive trust - The court stated that Hunter U.S. had no higher rights than Hunter Canada, which had none, because Syncrude justifiably rescinded the contract and obtained a waiver of Hunter Canada's rights as a precaution - The court stated that Syncrude need not have established the trust fund and it was not an admission of liability - See paragraphs 129 to 169.

Cases Noticed:

Wallis, Son & Wells v. Pratt & Haynes, [1911] A.C. 394 (H.L.), refd to. [para. 28].

R.W. Heron Paving Ltd. v. Dilworth Equipment Ltd., [1963] 1 O.R. 201 (H.C.), refd to. [para. 28].

Cork v. Greavette Boats Ltd., [1940] O.R. 352 (C.A.), refd to. [para. 28].

Chabot v. Ford Motor Co. of Canada Ltd. (1982), 138 D.L.R.(3d) 417, refd to. [para. 28].

Suisse Atlantique Société d'Armement Maritime S.A. v. N.V. Rotterdamsche Kolen Centrale, [1967] 1 A.C. 361 (H.L.), refd to. [para. 32].

R.G. McLean Ltd. v. Canadian Vickers Ltd. (1970), 15 D.L.R.(3d) 15 (Ont. C.A.), refd to. [para. 32].

Canso Chemicals Ltd. v. Canadian Westinghouse Co. (No. 2) (1974), 10 N.S.R.(2d) 649; 2 A.P.R. 649; 54 D.L.R.(3d) 517 (C.A.), refd to. [para. 32].

Photo Production Ltd. v. Securicor Transport Ltd., [1980] A.C. 827 (H.L.), folld. [para. 33].

Schofield v. Gafco Enterprises Ltd. (1983), 43 A.R. 262 (C.A.), refd to. [para. 36].

Peters v. Parkway Mercury Sales Ltd. (1975), 10 N.B.R.(2d) 703; 4 A.P.R. 703 (C.A.), refd to. [para. 36].

Keefe v. Fort (1978), 27 N.S.R.(2d) 353; 41 A.P.R. 353; 89 D.L.R.(3d) 275 (C.A.), refd to. [para. 36].

Beldessi v. Island Equipment Ltd. (1973), 41 D.L.R.(3d) 147 (B.C.C.A.), dist. [para. 37].

Karsales (Harrow) Ltd. v. Wallis, [1956] 1 W.L.R. 936 (C.A.), refd to. [para. 39].

Harbutt's "Plasticine" Ltd. v. Wayne Tank and Pump Co., [1970] 1 Q.B. 447 (C.A.), refd to. [para. 39].

Traders Finance Corp. v. Halverson (1968), 2 D.L.R.(3d) 666 (B.C.C.A.), refd to. [para. 39].

Beaufort Realties (1964) Inc. v. Belcourt Construction (Ottawa) Ltd. and Chomedey Aluminum Co. Ltd., [1980] 2 S.C.R. 718; 33 N.R. 460, refd to. [para. 41].

Hayward v. Mellick (1984), 2 O.A.C. 161 (C.A.), refd to. [para. 43].

Waters v. Donnelly (1884), 9 O.R. 391 (Ch.), refd to. [para. 52].

Morrison v. Coast Finance Ltd. (1965), 55 D.L.R.(2d) 710 (B.C.C.A.), refd to. [para. 52].

Harry v. Kreutziger (1978), 95 D.L.R. (3d) 231 (B.C.C.A.), refd to. [para. 52].

Taylor v. Armstrong (1979), 99 D.L.R. (3d) 547 (Ont. H.C.), refd to. [para. 52].

Davidson v. Three Spruces Realty Ltd. (1977), 79 D.L.R.(3d) 481 (B.C.S.C.), refd to. [para. 53].

Gillespie Brothers & Co. v. Roy Bowles Transport Ltd., [1973] Q.B. 400 (C.A.), refd to. [para. 53].

Ailsa Craig Fishing Co. v. Malvern Fishing Co., [1983] 1 All E.R. 101 (H.L.), refd to. [para. 58].

Becker v. Pettkus, [1980] 2 S.C.R. 834; 34 N.R. 384, refd to. [para. 60].

Sorochan v. Sorochan, [1986] 2 S.C.R. 38; 69 N.R. 81; 74 A.R. 67, refd to. [para. 60].

Deglman v. Guaranty Trust Co., [1954] S.C.R. 725, refd to. [para. 60].

Thomas Equipment Ltd. v. Sperry Rand Canada Ltd. (1982), 40 N.B.R.(2d) 271; 105 A.P.R. 271; 135 D.L.R.(3d) 197 (C.A.), refd to. [para. 103].

Schofield v. Gafco Enterprises Ltd., [1983] 4 W.W.R. 135; 43 A.R. 262 (C.A.), refd to. [para. 103].

