Hunter Engineering Co. v. Syncrude Canada Ltd.

Hunter Engineering Co. v. Syncrude Canada Ltd.
Collection
Supreme Court Judgments
Date
1989-03-23
Report
[1989] 1 SCR 426
Case number
19773, 19950
Judges
Dickson, Robert George Brian; McIntyre, William Rogers; Wilson, Bertha; Le Dain, Gerald Eric; La Forest, Gérard V.; L'Heureux-Dubé, Claire
On appeal from
British Columbia
Subjects
Contract
Sale
Trust
Notes
SCC Case Information: 19773, 19950
Decision Content
Hunter Engineering Co. v. Syncrude Canada Ltd., [1989] 1 S.C.R. 426
Hunter Engineering Company Inc. Appellant
and
Hunter Engineering Company Inc.,
carrying on business as Hunter Machinery
Canada Ltd., Integrated Metal Systems
Canada Ltd. and Allis‑Chalmers Canada Ltd. Appellants
v.
Syncrude Canada Ltd., Canada‑Cities Service Ltd.,
Esso Resources Canada Limited, Petro‑Canada
Exploration Inc., Gulf Canada Resources Inc.,
Pan‑Canadian Petroleum Limited, Her Majesty The
Queen in Right of the Province of Alberta, Alberta
Energy Company Ltd., Hudson's Bay Oil and Gas
Limited and Petrofina Canada Ltd. Respondents
Indexed as: Hunter Engineering Co. v. Syncrude Canada Ltd.
File Nos.: 19773, 19950.
1988: February 25, 26; 1989: March 23.
Present: Dickson C.J. and Estey*, McIntyre, Wilson, Le Dain*, La Forest and L'Heureux‑Dubé JJ.
on appeal from the court of appeal for british columbia
Contracts -- Breach -- Design Faults -- Responsibility for design faults -- Design created from buyer's specifications as to proposed use ‑‑ Whether or not company supplying specifications or company creating design liable.
Sale of goods -- Implied warranty as to fitness -- Machinery defective -- Defects appearing after expiry of contractual warranty -- Whether or not breach of implied statutory warranty -- Sale of Goods Act, R.S.O. 1970, c. 421, ss. 15(1), (4), 53.
Contracts -- Fundamental breach -- Exclusionary clause -- Contractual warranty time limited -- Portion of machinery supplied defective ‑‑ Defect discovery after expiry of warranty -- Defective machinery reparable ‑‑ Whether or not fundamental breach.
Trusts and trustees -- Constructive trust -- Trust set up as interpleader pending outcome of passing‑off action -- Trust to pay for machinery with balance going to successful party in passing‑off action -- Possible beneficiaries of trust not parties to trust agreement -- One possible beneficiary ineligible as a result of passing‑off action -- Other beneficiary not willing to assume warranties as required by trust -- Whether or not company setting up trust or company intended as beneficiary of trust entitled to balance of trust moneys.
The disputes between these parties arise out of three contracts for the supply of gearboxes for the Alberta tarsands project. In the first contract, made on January 29, 1975, Syncrude Canada Ltd. (Syncrude), through its agent Canadian Bechtel, ordered 32 "mining gearboxes" from the Hunter Engineering Company Inc. (Hunter U.S.) These gearboxes, which drove conveyor belts moving sand to Syncrude's extraction plant, were fabricated by a subcontractor, Aco.
The second contract, made between Syncrude and a division of Allis-Chalmers Canada Ltd. (Allis‑Chalmers), was for the supply of a $4.1M extraction conveyor system and included 4 "extraction gearboxes" to drive the machinery which separates the oil from the sand. These gearboxes were built according to the same design as the mining gearboxes supplied by Hunter U.S. and were fabricated by the subcontractor Aco. The extraction gearboxes entered service on November 24, 1977.
Both the Hunter U.S. and the Allis‑Chalmers contracts included a warranty limiting their liability to 24 months from the date of shipment or to 12 months from the date of start‑up, whichever occurred first. In addition, the Allis‑Chalmers warranty included a clause stating that the "Provisions of this paragraph represent the only warranty . . . and no other warranty or conditions, statutory or otherwise shall be implied". Both the Hunter U.S. and Allis‑Chalmers contracts provided that the laws of Ontario were to apply.
