Data

Date:: 16-12-1998
Country:: Canada
Number:: 97-GD-4131 1 Windsor
Court:: Ontario Court (General Division)
Parties:: Nova Tool & Mold Inc. v. London Industries Inc.

Keywords

APPLICATION OF CISG (ART. 1(1)(A) CISG)- COURT'S FAILURE TO DISCUSS CISG PROVISIONS ON LACK OF CONFORMITY REFERRED TO BY PARTY

Abstract

A Canadian seller and an US buyer concluded a contract for the production and delivery of molds which the buyer would use to manufacture automobiles parts. When the seller was delayed in production, the buyer had to engage another producer to manufacture one of the ordered molds, as to ensure delivery to the final customer in due time. Other molds had to be finished ("grained") by another company. Accordingly, when the seller sued for payment, the buyer counterclaimed damages for the extra costs caused by the change of producer, and by the "graining" of the other molds. The buyer further claimed damages for breach of warranty, since some of the molds did not conform to contract specifications.

The buyer based its counterclaim both on breach of contractual warranty and on lack of conformity of the goods according to the applicable CISG provisions (Arts. 1(1), 35(1), 36(1)(2), 45(1)(a)(b) and 74 CISG). The Court granted the buyer damages without discussing CISG provisions on lack of conformity, notwithstanding the fact that CISG was applicable to the case at hand under its Art. 1(1)(a).

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The [seller] sues the [buyer] for money which it claims is owing to it for the manufacture of molds for [buyer]. [Buyer] counterclaims for damages alleging the molds in question were defective and/or not delivered within the time set out in the contract(s).

[Seller] is a mold manufacturer carrying on business at Windsor. Its founder and President is John Novosel Sr. who started the business in 1989. He completed his training as a mold maker in Europe and has 33 years experience in the mold making industry. He is assisted in the business by his son, John Novosel Jr. who is also an experienced mold maker. John Jr. took 3 years in engineering technology at St. Clair College. He has been the general manager of [seller] since 1989. [Seller's] plant is at Oldcastle, outside of Windsor. It was built in 1988, and has been occupied by [seller] since 1993, at which time it built an addition to the plant giving it approximately 30,000 square feet of space. [Seller] has a workforce of about 50. Its main business is the manufacture of steel molds used in the manufacture of plastic auto parts in plastic injection machines. It supplies General Motors, Siemen Automotive and Mayco Plastics among others. Mayco manufactures parts for Chryslers. The molds which [seller] makes are also known in the industry as "tools". The plastic parts produced in the plastic injection machines may have a smooth surface or a leather-like surface. The leather-like surface is known as "grained" or "textured". These terms are interchangeable. Such a surface is the result of a process known as "graining" or "texturing". [Seller] does not do graining in its own plant and where that finish is required by its customer, sub-contracts that work out to shops which specialize in the process and pays the sub-contractor, normally passing that expense on to its own customer. If time is available, [seller] obtains quotes from the texturing sub-contractor before contracting for that work. Selection of the texturing sub-contractor depends on the best price quoted and/or the best time of completion and/or the requirements of its customer. There are different types of texture, some of which are more complicated than others.

The time available for [seller] to submit a quote on a mold is very short, leaving it insufficient time to obtain texturing quotes which happens frequently. It budgets a figure for texturing in its costs analysis based on, I assume, its experience with the type of texturing required by its customer if no quote is available. Ordinarily, [seller] does not bill its customer separately for texturing, but includes the cost and some of the profit in its price.

When plastic injection shops require molds, they normally send out a request for quotes ("R.F.Q.") to the mold making shops along with data essential to the estimate of costs and quotations based thereon made by the mold makers.

On receipt of the R.F.Q. and accompanying data, they estimate the costs of making a mold and submit quotations to the parts manufacturer who sends a purchase order to the successful bidder. [Buyer] is a manufacturer of plastic auto parts by the plastic injection method. Its plant is in London, Ohio where it employs about 65 people. The Honda plant in Ohio is one its most important customers.

[Buyer] and [seller] have done business together before the matters involved in this action. In the past [seller] had manufactured molds for [buyer] for the production of plastic car seats for children, baby walkers, and other items for children. [Seller] also did a number of other engineering changes and repair work doing a number of automobile molds for [buyer].

In late 1995 or early 1996, [buyer] sent [seller] a request for quote for 9 molds for certain parts required by Honda along with the engineering prints, specifications, and Honda's time schedule. Two of those molds are in issue in this action, jobs 619 and 620. John Novosel Jr. knew that these were for Honda parts, that Honda was a good customer of [buyer] and that timing was tight.

Each parts manufacturer has different standards and different types of specifications which would be set out or accompany the request for quote.

On receipt of [buyer's] R.F.Q. [seller] issued a "parts print" or data to one of its engineers, Thomas Swan, to prepare a quote based on his estimate of the costs of building each mold according to the specifications. In February of 1996, [buyer's] Project Engineer met with Swan at [seller's] shop and gave Swan the prints to quote from. A second copy of these prints was faxed to John Novosel Jr. Swan prepared work sheets broken down into the main areas of the mold and estimated the costs of material, components, and labour to complete the jobs. On receipt of a purchase order for a mold, [seller] assigns a 3 digit number to that mold for identification.

