Data
- Date:
- 20-09-2002
- Country:
- Canada
- Number:
- 2002 MBQB 229
- Court:
- Court of Queen’s Bench of Manitoba
- Parties:
- Brown & Root Services Corp. v. Aerotech Herman Nelson Inc.
Keywords
APPLICATION OF CISG - MATERIAL AND TERRITORIAL CONDITIONS FULFILLED -QUESTION OF CISG APPLICATION AND ITS RELATION TO DOMESTIC LAW NOT ADDRESSED BY COURT
AVOIDANCE (TERMINATION) OF CONTRACT FOR FUNDAMENTAL BREACH IN CASE OF NON-CONFORMING DELIVERY (ART. 49) - NOTICE WITHIN REASONABLE TIME
Abstract
In 1995 the plaintiff, an American company (hereinafter "the buyer") contracted to provide logistical support for the U.S. military in the Hungary/Bosnia region. A component of the contract required tents, appropriately heated, for the purpose of housing troops on their way to Bosnia. The buyer acquired the heaters for the tents from the defendant, a Canadian company (hereinafter "the seller"). The buyer brought an action against the seller and its sole officer and director, with respect to the purchase of the heaters and related goods and services. It alleged that the seller fraudulently misrepresented that the heaters were new, and in doing so, the seller fundamentally breached its agreement by materially misrepresenting the true condition of the equipment.
The buyer sought reimbursement for the cost of the heaters and other related equipment. It further sought reimbursement of the costs for the shipment of the goods, as well as punitive damages for fraud. The seller counterclaimed for losses relating to the cost of sending technicians to Hungary, excess baggage charges, and vehicle rental. It contended that the buyer received what it bargained for and accepted the goods. Furthermore, the seller argued that the buyer failed to supply adequate power generators necessary to operate the equipment supplied. It also maintained it was willing to honor the warranty on the product in respect of any valid complaints.
As to the applicable law, the trial court acknowledged that this was a transaction for the sale of goods between a U.S. buyer and a Canadian seller in which the buyer’s standard purchase order terms and conditions applied. These terms and conditions formed the basis of the contract.
The sole reference to the CISG in the trial court’s opinion is found at para. 95. The seller maintained that fundamental breach should not be considered given the fact that the buyer received what it had bargained for. The seller argued for the application of Arts. 38 and 49 CISG, in that the buyer took too long in order to assert a fundamental breach and termination of the contract. However, the court observed that the buyer terminated the contract within a reasonable time. Thereafter, the court refers only to Canadian sales law and cases, and a number of common law principles.
As to the merits, the trial judge found that the buyer expected the heaters to be new product in keeping with the terms of the contract, and that there was an obvious intention to mislead on the part of the seller. It ruled in favour of the U.S. buyer.
This case was appealed. See the Appellate decision of the Court of Appeal of Manitoba of 04-05-2005, Abstract and Fulltext in UNILEX.
Fulltext
(¡)
McKELVEY J.
ISSUES:
[1] Brown & Root Services Corporation and Kellogg Brown & Root, Inc. (collectively "B & R") operate as an engineering/construction management firm, with their head offices located in Houston, Texas, U.S.A. In 1995, they contracted to provide logistical support for the U.S. military in the Hungary/Bosnia region during Operation Joint Endeavour ("LOGCAP contract"). A component of the contract was the necessity to construct life support areas for the military operation. The life support areas required tents, appropriately heated, for the purpose of housing troops on their way to Bosnia.
[2] This case revolves around the acquisition of the heat source for the tents by B & R from Aerotech Herman Nelson Inc. ("Aerotech"), a Winnipeg company, which is owned and operated by Paul Sigurdson. He is also the president, sole officer and director of Aerotech.
[3] B & R have brought this action against Aerotech and Sigurdson with respect to the purchase of 282 H82 Herman Nelson heaters along with related goods and services on or about December 16, 1995. B & R allege that:
¡¤ 1. Aerotech and Sigurdson fraudulently misrepresented that the H82 heaters were new; and
¡¤ 2. Aerotech and Sigurdson fundamentally breached their agreement with B & R and materially misrepresented the nature of the heating equipment and their ability to supply technicians.
B & R seek reimbursement of the cost of the heaters and other related equipment in the amount of $1,359,571.50 (U.S.). They further seek the cost of shipment of the goods to Kaposvar in the amount of $321,905.55 (U.S.) from Aerotech and Sigurdson. (All dollar amounts used in this decision are in Canadian dollars except where stated otherwise.) Punitive damages related to a possible fraud is also sought by B & R.
[4] Aerotech counterclaims for losses it allegedly incurred:
¡¤ 1) the cost of technicians and their airfares to Hungary;
¡¤ 2) excess baggage charges and vehicle rental.
Aerotech contends that B & R received what they bargained for and accepted the goods. Aerotech indicates that B & R failed to supply adequate power generators necessary to operate the equipment supplied. Further, Aerotech maintains it was willing to honour the warranty on the product in respect of any valid complaints.
FACTS:
[5] In December 1995, B & R determined that there was an urgent need to obtain a heating source for troop tents in Kaposvar. B & R assigned Ken Dreiling, a field buyer, to locate and purchase suitable heaters.
[6] Dreiling was contacted by Stephen Riggins, a manufacturer's representative sourcing materials through his company SRSCO, Inc., in Florida. He requested from B & R and was given the opportunity of assisting in the sourcing of heaters. Riggins learned of Aerotech and contacted its sales manager, Peter Marykuca, on December 15, 1995. Riggins, B & R and the principals of Aerotech had no prior dealings before participation in this transaction.
[7] Riggins and Marykuca initially discussed various heating options. The next day, Riggins and Sigurdson, who took over negotiations from Marykuca, continued those discussions. Sigurdson suggested the H82 to accommodate the heating urgency.
[8] Sigurdson, on December 16, 1995, forwarded by facsimile transmission two quotations to Riggins, both accompanied by a brochure containing the H82 product specifications. One of the quotations provided an indication of potential additional costs, such as technicians to set up the heaters.
[9] The second quotation referred to an H82 Bare Base Heater, which was described in the accompanying brochure as a "NEW PRODUCT!". Among other representations, the H82 was said to be complete with all accessories and manuals, designed to burn all grades of diesel, kerosene and jet fuels up to JP8 PLUS/OR and all grades of automotive or aviation gasoline and was complete with sealed Hobbs Hour meters. The quote provided that the times displayed on the meters were hours accumulated for testing purposes since manufacture.
[10] The second quote also advised that the heater was "... designed to meet rugged military requirements". The matter of a delivery delay was stroked out and "48 hours" inserted as Sigurdson told Riggins that delivery could be accomplished within that timeframe. Time was of the essence as troops were moving into the area within days.
[11] Sigurdson also included a list of Aerotech's alleged customers, some 10 pages in length.
[12] Aerotech agreed to pay Riggins a commission, through his company, for linking it with B & R. The fact that a larger commission was available through this deal as opposed to other heating products is inconsequential to the essence of any agreement reached between these parties.
[13] Riggins forwarded the quote to B & R. B & R Houston had no knowledge of the functionality of heaters and were simply endeavouring to procure them for the Kaposvar operation. Further highlights of the forwarded quote are:
¡¤ 1) Aerotech described itself in the brochure as a manufacturing company with over 1500 H82s in stock;
¡¤ 2) all units were to be test-fired and operated prior to shipment;
¡¤ 3) a spare parts component would be added;
¡¤ 4) a team of five technicians to handle all installations and set-up was to accompany the heaters.