The third contract was made between Syncrude and Aco on March 1, 1978. It arose out of some unusual circumstances. Between August and December 1977, Syncrude issued purchase orders to Hunter Machinery Canada Ltd. (Hunter Canada) for an additional 11 mining gearboxes built to the same design as the 32 purchased from Hunter U.S. Hunter Canada was a Canadian‑incorporated company established by employees of Hunter U.S. without the latter's knowledge. It held itself out to Syncrude as the Canadian arm of Hunter U.S. and not until January 1978 did Hunter U.S. discover the deception. It initiated a "passing‑off" action against Hunter Canada, notified Syncrude, and offered to assume the Hunter Canada contract. Syncrude, however, opted not to prejudge the result of the litigation by agreeing to let Hunter U.S. step into the contractual shoes of Hunter Canada and, instead of accepting this offer, it contracted directly with the subcontractor Aco for supply of the 11 gearboxes at the price Aco would have received from Hunter Canada. These 11 gearboxes were delivered and progressively put into service between May and December 1978.
In March 1978, Syncrude unilaterally established a trust fund into which it paid the money due under the Hunter Canada contracts. Hunter Canada waived all rights under these contracts but Hunter U.S. refused to become a party to Syncrude's trust agreement. The agreement provided, inter alia, that the trustee would pay to Aco its price for the gearboxes when they were completed. The balance would be paid to Hunter Canada or Hunter U.S., depending on the outcome of the passing‑off action, provided the warranty and service obligations granted by Hunter Canada were assumed. Hunter U.S. was successful in its action but refused to assume the more generous warranty provisions of the Hunter Canada contract as required by the terms of the trust agreement.
Hunter U.S. was found to be responsible at trial and on appeal, as designer of the gearboxes, for the failures and was liable because of a breach of the statutory warranty of reasonable fitness found in the Ontario Sale of Goods Act. Liability was not based on the contractual warranty because it had expired. Allis‑Chalmers was not found liable, at trial, for breach of warranty or fundamental breach of contract; there was accordingly no need to rule on its third party claim against Hunter U.S. The Court of Appeal allowed Syncrude's appeal from that judgment. It also allowed the appeal of Hunter U.S. from the finding at trial that it was not entitled to the trust funds and that the trust income be held for Syncrude.
Hunter U.S. appealed against the finding that it was liable for design default and that s. 15(1) of the Sale of Goods Act applied. Allis‑Chalmers appealed against the finding with respect to fundamental breach. Syncrude cross-appealed with respect to the ownership of the trust fund.
At issue here are: (i) the liability of Hunter U.S. for the design faults which caused the gearboxes to fail; (ii) the liability of Hunter U.S. under the statutory warranty in the Sale of Goods Act; (iii) the liability of Allis‑Chalmers under the doctrine of fundamental breach; (iv) the ownership of the trust fund.
I
Held: The appeal of Hunter U.S. should be dismissed.
Per Wilson and L'Heureux-Dubé JJ.: Hunter U.S. was responsible for the design faults that caused the gearboxes to fail. Syncrude's specifications were a recitation of what the gearboxes were to be able to achieve and general guidelines as to how this was to be done. Hunter U.S. took on the task of deciding specific design details. It was the design decisions that proved to be wrong.
Hunter U.S. was liable for the repair of the gearboxes, even though their failure was discovered after the contractual warranty period had expired, because of a breach of the implied warranty of fitness contained in s. 15(1) of the Ontario Sale of Goods Act. The Hunter U.S. contract neither explicitly excluded the implied warranty nor was inconsistent with it so as to render it inapplicable. The circumstances surrounding this contract met the conditions necessary to bring the implied statutory warranty into play.
Per McIntyre J.: The appeal of "Hunter U.S." against the finding of liability for a design fault should be dismissed for the reasons of Wilson J.
Per Dickson C.J. and La Forest J.: The contract between Syncrude and Hunter U.S. placed responsibility for the design of the gearboxes solely upon Hunter U.S. and Hunter U.S. failed to discharge that responsibility. Hunter U.S. did more than merely design the gears according to specifications provided by Syncrude's agent. The specifications provided by Syncrude were about what the gearboxes were required to do, not how they were to be built. They were not faulty. Syncrude was out of time with respect to the contractual warranties in the Hunter U.S. and Allis‑Chalmers contracts and could not rely on them.
The presence of an express warranty in the contract does not render the statutory warranties inconsistent. Clear and direct language must be used to contract out of statutory protections, particularly where the parties are two large, commercially sophisticated companies. Hunter U.S. could not avoid liability under s. 15(1) of the Sale of Goods Act. All three prerequisites for its application were met. The design and manufacture of the gearboxes was in the course of Hunter U.S.'s business activities. Hunter U.S. knew the purpose of the gearboxes and Syncrude, through its agent, relied upon the skill and judgment of Hunter U.S. The gearboxes were not reasonably fit for the purpose for which they were required.
II
Held: The appeal of Allis-Chalmers from that part of the judgment of the Court of Appeal imposing liability should be allowed and its third party claim against Hunter U.S. should be dismissed.
Per Wilson and L'Heureux-Dubé JJ.: The revision to the Allis‑Chalmers agreement explicitly and unambiguously ousted the statutory warranty.