The first cost estimate prepared by Swan was to what became jobs 619 and 620. Swan did not allow for any texturing costs for 619 and 620 although he was aware that the specifications called for texturing. Swan was not familiar with the grain print and felt that he had to get the sub-contractor's price on it to include in his cost estimate and the eventual quote to [buyer]. There is no evidence that he ever obtained such a quote. His cost estimate for graining was zero. Swan did not explain why he failed to get a graining quote, although he was aware that it would add to [seller's] costs. Obviously, he did not enter an estimated cost based solely on his experience either. He did not explain his failure to enter any costs of graining on his work sheet. He estimated the total cost of 620 at U.S. $191,800 with delivery in 24 weeks. This figure formed the basis of [seller's] quote which was arrived at in consultation with John Novosel Sr. and John Novosel Jr. There are many mold shops in the Windsor-Detroit and Ohio area competing for such jobs. [Seller] submitted a quotation of U.S. $186,800 for job 620 on June 12, 1996 followed by a second quote of U.S. $186,400 after some discussion with [buyer]. [Seller] normally tried for a profit of 10 - 15%. [Buyer] received quotes from other mold makers on what became [seller's] job 620, namely:

Cambridge Tool Die US $445,000
Akromold US $348,500
Reko US $250,000

[Seller's] quote on job 620 did not says if texturing was included or not. Where graining is called for in the prints, it is standard practice in the industry that graining and the cost of graining are included in the mold maker's quote. In this regard, I accept the evidence of Jerry Moder, [buyer's] Account Manager. If [seller] was not including graining in its quote, it should have made it clear. [Seller] now submits that graining was not included in its quote. I reject that submission.

[Seller's] quote for 620 at U.S. $186,400 was accepted, and [buyer] issued a purchase order at that price on July 24, 1996. It contained [buyer's] standard terms and conditions, a copy of which follows as Schedule "A".

[Seller] was aware that the molds it was to build for [buyer] were to be used by [buyer] to manufacture parts for Honda and had to be built, tried out, and delivered by [seller] in accordance with Honda's strict delivery schedules of which [seller] was aware on receipt of the purchase order. Ninety five percent of [buyer's] production was for Honda. [Buyer] had to deliver parts for Honda's prototypes and mass production vehicles. Honda does not allow any flexibility in its schedules. Honda does not accept excuses for failure to meet its schedules. On receipt of the purchase order, [seller] believed that it could meet Honda's schedules for jobs 619 and 620 at the time it quoted on those jobs.

Although not a party to [buyer's] contracts with [buyer's] suppliers, Honda sought to control and to some extent did control some aspects of the quotations and production activities of the companies which supplied its feeder plants such as [buyer]. I accept the evidence of Jerry Moder as to Honda's event schedules and [seller's] failure to meet them. I also accept his evidence with respect to problems with the molds on the try-outs.

Unfortunately, [seller] was very slow in getting started on 619 and 620. [Seller] did not start the engineering work until October 13, 1996. [Seller] required payment of one-third of the price on receipt of the purchase order and sent its invoice to [buyer] on receipt of the purchase order and the first 1/3rd of the price was paid. [Seller] did not actually start working on the molds until September 1, 1996. [Seller] never informed [buyer] of these delays. There was only one day of work on September 1, 1996, and no further labour until October 13, 1996. At that point, [seller] was more than one month behind schedule. The first try-out on 620 which ought to have been held on November 1, 1996 was not held until December 4, 1996. 620 should have been 90 percent complete at that date, but was not. [Buyer] received no word from [seller] before the first try-out of any problems with 619 and 620. Up to December 4, 1996, [seller] had only worked about 29 % of the total hours originally estimated. The first try-out on 619 was held on November 15, 1996. Problems were noted. A second try-out on 619 was held on January 2, 1997. Again, 11 problems were noted.

620 was not ready for its first try-out on December 4, 1996. Only 2 of the 4 cavities had been completed. The following problems were observed on the first try-out, amongst others:
1) Mis-matched edges
2) Ribs
3) Flashing
4) Alignment problems
5) Error in design
6) Wall thickness variations.

[Seller] sent [buyer] invoices for the second 1/3rd of the price after the first try-outs as originally agreed which invoices were paid although [seller] had only completed 29% of the total hours. [Buyer] paid in good faith, because [seller] was still trying to make progress. [Buyer] believed [seller's] assurance that it would not take long and would finish on time.

The second try-outs were scheduled for January 2, 1997. Both 619 and 620 were tried out on that date. Again, each showed a number of problems -- 9 in 620 and 11 in 619. There were still 2 major deficiencies at the second try-out of 620:
(1) Two of the 4 cavities were still not completed and,
(2) The ejector system had not been installed.

