Data
- Date:
- 21-08-2003
- Country:
- Canada
- Number:
- C993594
- Court:
- British Columbia Supreme Court
- Parties:
- Mansonville Plastics (B.C.) Ltd. v. Kurtz GmbH
Keywords
APPLICATION OF CISG BY VIRTUE OF PRIVATE INTERNATIONAL LAW RULES (ART. 1(1)(B) CISG).
LACK OF CONFORMITY (ART. 35 CISG) - SELLER NOT IN BREACH IF GOODS ULTIMATELY ABLE TO PRODUCE SUITABLE GOODS
RIGHT TO SUSPEND PERFORMANCE (ART. 71 CISG)
Abstract
A British Columbian manufacturer of expanded polystyrene (“EPS”) entered into a contract with an Austrian subsidiary of a German seller for the sale of a pre-expander and a block mould to be financed by a lease contract. Notwithstanding the fact that the buyer had agreed to provide the seller with a letter of credit prior to the shipment of the equipment, it failed to do so. After installation of the equipment, although the buyer had received assurances that the equipment would produce EPS products compatible with Canadian testing requirements, the buyer found several flaws in the blocks produced by means of the seller’s equipment. From July 1, 1997 to July 1999, the seller made several attempts to fix the problems but the equipment was able to produce suitable EPS products only almost one year after delivery. Then the buyer initiated an action against the seller for breach of contract and breach of statutory warranties of fitness.
As to the applicable law, the Court rejected the seller’s argument that the buyer had implicitly agreed to the application of German law. In the opinion of the Court, the mere fact that the seller’s confirmation of order stated that delivery was to be carried out according to “General Terms of Delivery of the [seller]” did not mean that a choice-of-law clause in favor of German law had been agreed upon by the buyer. Instead, the law having the closest relationship with the contract was the law of Ontario, Toronto being the place where the equipment had been installed and put into operation.
As to the seller’s argument that late delivery had been provoked by the buyer’s failure to open the letter of credit and that therefore the seller was entitled to suspend performance under Art. 71 CISG (the Convention being applicable as incorporated into Ontario law), the Court found that suspension of performance by the buyer was justified but only for two weeks. Since delivery was delayed for six weeks, such a delay amounted to breach of contract by the buyer.
Moreover, the Court held that the seller’s equipment could not be considered as non-conforming under Art. 35 CISG given that, notwithstanding the fact that for a long period of time after installation the equipment was unable to produce suitable EPS blocks, it ultimately became capable of doing so.
Without any further reference to CISG provisions, the Court found that the buyer had breached three of the five contractual warranties it had undertaken under the contract and held the seller entitled to damages for late delivery and breach of contractual warranties.
Fulltext
INTRODUCTION
[1] The Plaintiff ("Mansonville") claims damages in the approximate sum of $2.7 million against the Defendants (collectively "Kurtz") as a result of deficiencies and defects which Mansonville alleges in relation to two pieces of equipment which Mansonville purchased from Kurtz. Mansonville bases its claim in breach of contract and breach of statutory warranties of fitness.
[2] Kurtz defends the action on the basis that there were no breaches of contract or statutory warranties. Kurtz also maintains that Mansonville's claims are time-barred under German law, which it says is the applicable law.
FACTS
[3] Mansonville is in the business of manufacturing a product known in the industry as expanded polystyrene ("EPS") and more commonly known by the public under its trade name of styrofoam. Mansonville is owned by Mr. Mario Cormier, who has been involved in the industry for over 40 years. It has a plant in Surrey, B.C., on property which it shares with other companies owned by Mr. Cormier. Mansonville has a number of EPS products which it produces for sale into the construction, marina, packaging and forestry industries.
[4] Kurtz is a European based organization which has been in existence for over two centuries. Kurtz GmbH is a German company, Kurtz Altaussee GmbH is an Austrian company and Kurtz North America, Inc. is an American subsidiary. Kurtz makes equipment used for the production of EPS products. In addition to manufacturing equipment, Kurtz Altaussee GmbH has a plant in Austriawhich utilizes Kurtz equipment to produce EPS blocks.
[5] In simple terms, EPS products are manufactured out of a raw material known as resin or bead containing a liquid called pentane which turns into gas when exposed to heat. The first main stage of the manufacturing process is to treat the raw bead with steam in a machine called a pre-expander or prefoamer (which can either be of a batch or continuous variety). This process causes the bead to expand. The expanded beads are then placed on a fluid bed before they are stored for a period of time in bags made of porous material called silos. Both the placement of the beads on the fluid bed and their storage in the silos are for the purpose of allowing the beads to stabilize and to permit most of the pentane gas to be replaced with air.
[6] The beads are next placed in a machine called a block mould, where steam, acting together with the pressure and heat caused by it, is used to cause the beads to fuse in a single piece of EPS. The size of the fused block depends on the dimensions of the block mould or, if the block mould is adjustable, the dimensions at which it is set. The block is then given a further period of time to cure, after which it is cut or ground into the size of the product which is needed. If a block is required to be square or rectangular but is irregularly shaped when it comes out of the mould, it is necessary to have the block trimmed so that it becomes square or rectangular.
[7] A Canadian standard has been established for thermal insulation products such as EPS. It is necessary for a producer to meet the Canadian standard in order to sell EPS blocks into the construction industry in Canada. The standard creates four types of product which are differentiated by the density of the product. Mansonville produces Type 1 and Type 2 products, the latter of which has a higher density and is not as lightweight. The two main tests which the product must pass in order to fulfill the standard are a compressive test and a flexural test. The standards for the compressive test for Type 1 and Type 2 materials are a minimum of 70 and 110 kilopascals ("kPa"), respectively, and the standards for the flexural test for Type 1 and Type 2 materials are a minimum of 170 and 240 kPa, respectively. The tests are administered by an independent organization, which in the case of Mansonville is a firm called Intertek Testing Services NA Ltd. ("Intertek").
[8] In addition to Type 1 and Type 2 products, Mansonville manufactures products which are called non-conforming products. This means that they do not need to conform to the Canadian standards. These products are used for packaging and landscaping fill. The objective is to produce the non-conforming products at as low a density as possible because a lower density means that fewer beads are required to manufacture the products (which represents a saving in the cost of raw materials).
[9] In the fall of 1996, Mansonville decided to upgrade its equipment through the acquisition of a new pre-expander and block mould. After consulting with its accountants, Mansonville decided to finance the purchase of the new equipment by way of a lease transaction through National Capital Leasing Ltd. ("National Capital"), a leasing company from which Mansonville had previously leased other equipment. This meant that the equipment supplier would sell the equipment to National Capital which, in turn, would lease it to Mansonville for a period of time, following which Mansonville would have the option of purchasing it from National Capital.
[10] The Mansonville employee charged with the responsibility of making inquiries and negotiating with equipment suppliers was Mr. Bob Teperto, the General Sales Manager, but he was required to obtain final approval from Mr. Cormier before making any commitments on behalf of Mansonville. The Mansonville employee given the responsibility to deal with the financing for the purchase of the new equipment was Ms. Dona Hurry, Vice-President, and she was similarly required to obtain final approvals from Mr. Cormier.
[11] Mansonville looked into several different brands of equipment. It had been Mr. Cormier's initial inclination to purchase the block mould from a manufacturer known as Idropress but Mr. Teperto investigated other types of equipment. Mansonville had previously purchased equipment from Kurtz and in the fall of 1996 a Kurtz sales representative came to Mansonville's plant. Brochures containing information about pre-expanders and block moulds manufactured by Kurtz were provided to Mr. Teperto by this sales representative or as a result of a subsequent inquiry by Mr. Teperto.
[12] In December of 1996, Mr. Teperto wrote to Kurtz requesting that he be provided with a quotation in respect of the pre-expander and block mould. Kurtz provided two separate quotations dated December 18, 1996, one relating to the pre-expander and one relating to the block mould. These became the subject matter of negotiation between the parties and led to the agreement between them. Each of the quotations began with the phrase "We are pleased to quote in accordance with our general terms of sale and delivery as follows".
[13] In January 1997, Mr. Teperto travelled to some locations in the United States to investigate equipment and he then travelled with Mr. Cormier to Europe in the beginning of February 1997. In the meantime, there were apparently negotiations between Mansonville and Kurtz regarding the terms of payment because a revised Kurtz quotation referenced a letter dated January 31, 1997, although neither party is able to produce a copy of this letter. The evidence was to the effect that the payment terms in the initial quotation were in accordance with Kurtz's normal policy (namely, 1/3rd down payment, 1/3rd upon shipment and 1/3rd within 60 days after shipment) and that Kurtz's policy was to require security if the final payment was to be in an amount greater than 1/3rd of the purchase price.
[14] While in Europe, Messrs. Teperto and Cormier met with Kurtz representatives and also travelled to Italy to view the Idropress block mould. Mr. Teperto testified that he was told the following by the Kurtz representatives, Mr. Herbert Jaksch and Mr. Rudi Albrecht, during this trip and during their previous telephone discussions:
(a) the Kurtz equipment was high quality and state-of-the-art;
(b) Kurtz was familiar with all world markets and was familiar with Mansonville's needs and there would be no problem with meeting Canadian standards for EPS products;
(c) the Kurtz equipment were simple machines to operate and were very operator friendly;
(d) the Kurtz representatives referred to the Kurtz brochure in connection with densities to be achieved for Type 1 product, which referenced a density of 13 grams per litre ("g/l") (which is equivalent to .81 pounds per cubic foot ("lbs./cu. ft.")), they said that the equipment would yield 1.25 lbs./cu. ft. for Type 2 product and they said that the equipment could achieve a density of .70 lbs./cu. ft. for non-conforming products;
(e) the cycle times for the block mould were 2 ½ to 3 minutes; and
(f) there would be no draft or taper on the blocks in order to allow them to be ejected from the mould (Mr. Teperto told Mr. Jaksch that if Mansonville did not need to trim blocks for some of its products, it would save Mansonville a lot of money and make it more competitive and more profitable).
[15] Mr. Cormier testified that he was told the following by the Kurtz representatives during the trip:
(a) the moveable wall of the block mould could be programmed so that it would open at the same time as the block expanded in the mould;
(b) the moveable wall would be dead straight and the blocks would not have to be trimmed;
(c) it would be no problem to reach a density of .70 lbs./cu. ft. with one pass of the bead on the pre-expander;
(d) the block mould would pass the standards for Canada and the United States; and
(e) the equipment could be manufactured in four months.
[16] As a result of their investigations, Messrs. Cormier and Teperto decided that they preferred the Kurtz equipment and, when they returned to Canada, Mr. Teperto wrote to Mr. Jaksch on February 7, 1997. The letter attached summaries of Mr. Teperto's understanding of the equipment to be purchased (as well as some equipment which was not ultimately purchased) and each of the two relevant summaries incorporated the terms and conditions as quoted by Kurtz (as amended by the January 31, 1997 letter and as amended by handwritten changes made by Mansonville on the quotations). The aggregate purchase price for the pre-expander and block mould was 992,000 German deutsche marks ("DM"), or approximately $805,000 (Cdn.).
[17] The quotation for the pre-expander contained certain specifications of the equipment. It stated that the density range would be 12 to 30 g/l. It also stated the anticipated outputs according to various densities from 13 g/l to 25 g/l (for example, at a density of 18 g/l, the output was represented to be 2480 kg/h), but it did not state the anticipated outputs at the two extremes of the density range. The delivery time was expressed to be four months after clarification of all technical and commercial details. The payment terms, as revised, referenced the missing letter of January 31, 1997 and stated as follows:
30% Down payment with order confirmation (Note: order confirmation can arrive with Letter of Intent from financial institution until paperwork finalized).
30% Upon notification of shipment.
40% 60 days after delivery by an irrevocable Letter of Credit to be opened in our favor with Creditanstalt - Bankverein in A-8010 Graz, Herrengasse 13-15. Payable at sight in Austria. All charges of the issuing bank are to be paid by the purchaser. Part shipment and transhipment allowed in the L/C has to be opened on receipt of the order confirmation as otherwise we might not be able to meet the delivery date.