A fundamental breach occurs where the event resulting from the failure of one party to perform a primary obligation has the effect of depriving the other party of substantially the whole benefit that the parties intended should obtain from the contract. Fundamental breach represents an exception to the rule that the contract continues to subsist and that damages be paid for the unperformed obligation for it gives the innocent party an election to put an end to all unperformed primary obligations of both parties. This exceptional remedy is available only where the very thing bargained for has not been provided.
The breach of the Allis‑Chalmers contract was not a fundamental breach because it did not undermine the contractual setting. Allis‑Chalmers breached only one aspect of its contract. The inferior performance of the gears did not deprive Syncrude of substantially the whole benefit of the contract and the cost of repair was only a small part of the total cost. The gears, while not reasonably fit, worked for a period of time and were repairable. Serious but repairable defects in machinery have often been found not to amount to fundamental breach.
Even if the breach by Allis‑Chalmers were to be characterized as fundamental, however, the liability of Allis‑Chalmers would be excluded by the terms of the contractual warranty.
The "rule of law" approach to fundamental breach should be discarded and the construction approach to exclusionary clauses already adopted by this Court should be reaffirmed. The relevant question for the courts is whether the parties, on a true and natural construction, succeeded in excluding liability at the time the contract was made. After considering the provision's true construction, the court must consider whether or not to give it effect in the context of subsequent events, such as fundamental breach. The courts are quite unable to assess in isolation whether or not a contractual provision is reasonable and any notion that the courts should refuse to enforce a provision for want of its being reasonable should not be imported into the law. Exclusion clauses can be rendered unforceable even if no fundamental breach is found. Legislative protection exists and other judicial avenues such as unconscionability might apply in appropriate circumstances.
Even if the breach of the Allis‑Chalmers contract were a fundamental breach, there would be nothing unfair or unreasonable, or unconscionable if this is a stricter test, in giving effect to the exclusion clause. The contract was made between two companies in the commercial market place, both of roughly equal bargaining power and both familiar and experienced with this type of contract. Allis‑Chalmers' reliance on the exclusion clause was not tainted by any sharp or unfair dealing.
Per McIntyre J.: The appeal of Allis‑Chalmers should be allowed. Any breach of the contract by Allis‑Chalmers was not fundamental and, even if the breach were properly characterized as fundamental, the liability of Allis‑Chalmers would be excluded by the terms of the contractual warranty. It was therefore unnecessary to deal further with the concept of fundamental breach in this case.
Per Dickson C.J. and La Forest J.: The provision in the Allis‑Chalmers contract was sufficient to exclude the operation of the implied warranty in s. 15(1) of the Sale of Goods Act.
Allis‑Chalmers, given the inapplicability of implied statutory warranties and the expiry of its express warranty, could only be found liable under the doctrine of fundamental breach. This doctrine has served to relieve parties from the effects of contractual terms, excluding liability for deficient performance, where the effects of these terms have seemed particularly harsh. It has, however, spawned a host of difficulties. The doctrine of fundamental breach should be replaced with a rule that holds the parties to the terms of their agreement, provided the agreement is not unconscionable. The courts do not blindly enforce harsh or unconscionable bargains.
The parties should be held to the terms of their bargain. The warranty clause freed Allis‑Chalmers from any liability for the defective gearboxes. In the present case there was no inequality of bargaining power and unconscionability was therefore not in issue.
III
Held (Wilson and L'Heureux-Dubé JJ. dissenting): The cross-appeal of Syncrude should be allowed.
Per Dickson C.J. and La Forest J.: There was no basis in law or in equity for awarding the trust fund to Hunter U.S. Hunter U.S. was not entitled to those moneys under the terms of the trust agreement. It did nothing for Syncrude to assist in producing the gears contemplated by the Hunter Canada Contract. The drawings used by Aco in manufacturing those gears were given by Syncrude and were properly in Syncrude's possession. There was no breach of copyright or theft. Hunter U.S. did not satisfy the criteria necessary to establish a constructive trust. There was no unjust enrichment.
As between Hunter U.S. and Hunter Canada, Hunter U.S. would have been allowed to claim any profits made by Hunter Canada under the traditional doctrine of constructive trust. Hunter Canada stood in a fiduciary relationship to Hunter U.S. and equity will not permit the fiduciary to profit at the expense of the principal. The test for unjust enrichment enunciated in Pettkus v. Becker, too, would be satisfied.
The relations between Hunter Canada and Syncrude were regulated by contract. Where a party has entered a contract misled by fraudulent misrepresentations, the contract is voidable at the instance of the innocent party. Syncrude was entitled accordingly to rescind its contract with Hunter Canada and retain the money it would have paid under that contract. The fact that Hunter Canada was not entitled to the money precluded any claim by Hunter U.S. because that claim only arose as a result of Hunter Canada's actions.
