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November 2012

Case Study - Ontario Court of Appeal Decision

Implied Conditions in Rental Agreements

McCague Borlack LLP Lawyer Hillel David represented the plaintiffs (respondents) in these subrogation claims before the Ontario Court of Appeal. (Go directly to the decisions from the Court of Appeal for Ontario c55215 & c55214.)

The appeals to the Ontario Court of Appeal in the Szilvasy and Collett claims against Reliance Home Comfort for damages arising from leaking hot water tanks were heard on October 23, 2012 and the decisions were released on November 27, 2012.1 These claims are among the very few that have traveled from Small Claims Court all the way to the Court of Appeal.

The hot water tank in the Szilvasy claim was 9 years old at the time of loss. In the Collett claim, it was 19 years old. In both cases the loss was caused by internal corrosion in the tank. In each case the plaintiff homeowner had assumed the lease entered into by the original lessee (although both were subrogated claims made by the plaintiffs' insurer). The evidence in both cases indicated that it was virtually impossible to detect the internal corrosion and that there was no practical way of maintaining the tank so as to avert the type of failure that occurred.

Reliance had sent out a document titled Water Heater Rental Agreement to its customers as a billing insert. The document contained self-described Terms and Conditions, including a limitation of liability/exemption clause, although it was conceded by Reliance that the document did not constitute the contract made between the parties, there being no evidence that Reliance's customers had agreed to the Terms and Conditions. Even had there been such evidence, Reliance would have been faced with the provision in the Consumer Protection Act ("CPA") that renders void any contract term that purports to negate or vary any implied condition or warranty under the Sale of Goods Act. Reliance had also sent out a warning notice which reminded customers that "there is always a possibility that the product may leak".

Reliance did not inspect the heaters, nor would an inspection have been meaningful because the key elements of a heater cannot be assessed without destroying the heater. Furthermore, inspections would not assist in predicting when a particular tank might leak or in averting that eventuality. All hot water tanks will eventually fail if left in service indefinitely, and it is not possible to predict the life expectancy of any individual tank.

This appeal decides who should bear the cost of the property damage—the homeowner (or her property insurer) or the company that supplied the heater.

The basic underlying issue on the appeals was reflected in the following statement: "This appeal decides who should bear the cost of the property damage—the homeowner (or her property insurer) or the company that supplied the heater."2 The central issue on the appeals was stated to be: "[W]hether s. 9 of the CPA applies to the water heater rental arrangement between the parties."3

Section 9(2) of the CPA provides that the implied conditions applying to the sale of goods by virtue of the Sale of Goods Act are deemed to apply to goods that are leased or otherwise supplied under a "consumer agreement". That term is defined in the CPA to mean "an agreement between a supplier and a consumer in which the supplier agrees to supply goods or services for payment". The plaintiffs were both residential, not business, users of the hot water tanks. The tanks were supplied for (rental) payments. The agreements with Reliance therefore were "consumer agreements".

Reliance argued that the CPA was inapplicable because the lease agreements had been entered into prior to the enactment of the CPA, and retroactive application of the statute was impermissible. That argument was rejected on the ground that the legal effects of the rental agreements were ongoing at the time when the CPA came into force, and the loss-creating events (the leaks) occurred after that time. The application of the CPA in those circumstances was retrospective, not retroactive. There is no bar to the retrospective application of a statute unless the statute expressly or impliedly prohibits that, which is not the case with the CPA.

Reliance then argued that one of the preconditions set out in the Sale of Goods Act for the implication of the conditions of reasonable fitness for purpose and merchantable quality had not been met, that being that the plaintiffs had not made known to Reliance the particular purpose for which the tanks were required "so as to show that [the plaintiffs] relie[d] on [Reliance's] skill or judgment". Short shrift was given to that argument. The plaintiffs were ordinary homeowners. Reliance was in the business of supplying hot water tanks to residences—in fact, it had approximately 1.2 million tanks on lease to its customers. There was no doubt that Reliance knew the purpose for which the plaintiffs rented the tanks, namely to produce hot water at their homes, or that the plaintiffs were each relying on Reliance's skill or judgment to provide to them a properly functioning water heater.

There was therefore an implied condition in each instance that the water heater would be reasonably fit for its intended purpose of providing hot water in the homes. In view of the fact that the tanks leaked, they were not reasonably fit for that intended purpose.

Reliance argued that such an interpretation amounted to a warranty that the tanks would be "as good as new" throughout the lifetime of a lease. That argument too was summarily rejected with the following comment: "The water heater need not be in the same condition as a new heater. It can be worn, rusted or otherwise in a less than pristine condition so long as it is reasonably fit for the purpose of heating water—without leaking."4

The court did not expressly address an issue that was the subject of much argument on the appeals, that being Reliance's position that the implied conditions of fitness and merchantable quality do not remain in force throughout the term of a lease, but rather only for a reasonable period of time after the lease has been entered into. Given the dismissal of the appeals, the effect of the decisions is that the implied conditions do remain in force throughout the full term of a lease. After all, the losses in these cases occurred 9 and 19 years respectively after the lease agreements had been made, and it was the breach of the implied condition of reasonable fitness for purpose at those late dates that was the basis for Reliance's liability.

A person who pays for the use of a product is entitled to a working product during the payment period, regardless of when that may be.

There are a number of sound and compelling reasons why the implied conditions should remain in force throughout the term of a lease, not the least of which is that the CPA is remedial legislation whose whole purpose is the protection of consumers.5

Any interpretation that would deprive a consumer renting a product such as a hot water heater of the protection of the implied conditions at a time when the consumer is making a rental payment for the heater, regardless of how long into the lease that might be, could hardly be said to be protecting the consumer. To the contrary, any such interpretation would defeat rather than promote the consumer protection purpose of the statute. A person who pays for the use of a product is entitled to a working product during the payment period, regardless of when that may be.

These cases establish the basic principle that consumers who lease or rent products such as hot water tanks, which can be leased for long periods of time, will generally receive the protection afforded by the CPA (unless the preconditions for such protection have not been satisfied, which likely will only rarely occur) throughout the terms of the leases. A mere warning is not sufficient compliance with the implied conditions. Lessors such as Reliance who leave their products in place indefinitely do so at their own risk. The question of whether some types of leased products (one example might be cars) will have the CPA protection or will have a more limited or different form of protection awaits further clarification. Read the decisions from the Court of Appeal for Ontario c55215 & c55214.

Should you wish to obtain further information concerning this decision, please contact Hillel David, Member of McCague Borlack LLP's Subrogation Practice Group.

1 The Szilvasy and Collett decisions are cited as 2012 ONCA 821 and 822 respectively.
2 Szilvasy, at para. 1.
3 Szilvasy, at para. 24.
4 Szilvasy, at para. 43.
5 "[T]he main objective of consumer protection legislation such as the CPA is to protect consumers" and the CPA "must be interpreted in a manner that furthers the consumer protection objective": Weller v Reliance Home Comfort 2012 ONCA 360 at para. 15.


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