[18] The quotation for the block mould stated its dimensions (which had been revised by Mansonville and were set out in Mr. Teperto's summaries). Added to the quotation was the requirement that there be a program option to move the sidewall during fusion as a secondary program at no charge. The delivery time and payment terms were the same as were contained in the quotation for the pre-expander.
[19] In his February 7 covering letter, Mr. Teperto stated that the letter of credit was in process and would be forwarded by February 14, 1997, and he asked if Mansonville could still have shipping on May 20, 1997 as discussed. He asked Mr. Jaksch to sign each page of his summaries and to return them. Mr. Jaksch did sign and return the summaries, and the only change he made was to clarify that the quoted terms and conditions had been revised by the January 31 letter. Mr. Teperto, who was not involved in the negotiation of the terms of payment, testified that he was leaving the arrangements for a letter of credit to Mr. Cormier and Ms. Hurry. Mr. Cormier testified that he did not do anything to obtain a letter of credit and that he did not authorize anyone else to get a letter of credit. Ms. Hurry testified that she was unaware of the contents of Mr. Teperto's covering letter and that Mansonville was not making any effort to obtain a letter of credit at the time. Ms. Hurry explained that as the equipment was to be leased by Mansonville from National Capital, she was leaving the requirement for the letter of credit up to National Capital. She was advised by National Capital that there was a legal issue which prevented an equipment lessor arranging for a letter of credit and it was her expectation that National Capital would deal with Kurtz on this point.
[20] Mr. Jaksch of Kurtz travelled to Mansonville's plant mid-February 1997 and one or two other occasions leading up to the finalization of the order. He was shown where Mansonville intended to install the new equipment within its plant and he worked with Mr. Teperto on a footprint drawing of the plant and the hook-ups for the equipment.
[21] On March 3, 1997, National Capital sent to Kurtz a document called a purchase order in respect of the pre-expander, the block mould and another piece of equipment which was later deleted from the transaction. The document stated that it was given in reliance of Kurtz's assurance that the "Lessee" had selected the equipment and had agreed to accept it. It stated the purchase price and terms of payment as set out in Kurtz's revised quotations, but without reference to a letter of credit.
[22] In response to the purchase order sent by National Capital, Kurtz sent it an order confirmation dated March 6, 1997 in respect of both items of the equipment. It repeated the specifications contained in Kurtz's two quotations, as revised by the summaries sent to Kurtz by Mr. Teperto on February 7 (including the program option to move the sidewall during fusion as a secondary program). Beside the heading "Delivery" was written "week 24/97" (i.e., the 24 th week of 1997, which was the week of June 8). It stated that "delivery is carried out according to the 'General Terms of Delivery of the Kurtz Group' ". The payment terms were as follows:
30% Down payment with order confirmation
30% Upon notification of shipment
40% 60 days after delivery by an irrevocable Letter of Credit to be opened in our favour with Creditanstalt - Bankvere in A-8010 Graz, Herrengasse 13-15, account no. 0087-76171/00. BLZ 11870, Swift Code CABVATWWGRA. Payable at sight in Austria. All charges of the issuing bank are to be paid by the purchaser. Part shipment and transhipment allowed. The L/C has to be opened on receipt of the order confirmation.
Subsequent order confirmations were issued by Kurtz to National Capital as a result of the insertion and deletion of certain ancillary equipment in the order but nothing material changed with respect to the pre-expander and the block mould.
[23] Kurtz invoiced National Capital for the 30% down payment on March 10, 1997 and payment was made on the same day. The letter of credit was also to have been opened at this time. It appears that Mr. Holland of National Capital had one or more conversations with Mr. Jaksch of Kurtz about National Capital's difficulty with respect to a letter of credit. On May 2, 1997, Mr. Jaksch wrote to Mr. Holland asking that he be provided with written notification that the last payment of 40% would be effected either by bank guarantee or by payment at the same time as the second payment of 30%.
[24] In the middle of April 1997, Mansonville had written to Kurtz requesting that it provide the best shipping date for the equipment. Kurtz replied on May 7 that the pre-expander would be shipped at the end of week 22 and the block mould would be shipped at the end of week 24, with delivery approximately four weeks later. In Mansonville's next correspondence to Kurtz, no mention was made of the shipping or delivery dates being late.
[25] Payment of the second instalment of 30%, which was to be made on notification of shipment, was made by National Capital on May 21. On that same day, Ms. Hurry wrote to Kurtz about the fact that Kurtz had told National Capital that the final payment was either to be made in advance or with a letter of credit. She raised the fact that if Mansonville made the final payment at that time, it would incur extra interest charges, and she inquired whether Kurtz would be willing to pay for the extra interest. She also made the observation that Mansonville's experience was that if a purchase was paid 100% in advance, the attitude of the seller was to put the buyer on the back burner, and she stated that it was imperative that Mansonville receive the equipment as scheduled.
[26] Mr. Walter Kurtz replied to Ms. Hurry's letter on May 22. He stated that due to negative experiences, Kurtz was insisting on getting a guarantee and he pointed out that the opening of a letter of credit was part of the conditions of payment. He asked to be advised of the cost of a letter of credit or advance payment and stated what they would then decide how to come to a mutual agreement.
[27] Ms. Hurry replied on the following day and proposed that if Kurtz would give a discount of 3/4% on the total contract price, Mr. Cormier would personally deliver a bank draft for the balance of the price when he travelled to Kurtz's plant to witness the commissioning of the block mould upon the completion of its manufacture. Further communications ensued and Kurtz agreed to discount the purchase price by 4200 DM (which was approximately one-half of the cost of an early drawdown of the final instalment of the lease financing) if the balance of the price was paid at the time of the commissioning of the equipment.
[28] Mansonville had decided that the personnel which operated its existing pre-expander and block mould were not sufficiently qualified to operate the new Kurtz equipment. It hired two graduates of British Columbia Institute of Technology, Alfred Oostenbrink and Brent Foster, who completed a two year diploma course in plastics technology in the spring of 1997. They commenced work at Mansonville in May 1997 and spent their first few weeks working with the staff operating the existing pre-expander and block mould. In early June, Messrs. Oostenbrink and Foster travelled to Germany and Austria for the purpose of being trained on Kurtz equipment. Mr. Oostenbrink testified that they were taught for one day about basic block moulding principles and that, while they observed Kurtz employees making some blocks, they were not given the opportunity to make blocks on their own.
[29] Mr. Cormier travelled to Kurtz's plant in Altaussee, Austria, for the commissioning of the equipment and he joined Messrs. Oostenbrink and Foster in the middle of June 1997. Mr. Cormier was not satisfied with the commissioning of the equipment. He testified that the construction of the equipment had not yet been completed when he arrived (among other things, the hydraulics for the programmable wall had not yet been installed) and the blocks which were made did not have good fusion. Mr. Kurtz testified that the purpose of the commissioning was to test the operational parts of the equipment and that it was not expected to produce good blocks because the Kurtz plant in Altaussee did not have sufficient steam capacity for a block mould of that size.
[30] As a result of Mr. Cormier's dissatisfaction with the commissioning, Mansonville did not release to Kurtz the bank draft it had been given by National Capital for the balance of the price of the equipment. He also told Mr. Jaksch that he wanted a guarantee from Kurtz that the block mould would be as good as or better than the Idropress block mould in terms of quality, fusion and cycle times.
[31] Around the time Mr. Cormier returned from Austria, Mr. Teperto requested Kurtz to provide shipping details for the equipment. By fax dated June 25, Kurtz advised that the pre-expander had been shipped, with an estimated time of arrival in Vancouver of July 11, and that the estimated time of shipment of the block mould was July 2, with an estimated time of arrival in Vancouver of July 28. The fax also asked Mansonville to fax a copy of the bank transfer regarding the final payment so that Kurtz could confirm the arrangement for the shipping of the block mould and so that the block mould could leave the harbour at its scheduled time without incurring storage charges.
[32] On June 23, Mr. Kurtz wrote to Mr. Cormier stating that Kurtz did not know what Idropress was guaranteeing its customers and that what he could guarantee was that the block mould would produce blocks which are within the standards set by the German Industry DIN. A copy of these standards was enclosed with the letter.
[33] Mr. Cormier and Ms. Hurry sent a fax to Mr. Kurtz on June 29, apparently following telephone communications between representatives of the two companies. The fax recounted that Mansonville had suggested that the bank draft be put in the hands of Kurtz's lawyer on an undertaking that it would not be released until the mould was set up and running. The fax also recounted that this suggestion had been rejected by Kurtz, which took the position that it still wanted the letter of credit. In view of Kurtz's position, Mansonville stated in the fax that the bank draft would have to be returned to National Capital and that the letter of credit would be in hand by the end of the following week.
[34] Mansonville apparently had a change of heart, presumably because National Capital was still declining to have the balance of the purchase price paid by way of a letter of credit. By letter dated July 3, Ms. Hurry advised Kurtz that National Capital would be making a bank transfer to it. In her letter, Ms. Hurry complained that Kurtz would now have everything and Mansonville had nothing so far. The bank transfer was made and Kurtz received the balance of the purchase price on July 9.
[35] The pre-expander was shipped in late May or early June 1997 and was received at Mansonville's plant in mid-July 1997. Kurtz shipped the block mould on or about July 16 (week 29) and it arrived at Mansonville's plant in mid-August (week 33).
[36] Mr. Cormier wrote to Kurtz on July 23 setting out his perspective of the events surrounding the letter of credit and the delay in shipping. Mr. Cormier made the following statements in his letter:
On May 8th, we received confirmation from you and a fax from Mr. Sallfeldner May 7th stating that the calendar week of shipping would be week 22 for the pre expander and week 24 for the block mold.
... The agreement being that I would be present in Austria for the commissioning of the mold in week 24 and was prepared to hand [the bank draft] over to you or have it wired to your bank immediately upon seeing the equipment up and running.
The prefoamer did leave on time as scheduled ...
According to the shipping notice on June 25th , the block mold was not scheduled to leave now until week 27, (July 2nd ) ...
... This delay in your refusal to accept payment and still insisting on a L/C ... caused a weeks delay ... Disgusted with the whole affair, we sent the bank draft to your bank account by courier. Which obviously you received and now the container left July 15th, thirteen days later. A delay which we consider totally your responsibility. We calculate a total delay of 32 days.
Kurtz did not respond to Mr. Cormier's letter.
[37] Kurtz technicians travelled to Mansonville's plant near the end of August 1997 for the installation, start up and training in respect of the equipment (the pre-expander, which had been shipped prior to the block mould, had already been put into operation by Mansonville's staff). When the technicians first arrived, Mr. Cormier had an angry attitude towards Kurtz as a result of the delay in the delivery of the equipment, but his anger tempered after the block mould was set up and began producing blocks.
[38] On September 4, Ms. Hurry signed a document acknowledging that the pre-expander and block mould were running, that the Mansonville staff had been trained and that 300 blocks had been made and were okay. The document also attached a list of nine mechanical items which Mansonville's technician, Alfred Oostenbrink, completed at Kurtz's request. Ms. Hurry testified that she signed the document because the Kurtz technician, Karl Schnitzhofer, wanted a senior Mansonville officer to sign it. She said that when she signed the document, she had attended at the plant and saw that the blocks being produced appeared to be okay on the outside, but she had not seen any of the blocks in a cut state (which would show the degree of fusion in the centre of the blocks). Mr. Schnitzhofer testified that the mould was making good blocks and that he was able to see that they had fused properly when they were cut into sheets. The Kurtz technicians then left Mansonville's plant and returned home.
[39] By mid-September, Mansonville was experiencing problems with the fusion in the blocks. Ms. Hurry attempted unsuccessfully to get in touch with Mr. Schnitzhofer. On October 2, Ms. Hurry wrote to Mr. Jaksch outlining three problems with the manufacturing process which Mr. Oostenbrink had told her about (namely, the start-up of the pre-expander was blowing fuses, the moveable sidewall was not properly returning to its position and there were difficulties with getting fusion for Type 2 blocks). Mr. Jaksch did not respond to Ms. Hurry's letter but it appears that he eventually had Mr. Peter van Deursen, an employee of Kurtz North America, get in touch with Mr. Oostenbrink. Mr. Van Deursen made some suggestions to Mr. Oostenbrink in the latter part of October.