Hunter U.S. was not a party to the trust agreement and consistently refused to honour the warranty and service obligations stipulated in the trust agreement. Syncrude was under no obligation to accept the offer made by Hunter U.S. To found a restitutionary remedy in favour of Hunter U.S. would be tantamount to compelling Syncrude to contract with Hunter U.S. Further, if the claim of Hunter U.S. were to prevail, Hunter U.S. would be enriched and Syncrude would suffer a corresponding deprivation for no juristic reason.
Syncrude created the trust fund, no doubt from an abundance of caution, and should not be put in a worse position than if it had merely rescinded its contract with Hunter Canada. The establishment of the fund was not an admission that the moneys belonged to either Hunter Canada or Hunter U.S. Its purpose was to ensure that someone would promptly assume the warranties.
Per McIntyre J.: Syncrude should have ownership of the trust fund for the reasons given by Dickson C.J.
Per Wilson and L'Heureux‑Dubé JJ. (dissenting): The trust fund did not need to be disposed of according to the terms of the trust agreement. The trust terms were not agreed upon by either Hunter U.S. or Hunter Canada. Since Syncrude was no longer prepared to acknowledge, as it was in 1978, that the profit margin was payable to one of these two parties, entitlement to the trust fund should be decided on the equitable principles governing unjust enrichment.
Syncrude's entitlement was limited to working gearboxes at the price agreed upon and any additional money arising out of the circumstances, once repair costs were paid out of the fund, would constitute an enrichment.
Hunter U.S. would be correspondingly deprived of the interest income it would have earned on the contract for the supply of the additional 11 mining gearboxes under the Hunter Canada contract. No contractual link for the causal connection between contribution and enrichment needed to be proved. There was sufficient causal connection in the fact that Hunter U.S. first offered to assume the whole Hunter Canada contract and later, after it won its case, was prepared to offer Syncrude the warranty terms under which the original 32 gearboxes were supplied. Syncrude had been willing to pay the profit margin to Hunter U.S. in 1978 and could not argue now that it had no need of Hunter U.S.
Cases Cited
By Dickson C.J.
Applied: Pettkus v. Becker, [1980] 2 S.C.R. 834; considered: Suisse Atlantique Société d'Armement Maritime S.A. v. N.V. Rotterdamsche Kolen Centrale, [1967] 1 A.C. 361; Beaufort Realties (1964) Inc. v. Chomedey Aluminum Co., [1980] 2 S.C.R. 718; Photo Production Ltd. v. Securicor Transport Ltd., [1980] A.C. 827; referred to: Chabot v. Ford Motor Co. of Canada Ltd. (1982), 138 D.L.R. (3d) 417; Sperry Rand Canada Ltd. v. Thomas Equipment Ltd. (1982), 135 D.L.R. (3d) 197; Gafco Enterprises Ltd. v. Schofield, [1983] 4 W.W.R. 135; Beldessi v. Island Equipment Ltd. (1973), 41 D.L.R. (3d) 147; George Mitchell (Chesterhall) Ltd. v. Finney Lock Seeds Ltd., [1983] 2 All E.R. 737; Cain v. Bird Chevrolet‑Oldsmobile Ltd. (1976), 12 O.R. (2d) 532 (H.C.), aff'd (1977), 88 D.L.R. (3d) 607 (Ont. C.A.); Karsales (Harrow) Ltd. v. Wallis, [1956] 1 W.L.R. 936; B. G. Linton Construction Ltd. v. Canadian National Railway Co., [1975] 2 S.C.R. 678; Harbutt's "Plasticine" Ltd. v. Wayne Tank & Pump Co., [1970] 1 Q.B. 447.
By Wilson J.