Many of these representations were erroneous.
[14] B & R wished to negotiate directly with Aerotech. From this point on, the negotiations continued between B & R personnel and Sigurdson.
[15] These discussions resulted in a third quote on December 16th to B & R. This quotation was essentially identical to those previously forwarded to Riggins. Aerotech argues that this quote was the "offer" which was "accepted" by a Notice of Award from B & R.
[16] As the Houston based B & R employees involved in this transaction were unfamiliar with H82s, they placed a telephone call to Jack Avant. Mr. Avant functioned as B & R's project general manager under the LOGCAP contract overseeing the entire operation in Kaposvar. Avant was familiar with H82s and felt they would be appropriate to alleviate the heating crisis. Sigurdson and B & R agreed that the heaters would not be pre-fired and tested prior to shipment as that could be done by the Aerotech technicians who were to accompany the equipment to Hungary.
[17] As a consequence of these discussions and quotations, B & R prepared and forwarded a Notice of Award to Aerotech on December 16, 1995. The Notice of Award provided that spare parts packages were to accompany the heaters. The spare parts packages would establish a parts inventory for the machines. Aerotech technicians were to travel to Kaposvar for the purposes of testing and set-up of the heaters. B & R's standard Purchase Order Terms and Conditions accompanied the Notice of Award. Of particular importance with respect to the terms and conditions are the following:
1. INTEGRATION. Seller agrees to sell and Buyer agrees to buy the goods and services described in this Purchase Order (the "Goods"), for the price and on the terms of payment shown herein. Unless otherwise provided herein, this sales contract shall be governed by the laws of the State of Texas in effect on the date of execution by Buyer. These terms and conditions, together with the purchase order form and the other documents expressly referred to therein (collectively, this "Purchase Order"), become effective when executed by Buyer and Seller, and constitute the entire agreement and supersede all proposals, negotiations and counter proposals. Buyer shall have no obligation to make payment to the Seller before and unless this Purchase Order is so executed by Buyer and Seller, or is otherwise agreed to in writing between Buyer and Seller.
...
4. INSPECTION, EXPEDITING, AND DOCUMENTATION. Seller is fully responsible for the design, fabrication, and construction of the Goods and for compliance with all applicable terms, conditions, specifications, drawings and codes. Seller shall have the obligation, and Buyer shall have the right, to inspect and expedite the Goods in process of manufacture, in storage, in transit and upon delivery to assure compliance therewith. Buyer will be supplied as needed data, drawings, specifications, test results, quality documentation, schedules and other documents and information in accordance with the Supplier Data Requirements List (SDRL) included in this Purchase Order. Buyer's inspection, waiving of inspection, review, approval, or acceptance of the Goods or of any drawings or data supplied hereunder shall not relieve or discharge Seller either expressly or by implication of its responsibilities and obligations under this Purchase Order.
5. TIME OF PERFORMANCE. The delivery date shown herein is of critical importance to the avoidance of substantial loss on the project to various contractors and the Owner. IN THE EVENT OF DELAY, OR ANTICIPATED DELAY, from any cause, including force majeure. Seller shall immediately notify Buyer in writing of the delay or anticipated delay, and will undertake to shorten or make up the delay by all reasonable means. If Seller fails to meet the shipping date or progress requirements established in this Purchase Order without Buyer's written approval, Buyer may cancel all or any part of this Purchase Order without charge to Buyer.
...
7. CONFORMING GOODS. The Goods shall conform strictly to the description, plans, specifications, and sample, if any, and no deviation or substitution will be permitted without the express written agreement of Buyer. If there are no specific descriptions, plans, specifications, or samples, and to the extent that they are not explicit, the Goods shall be new, of the latest design or model conforming to the Buyer's requirements, and of the best quality unless otherwise specified. If the words "or equal" are used in this Purchase Order, proposed equals must be approved in writing in advance by Buyer. There shall be no substitutes or shipment of more or less than the quantity specified without prior written approval of Buyer. If goods received do not conform to those ordered or if more or less than the quantity ordered are shipped, Buyer may reject such shipment in whole or in part by giving notice thereof to Seller. Seller shall thereafter remove such rejected Goods at Seller's expense within ten (10) days after notice.
8. WARRANTY. Seller warrants to Buyer that the Goods and/or work furnished under this Purchase Order, whether manufactured or fabricated by Seller or others, will (a) strictly conform to the specifications, drawings, samples, and other descriptions referred to herein or provided by Buyer to Seller, (b) be of merchantable quality and fit for the purposes intended, (c) conform with all applicable laws, ordinances, codes and regulations, and (d) be free from defects in materials and workmanship for a period of one year after being placed in service in the Owner's plant or structure. All work shall be done in a skilled manner and shall be of first-class workmanship in every respect and the Goods shall be new. If required by Buyer, Seller shall supply satisfactory evidence of the kind and quality of the Goods. Seller further warrants that the Goods will be of sufficient size and capacity, and of proper materials, to properly perform the functions specified in this Purchase Order.
9. WARRANTY REMEDIES. If within the warranty period specified in 8 above, Buyer discovers defects, errors, omissions, performance deficiencies or breach of any warranty as to the Goods, then Seller shall promptly repair or replace without cost to Buyer, the Goods in question. If Seller fails after reasonable notice to proceed promptly with the repair or replacement of the defective Goods, Buyer may repair or replace the Goods and charge all related costs including access costs to Seller without voiding the warranties herein. The rights and remedies of Buyer provided in this paragraph are in addition to any other rights or remedies provided in law, equity, or under this Purchase Order.
[18] The Notice of Award stated "TIME IS OF THE ESSENCE!". The delivery date was anticipated to be December 19th. Later on December 16th, Sigurdson forwarded a further quote which specified the details of the spare parts packages and that manuals would be sent, as well as the prices for each.
[19] The formal Purchase Order of B & R was forwarded to Sigurdson on December 18, 1995. The order was signed by Dreiling on behalf of B & R. The seller's acceptance signature was never affixed to the documentation. Dreiling did not consider this to be unusual as a signed copy was generally not received unless there were exceptions taken to the contents of the Purchase Order. There were no such exceptions taken by Aerotech or Sigurdson at any time. The formal Purchase Order again attached the B & R standard Purchase Order Terms and Conditions, previously attached to the Notice of Award, which in both paragraphs 7 and 8 stipulate that "the Goods shall be new."
[20] The December 18th Purchase Order was for:
¡¤ 1. 56 spare parts kits - $39,312.00 (U.S.) ($702.00 each)
¡¤ 2. 282 Bare Base Recirculating Heaters - $1,319,760.00 (U.S.) ($4,680.00 each)
¡¤ 3. 15 manuals - $499.50 ($33.30 each)
¡¤ 4. Cable (not to exceed $7500.00)
¡¤ 5. Five technical representatives (not to exceed $25,000.00 at a rate of $500.00 per day, per person)
[21] Aerotech invoiced B & R on December 18, 1995, by way of a facsimile transmission for the spare parts kits, pre-installation service, 282 Bare Base Recirculating Heaters and manuals. The transmission of these invoices confirms and responds to the December 18th Purchase Order of B & R. In response to the invoices, B & R, on December 19th and 20th, forwarded by wire transfer, the aggregate sum of $1,359,571.50 (U.S.) to Aerotech.