[40] On October 27, 1997, two Kurtz representatives, Mr. Ron Watkins of Kurtz North America and Mr. Rudi Knörzer of Kurtz GmbH, visited Mansonville's plant by way of following up on the sale of the equipment and to clarify the outstanding problems. They met with Mr. Cormier and Mr. Teperto, and discussed the problems with them.
[41] A Kurtz technician, Mr. Randy Scholwin, attended at Mansonville's plant near the end of October 1997. The Kurtz service report stated that the purpose was to fix problems with the pre-expander and block mould. Ms. Hurry signed the service report by way of confirming that Mansonville was satisfied with the work completed. In signing the report, Ms. Hurry added a qualification that the work on the moveable wall was a temporary fix and that there would have to be an eventual correction to the software for the moveable wall. Ms. Hurry testified that in signing this document, she was not intending to sign off on the fusion problem.
[42] On November 11, each of Mr. Knörzer and Mr. Watkins wrote letters to Mr. Cormier with reference to their October 27 meeting. Mr. Knörzer stated that he was very keen on finding a solution for the problems with the pre-expander and the block mould as soon as possible and that Kurtz was doing everything to put the machine in good operating condition. In his letter, Mr. Watkins stated that Mansonville's concerns and problems had been passed on within Kurtz and that progress was being made.
[43] There were further communications between Mansonville and Kurtz during November, and arrangements were made for Mr. Jaksch and Mr. Scholwin to attend at Mansonville's plant at the beginning of December. Arrangements were also made by Mansonville for the attendance of representatives of two of its bead suppliers, Styrochem and BASF. In the meantime, Mansonville wrote to Kurtz on November 27 stating that the major issues requiring discussion were (i) controlling the density at the prefoaming state, (ii) getting fusion in the blocks at the block moulding stage, and (iii) completing repairs on the block mould. The letter also referenced program changes which needed to be considered.
[44] The representatives of Kurtz, Styrochem and BASF spent parts of the first week of December at Mansonville's plant. Different Styrochem and BASF beads were pre-expanded and a number of blocks were produced utilizing different settings on the block mould. No solutions to the density and fusion problems were found. When the Kurtz representatives left, they made some suggestions with respect to the pre-expander process.
[45] Kurtz then dispatched Mr. Schnitzhofer, who had been involved in the start-up of the equipment, to the Mansonville plant. He arrived at Mansonville's plant on or about December 12 and worked with Mr. Oostenbrink for approximately one week. Mr. Schnitzhofer made adjustments to the settings and some improvement was made in the quality of the blocks.
[46] Intertek, the independent testing firm, had been pressing Mansonville to have its product re-certified in view of the change in its moulding equipment. On December 16, an Intertek representative conducted a routine inspection of Mansonville's plant and took samples for testing. When subsequently tested, the samples did not meet the flexural strength minimum requirement of the Canadian standards. The samples did meet the compressive strength minimum of the Canadian standard for Type 1 product but the samples were of relatively high density and they did not come close to meeting the Type 2 standard.
[47] When Mr. Schnitzhofer left on December 17, there was a discussion about him returning to the Mansonville plant in the second or third week of January 1998. Mr. Schnitzhofer had understood that Mansonville was installing new storage silos and a new mixing station. Mr. Schnitzhofer did not return in January because Kurtz felt that the new silo plant should be installed before he undertook further testing. On January 22, 1998 his supervisor, Mr. Mittermair, wrote to Mansonville inquiring as to, among other things, whether the work was completed on the silo plant and mixing station.
[48] Mr. Mittermair apparently wrote a follow-up letter to Mansonville on February 13 and Mansonville responded on the same day (Mr. Mittermair's letter appears to have been misplaced by both sides but Mansonville's response references a fax of February 13 from him). The letter opened with a complaint that Mr. Schnitzhofer's return to its Mansonville's plant did not need to await the completion of the installation of the new silos and mixing station. The letter stated that the areas to be resolved were that (i) the program for the moveable wall had to be fixed, (ii) the moveable wall was crooked in the sense that it did not produce square or rectangular blocks, (iii) an adjustment had to be made to the chains on the moveable wall, (iv) the steam piping had to be reconfigured as a result of an error in the Kurtz blueprint showing where the piping connected to the block mould, (v) the fusion in the blocks had to be sufficient to meet the Canadian testing standards, and (vi) the pre-expander had to be able to prefoam bead at a density as low as .75 pounds per cubic foot for non-conforming products as Mr. Jaksch had promised when the equipment was ordered.
[49] Mr. Schnitzhofer returned to Mansonville's plant on or about March 5. This was one day after an Intertek representative attended at the plant. As a result of the inspection, Intertek issued a discrepancy report which listed three basic discrepancies: (i) there was no in-house testing equipment, (ii) the Styrochem beads were not qualified, and (iii) the requirement to meet the Canadian standard was outstanding. On or about March 12, Intertek told Mansonville that it could no longer use the stamps in its possession signifying certification of its product and it physically removed the stamps from Mansonville on the same day or a few days later.
[50] When Mr. Schnitzhofer arrived, the installation of the new silo plant had not yet been fully completed. He began giving instructions to Mr. Oostenbrink in connection with the prefoaming of beads and production of blocks on the first two days of his attendance at Mansonville's plant. He was then postponed in his main endeavours for approximately 10 days because Mr. Cormier wanted Mansonville to fill an order and to bring in an outside contractor to reconfigure the steam pipe leading to the block mould so that it would no longer have a double bend in it.
[51] Mr. Cormier and Ms. Hurry attended an open house at the North American head office of Kurtz in Wisconsin, where they met with Kurtz representatives, including Mr. Walter Kurtz, on or about March 12. While they were attending the meeting, Mr. Cormier received a telephone call from Mr. Teperto advising him that the Intertek representative was at Mansonville's plant for the purpose of removing the certification stamps. As a result, Mr. Kurtz and Mr. Albrecht travelled to Mansonville's plant, where a meeting was held on March 16 between them, Mansonville representatives and the Intertek representative. They discussed the test criteria and the types of beads involved. There was agreement between them with respect to a process upon which Kurtz would embark to work through different settings at different densities on four types of beads in an effort to reach the certification standards. It was agreed that the first bead to be used was one manufactured by Styrochem because it was the one which had been the most reliable in the past.
[52] Mr. Schnitzhofer recommenced his experimentation on March 17. Mansonville did not have the Styrochem bead in stock and Mr. Schnitzhofer had to work with a softer bead until some Styrochem bead was delivered. He worked for the next week in an effort to improve Mansonville's product. Some samples were taken to a less expensive testing agency, Powertech, on or about March 25. Powertech was able to immediately give the results of the flexural tests for six samples taken from two of four blocks. Five of these six samples met the Canadian standard for the flexural test and Mr. Schnitzhofer mistakenly believed that the sixth sample would have met the standard if it had a thickness of one inch.
[53] It was at this point that Mr. Cormier told Mr. Schnitzhofer to leave Mansonville. Mr. Cormier testified that he told Mr. Schnitzhofer to leave Mansonville's plant on March 25 because he did not perceive any significant improvement in the quality of the blocks and he believed that the cost of continued experimentation would lead Mansonville into bankruptcy. Mr. Schnitzhofer testified that although the samples had passed the flexural test, Mr. Cormier expressed the view that the density was too high and that after he answered an inquiry from Mr. Cormier to the effect that he believed that he had made good blocks when he was there in December, Mr. Cormier told him to leave.
[54] Powertech subsequently provided all of the test results to Mansonville. Other than 5 of the 6 samples in respect of which Mr. Schnitzhofer learned the results prior to his departure, none of the other 12 samples passed the flexural test. None of the 5 samples which passed the flexural test also passed the compression test, with the result that none of the samples met the Canadian standards for Type 1 or Type 2 product.
[55] An Intertek representative re-attended at Mansonville's plant on March 30 and April 1 to take samples for testing. The preponderance of the evidence indicates that the representative took the March 30 samples from blocks that were moulded on the day of Mr. Schnitzhofer's departure and that the April 1 samples were moulded on March 31. The evidence also indicates that the beads for these blocks were not prefoamed at excessive densities. Although it was not known until Intertek issued its report on May 15, the samples passed the Canadian standard tests for both Type 1 and Type 2. Mansonville's product was again certified for Canadian purposes.
[56] On March 31, Mansonville wrote to Mr. Rainer Kurtz, the brother of Walter Kurtz, complaining that its problems had still not been resolved and that the product produced by the block mould had failed testing, resulting in Mansonville losing its certification. The letter complained about Mr. Schnitzhofer and referenced the fact that Walter Kurtz was coming to Mansonville's plant on April 6 and 7 for the purpose of making decisions pertaining to the performance of the block mould and the prefoamer. The letter stated that Mansonville needed to know the intention of the Kurtz organization to correct the problems and requested Rainer Kurtz to also attend the meeting.
[57] Walter Kurtz wrote to Mr. Cormier on April 3 to advise that he would not be able to come to Mansonville's plant on April 6 as a result of unforeseen urgent meetings (although he testified that the real reason he did not come was because there was nothing further Kurtz was prepared to do in view of the fact that Mansonville had sent its top technician away). Nor did Rainer Kurtz travel to Mansonville's plant. He did write to Mansonville on April 7 to state that he could not personally do more for Mansonville. He commented that while Kurtz's customers normally conducted tests to determine the optimum production parameters based on the local situation and the raw material which is used, Kurtz had sent Mr. Schnitzhofer to support Mansonville, with the last visit being from March 4 to 26. The letter asserted that Mansonville seemed to have its own ideas with respect to the steps to determine the correct production parameters and that Kurtz was not responsible in the event that Mansonville's procedure was not successful.
[58] The parties exchanged two more letters setting out their perspectives of the past activities and their positions. In Mansonville's letter dated April 13, 1998, it enclosed invoices paid by it in connection with the reconfiguration of the steam piping, the replacement of the contactors on the block mould and new hoppers Mansonville had to obtain because Kurtz had shipped the wrong size of hopper. Kurtz reimbursed Mansonville in respect of these invoices in the amount of approximately $32,000.
[59] In Kurtz's final letter of June 9, 1998, it took the position that the block mould was mechanically in order and that it had fulfilled its normal delivery range (although the letter ended off with a statement that Kurtz was prepared to assist in the future). Although Mansonville had been quick to complain in writing about its problems in the past, it did not respond to this letter. When Mansonville next sent correspondence to Kurtz on September 29, 1998 regarding payment of an invoice, there was no mention of Mansonville continuing to experience problems with the equipment.
[60] Apart from one dealing in connection with a specific difficulty with the equipment, there was no further communication between Mansonville and Kurtz regarding the performance of the equipment and no further attendances were made to Mansonville's plant by Kurtz technicians. The one dealing occurred in November 1998 when the moveable wall was out of alignment by almost five inches from its top to bottom. Kurtz gave Mansonville instructions with respect to the re-alignment of the wall and these instructions were carried out successfully by Mansonville.
[61] Mr. Oostenbrink testified that after Mansonville got its certification back in mid-May 1998, he continued making blocks with high density in order to maintain the certification and that the quality of the blocks improved slowly as he made small changes to the settings. He believes that the most important changes he made related to two aspects of a butterfly valve which regulated the amount of pressure in the block mould during the various stages of production.
[62] Mr. Oostenbrink testified that the first aspect involved a programming change made by Mr. Schnitzhofer in respect of a butterfly valve when he came to Mansonville's plant in March 1998 so that the steam pressure could reach a higher level (although Mr. Oostenbrink had to concede in cross examination when confronted with documentation that the setting had been at the higher level in December 1997). The second aspect was that Mr. Oostenbrink ensured that the setting of the butterfly valve was such that the steam flaps did not vary by more than 5% during any of the stages of production of the block. As a result, it is Mr. Oostenbrink's opinion that the steam is able to get all of the way through the block before the sealing of its outside surfaces and that the fusion occurs at an earlier stage of the production. The other important change in the opinion of Mr. Oostenbrink is that commencing in June 1999, where lower densities are required for approximately 40% of Mansonville's product, the beads have been given two passes during the pre-expansion stage (once with the Kurtz batch pre-expander and once with Mansonville's previous continuous pre-expander).