Approved: Photo Production Ltd. v. Securicor Transport Ltd., [1980] A.C. 827; distinguished: Beldessi v. Island Equipment Ltd. (1973), 41 D.L.R. (3d) 147; referred to: Hunter Engineering Co. v. Hunter Machinery Canada, Meredith J., Vancouver Registry C780211, December 28, 1978, unreported; Wallis, Son & Wells v. Pratt & Haynes, [1911] A.C. 394; R. W. Heron Paving Ltd. v. Dilworth Equipment Ltd., [1963] 1 O.R. 201; Cork v. Greavette Boats Ltd., [1940] O.R. 352; Chabot v. Ford Motor Co. of Canada Ltd. (1982), 138 D.L.R. (3d) 417; Suisse Atlantique Société d'Armement Maritime S.A. v. N.V. Rotterdamsche Kolen Centrale, [1967] 1 A.C. 361; R. G. McLean Ltd. v. Canadian Vickers Ltd. (1970), 15 D.L.R. (3d) 15; Canso Chemicals Ltd. v. Canadian Westinghouse Co. (No. 2) (1974), 54 D.L.R. (3d) 517; Schofield v. Gafco Enterprises Ltd. (1983), 43 A.R. 262; Peters v. Parkway Mercury Sales Ltd. (1975), 10 N.B.R. (2d) 703; Keefe v. Fort (1978), 89 D.L.R. (3d) 275; Karsales (Harrow) Ltd. v. Wallis, [1956] 1 W.L.R. 936; Harbutt's "Plasticine" Ltd. v. Wayne Tank and Pump Co., [1970] 1 Q.B. 447; Traders Finance Corp. v. Halverson (1968), 2 D.L.R. (3d) 666; Beaufort Realties (1964) Inc. v. Chomedey Aluminum Co., [1980] 2 S.C.R. 718; Hayward v. Mellick (1984), 2 O.A.C. 391; Waters v. Donnelly (1884), 9 O.R. 391; Morrison v. Coast Finance Ltd. (1965), 55 D.L.R. (2d) 710; Harry v. Kreutziger (1978), 95 D.L.R. (3d) 231; Taylor v. Armstrong (1979), 99 D.L.R. (3d) 547; Davidson v. Three Spruces Realty Ltd. (1977), 79 D.L.R. (3d) 481; Gillespie Brothers & Co. v. Roy Bowles Transport Ltd., [1973] Q.B. 400; Ailsa Craig Fishing Co. v. Malvern Fishing Co., [1983] 1 All E.R. 101; Pettkus v. Becker, [1980] 2 S.C.R. 834; Sorochan v. Sorochan, [1986] 2 S.C.R. 38; Deglman v. Guaranty Trust Co., [1954] S.C.R. 725.
Statutes and Regulations Cited
Business Practices Act, R.S.O. 1980, c. 55, s. 2(b)(vi).
Business Practices Act, S.P.E.I. 1977, c. 31, s. 3(b)(vi).
Consumer Product Warranty and Liability Act, S.N.B. 1978, c. C-18.1, ss. 24, 25, 26.
Consumer Products Warranties Act, R.S.S. 1978, c. C‑30, ss. 8, 11.
Consumer Protection Act, R.S.M. 1970, c. C200, s. 58(1).
Consumer Protection Act, R.S.N.S. 1967, c. 53, s. 20C.
Consumer Protection Act, R.S.O. 1980, c. 87, s. 34(1).
Sale of Goods Act, R.S.B.C. 1979, c. 370, s. 20.
Sale of Goods Act, R.S.O. 1970, c. 421, ss. 15(1), (4), 53.
Trade Practice Act, R.S.B.C. 1979, c. 406, s. 4(e).
Trade Practices Act, S.N. 1978, c. 10, s. 6(d).
Trade Practices Inquiry Act, R.S.M. 1987, c. T110, s. 2.
Unfair Contract Terms Act 1977 (U.K.), c. 50.
Unfair Trade Practices Act, R.S.A. 1980, c. U‑3, s. 4(b), (d).
Authors Cited
Atiyah, P. S. The Sale of Goods, 6th ed. London: Pitman, 1980.
Fridman, G. H. L. Law of Contract in Canada, 2nd ed. Toronto: Carswells, 1986.
Fridman, G. H. L. Sale of Goods in Canada, 2nd ed. Toronto: Carswells, 1979.
Fridman, G. H. L. Sale of Goods in Canada, 3rd ed. Toronto: Carswells, 1986.
Ogilvie, M. H. "The Reception of Photo Production Ltd. v. Securicor Transport Ltd. in Canada: Nec Tamen Consumebatur" (1982), 27 McGill L.J. 424.
Waddams, S. M. "Unconscionability in Contracts" (1976), 39 Modern Law Review 369.
Waddams, S. M. "Note" (1981), 15 U.B.C. Law Rev. 189.
Waddams, S. M. The Law of Contracts, 2nd ed. Toronto: Canada Law Book, 1984.
Waters, D. W. M. The Law of Trusts in Canada, 2nd ed. Toronto: Carswells, 1984.
Ziegel, Jacob S. "Comment" (1979), 57 Can. Bar Rev. 105.
APPEAL from a judgment of the British Columbia Court of Appeal (1985), 68 B.C.L.R. 367, in respect of a judgment of Gibbs J. (1984), 27 B.L.R. 59. Appeal of Hunter U.S. dismissed.
APPEAL from a judgment of the British Columbia Court of Appeal (1985), 68 B.C.L.R. 367, in respect of a judgment of Gibbs J. (1984), 27 B.L.R. 59. Appeal from that part of the judgment of the Court of Appeal which imposed liability on Allis‑Chalmers Canada Limited allowed and the third party claim against Hunter U.S. dismissed.