As a result parts had to be removed by hand and were not fit for installation. Although there were problems, [seller] was anxious to please and had come through for [buyer] before. This gave [buyer] enough confidence in [seller] to believe them and to-assure Honda that the problems would be resolved by the next try-out. A meeting was held on January 3, 1997. Present for [buyer] were: Jerry Moder, Engineering Manager, M. Takeuchi, Senior Engineering Manager and Brad Rechel, Administrative Manager. Present for [seller] were: John Novosel Sr., John Novosel Jr., Rob Schmidt, [seller's] Sales Manager and Mike Talbot, Engineering Manager. Thomas Swan, Program Manager, had left [seller] on November 1, 1996. The [buyer] representatives recognized the seriousness of the situation. They were under pressure from Honda both from Ohio and Japan. Moder was very frustrated and was very emotional during the meeting. The major concern was whether or not [seller] would have enough time to finish the molds on schedule. Moder told them that [seller] was making Matt Zawyer's life a nightmare because of all the problems and the criticism he was getting from Honda. It was a very serious meeting. The [buyer] representatives tried to convey that to the [seller] representatives as professionally as possible. Brad Rechel was present, as he was to report the status to Honda as to what promises had been made or broken. Rob Schmidt, [seller's] Sales Manager, assured the [buyer] representatives that the problems would be corrected by the third try-out. Eventually there were 11 try-outs on 619. The third try-out was held on January 20, 1997. [Seller] had made an attempt to finish the back-side detail of the part produced that day, but that back-side detail was wrong. There were still a significant number of errors and a mis-match resulting in excessive flash. These had been noted on previous try-outs. The end of the part was not correct to the print or data. There had been progress, but most of the areas of progress had substantial errors. In sum, they were no further along from the previous try-outs. The injector system had still not been connected and never was connected. According to the Honda schedule the part should have been finished, dimensionally, accurate, and with minor adjustments, ready for graining by the end of March.

They reviewed the problems and schedules on all 7 molds being built by [seller] with particular attention to 620. It was [buyer's] position that [seller's] Senior Management must take full responsibility. Schmidt said that, [seller's] electric discharge machine sub-contractor had let them down. However, he went on to say "we fell on our ass". [Seller's] representatives did not contradict him. The [seller] representatives said that they would meet [buyer's] every expectation. It was agreed that [seller] would get a new electric discharge machine sub-contractor. This was assigned to Dan Cusmanic, [seller's] Shop manager. He left [seller] on February 7, 1997. [Seller] was also to assign specific tool makers to complete the jobs and were not to work on any other jobs. [Seller] agreed to establish a daily time line to be determined by Mike Talbot, engineer on the jobs at the time. Up to that time [seller's] standard work week was 55 hours in 5 days plus half a day on Saturday. A normal shift of 10 hours was extended to 12 hour shifts and occasionally work was done on Sunday. On Sunday, January 5, 1997, Talbot sent [buyer] a January 1997 calendar setting out a proposed time line for that month. With [buyer] under pressure from Honda, all recognized the seriousness of the situation.

[Seller] was anxious to please, but its corrections were not good enough. 619 and 620 were supposed to be on the same Honda schedules and both were behind schedule. The [buyer] representatives at the January 20, 1997 try-out were upset. They told [seller] it was a do or die situation. The [seller] representatives promised to get back on schedule, but did not live up to their promise.

The next try-out was scheduled for February 5, 1997, but [seller] postponed it to February 10, 1997. [Buyer] reported the delay to Honda. Dan Cusmanic, [seller's] Shop Manager left [seller] on February 7, 1997. I accept Moder's evidence, and I find at that date, 620 was only 40 percent completed. Moder was concerned. Cusmanic was the most knowledgeable of [seller's] employees on the molds being made for [buyer]. Moder began to think that if there were no more progress, [buyer] would have to consider transferring 620 to another shop. He had never transferred a mold before. It is rare in the mold industry and difficult. It was the last option to meet Honda's requirements.

Shortly before February 10, 1997, Moder made inquiries of mold shops who might be able to finish. He phoned Reko, one of the shops that had quoted originally. Reko's bid was next highest above [seller's] quote. Reko turned him down. [Buyer] did not call Akromold, the next bidder. Moder then phoned Howard Russell, the President of Cambridge Tool Die Corporation, (Cambridge had originally been the high bidder with a quote of U.S. $445,000. on January 23, 1996) and asked if Cambridge had time to complete 620. Cambridge did. Moder told Russell of the state of 620, describing it in a rather better state than it actually turned out to be. Moder then dropped over some sample parts made on 2 of the try-outs. Looking at the parts alone it was very difficult for Russell to say how much time would be needed to complete 620 and could not possibly quote the costs. He said Cambridge would complete 620 but only on time and materials. As transfers in the mold industry are rare, there is no custom of the industry as to how the transferee should charge for the completion. Moder agreed to time and materials.