[63] Mr. Oostenbrink believes that most of the improvement occurred in the first part of 1999 and that Mansonville turned the corner in mid-1999 when he began giving beads a double pass through Mansonville's previous continuous pre-expander. Other Mansonville witnesses testified that the sales staff began intensified marketing at some point in 1999 (Mr. Teperto testified that it began in July 1999 and Mr. Cormier testified that it was near the end of 1999). Mansonville's sales started to climb significantly in July 1999.
[64] Mansonville's banker had become concerned about its performance. It was incurring losses and its operating line of credit had increased by a substantial amount. In October 1999, Mansonville's banker engaged PricewaterhouseCoopers ("PwC") to conduct a review and assessment of Mansonville. PwC issued a report dated November 29, 1999, in which it set out certain statements made to it by Mansonville's management.
[65] Mr. Cormier testified that one of the reasons for purchasing the Kurtz equipment was to expand Mansonville's market into the United States, particularly in the indirect sense of selling EPS to a related company which would sell laminated products containing EPS into the United States. In order to sell product into the United States, it is necessary for Mansonville's product to meet the U.S.standard, which is called ICBO. Mansonville underwent ICBO testing in July 2001. It has received its ICBO certification for Type 1 product and it has been orally advised that it has passed the ICBO test for Type 2 product. Mr. Oostenbrink gave evidence of his view that Mansonville's product was ready for ICBO testing by the end of 1999.
[66] Mansonville claims damages in respect of the inability of the Kurtz equipment to produce blocks of the quality anticipated by it for the period from July 1, 1997 (the start-up date anticipated by Mansonville based on delivery by mid-June 1997) to July 1999 (the earliest date Mansonville concedes that the equipment was producing satisfactory product). In addition to general loss of profit, these damages include (i) an alleged loss of a contract in respect of a project involving the Seattle Music Museum in the summer of 1997, (ii) the loss of sales to Mansonville's related company which was to sell laminated products into the United States market, and (iii) extra interest charged to Mansonville by its banker. Mansonville further claims damages in respect of the following matters which it claims to be continuing deficiencies in the equipment:
(a) extra trimming costs as a result of the fact that the blocks are not square;
(b) the loss occasioned by the non-operation of the density reduction program;
(c) the extra cost of double passing beads in the pre-expansion stage in order to meet the required densities; and
(d) the cost to rectify a leaky bearing on the pre-expander which has water leaking through the seal and which can potentially cause damage to the reduction gear and the electric motor of the pre-expander.
ISSUES
[67] The issues to be decided in this case are the following:
(a) are Mansonville's claims time-barred?
(b) is Kurtz liable for late delivery of the equipment?
(c) did the equipment breach statutory warranties of fitness?
(d) what were the contractual warranties given by Kurtz?
(e) were there breaches of the contractual warranties?
(f) what was the duration of the breaches?
(g) is Kurtz liable in respect of the leaky bearings?
(h) what are the damages suffered by Mansonville for which Kurtz is liable?
(i) which of the Kurtz Defendants are liable to Mansonville?
[68] No issues were raised with respect to the involvement of National Capital as the buyer of the equipment from Kurtz and the lessor of the equipment to Mansonville. For the purposes of determining the above issues, I will treat National Capital and Mansonville as one and the same.
DISCUSSION
(a) Limitations Defence
[69] I start with this issue because the other issues become academic if Mansonville's claims are time-barred.
[70] The parties agree that Mansonville's claims are time-barred under German law, but not under Austrian law. The claims are not statute-barred under British Columbialaw.
[71] The first sub-issue is whether the parties agreed that their contract would be governed by German law. Kurtz introduced into evidence a document entitled "Terms and conditions of supply and payment" which was expressed to be valid as of February 1996. A clause in this document provided that the law of Germany shall apply. However, there is no evidence that this document was ever agreed to by or provided to Mansonville. Mr. Walter Kurtz testified that he saw a similar document in Mansonville's file in connection with a sale of equipment by Kurtz to Mansonville in the 1980's, but he did not recall whether the governing law clause was contained in this document.
[72] The facts that the Kurtz quotation referred to "general terms of sale and delivery" and that the Kurtz order confirmation stated that the delivery was to be carried out according to the "General Terms of Delivery of the Kurtz Group" are not sufficient to constitute agreement by Mansonville of a governing law clause which was not proven to be expressly agreed to by Mansonville or contained in a document provided to Mansonville. I find that Mansonville did not have notice of any standard terms which Kurtz may have wanted to be incorporated into their contract. There are no other circumstances from which it can be implied that the parties agreed that the law of Germany would be the governing law.
[73] As it was not proven that Mansonville agreed, expressly or impliedly, that the governing law of the contract would be the law of Germany, it is necessary to determine the jurisdiction which has the closest and most substantial connection to the transaction: see Imperial Life Assurance Co. of Canada v. Colmenares (1967), 62 D.L.R. (2d) 138 (S.C.C.). I agree with counsel for Mansonville that the present case is similar to Deco Automotive Inc. v. G.P.A. Gesellschaft Fur Pressenautomation MbH , [1989] O.J. No. 1805 (Ont. Dist. Ct.), where the decision with respect to the governing law was succinctly stated as follows:
As for the question of the applicable law, having regard to the test set out in Imperial Life v. Colmenares, 62 D.L.R. (2d) 138 at 143 and 144 and the factors therein set forth, it appears to me that a contract having as its subject matter a transfer system designed for, delivered to, installed at and put into operation in a plant in Toronto, and the defendant's forces attending in Ontario in that regard, has its closest and most substantial connection with Toronto and thus the law that should apply is the Law of Ontario. (p. 11)
Of the three jurisdictions involved in the contract (being British Columbia, Austria and Germany), it is my opinion that Germany had the least connection to the transaction. The equipment was manufactured in Austria and was delivered to, installed and made operational by Kurtz representatives at Mansonville's plant in British Columbia. The only connections to Germany were the facts that the head office of Kurtz is located in that jurisdiction and that some of the individuals involved in the negotiations were employed by Kurtz GmbH. These connections are less substantial than the connections to British Columbia and Austria.
[74] I hold that Germany was not the jurisdiction with the closest and most substantial connection to the transaction and that Mansonville's claims are not time-barred or statute-barred.
(b) Late Delivery
[75] Kurtz's quotation stated that the delivery time would be four months after clarification of all technical and commercial details. The order confirmation specified week 24/97 (i.e., the week of June 8, 1997) under the heading "Delivery". The pre-expander was shipped at the end of May or beginning of June 1997 and was received at Mansonville's plant in mid-July. The block mould was shipped on or about July 16 and arrived at Mansonville's plant in mid-August.
[76] It is the position of Kurtz that Mansonville forfeited the right to complain about late delivery because it breached its obligations under the contract. There is no question that Mansonville did breach the requirement to provide a letter of credit from and after the time of the order confirmation. Its reasons for breaching the requirement are suspect and it can be reasonably inferred that Mansonville misled Kurtz when Mr. Teperto wrote the February 14, 1997 letter stating that the letter of credit was in process. However, the fact that Mansonville was in breach of its obligations under the contract does not necessarily excuse Kurtz from the performance of its obligations.
[77] Kurtz relies on the United Nations Convention on Contracts for the International Sale of Goods (the " Convention "), which is made applicable in British Columbia by the International Sale of Goods Act , R.S.B.C. 1996, c. 236 (and which is also applicable in Austria and Germany). Article 71 of the Convention provides that a party to a contract may suspend the performance of his obligations if it becomes apparent that the other party will not perform a substantial part of his obligations. Subsection (3) of Article 71 states that a party suspending performance must immediately give notice of the suspension to the other party.
[78] Counsel for Kurtz submitted that Kurtz had given notice of suspension in its correspondence in May 1997. I do not read the correspondence in this fashion and, indeed, there is no evidence that Kurtz did actually suspend the performance of its obligations until the block mould was ready for shipment. Although the June 25, 1997 fax from Kurtz to Mansonville did not explicitly state that Kurtz would be suspending the performance of its obligations, the fax was sufficient to convey the message that the block mould would not be shipped until the final payment was made. In view of the negotiations to replace the letter of credit with an early final payment (which was discounted to take the early payment into account), it was reasonable for Kurtz to refer in its fax to the final payment, rather than the letter of credit. Mansonville would not have been misled into believing that it could not post a letter of credit and, indeed, Ms. Hurry stated in her June 29 letter that the letter of credit would be provided to Kurtz.
[79] I hold that Kurtz was entitled to suspend performance of its obligations under the contract as a result of Mansonville's failure to provide the stipulated letter of credit and that Kurtz did suspend performance of its obligations for the period from July 2 to July 16, 1997. The length of the delay in the delivery of the equipment is to be determined on this basis.
[80] The order confirmation indicates that the delivery of the equipment was to take place in week 24/97, which was the week of June 8, 1997. Mr. Kurtz testified that Kurtz had made a mistake and had forgotten to make it clear in the order confirmation that delivery meant delivery to the port from which the equipment would be shipped by boat. He said that Kurtz accepted the mistake and recognized that it had agreed to deliver the equipment to Mansonville in week 24.
[81] I have reservations about whether Mansonville ever believed that the equipment would be delivered to it in week 24. There is evidence to suggest that Mansonville may have had the same understanding as Kurtz; namely, that the equipment would be ready for delivery during week 24. This evidence includes statements made by Mr. Cormier in his July 23, 1997 letter and the fact that Mansonville did not complain when told in early May 1997 of the shipping dates.
[82] Despite my reservations, no submissions were made by counsel on this point and the order confirmation is not ambiguous with respect to the time of delivery. I consider myself bound to interpret the order confirmation without the aid of extrinsic evidence. On a literal interpretation of the order confirmation, Kurtz was required to deliver the equipment to Mansonville in Surrey by the end of the week of June 8, 1997. The block mould was not delivered to Mansonville until mid-August and, after making allowance for the two week period during which Kurtz suspended performance of its obligations under the contract, I find that Kurtz was in breach of the contract for a six week delay in the delivery of the equipment.
(c) Statutory Warranties of Fitness
[83] Article 35 of the Convention reads, in part, as follows:
(1) The seller must deliver goods which are of the quantity, quality and description required by the contract and which are contained or packaged in the manner required by the contract.
(2) Except where the parties have agreed otherwise, the goods do not conform with the contract unless they:
(a) are fit for the purpose for which goods of the same description would ordinarily be used;
(b) are fit for any particular purpose expressly or impliedly made known to the seller at the time of the conclusion of the contract ...
Sections 17 and 18 of the B.C. Sale of Goods Act , R.S.B.C. 1996, c. 410 are to like effect.
[84] Schreiber Brothers Ltd. v. Currie Products Ltd. (1980), 108 D.L.R. (3d) 1 (S.C.C.) is the leading Canadian decision dealing with the situation of where the cause of a defect in goods is unknown. It stands for the proposition that the buyer is not required to show how the defect arose and that it is sufficient for the buyer to exclude, on a balance of probabilities, other probable causes of the defect which would not be the responsibility of the seller. Afton Mines Ltd. (N.P.L.) v. Canadian General Electric Company Limited (1983), 44 B.C.L.R. 389 (S.C.) is an example of a case where the buyer was able to negative all other probable causes of failure. Kolibab v. Tenneco Canada Inc., [1996] 10 W.W.R. 53 (Sask. Q.B.) is an example of a case where the buyer was not able to eliminate all other probable causes because the court found that operator error resulted in most, if not all, of the problems.
[85] Counsel for Mansonville points to the decision in Wharton v. Tom Harris Chevrolet Cadillac Ltd. , 2002 BCCA 78 as authority for the proposition that all accessories and components of the goods must be free from defects. Counsel also argues that the test is performance based and relies on a passage from Altronics of Bethlehem, Inc. v. Repco, Inc. 957 F.2d 1102 (3 rd. Cir. 1992) at p. 1105 stating that a product may be found defective if it functioned improperly in the absence of abnormal use and reasonable secondary causes.
[86] The facts of the present case are different from the circumstances of the authorities relied upon by counsel. The uniqueness of the case at bar is that the equipment began producing acceptable EPS blocks without any repair or other alteration to the mechanical functioning of the equipment. If the equipment is now fit for the purpose for which it was intended, how could it have been unfit at the time of its delivery if no change was made to it?