[22] The heaters were moved in two shipments to Kaposvar, on December 19th and December 20th, 1995. The goods were transported by Curtis Air, a subcontractor of B & R, whose sole purpose was to ensure that the goods were moved to Budapest. Curtis Air personnel served no inspection function on behalf of B & R. The heaters were moved by subcontracted land transport from Budapest to Kaposvar.
[23] The five technicians from Aerotech were not dispatched with the heaters as B & R expected. They did not arrive in Hungary until January 3, 1996.
[24] The first load of heaters arrived in Kaposvar on December 22, 1995. The arrival of the heaters resulted in immediate reports from B & R employees on site to Houston that they appeared to be used and had other deficiencies. The deficiencies reported included missing and broken parts. Many of the machines also had red DRMO (Defence Reutilization & Marketing Organization) tags attached to them, while others had new hour meters on old units or meters showing extensive use.
[25] B & R immediately contacted Sigurdson with these concerns. Joe Williams, Dreiling's supervisor, testified that during that conversation he was advised by Sigurdson that "You're a fucking liar. They're new." At no time during this or earlier conversations with B & R representatives or Riggins, had Sigurdson or an Aerotech employee advised that the heaters were used, military surplus.
[26] Over the next several days, there was contact between Aerotech and B & R with respect to the status and operation of the heaters. On December 22, 1995, Williams, on behalf of B & R, verbally rejected the heaters in a conversation with Sigurdson.
[27] Marykuca went to the Houston B & R offices on December 28th. He was apologetic with respect to the lack of technicians to service the equipment.
[28] The technicians travelled to Hungary on January 3rd. They were sent home on January 13th by B & R. Both B & R personnel and the Aerotech technicians, upon their arrival, endeavoured to make the H82s functional. They had some success, but were frustrated by a lack of parts and power difficulties, as well as continued breakdowns.
[29] On March 6, 1996, the B & R legal department, by written notice, rejected the heaters due to "... the used condition of the equipment and its unsatisfactory performance or complete nonperformance". Aerotech was asked to remove the heaters and to reimburse B & R for all amounts paid, which included the purchase price, transportation costs and any other costs incurred. Further, any costs associated with the storing of equipment was said to be to Aerotech's account.
[30] The heaters remain in storage in Kaposvar, Hungary.
POSITION OF THE PARTIES:
[31] B & R take the position that they purchased new H82 Herman Nelson heaters, ducting, manuals and spare parts kits. The H82s were rejected because of their used condition and unsatisfactory performance.
[32] B & R maintain that Aerotech and, specifically, Sigurdson made the following representations:
¡¤ (a) It had in stock over 1500 new H82 series heaters, all manufactured by Aerotech;
¡¤ (b) Aerotech had spare parts kits and manuals in stock;
¡¤ (c) The heaters were manufactured to perform under rugged conditions;
¡¤ (d) Five fully qualified technicians of Aerotech were immediately available to accompany the equipment to Hungary for the handling of all installation and fire-up operations;
¡¤ (e) The heaters would be shipped complete with all accessories and manuals for immediate operation;
¡¤ (f) Payment of the aggregate price for said equipment by wire transfer would ensure "same day" shipment of fully operational equipment.
[33] B & R take the position that Aerotech fundamentally breached the agreement and materially misrepresented the nature of the heating equipment, as well as Aerotech's ability to supply qualified technicians. The breaches and misrepresentations included:
¡¤ 1) the heaters supplied were used, with the majority being surplus army equipment in various states of disrepair from prior military operations;
¡¤ 2) approximately 18 of the heaters were a different model, namely H81s and not H82s;
¡¤ 3) Aerotech did not manufacture any of the heaters;
¡¤ 4) the heaters were substantially deficient in many material respects;
¡¤ 5) many of the heaters were inoperable;
¡¤ 6) the technicians did not arrive in Kaposvar until January 3, 1996;
¡¤ 7) no manuals or spare parts kits were provided, although paid for;
¡¤ 8) the heaters could not be used properly, adequately or safely for the purposes for which they were intended;
¡¤ 9) not all of the 282 heaters arrived in Kaposvar.
[34] B & R also say that Aerotech and Sigurdson acted fraudulently and wilfully deceived. This occurred when they claimed the ability to perform the agreement and knew or ought to have known otherwise.
[35] Aerotech maintains that it was not a term of the agreement that the heaters be new nor that it would be the manufacturer. It also asserts that it was agreed that the five technicians would arrive as soon as passports were prepared.
[36] Aerotech submits that it at no time agreed to the written contractual Terms and Conditions of B & R in the Notice of Award or Purchase Order and that the agreement was entirely an oral communication between the parties.
[37] Aerotech also maintains that it is willing to honour the warranty, that B & R knew it was purchasing equipment that had yet to be reconditioned and essentially received what it bargained for.
ANALYSIS:
[38] I will review the various aspects of this transaction and procedural matters under a series of headings.
ADVERSE INFERENCE:
[39] Sigurdson did not testify during the course of the trial. The primary source of information surrounding the "deal" from Aerotech's perspective comes from Peter Marykuca.
[40] The court was asked by B & R's counsel to draw an adverse inference by Sigurdson's failure to give evidence in this case. Counsel argued that as the prime architect of the agreement from Aerotech's perspective, he was obligated to give evidence as to what transpired.
[41] Sigurdson's counsel urged me to refrain from drawing an adverse inference because of the failure to give evidence on the basis that testifying is a matter of election. Counsel argued that the decision not to call Sigurdson was because of extensive examinations for discovery, admissions from plaintiffs' witnesses at trial, read-ins from Sigurdson's examination for discovery and B & R could have called him as a witness.
[42] I am persuaded, after a review of the relevant caselaw, that an unfavourable inference should not be drawn. Sigurdson was extensively cross-examined on discovery. Many of his discovery responses were read into evidence on behalf of B & R. It is also a party's election whether to give evidence.
[43] In a general sense, Sigurdson's failure to testify must be weighed as to whether other evidence presented in the case is sufficiently persuasive to support the position put forth by Aerotech. Aerotech maintains an oral agreement existed between the parties and yet there is little evidence from its main architect.
[44] The witnesses called on behalf of B & R were credible, forthright, and provided information to the court in a fact based and material manner. With respect to Aerotech, Marykuca provided the court with a flavour of the company's business practices. At best those "practices" could be described as sharp. His evidence was at times evasive, confrontational and lacked the definitiveness necessary to render it totally reliable. Consequently, where the evidence diverges as to the substantive aspects of the "agreement", I accept that of the witnesses called on behalf of B & R.
[45] The failure of Sigurdson to testify did not raise an adverse inference, it simply created a significant gap in the defendant's evidence.
State of the Heaters:
[46] Of primary significance was the fact that the heaters were used rather than new as anticipated by B & R. Aerotech purchased these heaters as surplus from various suppliers, including DRMO. The heaters were manufactured by Engineered Air Systems Inc. At no time was Aerotech involved in the manufacturing process. Aerotech did not keep track of its inventory of surplus heaters at its Winnipeg business location. Further, no value was attributed to them for the purposes of the annual audited financial statements of the company.
