In the recent class action case of the Association pour la protection des automobilistes Inc. v. Toyota Canada Inc. et al., Qc. Ct. App., 500-09-015419-054 (April 24, 2008) (APA v. Toyota), the Québec Court of Appeal confirmed that conventional (in this case, extended) warranties transfer charges demanded by merchants from subsequent acquirers of automobiles were illegal.

The class action was originally filed in 2000 and related to extended warranties transfer charges demanded by Toyota Canada and its dealers from subsequent acquirers. As Toyota actually had stopped including transfer charges in its extended warranty contracts as early as 1994, the last transfer charges demanded under Toyota’s 6-year extended warranties had been collected in 2000.

The case essentially turned on whether the extended warranty (and the transfer charge) should be scrutinized under the Québec Consumer Protection Act (CPA) or excluded from the CPA’s scope on the ground that it should be viewed as an insurance contract that is governed by Québec’s Act Respecting Insurance. Under the later statute, the transfer charge would have been permissible. Under the CPA, the issue remained open for debate.

CPA Review

The court determined that an extended warranty for goods provided by a party with an interest in the sale of the relevant goods (such as a manufacturer or a merchant) should be viewed as a warranty provided in close relation to the goods and as part of a larger transaction clearly governed by the CPA. As a result, the extended warranty – and the legality or illegality of related transfer charges – had to be reviewed under the CPA, not under An Act Respecting Insurance.

To decide the issue of the legality of the warranty transfer charges, the court relied on section 154 of the CPA. That section essentially states that merchants and manufacturers are liable to subsequent purchasers of an automobile for the performance of conventional warranties. As a result, the court reasoned, requiring the payment of transfer charges for the conventional warranty to be honoured violated the spirit of section 154 and therefore was illegal.

Application to Conventional Warranties

A few observations can help put this decision in context. First, the implied prohibition on demanding conventional warranties transfer charges contained in section 154 of the CPA only applies to conventional warranties pertaining to automobiles. Therefore, as a general rule – and while section 48 of the CPA generally prohibits all merchants from charging any amount for the performance of a conventional warranty – the CPA does not prohibit, for consumer agreements generally, the inclusion by a merchant of a requirement for a subsequent acquirer to pay a transfer charge for a conventional warranty to be transferred and then honoured. The legality or illegality of warranty transfer charges for any specific consumer agreement (i.e., for goods other than automobiles) should therefore be reviewed on a case-by-case basis.

Conventional Versus Legal Warranties

Second – and more fundamentally – it should be remembered that the case and the warranty transfer charges issue is only concerned with conventional warranties. Under the CPA, merchants and manufacturers (broadly defined to include, in certain cases, distributors and similar intermediaries) always remain liable for all applicable legal warranties, whether imposed by the CPA or the Civil Code of Québec. These warranties – and the ensuing liability – generally cannot be contracted out of or limited by contract (and a transfer charge in this respect would most probably be illegal).

For example, in the case of any consumer sale of goods contract, a merchant and the manufacturer are liable at law for the goods’ quality, which includes a warranty against latent defects, a warranty of fitness for the normal purpose, a warranty of durability and a warranty of security. These warranties “follow” the relevant goods when they are transferred, with the result that subsequent acquirers can present claims directly against the manufacturer and, most probably, against the merchant as well. Where a merchant includes conventional warranties in its consumer sales contracts (be they basic or extended conventional warranties), such warranties are in addition to the legal warranties provided for by law, not in lieu of them.

Therefore, given the very broad scope of the legal warranties imposed by law for the quality of goods, one could wonder what (if anything) more extended warranties exactly cover. Many argue, in fact, that conventional warranties provide no measurable increased protection for a consumer and are essentially an indirect way for merchants to make consumers pay for the merchants’ obligations under the mandatory legal warranties regime. In APA v. Toyota, the court rightfully did not discuss the issue since it was not raised by the parties. But, there may come a day when a lawsuit will be brought against a merchant about a conventional warranty on the ground that such warranty should be either annulled or provided for free or for minimal consideration. The grounds for such a claim would be that the conventional warranty merely implements the obligations of the merchant under the applicable and mandatory legal warranties regime.

No Appeal to Supreme Court

Third and lastly, a bit of irony. As indicated above, the APA v. Toyota case has lasted eight years in court so far. In July 2008, Toyota decided not to seek leave to appeal the decision to the Supreme Court, essentially on two grounds. First, it had already been fourteen years since Toyota had modified its contracting practices and had stopped charging conventional warranty transfer charges. So, even a favourable outcome would not have impacted Toyota’s business. Second, Toyota estimated that its total exposure in terms of warranty charges reimbursements was just less than $300,000. Therefore, it made no sense economically to pursue the case further.

Quantum of Damages

The case is now back before the Québec Superior Court for a determination of the quantum of damages payable. Eight years (and counting) of legal proceedings will leave little recovery to be shared among the class participants, as is too often the case. But, that is another (and probably bigger) issue.