CROSS-APPEAL from a judgment of the British Columbia Court of Appeal (1985), 68 B.C.L.R. 367, in respect of a judgment of Gibbs J. (1984), 27 B.L.R. 59. Cross‑appeal of Syncrude allowed, Wilson and L'Heureux‑Dubé JJ. dissenting.
Jack Giles, Q.C., and Robert McDonell, for the appellants Hunter Engineering Inc. et al.
D. M. M. Goldie, Q.C., and P. G. Plant, for the appellant Allis‑Chalmers Canada Ltd.
D. B. Kirkham, Q.C., and Garth S. McAlister, for the respondents Syncrude Canada Ltd. et al.
The judgment of Dickson C.J. and La Forest J. was delivered by
THE CHIEF JUSTICE -- Three main issues are raised in this appeal: (i) was Hunter Engineering Company Inc. ("Hunter U.S.") responsible for design faults which resulted in cracks in the bull gears of gearboxes used to drive conveyor belts at the oil sands operation of Syncrude Canada Ltd. ("Syncrude"); if so, is Hunter U.S. liable to Syncrude for breach of the implied warranty of fitness contained in s. 15(1) of the Ontario Sale of Goods Act, R.S.O. 1970, c. 421; (ii) is the "doctrine" of fundamental breach a part of Canadian contract law and what is its effect, if any, on the liability of Allis-Chalmers Canada Limited ("Allis-Chalmers") to Syncrude; (iii) can the law of constructive trust be extended to reach, for the benefit of Hunter U.S., monies held under a trust agreement, to which Hunter U.S. was not a party, entered into by Syncrude in the unusual circumstances which will be described.
I
Facts
Syncrude operates a multi-billion dollar synthetic oil plant at Fort McMurray, Alberta, where oil extracted from tar sands is processed. Large bucket wheels scoop sand from its natural state and load it onto conveyor belts, which in turn carry the sand a substantial distance to an extraction plant. Motive force from 1250 horsepower motors is transmitted to the conveyor belts through a series of gearboxes. The trial judge, Gibbs J., described a "gearbox" as a unit which comprises a collection of gears, shafts and bearings contained within a steel box or casing. Power generated by a motor is transmitted through a drive shaft into the gearbox, then through a series of intermediate gears to a very large (the larger type being six and one half feet in diameter and the smaller five and one half feet in diameter) "bull gear" which revolves, turning a large shaft set in the centre of the bull gear and extending outside the gearbox casing, to which shaft is attached a pulley which moves the conveyor belt.
In January 1975, Canadian Bechtel Ltd. ("Bechtel"), as agent for Syncrude, contracted with Hunter U.S. for the supply of thirty-two mining gearboxes for use at Syncrude's oil sands project. In July of the same year, Syncrude contracted with Allis-Chalmers for the purchase of fourteen conveyor systems, including four extraction gearboxes. Both the Hunter and the Allis-Chalmers gearboxes were designed by Hunter U.S. in accordance with Bechtel specifications and fabricated by a subcontractor for Hunter U.S.
The gearboxes acquired from Hunter U.S. were put into service in July 1978. In September 1979, more than a year later, a gearbox failure occurred. The Allis-Chalmers extraction boxes went into operation in November 1977. In September 1979, nearly two years later, one of the extraction boxes failed and cracks were discovered in two of the other three.
The trial judge [see (1984), 27 B.L.R. 59] described the cause of the failure in these terms at pp. 62-63:
The outer rim of the bull gear is attached to the central shaft by steel plates, one on each side of the rim, called "web plates". Inside the outer rim a thicker portion of the rim provides a shoulder on each side. The intention was that the web plates be fitted snugly to the shoulder and welded in place. Halfway between the rim and the shaft eight 8 1/2 inch diameter holes were cut at regular intervals in line through each plate. Steel pipe was welded into each set of holes to provide rigid connections between the plates. At the outer edge of the web plates, where they met the inside of the rim, eight 3 inch radius "half moon" pieces were cut out at regular intervals. The result was that there was not a continuous weld attaching the web plates to the inside of the rim. The connection was broken in eight evenly spaced places by the 3 inch radius half moon cutouts.
The bull gears failed because the weld between the web plates and the outer rim failed. The diagnosis was that the weld failed because of flexing of the web plates and that the web plates flexed because there was insufficient strength to withstand the torque applied by the pinion gear to the bull gear. The evidence supporting the flexing diagnosis was uneven wear and pitting of the teeth on the bull and pinion gears. The continuous flexing of the web plates weakened and cracked the weld between the web plate and the rim. In time, if remedial action had not been taken the web plates would have broken away entirely.