[87] The evidence established that there are many variables involved in making EPS blocks. These include the settings on the equipment, the quality and age of the beads, the adequacy of the steam supply, the functioning of the fluid bed, the quality of the storage silos, the length of curing time between prefoaming and block moulding, and the ability of the operator. Mr. Schmit, who was the representative of Styrochem at Mansonville's plant in December 1997 and who testified as an expert witness on behalf of Mansonville in the trial, called the production of EPS a "black art". Although the reason for the inability of Mansonville to produce suitable blocks during the initial period following delivery of the equipment remains a mystery, it does not follow that the equipment was defective or unfit.
[88] In a different context, Southin J.A. said the following in Hollis v. Birch (1993), 81 B.C.L.R. (2d) 1 (C.A.):
Can a thing such as this be found not to be reasonably fit for the purpose for which it was intended because, from some unidentified cause, it breaks down more than a year after its insertion?
I think not. The failure of a thing does not establish, as a matter of law, that it is not reasonably fit for the purpose, although the failure of an ordinary article of commerce often leads, as a matter of fact, to such a conclusion. (p. 33)
This case represents the converse situation. The equipment ultimately produced suitable EPS blocks but for some unidentified cause it could not do so for a period of time following its delivery. As a matter of law, the failure of the equipment to produce suitable EPS blocks does not establish that it was not reasonably fit for that purpose. As a matter of fact, I infer from the ability of the equipment to ultimately produce suitable EPS blocks without any repairs or alterations to its mechanical functioning that it was fit for its intended purpose at the time of its delivery. Hence, Kurtz did not breach the statutory warranty of fitness under either the Convention or the B.C. statute.
(d) Contractual Warranties
[89] Mansonville asserts that the following promises were made by Kurtz prior to the purchase of the equipment and that they were breached by Kurtz:
(i) the machinery would be of the highest quality;
(ii) the machinery would provide trouble-free, simple, reliable performance and be easy to operate;
(iii) the machinery would produce good fusion at low densities;
(iv) the cycle times for the block mould would be two to three minutes;
(v) the blocks would not need to be trimmed for certain applications; and
(vi) Kurtz would supply with the equipment a density reduction program which would allow the sidewall of the block mould to move during fusion and thereby produce a savings in raw materials.
[90] The topic of contractual warranties was thoroughly canvassed in Gallen v. Allstate Grain Co. (1984), 9 D.L.R. (4 th ) 496 (B.C.C.A.), which was applied two years ago in Peacock, Inc. v. Reliance Foundry Co. , [2001] B.C.J. No. 226 (S.C.). Representations do not need to be written in order to constitute contractual warranties as long as it was not intended by the parties that the written document would constitute the entire agreement between the parties. The distinction between innocent misrepresentations and contractual warranties is that the former only gives rise to the remedy of rescission while the latter may form the basis of a claim for damages.
[91] In Gallen , Lambert J.A., for the majority, said the following about the determination of whether a representation constitutes a warranty:
More helpful than Halsbury, in my opinion, are the reasons of Mr. Justice Robertson in Yorke v. Duval, [1953] 3 D.L.R. 820, 9 W.W.R. (N.S.) 523, a decision of this court. They contain two guides for determining whether a pre-contractual representation is a warranty. First, at p. 524-5, Mr. Justice Robertson said that the way to decide is to look at the contract in the light of all the surrounding circumstances, and that one of the first things to look to is to what extent the accuracy of the statement - the truth of what is promised - would be likely to affect the substance and foundation of the adventure which the contract is intended to carry out. Then, second, at p. 525, Mr. Justice Robertson said that the essence of a warranty is that it becomes plain by the words and actions of the parties that it is intended that, in the purchase, the responsibility of the soundness will rest upon the vendor.
That seems to me to put the question squarely. What the trier of fact is trying to find out is this: who was to bear the risk that the statement might be wrong, the person who made it, or the person who acted on it? If it must be taken to have been intended, and understood, when said, to form a part of the contractual relations between the parties, then it is a warranty.
(p. 508)
[92] In Peacock , the seller had sold steel castings to the buyer which intended to utilize them in the manufacture of hydraulic cylinders. At issue was whether there were contractual warranties with respect to the proposed casting process. After reviewing the authorities, including Gallen , L. Smith J. concluded that the alleged oral representations were made and were contractual warranties. She went on to find that there had been a breach of the warranties on the evidence before the court.
[93] It is the position of Kurtz that the parties intended to have their agreement entirely in writing and that any oral representations are of no contractual force. In this regard, counsel relies on the portions of Gallen (at p. 512) and Toronto-Dominion Bank v. Johns, [1987] B.C.J. No. 1876 (C.A.) (at p. 8) quoting with approval the following passage from the article by K.W. Wedderburn entitled "Collateral Contracts", [1959] Camb. L.J. 58 at p. 62:
What the parol evidence rule has bequeathed to the modern law is a presumption - namely that a document which looks like a contract is to be treated as the whole contract. This presumption is "very strong" but "it is a presumption only, and it is open to either of the parties to allege that there was, in addition to what appears in the written agreement, an antecedent express stipulation not intended by the parties to be excluded, but intended to continue in force with the express written agreement.
As in Peacock , there is no "entire contract" clause in the order confirmation or any of the other written documents between Kurtz and Mansonville. It is therefore necessary to look at the documents and the other circumstances to determine whether there is a document that looks like a contract and, if so, whether the presumption that it is the whole contract has been rebutted.
[94] Counsel for Kurtz points to two circumstances as illustrating that it was the intention of the parties to have their agreement set out completely in writing. The first is that in his covering letter of February 7, 1997, Mr. Teperto asked Mr. Jaksch to sign each page of his summaries. The second is that in June 1997, Mr. Cormier wanted a written guarantee from Kurtz that the block mould would be as good or better than the Idropress block mould.
[95] It is my understanding that, although it is arguable that the parties entered into a binding contract when Mr. Jaksch returned signed copies of the summaries faxed to him by Mr. Teperto on February 7, 1997, counsel are in agreement that the order confirmation reflects the terms of the agreement between the parties, and I concur. In my opinion, the order confirmation itself contemplates that it was not intended to be the entire contract between the parties. The following three provisions of the order confirmation illustrate that there were aspects outside the document which were intended to be part of the contract between the parties:
(a) " Warranty : according to VDMA terms"
(b) "If not expressly arranged otherwise, the acceptance of the machine takes place on delivery at the works."
(c) "The delivery is carried out according to the "General Terms of Delivery of the Kurtz Group"."
I find that it was not the intention of the parties to have all of the terms of the contract between them contained in the order confirmation.
[96] Counsel for Kurtz also says that the representations attributed to Mr. Jaksch were mere statements of opinion or "puff" and were never intended to form collateral warranties to the contract. Counsel relies on Fraser-Reid v. Droumtsekas (1979), 103 D.L.R. (3d) 386 at p. 392. In my view, this involves the same determination of the intention of the parties as was discussed in Gallen .
[97] Counsel for Kurtz further attacked the credibility of Mansonville's witnesses. While I have concerns about the credibility of Messrs. Teperto and Cormier which I will discuss later in these Reasons for Judgment, Kurtz did not call Mr. Jaksch or any other witness to contradict their testimony with respect to the representations.
[98] I will now make my findings with respect to each of the alleged contractual warranties.
(i) Highest Quality
[99] I find that Kurtz did represent that it produced high quality state-of-the- art equipment. Mr. Walter Kurtz essentially admitted during his examination for discovery and his cross examination that Kurtz representatives made statements to this effect.
[100] Although I find that the representation was made, it is my view that it was not intended or understood to form part of the contractual relations between the parties. It was a representation about all of the equipment manufactured by Kurtz and one would not expect a global representation of this nature to be part of a contract for two items of equipment. Even if the representation could be interpreted to relate only to the equipment which Mansonville was going to purchase, it was too general and too difficult to measure in order to constitute a contractual warranty.
(ii) Easy to Operate
[101] I find that Kurtz did represent that the equipment was simple to operate and was operator friendly. This representation was consistent with the evidence given by Mr. Walter Kurtz in his examination for discovery and by Mr. Schnitzhofer during his cross examination.
[102] I also find that this representation was intended to form part of the contractual relations between the parties. Had the parties turned their mind to the question of who would bear the risk if representation turned out to be wrong, it is my view that they would have agreed that Kurtz would be the one at risk.
(iii) Good Fusion at Low Densities
[103] Mansonville asserts that Mr. Jaksch represented to it that the following densities could be achieved with the Kurtz equipment:
(a) Type 1 product - 13 g/l (or .81 lbs./cu. ft.);
(b) Type 2 product - 1.25 lbs./cu. ft. (or 20 g/l); and
(c) non-conforming product - .70 lbs./cu. ft. (or 11.2 g/l).
I accept that Mr. Jaksch made these representations with respect to the densities for Type 1 and Type 2 products. I find that the lowest density Mr. Jaksch represented in connection with non-conforming product was 12 g/l (or .75 lbs./cu. ft.).
[104] The evidence given by Mr. Teperto with respect to the density for non-conforming product was equivocal in my view. Counsel ordered a transcript of his testimony on this point, which I reproduce below:
Q Did Mr. Jaksch say anything to you about the densities that you'd be able to achieve in meeting the Canadian standards? Let's take it one at a time. Did he talk to you at all about the densities you'd be able to achieve for your type 1 product?
A Yeah. They referred back to their brochures and stuff that showed, you know, 13 grams per litre, which suited our needs. I mean, we talked - - they even said lower, but we - - you know, we kind of accepted what was in their brochure. But we knew there was other opportunities for what we called non-conforming materials, that they said it will get lower, no problem.
Q Did they give you numbers for how - - for what you could get for your - - densities for your non-conforming product?
A Yeah, seven zero. So, you know ...
Q So .7?
A .7. That was a number. But, you know, they even showed - - in their one thing is 12, which is .75 ...
Q So they showed 12 grams per litre, which is .75 pounds per cubic foot?
A That's right.
The way in which Mr. Teperto testified that .70 "was a number" and then made reference to the figure of 12 g/l in the "thing" (which was probably the brochure) suggests that there may have been some conversation about a density of .70 lbs./cu. ft. but the representation made by Kurtz was the 12 g/l density stated in the brochure (and the quotation). Mr. Jaksch may have mentioned a density of .70 lbs./cu. ft. but I find that the representation he made was that the equipment could achieve a density of 12 g/l or .75 lbs./cu. ft. This was the lowest end of the density range contained in the quotation and it is unlikely that Mr. Jaksch would have promised a lower density. Mr. Walter Kurtz testified that there was one block moulder in Europe with Kurtz equipment who had reached a density as low as 11.5 g/l in 1997, but not consistently, and that Mr. Jaksch would likely have told that to Mansonville. In my opinion, the fact that Mr. Jaksch may have mentioned that one other block moulder had been successful in reaching a density below 12 g/l did not constitute a contractual warranty that Mansonville would definitely be able to achieve the same low density if it purchased the Kurtz equipment.
[105] Mr. Cormier was not equivocal in his testimony. He testified that Mr. Jaksch said that it would be no problem to reach a density of .70 lbs./cu. ft. However, I prefer the testimony of Mr. Teperto over the evidence of Mr. Cormier, who did not appear to have as clear a memory. In addition to my reservations about Mr. Cormier's memory, I am also influenced by the fact that in Ms. Hurry's letter dated February 13, 1998 to Mr. Mittermair outlining areas of concern, she stated that the "prefoamer must be able to prefoam a constant level from .75 up as promised by Herbert at the time of placing the order". Ms. Hurry would have received this information from Mr. Cormier, whose memory would have been better five years ago.
[106] The density range at which the Kurtz equipment could perform was contained in the quotation and order confirmation prepared by Kurtz. They were intended to form part of the contractual relations between the parties, and I find that the related promises made by Mr. Jaksch were also intended to be part of the contract.
[107] I hold that Kurtz made contractual warranties regarding the densities at which Mansonville would be able to manufacture properly fused EPS product of the various types; namely, .75 lbs./cu. ft. for non-conforming product, .81 lbs./cu. ft. for Type 1 product and 1.25 lbs./cu. ft. for Type 2 product.