[47] The heaters had been stored outside at the Aerotech premises and were subject to the elements of both weather and wildlife. On December 18, 1995, Sigurdson instructed that the heaters be moved into the building and cleaned, paint touched up, and any decals removed. Further, according to Aerotech's mechanic, Murray Boles, they were also to replace the hour meters of those heaters with high hour rates recorded with those reflecting lower or new ones. The existing serial number was removed from each of the machines and was reserialed with an Aerotech number. Many of the heaters were steam-cleaned and painted, had fuel drained, and some were serviced. Not all of the heaters were appropriately drained, as at the time of the second shipment, approximately 18 machines were left behind, as they still contained fuel. Any servicing requiring parts necessitated that those be taken from other H82 machines. The DRMO label was removed from a number of the machines. All information was recorded and catalogued primarily by Mike Palitsky, who was employed with the financial services department of Aerotech.
[48] Mr. Boles gave evidence that on December 18th there was an almost 90% failure rate of those machines tested. However, those heaters that did not fire were still shipped. There were identified problems with respect to corrosion, dirt and soot in the combustion chambers, as well as electrical difficulties.
[49] The majority of the units had less than a 50 hour reading on their meters, albeit that must be weighed against the evidence of Boles. In excess of 20% of the machines had over 50 hours with some readings as high as 736 hours. There were 18 units with no meters at all.
[50] The machines were stamped by Aerotech with a date of manufacture being December 1995, albeit all were clearly used. The H81 heaters were said by Aerotech to have come from its 1990 manufacturing run.
[51] As indicated, the first shipment of heaters that arrived in Kaposvar created significant consternation and reaction from B & R personnel. The B & R technicians endeavoured to start the H82s. These technicians had previously serviced H82s as they were a known commodity in military operations. Some of the heaters became operational on a temporary basis, but only one in six actually started. The B & R technicians took parts from other H82s in an attempt to service and render the machines operational.
[52] The shipped H82s were initially described by Avant as being "junk heaters" with many common problems. This evidence was in keeping with that provided by other witnesses who identified the deficiencies as including rectifiers, wiring, fuel lines and the K8 relay (a proprietary item). Counsel for Aerotech and Sigurdson provided significant documentary evidence that many of the listed deficiencies were inconsequential and diminutive, with relatively simple rectification possible, at a negligible cost.
[53] Ed Stutz of B & R was sent to Kaposvar in December 1995 to evaluate the logistics process for ground transportation of goods to Kaposvar from aircraft arriving in Budapest. As a special project, he was asked to review the second shipment of heaters upon its arrival at the Budapest airport. Stutz testified that the heaters were obviously used with the possible exception of seven units, some exhibited DRMO tags, all were marked with December 1995 as the date of manufacture and the national stock numbers were covered by black spray paint. I accept his evidence and that of others as to the state of the heaters. I also accept that no spare parts kits, manuals or cable were observed at any time to have arrived from Aerotech.
[54] The evidence is uniform on behalf of B & R that there was an expectation that the heaters would be a new product in keeping with their Terms and Conditions. This, along with the other complaints, resulted in the verbal rejection of the equipment by Williams on December 22nd.
[55] The brochure provided by Aerotech for the Herman Nelson H82 in support of its quotation states "NEW PRODUCT" across the top. Marykuca gave evidence that the declaration "NEW PRODUCT" was meant to indicate a new product in Aerotech's inventory and not actually a new heater. I find that any reasonable buyer viewing such a brochure, particularly without being alerted otherwise by the seller, would conclude that the heaters were to be new. Marykuca testified that he told Riggins on December 16th that the heaters were used, surplus military equipment that required reconditioning. Riggins denies that assertion. Riggins indicated that such advice would have meant the end of discussions as B & R only wanted a new product.
[56] Riggins was to receive a significant commission with respect to the sale from Aerotech. However, that does not diminish what B & R's expectations were with respect to the product. Marykuca was confronted as to the "new" versus "used" issue on December 28th in Houston during a telephone conversation with Riggins. He responded "It's a grey area." That phrase was reiterated during Marykuca's cross-examination. There is no evidence that anyone from Aerotech informed B & R prior to the finalization of the agreement that the heaters were used, military surplus. Marykuca advised Sigurdson by memorandum (undated, but contemporaneous with the sale) that "... they must be sold surplus used. ... We have no Parts? ..." The U.S. military is an organization which would likely purchase only new equipment and certainly not surplus units which it had previously disposed of.
[57] The cost of these heaters is also of significance. According to Marykuca, they were purchased by Aerotech at around $45.00 per unit. The heaters were then sold to B & R, virtually without any reconditioning, for the sum of $4,680.00 (U.S.) per unit. This is against the backdrop of these units having no value in inventory for audited financial statement purposes.
[58] During the course of the trial, there was testimony respecting a number of other heater types, some of which were new products and which were considered as possible purchase options during the negotiation process. The attributes of those heaters are at variance in many respects from the H82. However, it is evident that the price being charged for the H82 by Aerotech was in keeping with that of new goods. This, accompanied by the fact that there was no documentation or conversation, excluding Marykuca's assertions, that these units were anything but new, facilitates a finding that B & R expected and transacted for new heaters. There was a fundamental variance in what was contracted for between the parties and what was received.
[59] The Aerotech technicians began working on the heaters in Kaposvar on January 5, 1996. Two of the technicians who were in attendance, being Murray Boles and Frank Nadoryk, gave evidence at trial with respect to their work. Boles presented a bleak picture as to the condition of the units and testified he at one point advised Avant that they were fighting a losing battle and could not go on. He gave evidence that part of the difficulty related to the power supplied by the generator sets of B & R. He also testified that given fuel, parts and equipment, they had a "fighting chance" to make them operable in a number of weeks.
[60] Nadoryk testified that many of the heaters worked on in Kaposvar had similar problems to those observed in Winnipeg. It was clear that parts were needed for the machines and a request was made of Aerotech to supply those around January 11th or 12th. It was his evidence that there were approximately 40 machines up and running when the technicians arrived in Kaposvar. The Aerotech technicians were able to make approximately another 45 operational. There is also evidence that a number of heaters that had been made operational functioned only on a temporary basis.
[61] One of the difficulties in servicing the machines was the K8 relay which could not be replaced unless it was taken from another H82 heater. The K8 relay functioned to set off an audible alarm and would shut down the machine if any difficulty was being experienced. Aerotech could have utilized a varied relay which would have been functionally appropriate, but would not have sounded the alarm. B & R did not sanction that the relay be substituted.
[62] Nadoryk also gave evidence that on January 11, 1996, he spoke to Sigurdson and advised him everyone wanted to come home. In fact, the Aerotech technicians were sent home around January 13th as there seemed to be little hope in making these heaters operational because of the lack of parts and their general condition. This was despite the fact that Sigurdson advised B & R that the technicians were making excellent progress.
[63] At a later point, all heaters were inspected to determine why they were not operational from a mechanical point of view. As counsel for the defendants correctly point out, many required only minimal repair at a negligible cost. However, in these circumstances, it must be the totality of the state of used heaters which is considered and not each on an individual basis.