Syncrude was forced to undertake its own repairs to the gearboxes when Hunter U.S. and Allis-Chalmers refused warranty coverage. Syncrude and the other plaintiffs claimed damages from Hunter U.S. and from Allis-Chalmers for the cost of repairing and rebuilding the gearboxes, contending that the gearboxes were inherently defective, unsafe and unfit for the purposes for which they were intended and were not of merchantable quality. The defendants conceded that the gear boxes failed because they were too weak for the service, but they denied liability. By third party notice, Allis-Chalmers claimed contribution or indemnity from Hunter U.S. on the ground that if Allis-Chalmers were found liable, the liability would be due to faulty design or negligence by Hunter U.S.
Both the Hunter U.S. and the Allis-Chalmers contracts included a warranty limiting their liability to 24 months from the date of shipment or to 12 months from the date of start-up, whichever occurred first. In addition, the Allis-Chalmers warranty included a clause stating that the "Provisions of this paragraph represent the only warranty . . . and no other warranty or conditions, statutory or otherwise shall be implied". Both the Hunter U.S. and Allis-Chalmers contracts provided that the laws of Ontario were to apply.
The trial judge noted that Hunter U.S. had designed the gearboxes and had drawn the plans and specifications for the internal working parts. He held that unless the Bechtel specifications provided to Hunter U.S. were inadequate, Hunter U.S. must take responsibility for the failures.
Hunter U.S. contended that there was no evidence led by Syncrude to show that the specifications were not met, to which the judge responded at p. 64:
However, although the Canadian Bechtel specifications give detailed operating criteria for the gearboxes they do not extend to design details. Indeed, they expressly provide that: "Correct and adequate design is the seller's (sole) responsibility."
In my opinion Hunter U.S. did not discharge the responsibility cast upon it when it accepted the Canadian Bechtel specifications. The torque applied by the pinion gear to the bull gear is directly related to the conveyor belt load which is translated into bull gear inertia which must be overcome by pinion gear force. The strength required in the moving parts within the gearbox to move the loaded conveyor belt is a design function and that design function was entirely the responsibility of Hunter U.S. The evidence was that the design load on the conveyor belt was never exceeded. The irresistible conclusion is that it was a design fault that prevented the gearboxes from performing the service. I so find.
The judgment of the Court of Appeal for British Columbia (reported (1985), 68 B.C.L.R. 367), affirmed the trial judge's finding that the cracks in the bull gears in the gearboxes were due to a breach of the design obligations of Hunter U.S. under its contract. The court awarded the sum of $1,000,000 against Hunter U.S., being the agreed cost, plus interest, of the repair of cracks in gears of the 32 mining gearboxes designed and supplied directly by Hunter U.S. to Syncrude.
The courts at trial and on appeal held that Hunter U.S. was not liable for the repair of the mining gearboxes under an express warranty because that warranty had expired. However, both courts also held that the cracks were in breach of the statutory warranty of reasonable fitness found in the Sale of Goods Act of Ontario.
Gibbs J. accepted Syncrude's argument that the Sale of Goods Act applied to the contract, barring express provisions to the contrary, and therefore held the implied warranty of fitness for purposes stipulated in s. 15(1) of that Act governed. Applying the three tests proposed by Professor Fridman in Sale of Goods in Canada (2nd ed. 1979) at pp. 203-4; (i) that the contract be in the course of the seller's business; (ii) that the seller have knowledge of the purpose of the goods; (iii) and that the buyer rely on the seller's skill or judgment, the trial judge found Hunter U.S. liable to Syncrude for breach of s. 15(1).
In this Court, Hunter U.S. submitted that its design responsibility was limited to providing the strength required by Bechtel's specifications, and that it was Bechtel's responsibility, as author of the specifications, to design to the strength required to move the loaded conveyor belt for the length of time Syncrude wanted the boxes to work without repair.
Paragraphs 21 and 22 of the Hunter U.S. Factum read:
21. It must be emphasized that there is no evidence that Hunter's design did not provide a strength required by the specifications, and there is no evidence excluding an insufficiency in the strength required by the specifications as an alternative probable cause of the cracks when they eventually appeared.
22. In the result, the issue is one of proper interpretation of the contract: is Hunter's design obligation limited to designing in accordance with the strength required by the specifications? Or does it extend to and include the responsibility for designing to the strength required to move the loaded conveyor belt (without replacing a single gear) for more than twenty months of continuous service? If the former, the appeal succeeds entirely.
Counsel for Hunter U.S. quoted the design requirements set out in the specifications:
1.11 Requirements
The specifications, requirement drawings and date sheets included herewith represent minimum requirements.
