Some recent decisions from the Ontario courts in Muskoka Fuels v. Hassan Steel Fabricators Limited serve as reminders that liability can be found under the Sale of Goods Act even without the cause of the defect in the subject product being proven, and even though the plaintiff had lost the defective product before the defendant had an opportunity to inspect it.

The case involved a leaking 500 gallon fuel tank and liability for the resulting environmental cleanup costs. The tank was manufactured by the defendant who sold it to the plaintiff. The tank had an expected service life of at least 10 years. Less than five months after the tank was put into service, diesel fuel leaked out of it through a 3/16” diameter hole in the bottom of the tank caused by internal corrosion.  

SPOLIATION

The defendant brought a motion at the opening of trial to strike the Statement of Claim or, alternatively, to preclude the plaintiff’s expert from testifying and to preclude the filing of the expert’s report, on the grounds that the plaintiff spoliated evidence.  

The leak was discovered in January, 2002. In September, 2002 defendant’s counsel advised that he was in the process of retaining an engineer to inspect the tank. By June, 2005 the defendant still had not retained an engineer but was invited to attend an inspection of the tank where samples of steel would be removed for analysis.  

The defendant’s representatives were unable to attend that inspection. In July, 2008 the defendant served an expert’s report, which was prepared without an inspection of the tank or the steel samples taken therefrom. The action was set down for trial and was scheduled to be heard in October, 2008. The defendant obtained an adjournment in order to consider new information that had recently arisen concerning the possible cause of the tank failure, and to obtain further expert reports. The defendant attempted to arrange an inspection of the tank and steel samples, but was told that the plaintiff’s expert had not kept the tank and was unable to locate the steel samples taken from it.  

The trial judge referred to the leading cases in McDougall v. Black & Decker, Cheung v. Toyota, and St. Louis v. R. and found that he ought not to strike the plaintiff’s claim “unless spoliation had been proven [it is the defendant’s onus], in that it is beyond doubt that this was a deliberate act done with the clear intention of gaining an advantage in the litigation, and the prejudice is so obviously profound that it prevents the defendant from mounting a defence.”  

The plaintiff’s expert offered no explanation as to how or why the evidence came to be lost, but the trial judge would not accept the defendant’s suggestion that an inference of deliberate destruction ought to be made from the lack of explanation. It is interesting that the spoliator therefore benefited from remaining silent and not explaining the loss of evidence.

The trial judge also held that the defendant had failed to establish profound prejudice. The defendant apparently did not do a good enough job of explaining why an inspection was necessary, especially since it had already delivered an expert report without having an inspection. The trial judge held that a further evidentiary record was required. She dismissed the motion without prejudice to the defendant’s right to bring it back on as a mid-trial motion, or to seek rulings relating to remedies for the loss of the items at the conclusion of the trial, after a complete evidentiary record had been established. The trial decision notes that the defendant did not renew its motion at anytime during, or at the conclusion of, the trial. The trial judge further found that the defendant had not been prejudiced by the loss of the evidence because:  

  1. the plaintiff was unable to prove during the course of the trial that there was any fault in the steel used in the tank; and  
  2. the defendant’s own expert was able to opine, without analyzing the composition of the steel used in the tank, that the hole was caused by internal corrosion, which the trial judge accepted.  

It seems the defendant was unable to establish that an inspection of the tank was necessary in order for it to defend itself, which will distinguish this case from others where the prejudice resulting from spoliation is much more severe.  

SALE OF GOODS ACT LIABILITY AND INFERENCES OF DEFECT

The case also highlights the common quandary concerning how to properly characterize the “defect” that must be proven to establish liability: is the “defect” the manner in which the product failed (i.e., the hole in the tank) or the cause of that failure (i.e., the lack of internal corrosion protection)? The trial judge did not accept that the defect in the tank was the hole itself because there was no evidence that the hole existed at the time of purchase. Instead, the trial judge found that the defect was the absence of a protective interior coating. The Court of Appeal disagreed and implicitly held that the “defect” was the appearance of the hole within the 10-year service life of the product. It was noted that the expert witnesses were unable to identify what caused the internal corrosion that led to the tank’s failure. However, relying on the Supreme Court of Canada judgment in Schreiber Brothers Ltd. v. Currie Products Ltd. (1980), the Court of Appeal held:

  • “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.”  
  • Once the buyer proved that the defect … 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.” (NB: Schreiber Brothers could also be read as requiring the plaintiff to go further and show that there was no alteration of the product after it left the defendant’s hands, or that there were no alternative causes for the damage other than the alleged defect in the product, before a defect will be inferred.)  

The trial judge had found that the tank was only used as intended, that it had not been used prior to being placed into service by the plaintiff, that it was properly installed, that it was not damaged during or after installation by some external mechanism, and that it did not fail due to improper maintenance. Those findings, combined with the facts that the tank was bought by description and that an examination of it at the time of its purchase would not have revealed the then unknown defect, allowed the Court of Appeal to find that the defendant had breached the implied condition of merchantability in s. 15(2) of the Sale of Goods Act, making it 100% liable for the cleanup costs.  

A defendant facing liability under the Sale of Goods Act better be able to explain a cogent theory as to how the alleged damages were caused, other than by a defect that existed in the subject product at the time of delivery, in order to avoid liability. Such a defendant would be well advised to obtain an inspection of the product as soon as possible after notification of the claim. Otherwise, the information necessary to build that theory might be forever lost, and the defendant should not expect Canadian courts to help them out of that predicament.