Representations by Aerotech:
[64] I find that B & R at all times expected that the H82 heaters would be a new product. This was in keeping with the B & R standard Purchase Order Terms and Conditions attached to both the Notice of Award and Purchase Order. While there is an "entire agreement" clause in the Terms and Conditions, it is essential that the representations made by Aerotech and Sigurdson be reviewed as they relate to B & R's contention that fraud and misrepresentation took place. B & R expected and the representation was made that the goods would be manufactured by Aerotech. Instead, Aerotech removed the actual manufacturer's plate replacing it with its own evidencing Aerotech's date of manufacture as December 1995 on all machines. There was an obvious intention to mislead the buyer, albeit the used state of the heaters was evident.
[65] The Aerotech brochure was a virtual copy of the brochure prepared by the actual manufacturer of the H82s, Engineered Air Systems Inc. The primary and essential difference is that the Aerotech brochure included the announcement of "NEW PRODUCT!". The other major alteration between the two brochures was the deletion in the first paragraph of "designed by Engineered Air Systems Inc.".
[66] Much of the information with respect to the representations of Aerotech came through the evidence of Marykuca. There were a great many inconsistencies and blatant inaccuracies uncovered throughout the course of his evidence which were readily admitted, particularly with respect to Aerotech's documentary representations. Sigurdson was identified as the individual who prepared all such documentation on behalf of Aerotech. Many inconsistencies were evident in the documentation, some of which are highlighted as follows:
¡¤ 1. The first line of all of Aerotech's quotations states "Thank you for your interest in our Aerotech Herman Nelson portable preheating equipment, now in its 54th year of field tested reliable service world wide." Aerotech began operation only in the year 1994.
¡¤ 2. The quotations make reference to Calgary operations at Unit 18-1220 Prominence Way S. W., Calgary, Alberta as well as two U.S. operations, one being in Pembina, North Dakota and the other in Spencer, Wisconsin. There are no "operations" in those locations, albeit there is a condominium in Calgary utilized by Sigurdson.
¡¤ 3. Despite representation to the contrary in certain of the quotes, Marykuca acknowledged that Aerotech did not build the Herman Nelson heater, nor did it build any other heater.
¡¤ 4. Several of the quotes were authorized primarily by Sigurdson but on one occasion by Marykuca who was described as being of "Sales and Engineering". Neither Marykuca nor Sigurdson were engineers nor had they any training in that regard.
¡¤ 5. Aerotech quotation No. 1202278 which was from Sigurdson to Riggins on December 16th included a further brochure with respect to the Aerotech Herman Nelson heater. On that brochure there is an indication by way of a seal of Aerotech Herman Nelson "FIFTY YEARS OF SERVICE". Again, Marykuca acknowledged that was not true nor was the representation on the document that Aerotech was "A LEADING FIRM IN MANUFACTURING AND SERVICE".
¡¤ 6. The brochure also acknowledged individuals no longer at Aerotech. Further, on page 3 it was stated "At Aerotech we pride ourselves on our attention to detail in meeting rigid military specifications. Over 20 years of military defence work gives our commercial accounts the huge advantage of our experience." Marykuca admitted that there was no familiarity with the U.S. military and any government contracts were basically of a small nature and for new products.
¡ñ 7. The brochure also stipulated that Aerotech had the "WORLD'S LARGEST PARTS INVENTORY". Marykuca could not attest as to the accuracy of such a statement.
[67] Marykuca acknowledged that there was nothing in the brochures that would alert a buyer that the Herman Nelson H82 was a used product. In fact he stated that they "might think it's new but it isn't".
[68] Marykuca also acknowledged during the course of his cross-examination the following:
¡¤ 1. The inventory of used H82s was kept outside without cover;
¡¤ 2. The years of manufacture were 1984, 1986 and 1987;
¡¤ 3. There was no consistency as to the condition of the heaters and all were used military equipment;
¡¤ 4. It was Sigurdson who decided to try to sell the H82s to B & R;
¡¤ 5. Sigurdson would say anything to make a deal;
¡¤ 6. There was no manual for the heaters;
¡¤ 7. There are no spare parts kits for the heaters;
¡¤ 8. He never saw anyone test or pre-service the heaters prior to shipment;
¡¤ 9. Aerotech in its quote of December 16, 1995, to Riggins indicated it was recommending that gasoline and aircraft fuel could be utilized with the H82s. Marykuca acknowledged that the manual for the H82 indicated that as a safety precaution gasoline was not to be utilized as fuel because of extreme flammability;
¡¤ 10. Aerotech at no time made any H82 heaters;
¡¤ 11. There were no engineers employed by Aerotech;
¡¤ 12. There was never a sale of H82s to the Canadian Army in and around this timeframe despite representations to that effect.
[69] There were also misrepresentations by Aerotech in removing many of the DRMO labels, the labels with respect to manufacture, re-serializing and placing varied dates of manufacture on the goods. There are also representations made with respect to the technicians who were to be travelling to Kaposvar, which will be dealt with under a separate section in this decision.
[70] The invoicing prepared by Aerotech is also worthy of comment in that several invoices, already paid by B & R, were forwarded a second and third time, arguably in the hopes that they might be paid again. The manuals and spare parts kits are examples of items which were invoiced on a number of occasions, paid for, but never received. Also, other invoices were sent payable in U.S. funds when the charges had been incurred in Canadian funds. These included the cost of the technicians' airline tickets, as well as excess weight charges.
[71] Sigurdson also claimed overtime wages from B & R with respect to his staff who readied the heaters for shipment to Hungary. His correspondence to B & R indicated that he had paid two and a half to three times the normal wage rate as overtime or, in another letter, one and a half to two times the rate. The evidence at trial disclosed that the employees who worked in readying the shipments were not paid any overtime. This aspect of the claim was abandoned at trial, but demonstrates the flavour of Sigurdson's business dealings.
[72] B & R, through senior counsel Mary Bray, by written correspondence, formally rejected the goods March 6, 1996. Sigurdson's response to that letter indicated that there was over $400,000.00 payable by B & R in unpaid invoices for goods and services. It was acknowledged at trial that no such amount remained owing.