This Specification covers all engineering services required to complete the design in accordance with the specifications. Correct and adequate design is the Seller's sole responsibility. [Underlining by counsel.]
and referred to clause 10.2.4 of the Specifications, headed "Service Factors":
Gear reducers shall conform to AGMA standards for 1.5 mechanical service factor and 1 : 1 thermal service factor based on rated motor horsepower with motor service factor of 1.0. The mechanical rating shall permit loads of 275% of motor rated horsepower for starting and for momentary peak loads up to six occurrences per hour, and shall permit single starts at loads of 300 percent of motor rated horsepower (200 percent of reducer rating).
Syncrude took a somewhat different view of the matter, contending that the specifications were in fact drafted by Hunter U.S. and incorporated into the contract on the recommendation of Hunter U.S. Counsel submitted that it was necessary to review the history under which the contract specifications came into being. I will summarize that submission in the paragraphs immediately following.
The first oil sands plant built in the area of Fort McMurray, Alberta, was built by Great Canadian Oil Sands ("GCOS") in the early 1970s. In about 1972, Hunter U.S. designed and supplied the gearboxes and the conveyor system of GCOS. The gearboxes supplied to GCOS were virtually identical in design to the gearboxes subsequently supplied to Syncrude. In 1974, Syncrude was in the planning stages for the construction of its plant. Hunter approached Syncrude and held itself out as being an expert in the design of gearboxes for the specific operation which Syncrude intended. Hunter U.S. supplied complete specifications for its gearboxes to Syncrude and represented that the specifications would be suitable for the particular purpose Syncrude intended.
The specifications gave various details regarding performance requirements of the gearboxes. However, they did not give any details of the dimensions of the components within the gearboxes. The service factors to which counsel for Hunter U.S. referred were taken directly from the original proposal of Hunter U.S. The mechanical service factor of 1.5 x horsepower, the thermal service factor of 1 : 1 and the mechanical rating of 275% of motor rated horsepower for up to six starts per hour are all found in proposed specifications. There was nothing in the specifications which related to the part of the low speed gear which eventually failed.
Syncrude accepted the representations of Hunter U.S. as to its ability to produce suitable gearboxes for Syncrude's purpose and issued a Purchase Order to Hunter U.S. into which the specifications suggested by Hunter U.S., including the precise service factors were incorporated.
Counsel for Syncrude also made the following additional points:
(i) the contract expressly provided, "Correct and adequate design is the Seller's sole responsibility";
(ii) Mr. Rao Duvvuri, the design engineer employed by Hunter U.S., who designed the gearboxes for both GCOS and Syncrude and prepared detailed design drawings of all the components of the gearboxes for the purposes of manufacture never discussed any of the matters relating to the design of the bull gear with Syncrude or Bechtel at any time;
(iii) the gearboxes should last 20 years; bull gears would normally be expected to last "10 years or beyond", yet Hunter U.S. conceded at paragraph 27 of its Statement of Facts that, "There is no dispute that the strength of the moving parts within the gear boxes was inadequate to carry the conveyor belt for longer than two years without at least one failure.";
(iv) Hunter U.S. called no expert witness, nor any evidence at all, except for certain extracts from the examination for discovery.
The following passage from the reasons of the trial judge at pp. 70-71, is apposite:
. . . on February 20, 1974 Hunter U.S., in the course of soliciting orders, sent Canadian Bechtel a technical description of their gearboxes, described as "shaft mounted conveyor drives". In the covering letter they said:
"Furthering our telephone conversation of last week, I am attaching two (2) copies of Specifications for the 1250 HP, 60 RPM output gear reducers.
Three Specifications are drawn up for installations in locations such as the Fort McMurray, Alberta Oil Sands Operation, and have been found quite suitable in other installations in that area.
We have included the Ringfedar ring shaft mounting as you indicated, also.
Please keep us informed on this project, and when you are in a position to accept prices for these units, we will be happy to respond with a minimum of delay."
And in a summary sheet:
"This specification is for a geared drive assembly designed to power a belt conveyor.
This drive group has been designed for installation and operation in the remote areas and hostile environment normal to the mining industry. The units are designed for a high degree of reliability based on design arts developed in similar installations. Special design consideration has been made for field servicings in the event it is necessary."
And on the introduction page of the descriptive document, described as "technical specifications":
"This specification has been prepared to qualify HUNTER ENGINEERING COMPANY INC., as a competent and experienced manufacturer of specialized gear driving equipment.
Hunter drives are designed for specific applications, incorporating those features required to minimize operational and environmental hazards having an adverse effect on the performance of the unit. Our market effort is directed towards those unique applications which challenge our designer's [sic] ingenuity. Hunter has the engineering, manufacturing and financial resources to supply the complete drive package designed to reliably power any defined processing function."
I am strongly of the opinion that upon its true construction the contract dated January 29, 1975, between Syncrude and Hunter U.S., places responsibility for the design of the gearboxes solely upon Hunter U.S., and that Hunter U.S. failed to discharge that responsibility. I would affirm the conclusions of the British Columbia courts on t