In any event, I find that it would have been extremely difficult to find a mold shop that would quote a fixed price on a transferred mold, particularly where it had no previous knowledge of it. In any event it would take about 4 or 5 weeks to get a quote. In view of Honda's schedule and the pressure [buyer] was in, getting a quote, or several quotes from mold shops which had time available, if any, was not an option. I find that [seller] could not have corrected the problems and deficiencies in 619 and 620 on time even if it could work 24 hours per day. Those molds were required to be ready 18 weeks from first try-out. [Seller] did make efforts to its limits, but was not successful. It was not and would not ultimately be successful because its employees lacked the skill and talent necessary to do so. 620 had not improved significantly from the first try-out. It was scheduled for completion in May 1997. Honda needed a small number of parts at that time to begin with. It first made 5 to 30 cars to acquaint its workers with the new model, for advertising purposes and to do the tests necessary to comply with Government regulations before mass production could start. [Buyer] worked hand in hand with the Honda engineers to see what adjustments were necessary for mass production. Honda representatives attended each scheduled event and subsequent evaluations. [Seller] well knew that [buyer] was obliged to supply the parts necessary on time for each event according to Honda's schedule. If [buyer] did not have the parts ready to supply Honda, Honda could not pass Government regulations and be certified for mass production for the new model year.

The next try-out was held on February 10, 1997. On [seller's] original estimate, 619 and 620 which were on the same schedule should have been completed. On February 10, 1997, however, deficiencies and problems still existed, including:
(1) The ejector system was not connected.
(2) The back-side detail was not satisfactory.
(3) Flash.

After transfer to Cambridge, [buyer] also learned that the core side was out of line. [Buyer] did not tell [seller] of its intention to transfer 620 until after the try-out on February 10, 1997. 620 had 4 try- outs and 619 had 11 try-outs before its completion. [Seller's] representatives met with [buyer's] representatives after the try-out on February 10, 1997. [Buyer] reiterated the seriousness of the situation, and that they had given [seller] ample time to get 620 onto schedule, but it was far from being complete, and therefore it would have to be moved to another mold shop which was not a slap in the face to [seller], but would enable them to apply more of their work force to the completion of 619 and 621 on schedule. 621 was then in the process of being built. [Seller] agreed to 620 being moved out. Shipping was agreed. it was understood that the move would be beneficial for both [seller] and [buyer]. [Seller] undertook to answer any technical questions and provide any information requested of it during the completion of 620. As no questions were put to it after the transfer, it did not have to comply with this undertaking.

There was no discussion of financial matters or legal liability. Moder did not say that [buyer] would seek reimbursement from [seller] for any excess costs. At that time Moder believed that Cambridge would finish 620 within the figure originally budgeted. It was only after Cambridge began its work that he realized the seriousness of the problems with 620. Although [seller] had decided not to send [buyer] an invoice for the final 1/3rd of the price, that was not mentioned at the meeting. [Seller's] representatives did not say that they thought it would cost Cambridge something more than it would cost [seller] to finish the mold. [Seller's] representatives did not ask for assurances from [buyer], that [buyer] would not look to [seller] for any excess charges. After the meeting Moder and John Novosel Sr. walked out into the shop. Moder made a plea to Novosel to concentrate and finish the other tools on schedule as the reputation of both companies was on the line. There was no discussion about charges for 620. Moder's first priority was to make sure that the molds got completed and were able to produce parts for Mass production for Honda. There was no discussion about whether or not graining was the obligation of [seller] included in the quoted price.

On February 12, 1997, Moder wrote to Rob Schmidt at [seller] as follows:
"In agreement from our meeting held at your facility on February 10, 1997. [Buyer] Industries has requested that [Seller] Tool release all tooling and tooling aids to Cambridge Tool Die for the mold [seller's] #620) centre pillar lower. All responsibility for the completion of this mold will transfer to Cambridge Tool Die commencing on the date of arrival February 12, 1997. As agreed during the meeting of February 10, 1997, [Seller] Tool Mold will support [Buyer] Industries and will answer any technical questions pertaining to the noted mold to make the transition as smooth as possible."

The intent of the letter was to inform [seller] that 620 was being moved to Cambridge and that all responsibility as far as the work to complete that mold was concerned, would transfer to Cambridge and to confirm asking them to support [buyer] during the transition if any technical questions arose with respect to the mold. The responsibility of Cambridge meant, in Moder's mind, the completion of the mold, correction of any errors made by [seller] and getting the mold to the state of mass production readiness. Moder did not believe on February 10, 1997 that [seller] could have completed both 619 and 620.

A Cambridge truck picked up 620 with all the components, prints and data. [Buyer] had a long relationship with Cambridge and had confidence in them as did Honda. Honda had agreed to the move to Cambridge. Cambridge had manpower available and time available to work on 620 as soon as it arrived at their shop. This was important to [buyer]. If the mold was not ready for production in time for Honda's mass production, it would have jeopardized [buyer's] relationship with Honda and future business with them.

Upon receipt of 620 Cambridge checked out the mathematical data and the die model and compared them with each other. Cambridge also checked the master data at Honda. The necessary electrical discharge machine work was done by Cambridge. Cambridge noted that the core half of the mold did not line up underneath the cavities. This was a significant problem which required welding and re-cutting. It was also noted that the lifter pockets were too long. These required significant work to remedy. They had 5 men work on the lifters around the clock with 3 on 1 shift and 2 on a second shift. Cambridge was anxious to see their work completed according to Honda's schedule. [Buyer] had one of its engineering personnel at Cambridge daily, it required, to monitor progress. By using a double shift Cambridge completed the 2 unfinished cavities of 620 in time for the first try-out.