[73] The position of counsel for Aerotech and Sigurdson is that:
¡¤ (a) there is no evidence with respect to B & R being under a misapprehension that the invoices sent, which had been paid, should again be paid;
¡¤ (b) there were other heating options not shared by Riggins with B & R, arguably because the H82 sale would elicit a greater commission;
¡¤ (c) the Purchase Order and the Terms and Conditions were post verbal offer and acceptance;
¡¤ (d) there was no evidence that Aerotech's claims to be in business for 50 years, where the plants were located, or the term "New Product" on the brochure were relied upon by B & R and induced it into the contract;
¡¤ (e) there was insufficient time to service the equipment because of a failure by Dreiling to properly and promptly source the need for heat. This served to put Aerotech in the unenviable position of having to react quickly to what was being put on the table by B & R;
¡¤ (f) there is no record of any tent or troops without heat or complaints from the U.S. military with respect to the heater issue;
¡¤ (g) there was no inducement to contract because Aerotech promised it had manufactured the heaters;
¡¤ (h) none of the witnesses on behalf of B & R gave evidence that Sigurdson told them that the heaters were new;
¡¤ (i) there was no evidence of any dialogue with respect to B & R's Terms and Conditions as to whether they were flagged or attention drawn to them;
¡¤ (j) there was no follow-up request to Sigurdson or any member of Aerotech to sign the acceptance of the Terms and Conditions on the Notice of Award;
¡¤ (k) there was no act of concealment by Aerotech - the heaters were clearly used and had been only steam cleaned prior to their shipment to Kaposvar;
¡¤ (l) witnesses gave evidence that the heaters could be up and running within eight weeks with the introduction of new parts;
¡¤ (m) there was evidence from Nadoryk that Aerotech manuals were on site in Kaposvar;
¡¤ (n) the substitution of a varied relay for the K8 does not activate an alarm, albeit it does serve as a safety mechanism in that the machine is shut down if there is overheating. Therefore, there is no impact on safety;
¡¤ (o) there was an agreement that the machines would be tested in Kaposvar and not prior to shipment;
¡¤ (p) paragraph 7 of the Terms and Conditions is not as plain as indicated by B & R in that there were other descriptions, plans and specifications to supplant the words "the Goods shall be new". That was said to be encapsulized in dialogue that six to eight weeks would be necessary to make the heaters operational;
¡¤ (q) it is unequivocal that on December 22nd B & R knew the status and condition of the H82 units and yet there was no notice of rejection by B & R advising Aerotech to pick up the heaters or to keep the technicians home other than what may have been stated by Williams;
¡¤ (r) B & R technicians worked on the heaters, the heaters were used in the field and their conduct was consistent with acceptance of the goods - "Do whatever it takes to get the heaters up and running";
¡¤ (s) there is no evidence that the delay of the technicians in their arrival caused damage;
¡¤ (t) there is no evidence of rejection or conduct consistent with rejection of the equipment;
¡¤ (u) the evidence demonstrated that many of the units required only a screw, washer or rivet to make them operational, which could have been secured at little cost;
¡¤ (v) there were six units which continued to be operational in the field until the spring of 1997.
That being said, the state of the heaters was clearly at odds with what was anticipated by and contracted for by B & R.
The Technicians:
[74] Aerotech represented on December 16th that "Aerotech Herman Nelson Inc. will supply five (5) Technicians to complete pre-installation service and pre-installation final test at installation on site Bosnia to arrive day and date of heater arrival at $500.00 per day per technician ..." The technicians did not leave Winnipeg until January 3, 1996, after securing passports, with their first date of work being January 5th. These technicians were not approached by Sigurdson for consideration of the assignment until December 27, 1995, several days after the arrival of the heaters in Kaposvar.
[75] In terms of expertise with the H82, only Nadoryk had any experience to speak of and that was primarily in the fall of 1995 (18 heaters). The other four technicians had relatively minimal, if any, experience with this type of machine. The servicing of the machines by the Aerotech technicians was difficult because of the lack of parts and the equipment itself.
[76] The evidence also showed that the task was complicated by the fact that there was often more than one problem with the machines, which included the difficulty with the K8 relay. It is evident from the evidence of Nadoryk that the technicians wished to return home, certainly by January 11th and work was terminated shortly thereafter.
B & R's treatment of the H82s:
[77] There was evidence, which I accept, that B & R's technicians took parts from other Aerotech H82s in an attempt to effect repairs and get the heaters "up and running" because of the urgent need for heat. The Aerotech technicians also adopted such a course of action upon their arrival because of the lack of appropriate parts.
[78] The generator sets which were supplied by B & R may have slowed the process of testing, albeit the actual state of the goods was the primary cause for any delay.
[79] I find that some of the H82s were damaged by employees of B & R through attempts to move them, which is primarily accomplished by way of forklift. Other H82s were "damaged" in an attempt to procure parts to make others operational.
[80] All the Aerotech heaters were ordered returned by B & R to the Kaposvar holding area during a February 15 to 17, 1996 timeframe. There were approximately 72 heaters returned from the field, with the rest already in storage in Kaposvar. Six heaters were apparently overlooked and remained in the field until 1997. There were three of those working with three being utilized as backup. All of the heaters were placed in storage and continue to be on a permanent basis. From October 1996 to the present time, the heaters have been moved on one occasion, being November 1998, to facilitate a planned inspection pursuant to this litigation. The inspection in question did not materialize as B & R would not permit the introduction of new parts into the heaters.
THE LAW:
[81] A valid contract of sale of goods must evidence an intention to create a valid binding contract which affects the legal relationship between two parties. That intention must be considered against the backdrop of the law of fraud and misrepresentation in determining if a contract of sale of goods was validly created. As Fridman in Sale of Goods in Canada, 4th ed. (1995), stated at p. 43:
... The basic and governing principle is that the intentions of the parties are to be discovered by looking at what they have said and done, whether orally or in writing, and by testing their acts and language in accordance with what a reasonable man in the situation of the parties would have understood those acts and that language to have meant. ...
[82] The various documents primarily transmitted by facsimile and communications flying back and forth between the parties in December, 1995, constituted an offer and series of counter-offers. I find that the ultimate offer was in the form of B & R's formal Purchase Order of December 18, 1995. This offer was accepted by Aerotech as evidenced, firstly, by the invoices issued by it to B & R on December 18, 1995, and ultimately, by Aerotech's performance of the contract by the sending of the heaters.
[83] Accordingly, I find that the terms of the contract are as set out in the formal Purchase Order issued on December 18, 1995. These terms include B & R's Purchase Order Terms and Conditions, which I described and quoted from in paragraph 17 of this decision. In particular, it was a term of the contract as stated in paragraph 7 of the Purchase Order Terms and Conditions that the goods be new. Further, there was to be no substitutes or shipment of more or less than the quantity specified without the prior written approval of the buyer. These "requirements" were all contravened by the shipped heaters. The non-conformity of the goods allowed the buyer to reject them by giving notice.
[84] The status and condition of the heaters was well known to Aerotech who took no steps to relate that information to B & R. Instead, Aerotech took steps to disguise the fact that the goods were used by virtue of altering hour meters, painting, cleaning, reserializing and changing manufacture plates.
[85] Term and Condition 8 also provided specific warranty requirements which were not complied with:
¡¤ (a) The goods did not strictly conform to the specifications and other descriptions provided by Aerotech;
¡¤ (b) They were not of merchantable quality and fit for the purpose intended;
¡¤ (c) They were not free from defects in materials and workmanship; and
¡¤ (d) They were not new.
[86] Between a buyer and a seller any express statements about the character or quality of the goods is significant. The law is concerned only with remarks which might be classified as important and are intended to be taken as true assertions. It is clear that certain statements about goods can amount to a condition precedent or as an undertaking with respect to the character or quality of the goods as being part of their description. The fact that these heaters were to be new was both a condition precedent and a condition as to their character and quality. It may be that factors such as the identity of the manufacturer was not in itself a material inducement to entering into the contract. However, the totality of the misrepresentations directly impacts the character or quality of the goods generally. It also impacted B & R in that the totality of the "representations" operated to create an air of credibility with respect to Aerotech, which they relied upon to their own detriment.
[87] The Sale of Goods Act R.S.M. 1987, c. S10 contemplates that the goods be suitable for their purpose, in the manner they were intended to be used. The buyer must demonstrate that the defect was such as to destroy the workable character of the goods sold thereby amounting to a fundamental and total breach of the contract. I find such was the case here.
[88] Courts have held that goods which need something done to them in order to render them useable in accordance with the intentions of the buyer, even if what needs to be done is trivial, will not render them to be of merchantable quality. These heaters taken as a group were not of merchantable quality despite the fact only small mechanical deficiencies were evident on some. If something still has to be done to the goods, they will not be in a deliverable state and title will not pass, even if the purchase price has been paid.