(iv) Cycle Times
[108] Mr. Teperto testified that Kurtz represented that the block mould would have a cycle time of 2 ½ to 3 minutes. This is consistent with the Kurtz brochures which contained two references to cycle time - one stated that the output would vary between 15 and 25 blocks per hour and the other stated that the capacity was 18 to 25 blocks per hour. It is also consistent with the testimony of Messrs. Kurtz and Schnitzhofer. I find that this representation was made and was intended to form part of the contract between the parties.
(v) No Trimming
[109] As with most of the representations, Mr. Teperto testified in more detail about the alleged warranty regarding trimming than did Mr. Cormier. In his testimony at trial, Mr. Cormier testified that either Mr. Jaksch or Mr. Teperto told him that a lot of Mansonville's products would not have to be trimmed if the blocks were made in the Kurtz block mould. At his examination for discovery, Mr. Cormier was asked whether Mr. Jaksch said that Mansonville would not have to do trimming or whether it was something Mr. Cormier inferred from what he was told. After evading the question, Mr. Cormier eventually answered that he had inferred it and he said that he did not recall hearing Mr. Jaksch actually say that Mansonville would not have to trim blocks.
[110] I again have the benefit of the transcript of Mr. Teperto's testimony on this topic. His evidence was as follows:
Q During this trip, what did Mr. Jaksch say to you, if anything, about the squareness of the blocks that you could manufacture with the block mould?
A With the Monoflex mould?
Q Yes.
A That there would be no draft. Just - - you'd have a square or rectangular block. If you made it 54 inches, it would be rectangular; if you made it 50, it would be square. The wall was - - you know, I mean, it was solid. It was gonna - - that's what they did.
Q Did you and he talk at all about the effect that that would have on your need to trim?
A Yeah. That was a key feature that we discussed, that if I didn't have to trim a lot of blocks for geofoam and a lot of blocks for flotation and a lot of blocks for Koraboid [phonetic], that was going to save us a lot of money, save us a lot of material, save us a lot of handling and make us more competitive and more profitable. And I think that was the whole reason we were spending all the money, was we had to get what we needed. We never looked at the Economat [phonetic] block because of some of those features. Like, we didn't want a taper. Idropress had a taper. You know, it put us off the Idropress, you know, being a tapered block. It was a big feature to have the square/rectangular block and then the movable wall with the ability to expand the bead and move the wall - - back the wall out afterwards. Those are, like - - it's hard to explain that you - - because you don't understand the full thing and yield, I don't think, but that was key for us. It was the difference of how we could pay for it and how we could get profitable and how we could compete in an industry that was competitive. I do the sales. I know what we sell. I know what the market bears. I - - I get input from the sales representatives that are working for me, basically, as the sales manager. So we qualify our market. All these features that Kurtz had was a great advantage for us to service our customers' needs, offer a superior product at less cost to us and competitive to the customer. It was what we went for. It was, like, from - - what you needed to go for.
[111] I accept that Mr. Teperto did discuss the topic of trimming with Mr. Jaksch. Unlike previous block moulds manufactured by Kurtz and other block moulds on the market, the current version of the Kurtz block mould did not have a taper to facilitate the ejection of the fused block from the mould. I find that Kurtz did make a representation that the mould did not have a taper. However, it is my view that Mr. Jaksch did not go further and make a contractual warranty that every block would be square or that Mansonville would not have to trim blocks intended for certain purposes.
[112] The manner in which Mr. Teperto testified about the conversation suggests that it was him, not Mr. Jaksch, who drew the conclusion that a lack of taper could save on the need to trim certain types of blocks. Even though Mr. Jaksch may not have disagreed with him or made a disclaimer, the nature of the discussion was such that Kurtz did not assume the risk in the event that the lack of a taper did not eliminate the need for trimming certain types of blocks.
[113] I find that there was no contractual warranty with respect to the topic of trimming.
(vi) Density Reduction Program
[114] The Kurtz block mould had a moveable sidewall which allowed blocks of different widths to be produced. Mr. Cormier came up with an idea which became known as the density reduction program. He reasoned that if the wall could open between 1 to 3 inches during fusion, the beads would expand into the greater space. This would create more product with the same amount of bead or, in other words, it would create a savings in raw materials. Mr. Cormier testified that he talked to Mr. Jaksch about it and that Mr. Jaksch phoned Kurtz engineers to see if the moveable wall could be programmed to move during fusion. Mr. Jaksch told Mr. Cormier that it could be programmed in this fashion. Kurtz's earlier quotation was revised to specify that the block mould was to include a "[p]rogram option to move sidewall during fusion as a secondary program at no charge". The same phrase was included in the order confirmation.
[115] At trial, both of Mr. Cormier and Mr. Teperto endeavoured to leave the impression that the density reduction program was never installed in the block mould. Mr. Oostenbrink testified that it had been installed but complained that the wall moves too quickly and at an inappropriate stage of the production to provide the savings in raw materials anticipated by Mr. Cormier.
[116] I find that, as stated in the revised quotation and the order confirmation, there was a contractual warranty that the block mould would be programmed to allow the sidewall to move during fusion. As to Mr. Cormier's conclusion that this would save Mansonville on raw materials, I find that no such representation was made by Kurtz and that, even if Mr. Jaksch had agreed with Mr. Cormier's conclusion, it did not become a contractual warranty because it was Mr. Cormier's idea and the risk of the conclusion not being realized rested with Mansonville.
(e) Breaches of Contractual Warranties
[117] I have found that Kurtz made the following contractual warranties:
(i) the Kurtz equipment was simple to operate and was operator friendly;
(ii) Mansonville would be able to manufacture properly fused non-conforming, Type 1 and Type 2 products at densities of .75 lbs./cu. ft., .81 lbs./cu. ft. and 1.25 lbs./cu. ft., respectively;
(iii) the cycle time for the block mould would be between 2 ½ and 3 minutes;
(iv) the mould would not have a taper; and
(v) the block mould would be programmed to allow the sidewall to move during fusion.
As I indicated in the previous section, Kurtz did program the block mould so that the sidewall could move during fusion and I find no breach of the fifth contractual warranty. Similarly, although there were some deficiencies in the operation of the moveable sidewall, there was no breach of the fourth contractual warranty regarding the absence of a taper.
[118] The evidence is clear the Kurtz equipment did not perform in accordance with the first three warranties from the fall of 1997 until at least the spring of 1998. According to the testimony of Mr. Oostenbrink, the cycle times were slow and inconsistent in 1997 and 1998, and are still slower than promised.
[119] Counsel for Kurtz submitted that the equipment was operating properly when it was set up in September 1997 and suggested that the Mansonville operators must have done something to cause the equipment to make faulty blocks. However, Mansonville was attempting to contract Mr. Schnitzhofer within two weeks of his departure on September 4 and there is no evidence that the Mansonville operators did anything inappropriate to the equipment. Mr. Oostenbrink testified that the equipment appeared to be running well at first but a huge consistency problem soon developed.
[120] In any event, even if the Mansonville operators had improperly changed the settings, Kurtz was still in breach of the warranty that the equipment was easy to operate because Kurtz's own technicians could not rectify the problem when they came to Mansonville's plant in December 1997. Even though Mansonville's operators were inexperienced, Kurtz never made any negative comments about the competency of the operators while it was attempting to rectify the problems in December 1997 and March 1998. In addition, Kurtz had undertaken to provide one week's training for Mansonville's operators and it never suggested that they required additional training.
[121] Counsel for Kurtz also submitted that the equipment was only warranted to work as represented in an optimum situation and that it was not the fault of Kurtz that Mansonville did not provide optimum circumstances for the operation of the pre-expander and block mould. I find that Kurtz did not make any disclaimers along these lines. Mr. Jaksch visited Mansonville's plant to prepare a footprint drawing of the plant and there is no evidence that he expressed any concerns about the ability of the equipment to work properly in the environment of the plant.
(f) Duration of the Breaches
[122] It is here where the credibility of Mansonville's witnesses comes into question. Although Mansonville regained its Canadian certification as a result of tests of blocks which were made around the time of Mr. Schnitzhofer's departure at the end of March 1998 and which were not over-densified, the evidence of Mansonville's witnesses was that the problems continued until at least July 1999, when Mansonville's sales started to increase significantly.
[123] In general, I agree with counsel for Kurtz that Messrs. Cormier, Teperto and Oostenbrink embellished the extent of the problems after Mr. Schnitzhofer was told to leave in March 1998. Although they may not have intentionally varied from the truth, it is my view that some of their memories were reconstructed and, although they may have genuinely believed in them, the reconstructed memories were not accurate in some respects.
[124] I agree with most of the examples relied upon by counsel for Kurtz during the closing submissions as reasons illustrating problems with their credibility, as well as their demeanour and attitude while testifying. The examples in relation to Mr. Cormier include the following:
(a) on the issue in question, Mr. Cormier testified that he was sufficiently satisfied with the quality of the product at the end of 1999 and told his sales staff to go out and sell. Mr. Teperto testified that this occurred in July 1999. In his examination for discovery, Mr. Cormier said that he was not satisfied with the blocks produced by the equipment until 2001;
(b) in his examination for discovery, Mr. Cormier denied that he had stopped Mr. Schnitzhofer from testing the equipment in March 1998. In his examination in chief at trial, he said that he had only stopped Mr. Schnitzhofer for a weekend. In reality, Mr. Cormier interrupted the testing for approximately 10 days;
(c) I prefer Mr. Schnitzhofer's recollection of the conversation on or about March 25, 1998 when Mr. Cormier told him to leave Mansonville's plant. Mr. Schnitzhofer's recollection is consistent with the notes which he made within a few days of the conversation. I find Mr. Cormier's recollection of the conversation to be faulty;
(d) Mr. Cormier testified that the block mould had never been programmed to have the sidewall move during fusion, while Mr. Oostenbrink agreed that the program had been installed.
I also found Mr. Cormier to be evasive on numerous occasions during his cross-examination at trial.
[125] Some examples in relation to Mr. Teperto's credibility include the following:
(a) like Mr. Cormier, he inaccurately testified that the block mould had never been programmed to have the sidewall move during fusion;
(b) Mr. Teperto wrote the misleading letter sent on February 14, 1997 stating that the letter of credit was in process when Mansonville never took any steps to open a letter of credit;
(c) when questioned about the February 14, 1997 letter in cross examination, Mr. Teperto tried to justify it on the basis that he had written the letter for his protection.
[126] Some examples in relation to Mr. Oostenbrink's credibility include the following:
(a) he gave answers to two outstanding requests from Mr. Cormier's examination for discovery which were not true;
(b) he incorrectly attributed part of the improvement in the operation of the block mould to a programming change made by Mr. Schnitzhofer in March 1998 when the evidence was to the effect that the change was made in December 1997 when the production was not satisfactory;
(c) he testified in examination in chief that 60% of the production runs presently require double passes through the pre-expander, but conceded in cross-examination that a figure of 40% was more accurate.
[127] There is another reason for doubting the testimony of Mansonville's witnesses that the problems with the equipment continued into mid or late 1999. The following paragraph is contained in the report dated November 29, 1999which PwC prepared for Mansonville's banker:
In the summer of 1997, the Company acquired on lease a pre-expander and a new block mould from a German company with an excellent reputation in the business. Unfortunately, considerable problems were experienced in achieving proper running of this machine and all of the problems were not ironed out until sometime in 1998. The Company does not currently have any operating problems and, indeed, the machines are now working exactly as specified and the quality of the product has, in the Company's opinion, never been better and cannot be matched by its local competitors who have yet to invest in this latest technology.
In his cross-examination at trial, Mr. Cormier agreed that the statements contained in the paragraph were told to PwC by either himself or Ms. Hurry but contended that the 1998 date was a mistake. I am not entitled to treat the statements contained in the PwC report as evidence of the truth of their contents but, being satisfied that the statements were made to PwC, I am entitled to use them for the purpose of assessing the credibility of Mansonville's witnesses.