I found Howard Russell, President of Cambridge, to be a credible witness and accept his evidence. Russell said he would never take on a job like that again as it was easier to build a new mold than to complete something like 620 as received from [seller]. On completion Cambridge submitted the bill to [buyer] for 5,817 hours of labour at U.S. $55.00 per hour for a total of U.S. $319,935 and material costs of U.S. $16,285. The total of labour and material is U.S. $335,220. It was extra labour costs and the deficiencies and problems in the mold received from [seller] which resulted in Cambridge's total bill exceeding [seller's] original quote. The labour hours were computed from the workers' time cards and time slips from every department. This information was entered into Cambridge's accounting system and then printed out. Russell said, he knew Cambridge's employees did that work and that it was necessary and reasonable to complete 620. Cambridge discounted its normal hourly rate of U.S. $60 to U.S. $55. Its actual labour cost is U.S. $52 per hour so that its profit on labour was under 5%. [Buyer] paid Cambridge U.S. $335,220 as billed. Cambridge completed 620 in August in time for Honda's mass production.

[Seller] had also received requests for quotes on other molds from [buyer] upon which it submitted quotes, and received purchase orders. These became the following job numbers: -619, 621, 621 (A), 6321633, 6371638 and 667. Aside from 619 there were no problems with any of the other molds which were completed and received by [buyer] as follows:
632/633 May 13, 1997
637/638 June 20, 1997
667 July 30, 1997
621 August 5, 1997
621(A) August 11, 1997
Job 619 was received August 5, 1997, and 620 received from Cambridge August 13, 1997.

[Buyer] complained, and I so find, that 619 is not operating properly as a result of which the parts produced are unsatisfactory. I find that the parts produced by 619 had " drag marks " and are unacceptable. The problem [buyer] has is that its production process must be slowed down to avoid the drag marks. The drag marks are caused by the ejector system. In order to avoid drag marks, production must be slowed. The mold can be corrected for U.S. $15,600. [Buyer] would like to send the mold out for correction, but it must produce enough parts to meet Honda's production. In order to send it out for correction, [buyer] must build up a stock pile of parts in which it can meet Honda's production requirements while the mold is out of its shop.

[Seller] has submitted invoices to [buyer] as follows:
619 US $ 66,700 August 5, 1997
621 US $ 55,500 August 5, 1997
621(A) US $ 48,334 August 11, 1997
632/633 US $ 42,850 May 13 20, 1997
637/638 US $ 51,050 June 20, 1997
667 US $103,400 July 30, 1997

[Seller] never chose to submit an invoice for the final 1/3rd with respect to 620, the first 2 payments of 1/3rd each having been made. [Seller] called [buyer] to inquire about the payment of the invoices. About a week later John Novosel Jr., received a call to come down to Ohio to discuss the money. From [seller's] point of view, there was over $300,000 unpaid and overdue. Both Novosels went down to [buyer] and met with Moder, Matt Zawyer, and Brad Rechel. Rechel produced a statement from Cambridge showing in detail the labour and material costs making up its bill to [buyer] of U.S. $335,220. They spent hours reviewing the statement category by category. The Novosel's were particularly concerned about the total number of hours at 5,817 when their original time estimate were building 620 from nothing was 2,660 hours. Rechel also produced some bills for texturing which he wanted [seller] to pay for. Both Novosels said they were not sure if graining was included in their price. They went through the Cambridge labour hours during which Moder gave explanations, sometimes with the assistance of Russell by telephone. The Novosels suggested figures for each category which they thought to be more reasonable and which were noted by Moder. The subject of texturing was discussed. The Novosels took the position it was not included in their quote. No resolution was reached on this issue. Problems under 619 were discussed and a part produced by 619 with visible imperfections was produced and examined. After completion of their review, some negotiation took place with a view to resolving the differences. Although the Novosels had suggested reasonable labour hours for each category, they thought the total resulting was still too high.

The total of the figures in each category which the Novosels' thought reasonable came to 4,322 labour hours resulting in a total cost of U.S. $237,700.00.

The Novosels purpose in attending the meeting was to get a final resolution, collect what they felt was due to [seller], and to continue a working relationship with [buyer]. John Novosel Sr. was looking for a "closing of the book on it". At this meeting there was no agreement of final resolution or "closing the book on it".

In its Statement of Claim as issued, [seller] claimed U.S. $367,834. Since that time [buyer] has paid U.S. $97,971.18. [Seller] has therefore amended its claim to U.S. $269,862.82.

[Buyer] has counterclaimed for damages as follows:
Paid Cambridge to complete 620 US $335,220

[Buyer] internal costs for late Delivery of 620 US $ 55,227
Repair costs for 619 US $ 15,600
Graining costs for 620, 621 667 (which should have been done by [seller]) US $ 39,660
TOTAL US $442,707
[Buyer] claims a set off of that amount against any amount it might owe [seller].