[89] It is fundamental to any contract that the goods must be of the quality and fitness contracted for. If they do not correspond with that description there may be a breach of condition.
... It does not depend on what the seller himself thought he was promising, if the words and conduct by which he communicated his intention to the seller would have led a reasonable man in the position of the buyer to a different belief as to the promise; nor does it depend on the actual belief of the buyer himself as to what the seller's promise was, unless that belief would have been shared by a reasonable man in the position of the buyer. ... Ashington Piggeries v. Christopher Hill Ltd., [1971] 1 All E.R. 847 (H.L.) at p. 882.
[90] If different goods of improper quality are delivered then the seller has failed to perform his contractual duty. Also, if the goods are mixed with those of a different description (in this case, H81 model heaters), this too can frustrate the contract, as can delivery of goods which are short on quantity. All these circumstances exist in this case and are also contrary to the expressed Terms and Conditions.
[91] Term and Condition 9 deals with "warranty remedies". In the circumstances of this case, Aerotech did not comply with the warranty remedies by properly repairing or replacing, without cost, the goods in question.
[92] The issue of acceptance is of importance in this case. A buyer who does not accept the goods after the goods have been delivered is not bound to return the goods to the seller. It is sufficient that the seller be advised of the rejection. The buyer must then exercise reasonable care over the goods to protect them from loss or damage but, accordingly, can recover the cost of storage. B & R gave notice of rejection and have exercised reasonable care over the heaters. The fact that some of the heaters were "damaged" by B & R personnel must be weighed against the repair of other heaters. There was arguably a betterment in Aerotech's favour of the heaters' overall general condition.
[93] There must be a positive signification of approval or acceptance by the buyer, which includes dealing with the goods as if the owner thereof. The buyer must have a reasonable opportunity of examining the goods to determine whether they are in conformity with the contract. Further, if the buyer retains the goods for more than a reasonable time, acceptance will be deemed. In a number of cases it has been held that keeping and using goods for some time, in the hope that they might be made to work or be repaired, does not constitute acceptance. Again, as was stated in Fridman:
... A buyer who points out the defects in the goods he has bought, and attempts to have the seller rectify those defects over a period of time, does not accept the goods for the purposes of the exercise of his right to reject them for failure to be of the right quality. ... the buyer is entitled to a reasonable time within which the seller has an opportunity to make the goods function in accordance with the quality they ought to have under the contract. Until such reasonable time has elapsed, and while the efforts by the seller are taking place, the buyer's conduct in retaining the goods does not amount to acceptance. (p. 256)
[94] This would reflect the circumstances before the court, including the verbal rejection on December 22nd and written rejection, within a reasonable time, in March 1996. Aerotech was required to supply new goods. B & R personnel, because of the urgency of the heat situation, endeavoured to utilize and render functional the used heaters that were supplied. B & R did not signify acceptance by an attempt to repair nor did it retain the goods without reasonable notice of rejection. B & R can claim the return of the whole purchase price on the grounds of a total failure of consideration even though it "enjoyed" the possession and use of the goods for a period of time. I find that a fundamental breach of contract is reflected in this case.
[95] Aerotech maintains that fundamental breach is not a consideration given the fact that B & R received what it bargained. The International Sale of Goods Act, S.M. 1989-90, c. 18, Cap. S11 and particularly articles 38 and 49 were argued to enhance the position of Aerotech in that B & R took too long if it was intending to assert a fundamental breach or repudiation of the contract. Aerotech maintains that the conduct of B & R from December 22nd onward was demonstrative of keeping the contract alive, at least until the end of the heating season. I am persuaded that B & R repudiated the contract within a reasonable time.
[96] A fraudulent misrepresentation or misstatement, which is known to be such, by the seller is always a ground for having a contract declared void and for claiming damages if the buyer was induced into making the contract. As stated in Fridman, supra, at 156:
... This will depend on the conduct of the parties, their words and behaviour, rather than on their thoughts. If an intelligent bystander would reasonably infer that a term was intended, that will suffice. The test, here, as with contract generally, is objective, not subjective.
In this case, a reasonable buyer would have anticipated that new product was an intended and, indeed, an expressed term. There were clear misrepresentations by Aerotech and Sigurdson in this case.
[97] In the instance of fraud, a buyer can rescind the agreement and sue for damages. Rescission is not normally allowed if the buyer cannot return the goods as they were unless some adjustments are made. It has been found, however, that a buyer who has made repairs to goods may not always be barred. The fact that repairs were made to the heaters does not, in these circumstances, constitute acceptance or prevent rescission.
[98] Counsel for B & R has brought to the attention of the court a number of cases dealing with fraud, including the leading case Derry v. Peek (1889), 14 P.C. 337 (H.L.). As counsel for both parties have correctly articulated, there are four elements, being:
¡¤ 1. a false representation or statement;
¡¤ 2. which was knowingly false;
¡¤ 3. which was made with the intention to deceive the plaintiff;
¡¤ 4. and which materially induced the plaintiff to act, causing it damage.
It is against this framework that the evidence must be considered in this case. B & R rely on the cases of 473759 Alberta Ltd. v. Heidelberg Canada Graphic Equipment Ltd., [1995] 5 W.W.R. 214 (Alta. Q.B.) and Mining & Allied Supplies (Overseas) Ltd. v. Parks et al (1994), 96 Man. R. (2d) 91 (Q.B.).
[99] Counsel for Aerotech have relied on a number of cases which deal with fraud and when a contract is voidable and rescission possible. Essentially, the argument on behalf of the defendants is that the facts of this case do not facilitate a finding of fraud. Aerotech's counsel argues that all four elements of fraud are not met with respect to this matter. In the alternative, the element absolutely missing was any proof of material inducement causing damage.
[100] The onus of proof as stated in Continental Insurance Co. v. Dalton Cartage Co. Ltd. et al (1982), 131 D.L.R. (3d) 559 (S.C.C.), is a higher degree of probability than would be required if considering whether negligence was established. That case went on to say that it did not adopt so high a degree of proof as a criminal court, however, the degree of probability was said to be "commensurate with the occasion". (Laskin C.J.C., for the court, quoting Lord Denning in Bater v. Bater, [1950] 2 All E.R. 458 at p. 459.]
[101] The cases with respect to the issue of fraud indicate that fraud does not render a contract void, but only voidable: Racicot et al v. Bertrand et al, [1979] 1 S.C.R. 441. Consequently, Aerotech argues there was no election in this case to repudiate the contract and, arguably, all conduct was to the contrary. The act of continuing to work on the heaters, use of the heaters and their placement in the field, were all acts inconsistent with a repudiation of the contract. As was stated at p. 458 of the Racicot decision:
... A person who, being aware of the defect of his title to a property, nevertheless acts in all respects and for several months as an absolute owner and exercises all the rights of such an owner, demonstrates an unambiguous intent not to avail himself of the defect of his title.
[102] Counsel for Aerotech argued that B & R acted as owners of these heaters. Further, what it received was consistent with the deal struck on December 16, 1995. It is argued that B & R representatives, in their evidence, advised that Sigurdson told them that Aerotech needed six to eight weeks to work on the heaters, which was agreed would take place in Kaposvar. It was further argued that it was always a term of the "deal" that additional work and time would need to be expended to make the heaters operational. I find that B & R agreed that pre-service and start-up would be accomplished by the Aerotech technicians in Kaposvar. However, those technicians were expected to travel with the equipment and the start-up was to be of new machines. The repairs, replacement of parts and other work required on the shipped H82s was never contemplated by B & R.