[128] In closing submissions, counsel for Mansonville pointed to the evidence that Mansonville's sales began to materially increase beginning in July 1999 as corroboration of the testimony of the Mansonville witnesses that the problems with the equipment continued until that time. It is my view that these witnesses reconstructed their memories on this point and used the date of the commencement of the increase in sales as justification for their recollections. This would not include Mr. Cormier, of course, because he maintained that the problems persisted until at least the end of 1999, which was after the PwC report stating that Mansonville did not have any operating problems and that the machines were working as specified.
[129] Mansonville regained its Canadian certification with blocks made around the time of Mr. Schnitzhofer's departure near the end of March 1998, although it did not learn of it until mid-May 1998. I accept that there were still problems with the operation of the equipment after Mr. Schnitzhofer left but I find that most of the problems had come to an end within a couple of months of the regaining of the certification. I hold that, with the exceptions of the length of the cycle times and the need for Mansonville to double pass the bead through the pre-expander to achieve the required densities for some products, Kurtz ceased to be in breach of its contractual warranties in July 1998.
[130] Counsel for Kurtz submitted that Mr. Schnitzhofer was able to get the density down to 12.8 g/l (.80 lbs./cu. ft.) in one pass on the pre-expander without burning the bead when he was at Mansonville's plant in March 1998 and that it is not necessary for Mansonville to double pass bead on its continuous pre-expander. I find that Mr. Schnitzhofer was not able to achieve a low density with one pass on a consistent basis and that it is necessary for Mansonville to double pass bead on its continuous pre-expander in order to achieve the density represented by Kurtz.
(g) Leaky Bearings
[131] The sealing arrangement on the Kurtz pre-expander leaks through the sealing gland and bearing arrangement. This leads to water leaking into the reduction gear and electrical motor. Mansonville seeks damages to resolve the problem in one of the two ways in which other Kurtz customers have dealt with the bearing systems on their Kurtz pre-expanders. One way was to replace the bearing system and the other way was to have the bearing system moved to the top of the machine.
[132] Mr. Schnitzhofer replaced the bearing in March 1998 as a preventative measure. Mr. Oostenbrink testified that the bearing started leaking and has been leaking ever since. On cross-examination, Mr. Oostenbrink conceded that Mansonville has not had anyone look at it with a view of changing the seal or bearing. I infer that Mansonville does not consider it to be a serious problem.
[133] Kurtz's expert, Mr. Morris, gave the opinion that the seal often requires replacement after several years of operation as a result of wear and tear. Mansonville's expert, Mr. Sandilands, conceded on cross-examination that one solution was to replace the seal.
[134] In my view, Mansonville has not proven on a balance of probabilities that the leaky bearings have resulted from faulty design or other cause which is the responsibility of Kurtz. The fact that two other Kurtz customers did something to the bearing system on their pre-expanders is not proof that the bearing system on Mansonville's bearing system is defective. Although Mr. Schmit expressed the opinion that the leaking needs to be repaired for the pre-expander to consistently make product to industry standards, Kurtz is not responsible to remedy the effects of wear and tear. The existence of the leak is not, by itself with nothing more, sufficient to prove liability on the part of Kurtz.
(h) Damages
[135] I have held that Kurtz is liable in respect of the following:
(a) the breach of contract arising from the delay in delivery of the block mould for a period of six weeks;
(b) the breach of the contractual warranties regarding the performance of the equipment until mid-summer 1998; and
(c) the continuing breach of the contractual warranties relating to cycle times and the density which could be achieved by the pre-expander.
Mansonville is entitled to be compensated in damages in respect of these breaches.
[136] Counsel for Mansonville cited several authorities dealing with general principles in the assessment of damages. In Pacific Destination Properties Inc. v. Granville West Capital Corp. (1999) 65 B.C.L.R. (3d) 27 (C.A.), the Court said the following:
In assessing damages for loss of opportunity the court must reach a conclusion as to what would have taken place had there been no breach. If it is shown with some degree of certainty that a specific contract was lost as a result of the defendant's breach, some damages should be awarded. Even though the plaintiff may not be able to prove with certainty that it would have obtained specific results but for the breach, it may be able to establish that the defendant's breach deprived it of the opportunity to obtain such business. See: Houweling Nurseries Ltd. v. Fisons Western Corp. (1988), 37 B.C.L.R. (2d) 2 (B.C.C.A.) ( ¶ 54)
The Court also made reference to Bradshaw Construction Ltd. v. Bank of Nova Scotia (1992), 73 B.C.L.R. (2d) 212 (C.A.), where it was stated that the standard of proof for assessing the actual amount of loss is not as strict as the standard of proof on a balance of probabilities and that the best that can be estimated are the possibilities, not the probabilities.
[137] In Pan-Asia Development Corp. v. Smith , [1996] B.C.J. No. 1919 (S.C.), Baker J. made the following comment regarding lost opportunity:
Where the plaintiff proves that, but for the defendant's conduct, the plaintiff had a reasonable probability of realizing an advantage of real monetary value, the court must attempt to estimate the value of the lost chance and award damages on a proportionate basis, by discounting the value of the chance by the improbability of its occurrence. ( ¶ 61)
Counsel referred to a passage in Jenkins Road Developments Ltd. v. Willie , 2001 BCSC 80 at ¶ 6 where Vickers J. relied on the Pan-Asia decision for the proposition that in a case such as this one, the court should not bring a pessimistic approach to the task of assessing damages. Although the Court of Appeal reduced the award of damages in Jenkins Road [2002 BCCA 399], it quoted ¶ 6 of the trial decision with apparent approval.
[138] Mansonville's expert on damages was Ms. McFarlane of BDO Dunwoody LLP. She estimated Mansonville's economic loss in respect of (i) losses from pre-existing operations caused by the delayed delivery of the equipment and the failure of the equipment to operate properly until June 1999, (ii) the loss of the contract for the Seattle Music Museum project in 1997, (iii) the delay in the commencement of sales of EPS by Mansonville to the related company, Korolite Engineered Panel Structures Ltd. ("Korolite"), for the manufacture and sale into the United States of laminated products, and (iv) extra interest charges paid to Mansonville's banker.
[139] Mansonville's controller, Mr. Khaddoura, provided an estimate for use in calculating the extra costs in having to give a portion of the beads a second pass during the pre-expansion stage of production. No evidence was proffered with respect to any continuing damage resulting from the length of cycle times of the block mould.
(i) Losses from Pre-Existing Operations
[140] Ms. McFarlane calculated Mansonville's loss on its pre-existing operations caused by the delayed delivery and faulty operation of the equipment by taking the difference between projected "contribution margin" and actual "contribution margin" for the period from July 1, 1997 to October 31, 2002. The term "contribution margin" means revenue minus variable cost of sales, variable general and administrative expenses, and variable selling expenses.
[141] In making this calculation, Ms. McFarlane "dragged back" the sales of EPS (measured in board feet) made by Mansonville for a two year period on the assumption that Mansonville would have accomplished those sales if the equipment had been delivered on time and operated properly. In effect, she assumed that the sales which Mansonville actually made in July 1999 would have been made in July 1997 and that the sales in each of the 23 months following July 1999 would have been made two years earlier.
[142] However, it was only possible for Ms. McFarlane to use actual figures up to October 2002 (the fiscal year end of Mansonville preceding the preparation of her report in February 2003), which were dragged back to October 2000. For the period from November 2000 to October 2002, the figures to be dragged back two years are the projected sales of Mansonville from November 2002 to October 2004. This projection was made more difficult because Mansonville's sales have generally been declining since July 2001 on a 12-month rolling basis with some levelling off near the end of the fiscal year ended October 2002. Mansonville believes that this has been caused by an illegal price war instigated by one of its competitors. Ms. McFarlane created the following three scenarios:
(a) a worst case scenario in which she assumed that sales would stay the same as their 2002 level;
(b) a best case scenario in which she assumed that sales returned to their level prior to the price war; and
(c) a middle case scenario in which she assumed that sales would return halfway from the 2002 level to the level prior to the price war.
Ms. McFarlane calculated the economic losses for the worst, middle and best case scenarios to be $722,000, $913,000 and $1,105,000.
[143] Kurtz's financial expert was Mr. Bowie of KPMG. He critiqued Ms. McFarlane's report and he did some of his own calculations using information relied upon by Ms. McFarlane. On this head of loss, Mr. Bowie criticized the calculations of Ms. McFarlane on the basis that in computing the contribution margin loss, she used average historical variable expense relationships for the period from 2000 to 2002. It is the opinion of Mr. Bowie that this creates a built-in or inherent contribution margin loss of approximately $173,000 and that it is more appropriate to use the actual variable expense relationships during the relevant periods. Using the actual expense relationships, Mr. Bowie calculated the economic losses for the worst, middle and best case scenarios to be $301,000, $449,000 and $597,000.
[144] In her rebuttal report, Ms. McFarlane did not deny that her approach created a built-in contribution margin loss but she defended the approach on the basis that the average cost relationships are preferable to the actual cost relationships. She agreed that Mr. Bowie's method would be correct if there had been no loss of efficiency and effectiveness during the loss period but she argued that the problems with the equipment created a diminishment of efficiency. If the actual cost relationships are used, she reasoned, Mansonville would not be compensated for the decrease in efficiency caused by the problems with the equipment during the loss period.
[145] It is my view that there is merit in the positions of both of Mr. Bowie and Ms. McFarlane. The damages to which Mansonville is entitled should include losses brought about by lessened efficiency caused by the problems with the equipment, but Mansonville should not be compensated in respect of losses which it did not incur. In addition, Ms. McFarlane's approach assumes that all of the inefficiency was caused by problems with the equipment and it is my view that other potential causes of inefficiency should also be taken into account.
[146] In her computation of operating loss, Ms. McFarlane assumed a loss period from July 1, 1997 to July 1, 1999, although her calculations included a "market buildback period" of approximately 5 to 6 months. In his report, Mr. Bowie made calculations for three different loss periods, including a loss period from July 1, 1997 to March 31, 1998, but in his calculations he used the actual cost relationships rather than the average cost relationships. His calculation of the loss period from July 1, 1997 to March 31, 1998 was $142,000.
[147] In her rebuttal report, Ms. McFarlane did the calculations for these three loss periods but used the average cost relationships as she had in her initial report. She calculated the loss in respect of a loss period from July 1, 1997 to March 31, 1998 to be $658,000. In her calculation, she assumed that the number of board feet of product which Mansonville would have sold, but for the late delivery and problems with the equipment, from July 1, 1997 to October 31, 1998 (which included a market buildback period) were the actual number of board feet produced during the periods (i) April 1, 1998 to October 31, 1998, (ii) July 1, 1999 to October 31, 1999 and (iii) November 1, 1999 to March 31, 2000. The inclusion of a market buildback period in this calculation is questionable because Mansonville's actual sales remained more or less level for the period from August 1998 until July 1999.
[148] As a result of my earlier holdings, the loss period was from mid-July 1997 until July 1998, a period of approximately one year. The block mould should have been delivered by mid-June, 1997 and, with a two week set-up period, it should have been operational by the beginning of July 1997. It was not operational until the beginning of September 1997 but I have held that two weeks' of delay were not the fault of Kurtz. Hence, the loss period began in mid-July, 1997. The loss period ended in July 1998, when I have held that the problems regarding production were essentially resolved.
[149] I have not endeavoured to calculate the lost contribution margin in respect of a period from mid-July 1997 to July 1998. The calculations done by the experts are based on assumptions and projections which may not be valid, and the assessment of damages is not merely a mathematical calculation (see, for example, Houweling Nurseries Ltd. V. Fisons Western Corp. (1988), 37 B.C.L.R. (2d) 2 (C.A.) at p. 6 and Mulholland (Guardian ad litem of) v. Riley Estate (1995), 12 B.C.L.R. (3d) 248 (C.A.) at ¶ 43). I agree with the submission by counsel for Kurtz that the fact that Mansonville's sales remained level for approximately a year after the problems with the equipment were resolved tends to suggest that other factors were also at work in preventing the sales from increasing. The "dragging back" of sales from the period commencing July 1999 may well result in an overstatement of Mansonville's losses.
[150] On the basis of all of the evidence, including the opinions of the experts engaged by the parties, I assess the losses incurred by Mansonville on its pre-existing operations as a result of the late delivery of the equipment and the problems with the equipment which I have held to be in breach of the contractual warranties to be in the amount of $350,000.