No serious dispute is raised as to the amount due to [seller] pursuant to its invoices.
[Seller] is entitled to recover the sum of U.S. $269,862.82, subject to the claim of set off of U.S. $442,070 claimed in the counterclaim.
The counterclaim arises out of 4 areas:
(1) Payment to Cambridge of U.S. $335.220 for completion of 620

[Seller] knew that the molds to be built for [buyer] were to be used by [buyer] to manufacture parts for cars manufactured by Honda which had to be delivered in accordance with strict delivery schedules fixed by Honda of which [seller] was also aware. [Seller] believed it could meet Honda's schedule for 619 and 620.

I need not review the problems which plagued 620 from the time of the first try-out on December 4, 1996. Those and similar deficiencies and problems continued throughout the entire time that [seller] had that mold. The deficiencies and problems with 620 continued until February 10, 1997. At that time, the ejector system was not connected and 2 of the 4 cavities still had not been completed. This was followed by the meeting of the parties' representatives on February 10, 1997, particulars of which I have already outlined. I prefer and accept the evidence of Jerry Moder as to the discussions, which took place at that meeting as being the most accurate. This was followed by Moder's letter to Rob Schmidt.
(a) Accord and Satisfaction

On the basis of the oral discussions of February 10, 1997, and Moder's letter, [seller] raises a defence of accord and satisfaction and submits this part of the counterclaim must be dismissed. Accord and satisfaction is the purchase of a release from an obligation whether arising under contract or tort by means of any valuable consideration not being the actual performance of the obligation itself. The accord is the agreement by which the obligation is discharged. The satisfaction is the consideration which makes the agreement operative: per Scrutton L.J. in British Russian Gazette v. Associated Newspapers Ltd. , [1933] 2 K.B. 616 at 643.

In Law of Contracts in Canada, G.H.L. Fridman, 1976 Carswell at p. 479, Professor Fridman put it this way:
"In such instances, the consideration for the new contact is clear; it consists of the mutual releases of the parties from their respective duties under the first contract."

The burden of proving an accord and satisfaction is on [seller]: See Weldon v. Vaughn , [1880] 5 S.C.R. 35. In that case Chief Justice Ritchie held that the burden of proof is beyond a reasonable doubt. Of course that is no longer the law and the ordinary burden in civil cases of proof on a balance of probabilities now applies.

A cause of action arising from a breach of contract may be discharged by accord and satisfaction and need not be in writing unless the Statute of Frauds applies. It must be shown that the minds of [buyer's] representatives, particularly Moder went with the terms and understood their effect. In a very attractive argument, which loses none of its attractiveness by its lack of success, Mr. Barat for [seller] submits that the oral discussion on February 10, 1997, together with the letter of February 12, 1997, constitute an accord and satisfaction relieving [seller] from any liability for any damages incurred by [buyer] as a result of the removal and transfer of 620. Mr. Barat submits that [seller] gave up its lien, its right to complete 620 and its right to collect the final 1/3rd of the price and charges for the first try-out while [buyer] got immediate transfer of the mold to Cambridge and relief from payment of the final 1/3rd of the price and charges incurred by [seller]. He also submitted that not invoicing for the final 1/3rd, the transfer and answering technical questions after the transfer constituted satisfaction. However, these submissions are not supported by the facts. The only agreements were:
(1) Transfer of the mold;
(2) Answering any technical questions which [buyer] might request.

At that date [buyer] had no knowledge that it would incur any expenses over [seller's] price by reason of the transfer. It was not agreed:
(1) That [seller] would not invoice [buyer] for its expenses after the first tryout and final 1/3rd of the price; and
(2) That [buyer] would not claim damages from [seller] resulting from [seller's] breach of contract and transfer of the mold. With respect to the final 1/3rd of the price, and the expenses incurred after the first try-out, this was unilateral decision of [seller], not to invoice [buyer] which strikes me as an admission of its failure to perform its contract.

Mr. Barat also interprets the words "release" and "responsibility" in the letter of February 12, 1997 as somehow supporting the conclusion that there was an accord and satisfaction. He also submits, that as it was written by Moder on behalf of [buyer], the rule of contra proferentem must apply. Firstly, I see no ambiguity in the wording of the letter. Although it is quite true that everyone's language is to be construed against that person, there are limits to that rule, and it can never be applied to force one into a position which the context and surrounding circumstances do not warrant: Per Henry J. in Weldon v. Vaughn (supra) at pg. 51. The words of Moder's letter taken in their plain ordinary meaning in the context of the meeting of February 10, 1997 simply cannot be interpreted as a release of all liability rising out [seller's] breach of contract. The general words of a release (assuming that the letter is a release, which it is not,) must be restrained to the subject matter under discussion and intended by the parties to be adjusted. In this regard, resort must be had to the evidence of Moder about the meeting of February 10, 1997, which I prefer to that of any other witness to the contrary. Mr. Barat has also complained that [buyer] gave no notice of default to [seller]. The contract does not require any notice of default to be given. In any event, [buyer's] request for transfer was certainly a clear notice of default and must have been so interpreted by [seller]. The contract included the following terms:

"TIME OF DELIVERY: Time is of the essence on this order. If you fail to make delivery on or before the promised date, we may, in addition to any other remedy which may be available, purchase elsewhere and charge you with any resultant loss, unless late shipment has been authorized by us in writing. You shall bear any extra or higher transportation charges you incur to meet delivery requirements unless such charges are necessitated by our request for rerouting or expedited handling.