[103] The case of Showtime Marketing Services Ltd. v. Lower Fraser Valley Exhibition Association, [1991] B.C.J. No. 3779 (B.C.S.C.) was relied upon by Aerotech in support of the proposition that when there is a suggestion of fraud, the party must decide at once whether to carry on with the contract or take immediate steps to repudiate. If the party continues to carry out the contract, it cannot later rely on fraud or misrepresentation as a defence to a complaint of breach of contract. B & R, it is argued, carried on with the contract.
[104] The four elements of fraud are as outlined in paragraph 98.
[105] The facts of this case clearly establish the first three elements of fraud as has been described particularly in paragraphs 66-71 of this decision.
[106] The question which must now be answered is whether there was damage experienced by the plaintiffs in this case. I am urged by B & R's counsel to follow Krindle J. in Mining & Allied Supplies (Canada) Ltd. v. 2390869 Manitoba Ltd. [1994] M.J. No. 444 (Man. Q.B.) to make a finding of fraud and to set punitive damages on the basis, as Mr. Leslie paraphrased from that decision, that when you "find a thief you must punish the thief". I find that many days were lost while B & R sought alternative heating sources after the H82 debacle. This, in itself, caused damage to B & R in time expenditure, resources and financial outlay. I am satisfied that there was damage based upon the evidence before me. This is despite the fact that there was no evidence that tents or troops went without heat, nor was there evidence any penalties were lodged against B & R under the LOGCAP contract. I find that damage was indeed incurred.
[107] I am mindful, as well, that B & R paid a significant sum for something that was valued in Aerotech's own financial statement at "nothing". I am persuaded to find it in these circumstances, based upon a heightened onus of proof, that fraud has been proven.
[108] Mr. Sigurdson, the sole officer, director and shareholder of Aerotech, is unquestionably the architect of the "deal", as well as the directing mind of the company. Sigurdson directed the commission of the acts obviously intended to misrepresent or disguise the true state and condition of the heaters, as described in paragraphs 47 et seq. of this decision. He, as well, was the author of the misrepresentations outlined in these reasons, as demonstrated in paragraph 66. If he at any time had advised B & R that the heaters were used, surplus military equipment, the "agreement" would not have transpired. If I am required to pierce the corporate veil to find fraud against both defendants, I am prepared to do so based upon the tests set out in Constitution Insurance Co. of Canada et al v. Kosmopoulos et al (1987), 34 D.L.R. (4th) 208 (S.C.C.).
[109] Mr. Sigurdson's conduct was clearly intended to induce B & R to purchase goods from Aerotech of a nature and condition clearly different than what was expected or contracted for.
[110] Aerotech also argued that the ownership of the heaters had passed to the United States of America and, hence, this court was not in a position to make any order.
[111] The defendants' counterclaim was modified before the close of Aerotech's case. The total counterclaim was decreased as follows:
¡¤ 1. Spare parts kits - $39,000.00 (U.S.) - deleted;
¡¤ 2. Technicians - lowered to $4,214.00 (U.S.);
¡¤ 3. Airfare - $10,038.75 (Canadian);
¡¤ 4. Excess baggage charge - $825.00 (Canadian);
¡¤ 5. Vehicle rental claim - $1,454.33 (Canadian).
CONCLUSION:
[112] I find that Aerotech was in breach of its agreement with B & R to provide new heaters and other goods and services as was outlined in the terms and conditions agreed to by the parties.
[113] I find, on a balance of probabilities, that the H82 heaters were not in a deliverable state and were not of merchantable quality, character or fitness that was contracted for. Nor were they suitable for the intended purpose.
[114] I also find there was no acceptance of the goods and the fact they were utilized in Kaposvar was simply as a stopgap measure because of the urgent need for heat. The use of the heaters did not constitute acceptance in this case.
[115] The conduct of Aerotech and specifically Sigurdson in these dealings was, for the lack of a better word, "appalling". There was a fundamental and total breach of contract. The used heaters, absence of spare parts kits, invoicing practices and lack of qualified technicians on a timely basis were all materially different from what was represented or contracted for. This entitles the plaintiffs to repudiation. Further, there was no undue delay in B & R's rejection of the goods to negate that remedy.
[116] There were clearly misrepresentations by Aerotech on many issues, but most importantly that the goods were to be new. The only evidence on behalf of Aerotech in this regard was by Marykuca indicating that issue was a "grey area". Any reasonable person in the position of B & R would expect delivery of new goods capable of performance and function - they were to be "New Product" as stipulated in Aerotech's brochure and "new goods" as required by the Terms and Conditions. The H82s were expected to have been tested during manufacture and, consequently, the set up was to be a simple task in the field and not something expected to take six to eight weeks while machines were cleaned, repaired and had parts added. At no time did any witness on behalf of the defendants, nor did the statement of defence, indicate that these goods were sold as used or surplus. There were also clear misrepresentations with respect to the availability of the technicians and their expertise.
[117] The misrepresentations are replete throughout this case but the question of "new" versus "old", the technicians and the spare parts kits best exemplify these issues. The spare parts kits simply did not exist, albeit B & R were invoiced and paid approximately $40,000.00 (U.S.) for them.
[118] If I am wrong in finding that there was a fundamental breach of contract, then rescission is available on the ground of misrepresentation. Both the fundamental breach and the misrepresentations go to the root of the contract. Further, rejection of the goods took place within a reasonable period of time.
[119] I also make a finding of fraud on the part of Aerotech and Sigurdson and grant rescission of the contract and damages. In this regard, I allow B & R $50,000.00 punitive damages as ... "it is completely appropriate that the thief be punished":Mining & Allied Supplies (Canada) Ltd. v. 2390869 Manitoba Ltd., para. 29.
[120] I am not prepared to accept the defendants' argument that there is no cause of action in this case because the goods properly belong to the United States government and all actions should have been brought by them. It is true that a government property number was placed upon these machines, however, that does not result in a finding that the government owns it. Further, there was no privity of contract between the United States government and the defendants, nor any direct dealings. Consequently, I find that the action was properly constituted.
[121] I find for the plaintiffs and award the following:
Cost of the heaters and other related equipment in the amount of $1,359,571.50 (U.S.);
Cost of shipment of goods to Kaposvar in the amount of $321,905.55 (U.S.);
Punitive damages in the sum of $50,000.00;
Costs of the action.
Pre-judgment interest in accordance with The Court of Queen's Bench Act .
[122] The defendants' counterclaim is dismissed.}}
Source
Fulltext available at the:
- Canadian Legal Information Institute, online at http://www.canlii.org
Commented on by:
- Peter Mazzacano, “Brown & Root Services v. Aerotech Herman Nelson: the Continuing Plight of the U.N. Sales Convention in Canada,” Pace Review of the Convention on Contracts for the International Sale of Goods, Sellier European Law Publishers [forthcoming, fall, 2005].
This case was appealed: see the Appellate decision of the Court of Appeal of Manitoba, 04.05.2004, Abstract and Fulltext in Unilex}}