George Mitchell (Chesterhall) Ltd. v. Finney Lock Seeds Ltd., [1983] 2 All E.R. 737 (H.L.), refd to. [para. 110].

Cain v. Bird Chevrolet-Oldsmobile Ltd. (1976), 12 O.R.(2d) 532 (H.C.), affd. (1977), 88 D.L.R.(3d) 607 (Ont. C.A.), refd to. [para. 114].

B.G. Linton Construction Ltd. v. Canadian National Railway Co., [1975] 2 S.C.R. 678; 3 N.R. 151, refd to. [para. 119].

Statutes Noticed:

Sale of Goods Act, R.S.O. 1970, c. 421, sect. 15 [paras. 11, 95].

Consumer Protection Act, R.S.O. 1980, c. 87, sect. 34(1) [para. 50].

Consumer Protection Act, R.S.N.S. 1967, c. 53, sect. 20C [para. 50].

Consumer Protection Act, R.S.M. 1970, c. C-200; C.C.S.M., c. C-200, sect. 58(1) [para. 50].

Sale of Goods Act, R.S.B.C. 1979, c. 370, sect. 20 [para. 50].

Consumer Product Warranty and Liability Act, S.N.B. 1978, c. C-18.1, sect. 24, sect. 25, sect. 26 [para. 50].

Consumer Products Warranties Act, R.S.S. 1978, c. C-30, sect. 8, sect. 11 [para. 50].

Business Practices Act, R.S.O. 1980, c. 55, sect. 2(b)(vi) [para. 50].

Trade Practice Act, R.S.B.C. 1979, c. 406, sect. 4(e) [para. 50].

Unfair Trade Practices Act, R.S.A. 1980, c. U-3, sect. 4(b), sect. 4(d) [para. 50].

Trade Practices Inquiry Act, R.S.M. 1987, c. T-110; C.C.S.M., c. T-110, sect. 2 [para. 50].

Trade Practices Act, S.N. 1978, c. 10, sect. 6(d) [para. 50].

Business Practices Act, S.P.E.I. 1977, c. 31, sect. 3(b)(vii) [para. 50].

Authors and Works Noticed:

Fridman, Sale of Goods in Canada (2nd Ed. 1979), pp. 203-204 [paras. 12, 78]; 531 [para. 32]; 558 [para. 44].

Fridman, Sale of Goods in Canada (3rd Ed. 1986), p. 286 [para. 28].

Ogilvie, The Reception of Photo Production Ltd. v. Secunicor Transport Ltd. in Canada: Nec Tamen Consumebatur (1982), 27 McGill L.J. 424, p. 441 [para. 44].

Waddams, S.M., "Note" (1981), 15 U.B.C. Law Rev. 189 [para. 42].

Waddams, S.M., Unconscionability in Contracts (1976), 39 Modern Law Rev. 369 [para. 51].

Zeigel, "Comment" (1979), 57 Can. Bar Rev. 105, p. 113 [para. 51].

Waddams, S.M., The Law of Contracts (2nd Ed. 1984), pp. 308 [para. 148]; 349 [para. 58]; 352-353 [para. 124].

Atiyah, P.S., The Sale of Goods (6th Ed. 1980), p. 157 [para. 108].

Waters, The Law of Trusts in Canada (2nd Ed. 1984), pp. 378-382 [para. 144].

Counsel:

Jack Giles, Q.C., and Robert McDonnell, for the appellant, Hunter Engineering Inc. et al.;

D.M.M. Goldie, Q.C., and P.G. Plant, for the appellant, Allis-Chalmers Canada Ltd.;

D.B. Kirkham, Q.C., and Garth S. McAlister, for the respondent, Syncrude Canada Ltd. et al.

Solicitors of Record:

Farris, Vaughan, Wills & Murphy, Vancouver, British Columbia, for the appellants, Hunter Engineering Inc. et al.;

Russel & DuMoulin, Vancouver, British Columbia, for the appellant, Allis-Chalmers Canada Limited;

Owen, Bird, Vancouver, British Columbia, for the respondents.

These appeals and cross-appeal were heard on February 25 and 26, 1988, before Dickson, C.J.C., Estey, McIntyre, Wilson, Le Dain, La Forest and L'Heureux-Dubé, JJ., of the Supreme Court of Canada.

On March 23, 1989, the judgment of the Supreme Court of Canada was delivered in both official languages and the following opinions were filed:

Wilson, J. (L'Heureux-Dubé, J., concurring) - see paragraphs 1 to 66;

Dickson, C.J.C. (La Forest, J., concurring) - see paragraphs 67 to 168;

McIntyre, J. (concurring with Wilson, J., on the appeals and with Dickson, C.J.C., on the cross-appeal) - see paragraphs 169 to 170.

Estey and Le Dain, JJ., did not participate in the judgment.