"WARRANTIES: You warrant that the goods and services to be furnished hereunder will be (a) free from defects in materials and workmanship, (b) merchantable, (c) in full conformity with our specification, drawings, and data, and with your samples, labels and advertisements, (d) fit for the use intended by us, if you have reason to know of such intended use, (a) conveyed with good title, free from all security interests, liens and encumbrances, and (f) in compliance with all federal, state, and local laws and regulations (including occupational health and environmental control regulations) applicable to their manufacture, sale, or intended use. This warranty is not waived by and shall survive inspection, acceptance and use of the goods and shall be in addition to any other warranty given by you. No implied warranties are excluded. This warranty shall run to us, our successors, assigns and customers, and users of products.

"INSPECTION: Goods will be received subject to our inspection and acceptance at destination, and you shall bear the risk of loss before acceptance. Payment shall not constitute acceptance. We may reject any goods which are, in our judgment, defective or non-conforming, and at our option and without prejudice to any other legal remedy, we may hold such goods at your risk or return same to you at your expense. Defects are not waived by acceptance of goods, by payment, or by failure to notify you thereof.

"TERMINATION: We may terminate this order or any part hereof for cause in the event of any default by you, or if you fail to provide us, upon request, with reasonable assurance of future performance. In the event of termination for cause, we shall not be liable to you for any amount, and you shall be liable to us for any and all damages sustained directly or indirectly by reason of your default.

"REMEDIES: If you breach any warranty or any of the terms hereof, or if you otherwise fail to perform as specified herein, you will be in default and will be liable to us for all damages incurred by us, directly or indirectly, as a result of your default. Our remedy for damages is in addition to any other remedy which may be available to us, and such remedies shall be cumulative. Our remedies and the damages recoverable by us, shall in no way be limited except in a writing signed by our President or General Manager.

"ENTIRE AGREEMENT: This agreement, consisting of these terms and conditions and those on the reverse side hereof, constitutes the entire agreement between the parties with respect to the subject matter hereof and all prior discussions and agreements are merged herein, and the terms hereof cannot be modified except by written instrument executed by our President or General Manager."

I find that in all the circumstances of this case that it was reasonably necessary for [buyer] to transfer 620 to Cambridge for completion. I have accepted Moder's evidence that there was no discussion at the meeting of February 10, 1997 about money issues, no discussion about whether [seller] would charge [buyer] anything further for 620, no discussion about [buyer] looking to [seller] for any excess costs and no discussion about money matters. Moder is supported by the evidence of John Novosel Jr. who testified that Moder's letter of February 12, 1997 fairly summarized the meeting of February 10. The letter only refers to three things:
1) transfer of 620 to Cambridge;
2) Cambridge to be responsible for completion; and
3) [seller] to assist by answering any technical questions.

I find that transferring the mold to Cambridge and resulting damages flow directly from [seller's] breach of contract and were within the reasonable expectations of the parties at the time when the contract was made.

While the quantum of [buyer's] damages under this head may be more than [seller] anticipated, that does not prevent [buyer] from recovering them. Provided that the loss which could be contemplated was of the type which had in fact occurred, [seller] is liable for the whole of the loss although the quantum was greater than the parties might have contemplated: H. Parsons Livestock Ltd. v. Uttley Ingham Co. Ltd. [1978] 1 AII.E.R. 525.

I find that the transfer of the mold and completion by another mold shop was within the contemplation of the parties (or within their reasonable expectations) at the time the contract was made. If Cambridge's bill turned out to be more than the parties contemplated then that is irrelevant.

(b) Mitigation
[Buyer] was under a duty to mitigate its damages. [Seller] submits that by awarding Cambridge a time and materials contract it failed to take reasonable steps to mitigate by not obtaining quotes before contracting the completion to another mold shop. [Seller's] breach left [buyer] in exigent circumstances. It was in danger of incurring the loss of confidence in it by its major customer. If it failed to deliver in time it would have adverse effects on future business with Honda, as well as the possibility of liability in damages to Honda. In my view it was reasonable to proceed with Cambridge on a time and materials basis. Reko was not available. [Buyer] had confidence in Cambridge based on previous experience. There was a serious risk of not being able to deliver to Honda in time. [Buyer] was justified in proceeding as it did.