(ii) Seattle Music Museum Project
[151] Ms. McFarlane calculates a loss of $139,000 as a result of Mansonville's inability to carry out a contract for the supply of EPS to Con-Force Structures Limited ("Con-Force"), a Vancouvercontractor which wanted to bid on the construction of a building that came to house the Seattle Music Museum.
[152] Mr. Teperto began having discussions with Con-Force in early 1997. The concept was that the building would be constructed of concrete, and EPS would be used as a mould for the concrete. Discussions continued into the spring but Mansonville informed Con-Force that it could not participate in the project after Mr. Cormier returned from Europe in June 1997 (Mansonville's previous block mould could not produce the quantities of EPS which would be required for the project). Mr. Teperto testified that he did not know whether Con-Force continued with a bid after June 1997. He was aware that the building was ultimately constructed of steel, not concrete.
[153] In my opinion, it is entirely too speculative to conclude that Mansonville sustained a substantial loss with respect to this project. There is no evidence whatsoever that Con-Force would have been the successful bidder if Mansonville had been able to supply the required EPS. The fact that the building was constructed of steel suggests that Con-Force may well not have been the successful bidder. Mansonville may have lost an opportunity to enter into a supply arrangement with Con-Force but the opportunity would have led to nothing unless Con-Force was the successful bidder. There is no evidence with which I can properly assess the possibility or likelihood of Con-Force winning the contract for the project if Mansonville was in the position to provide EPS to it.
[154] It is my view that the following comments by Mackenzie J.A. in Fraser Park South Estates Ltd. v. Lang Michener Lawrence & Shaw , 2001 BCCA 9 apply to this claim of damages:
I think that the findings of the trial judge preclude any real and substantial chance of benefit from the respondents' breach. In my respectful view, any chance of loss to the appellant was no more than speculative and a mere speculative chance was insufficient to support any claim for damages beyond nominal damages in contract. ( ¶ 80)
[155] I award Mansonville nominal damages of $100 in respect of the lost opportunity to supply EPS to Con-Force for the Seattle Music Museum project.
(iii) Korolite Delay Claim
[156] When it decided to purchase the Kurtz equipment, it was Mansonville's intention to expand its market into the United States. It principally intended to accomplish this in an indirect fashion of selling EPS to the related company, Korolite, which would manufacture laminated products with the EPS and sell these products in the United States.
[157] Ms. McFarlane initially calculated Mansonville's loss under this head to be $1,217,000 consisting of a past loss of $316,000 and a future loss of $901,000. In making this calculation, Ms. McFarlane relied on the sale projections of Ms. Hurry up to 2012. She revised her calculations when Ms. Hurry disclosed that she did not feel comfortable with her projections beyond 2005 because they were too speculative. Ms. McFarlane revised her calculations on the basis that sales would remain constant from 2005 to 2012. The result of the revised calculations was that Mansonville's claimed loss was $457,000 consisting of a past loss of $305,000 and a future loss of $152,000.
[158] In her calculations, Ms. McFarlane was instructed to assume that the commencement of Korolite's business was deferred from January 1, 1999 to November 1, 2002 (a total of 46 months) as a result of the late delivery and problems with the Kurtz equipment. She also discounted future loss of profits at a rate of 2.5% per annum, the time value of money established pursuant to the Law and Equity Act , R.S.B.C. 1996, c. 253 (which more properly should have been 3.5% per annum under s. 56(4) of the Law and Equity Act ).
[159] In his report, Mr. Bowie did some alternate calculations. The first difference in his calculations is that he assumed delay periods of 12 and 24 months, rather than 46 months. The second difference is that he utilized a risk-based discount rate of 30%. On the assumption of a 12 month delay, he calculated the loss to be $133,000, of which $28,000 is a past loss and $105,000 is a future loss. On the assumption of a 24 month delay, he calculated the loss to be $294,000, of which $78,000 is a past loss and $216,000 is a future loss.
[160] In my opinion, an assumption of a delay of 46 months caused by the late delivery and problems with the equipment is not warranted by the evidence. Mr. Teperto testified that Mansonville applied for its ICBO testing (the U.S.standard) for Type 1 products in January 2001 and obtained approval in June 2001. He also testified that Mansonville has been orally advised that it passed the ICBO test for Type 2 products but has not yet received written confirmation. Mr. Oostenbrink testified that Mansonville was in a position to apply for its U.S. certification by the end of 1999.
[161] I find that the delay in Korolite entering the U.S.market attributable to Kurtz's breach of contract is the same 12 month period as its loss period for its pre-existing operations. The delay of the U.S.testing agency in processing Mansonville's application is not the responsibility of Kurtz. Nor is the delay in Mansonville's application after Mr. Oostenbrink believed that it was in a position to make the application. Of course, Mr. Oostenbrink's estimate in this regard must be tempered by my finding that the equipment was working properly prior to the time he stated in his testimony. The fact that Korolite delayed much longer than 12 months before entering the U.S.market leads me to conclude that there were other factors which was also influencing the decision. I do not believe that it is appropriate to make Kurtz responsible for any more of the delay than the 12 month period in respect of which the delivery of the equipment was late and the equipment was not working properly.
[162] In the calculation of the damages with respect to the Korolite delay claim, the experts differed with respect to the appropriate discount rate. Ms. McFarlane chose a risk-free rate of 2.5% per annum, while Mr. Bowie chose a risk-based rate of 30%. Mr. Bowie testified that a discount rate of 30% is basically a standard rate for startup businesses.
[163] In my opinion, an appropriate discount rate is between 20% and 25%. Although Korolite could be viewed as a startup company, its business is essentially an extension of Mansonville's business and I believe that a discount rate of 30% is too high in the circumstances. I have chosen a rate of 20 to 25% over a lower rate because Ms. Hurry has a tendency to be overly optimistic in her projections (of the 8 sales budgets done by Ms. Hurry for Mansonville from 1995 to 2002, 7 of them proved to be higher than the actual sales). In her rebuttal report, Ms. McFarlane did the calculations for 12 and 24 month delays using discount rates of 15% and 20%. Her calculation in respect of a 12 month delay with a 20% discount rate produced a loss of $168,000.
[164] On the basis of all of the evidence, including the opinions of the experts engaged by the parties, I assess the losses incurred by Mansonville as a result of the delay in Korolite commencing business caused by the late delivery of the equipment and the problems with the equipment to be in the amount of $150,000.
(iv) Extra Interest Charges
[165] Mansonville claims the sum of $12,331 in extra interest payments it made to its banker as a result of the interest rates on its operating and term loans being increased. The rate on the operating loan was increased from the bank's prime rate plus 0.875% to prime rate plus 1.375% in March 1999. The rate on the term loan was increased from prime plus 1.250% to prime plus 1.5% in November 2000.
[166] There is no evidence as to why Mansonville's banker increased the interest rates. The interest rates charged on the two types of loans were changed at different times and they were not lowered after Mansonville had a very profitable year in fiscal 2000. There is insufficient evidence for me to conclude that the interest rates were increased as a result of Kurtz's breaches of its contract with Mansonville.
[167] I hold that Mansonville has not proved a loss under this head of damages attributable to Kurtz's breaches.
(v) Double PrefoamingPass
[168] Mr. Oostenbrink testified that in order to get the density of the EPS product below .95 lbs./cu. ft., he began double passing bead on Mansonville's continuous pre-expander in June 1999. This requires extra steam and additional labour.
[169] Mansonville's controller, Mr. Khaddoura, made a calculation of the extra expenses for the period from November 1, 2002 to March 31, 2002, the only period for which Mansonville had retained all of its prefoaming reports. He calculated the variable overhead costs and labour costs associated with the double pass during this period. His calculation resulted in a total of $9,696. Based on evidence that this period represents 35% of Mansonville's annual sales and utilizing an 18 year loss period, Mansonville claims the sum of $498,000.
[170] In the event that I found Kurtz's representation to be that a density of .75 lbs./cu. ft. (as opposed to .70 lbs./cu. ft.) could be achieved by the pre-expander (as I have held), Mr. Bowie calculated Mansonville's saving on bead costs for this period to be $6,965 as a result of fewer beads being needed to the extent that the double pass reduced the density below .75 lbs./cu. ft. If this saving is netted out of Mansonville's claim, the damage figure is reduced to $134,000.
[171] I have two reservations with respect to Mr. Khaddoura's calculations. In calculating the variable overhead costs, he took the annual depreciation and repair costs for Mansonville's entire plant and then computed an hourly overhead cost, which he then applied to the double pass on the continuous pre-expander. My first reservation is that it does not seem appropriate to apply the same rate of depreciation to an old machine such as the continuous pre-expander as is applied to new equipment. I doubt that very little, if any, of the overall depreciation figure is attributable to the continuous pre-expander. My second reservation relates to the repair costs. There is no evidence of the level of repairs which is required by the continuous pre-expander and it may not be accurate to attribute the same proportionate cost of repairs to it as is attributable to Mansonville's other machinery.
[172] It is also my view that the loss figure should be discounted to take contingencies into account. Although Kurtz's equipment may have a 20 year life span, it does not necessarily follow that Mansonville will keep using it for the full 20 year period. It could become functionally obsolete or uneconomic in a shorter period, much in the same fashion as personal computers become obsolete even though they are still able to perform to their initial specifications. There are numerous other contingencies which may cause Mansonville to cease operating the equipment prior to 2017. The time value of money should also be taken into account in respect of future loss.
[173] On the basis of all of the evidence, I assess the losses incurred by Mansonville as a result of Kurtz's breach of the contractual warranty regarding achievable density in the amount of $75,000.
(vi) Total Damages
[174] I find that Mansonville has sustained damages in the aggregate of $575,100 as a result of Kurtz's breaches of contract, allocated as follows:
$350,000 - losses on pre-existing operations
100 - Seattle Music Museum project
150,000 - Korolite delay claim
nil - extra interest charges
75,000 - double prefoaming pass
$575,100
[175] Mansonville is also entitled to pre-judgment interest on its past losses. If the parties are unable to agree on the amount of pre-judgment interest, I direct that there be an accounting in respect of the interest before the registrar, who is to prepare a report and recommendation.
(i) Identity of Liable Defendants
[176] Counsel for all of the Defendants concedes that if I find Kurtz to be liable, the liability will extend to both of Kurtz GmbH and Kurtz Altaussee GmbH. Counsel for Mansonville says that Kurtz North America should also be liable.
[177] Mansonville's position on this point is based on the testimony of Mr. Walter Kurtz that it was typical for all three of the companies to be involved in a sale and that he represents all three companies when he is involved. In my view, this is not sufficient to create liability on the part of Kurtz North America.
[178] There is no evidence that there was any involvement in the transaction by Kurtz North America prior to the consummation of the contract with the issuance of the order confirmation. If Mr. Teperto or Mr. Cormier had been asked at that time which of the Kurtz companies Mansonville had contracted with, they may have answered Kurtz GmbH, Kurtz Altaussee GmbH or both but they would not have referred to Kurtz North America. The evidence is not sufficient to establish that Kurtz GmbH or Kurtz Altaussee GmbH was acting as agent for an undisclosed principal (namely, Kurtz North America) when they entered into the contract with Mansonville.
[179] All the evidence establishes is that the Kurtz companies work together and that Kurtz North America is involved in the set-up and servicing of machines sold in North America. The fact that Kurtz North America performs certain functions in relation to North American sales does not make it the vendor of the equipment or a party to the contract of purchase and sale.
[180] I find that Kurtz GmbH and Kurtz Altaussee GmbH were the parties to the contract with Mansonville and are liable to Mansonville for the breaches of the contract.
CONCLUSION
[181] I award Mansonville judgment against Kurtz GmbH and Kurtz Altaussee in the amount of $575,100 plus pre-judgment interest. Counsel did not make substantive submissions with respect to the appropriate award of costs (although they both claimed costs on behalf of their clients). If counsel are able to agree, they may include a costs provision in the Order reflecting the decisions in these Reasons for Judgment. If counsel are unable to agree on the appropriate award of costs, arrangements for a costs hearing may be made through Trial Division.}}
Source
Original in English:
- available at the CISG Canada website, http://www.yorku.ca}}