(c) Proof of Quantum
The burden is on [buyer] to prove its damages on a preponderance of credible evidence. Mr. Barat submitted that [buyer] has failed to meet the burden of proof in that it failed to enter in evidence at the trial the time records, invoices, cancelled cheques and other documents in the possession of Cambridge and [buyer]. Evidence with respect to Cambridge's labour and material was put together by Cambridge from its accounting records based on the original documents in its possession. Mr. Barat submits that the original documents should have been produced at trial for his inspection and cross-examination. Mr. Contini, for [buyer], pointed out that [buyer] produced all documents in its possession on or before trial for examination by Mr. Barat. Howard Russell was prepared to supply the Cambridge material if asked. Mr. Contini was prepared to make them available to Mr. Barat before trial but was never asked to produce them. If Mr. Barat had requested their production before trial, Mr. Contini would have been alerted to have them available at trial and would have done so.

In Parmenter v. Saunders (1947) O.W.N. 539 the Assistant Master held that a party claiming time and materials on a quantum meruit must produce all the supporting documents for examination by the adverse party. That case was distinguishable in that the contract between Parmenter and Saunders required the plaintiff not only to maintain specified documents but also to permit them to be examined by Saunders or his nominee. The Divisional Court in A-Jac Demolition v. Urlin Rent-A-Car 75 O.R. (2d) 474 placed a similar burden on a plaintiff, citing Parmenter, but its judgment was obiter on this issue. I accept the evidence of Howard Russell and find that the summary produced (Exhibit 3 Tab 55) is an accurate record of Cambridge's time and materials in the completion of 620. The fact that it is higher than [seller's] original quote is explained by the extra work necessary to correct [seller's] errors and deficiencies. I assess [buyer's] damages under this head at U.S. $335,220.00.

(2) Graining or Texturing
I find that graining by [seller] was required under the specifications on which it quoted. Unfortunately for [seller] its costs estimator failed to include the cost of graining in his estimate of total cost for the work on jobs 620, 621 and 667. The cost estimate was an internal document of [seller] and kept in its files until produced for the purposes of this litigation. When [seller] quoted it did not specify that graining was not included in its price, as it ought to have done if it was not included in its price. [Buyer] was entitled to assume that it was included. [Buyer] is entitled to recover the sum of U.S. $43,740.00 paid to Midwest Mold Texture, the graining sub-contractor approved by Honda. Midwest had to be used, as it was the shop required by Honda.

(3) Breach of Warranty
It was the policy of [seller] to make any required repairs to a mold at its expense for one year from the date of delivery, provided that the repairs were required due to defects for which it was responsible and not caused by its customer. This was only company policy and not a term of the contract. It is not relevant. I have already quoted the warranty provisions in the contract. [Buyer] relies on this contractual warranty and also relies on the implied warranties under the International Sale of Goods Act R.S.O. 1990 c. 110. [Buyer] relies particularly on Article 1(1)(a) and (1)(b), 35(1), 36(1), (2), 45(1)(a), (1)(b) and 74 all of which follow as Schedule "B" .

[Buyer] claims damages for breach of warranty as follows:
620 US $ 52,227.00
619 US $ 15,600.00
TOTAL US $ 67,827.00
The claim with respect to 620 arises out of the failure of [seller] to deliver it completed in February 1997. As the expense involved is the estimated labour costs which must be incurred in building up a bank of parts, packaging and shipping costs, Moder said these costs would not have been incurred if 620 had been completed in February 1997. I am not satisfied that these costs are the result of any fault or failure on the part of [seller]. I disallow this claim. 619 was delivered to [buyer] in imperfect condition which requires further work to correct. [Buyer] has not yet been able to build up a sufficient bank of parts to take it out of production and send it out for repairs. The estimated cost was U.S. $15,600.00 which I allow.

[Buyer] is therefore entitled to recover the following on its counterclaim:
Amount paid to Cambridge US $ 335,220.00
Graining US $ 43,740.00
Breach of Warranty -- Repairs to 619 US $ 15,600.00
TOTAL US $ 394,560.00
(4) Setoff

[Buyer] claims for a setoff of the U.S. $394,560.00 in damages due to it from [seller]. At one time setoff was only granted under s. 111 of the Courts of Justice Act or at common law for debt (or liquidated claim) against debt. That rule has been superceded by the setoff allowed in equity. The principles are set out in Telford v. Holt [1987] 2 S.C.R. 193. The court will allow setoff even for an unliquidated claim for damages against a liquidated claim.

As the claim and counterclaim arise out of the same transaction this is a proper case for setoff of [buyer's] counterclaim against [seller's] claim. As the counterclaim exceeds the claim by U.S. $124,697.18 there will be judgment for [buyer] for that amount.

If counsel are unable to agree on costs and wish to make submissions, those submissions should be made in writing and delivered to me care of the Judges' Secretaries (not to the office of the Local Registrar) within 14 days.}}

Source

Published in English:
-University of Pace Website (http://cisgw3.law.pace.edu/).
-1998 ACWSJ LEXIS 56746

Commented on by:
- J.S. Ziegel, in32 Canadian Business Law Journal, 1999, 313-319;
- B. Zeller, in 12 Pace International Law Review, 2000, 79-106 (also available at Pace Univ. Website)

Confirmed in major part (except for damages) by:
- Ontario Court of Appeal, 26-01-2000, C31315 (Nova Tool & Mold Inc. v. London Ind.Inc.)}}