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Case Study:

Szilvasy v. Reliance Home Comfort

Stephen Barbier
Hillel David,

September 2012

By Hillel David, Associate Lawyer
Presented at a Product Liability MB Seminar

On December 7, 2011 the Ontario Divisional Court released its decision in two appeals that both involved property damage caused by the failure of leased hot water tanks. In each case the hot water tank, located in the basement of the homeowner, developed a leak which resulted in damage to the home and contents. Leave to appeal to the Court of Appeal has been granted in both cases. The date for the hearing of those appeals has not yet been set.

The major issue in these cases is the question whether the condition of fitness for intended purpose2 that is implied in the lease of a product that is subject to the Consumer Protection Act will apply not only at the outset of the lease, but throughout the term of the lease.

The hot water tank in one of the claims was 19 years old at the time of loss. In the other claim, it was 10 years old. In both cases the loss was caused by internal corrosion in the tank. In each case the plaintiff had assumed the lease entered into by the original lessor. 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 had occurred. In other types of claim, the question may arise whether the lessee was contributorily negligent in failing to see and deal with the problem that led to the loss, or in having failed to maintain the product.

It was common ground among the parties that there was no written agreement that set out the terms and conditions of the lease. The presence of a written contract would not, however, have made any difference in view of the provisions of the Consumer Protection Act. That statute extends the application of the statutory implied warranties of fitness for intended purpose and merchantable quality that are mandated by s. 15 of the Sale of Goods Act to goods that are leased or otherwise supplied under a consumer agreement, and renders void any contract term that purports to negate or vary any implied condition or warranty under the Sale of Goods Act. Section 9(1) of the CPA adds a warranty that the services supplied under a consumer agreement are of a reasonably acceptable quality.

It should be noted, however, that the protection provided by the CPA extends only to "consumer transactions", which is defined to mean any act or instance of conducting business or other dealings with a consumer, including a consumer agreement, and is limited to instances where the consumer or the person engaging in the transaction with the consumer is located in Ontario when the transaction takes place. There are other limitations to the application of the CPA as well, but these are the major ones insofar as leased products are concerned.

Did the lessees assume the risk of failure because they retained ownership or care and control of the water heaters?

The lessor has raised the following issues:

  1. Should the CPA be applied retroactively?
  2. Have the preconditions for the implied conditions in the Sale of Goods Act been satisfied?
  3. Was there a breach of the implied condition of fitness for intended purpose?
  4. Do the implied conditions remain in force throughout the term of the lease?
  5. Did the lessees assume the risk of failure because they retained ownership or care and control of the water heaters?
  6. Was it wrong to imply a contractual term contrary to the express communications from the lessor that it would not be responsible for consequential damage?

The only one of those issues that is not, in my view, inconsequential and perhaps even frivolous, is the argument regarding the continued vitality of the implied conditions throughout the term of the lease, even where, as in one of these cases, the lease has been in force for 19 years or more.

The trial judge gave the following reasons for finding that there was an implied condition of fitness during each month in which a lease payment was made:

...The water heaters are rented on open-ended contracts for a monthly fee. The rental fee does not vary from day one until the heater breaks down. The risk of flooding increases as time goes by but the charges to the consumer remain constant without any recognition that that it is more and more likely that the consumer will suffer damage. The contracts treat the water heater at all times as if it were just installed.

It has been economic for the defendant to act as it has. That is to deny claims rather than institute a program of replacement at a fixed time or to amortize the cost of the heater over a reasonable period of time and then transfer the ownership and the risk to the homeowner. By retaining ownership the defendant retains the risk of failure of the property, which it owns, and the liability that follows.

...This is a case of an open-ended lease of property and by leaving the lease open-ended and continuing to charge the same amount each month, it is reasonable to say that the implied warranty of fitness continues with each monthly payment as a new starting point. If defendant is charging as if the water heater were new, why should the warranty not be as effective as if the heater were new?

The Divisional Court judge (Pardu J.) made the following comments:

The factual context here is important. All hot water tanks will corrode and eventually leak. The Appellant had no plan to replace water tanks before they leaked at any stage of their life span. There is no way to diagnose whether an individual hot water tank is likely to fail. The Appellant has approximately 1.2 million hot water tanks leased to customers. Based on past experience, in any given year, the chance that a hot water tank will fail and cause consequential property damage is .005%. This case is quite different from the case of the sale of a used car, where there is no ongoing relationship between the parties, and both parties would recognize that mechanical issues would arise in the future for which the vendor would bear no responsibility.

Here the lessor promised to provide the lessee with a working hot water tank at all times. If the tank failed they undertook to replace it. If it required service, they provided it. The lessor retained ownership of the tank at all times. A tank provided by the lessor might be brand new or it might be 19 years old. In rare cases, a hot water tank might fail almost immediately because of a manufacturing defect. There is no meaningful way to differentiate amongst the lessor's contractual obligations depending on the age of the tank. Given the lessor's acknowledged contractual obligation to provide a working hot water tank at all times, it would be illogical to conclude that there was not a continuing warranty as to the proper functioning of the tank.

Given the lessor's acknowledged contractual obligation to provide a working hot water tank at all times, the lessor should not be entitled to escape liability for loss or damage resulting from a breach of that acknowledged contractual obligation. The lessor cannot hive off that liability for resulting harm from its admitted contractual obligation to provide a properly functioning product at all times. There is a fundamental inconsistency between an admitted obligation to replace a failed leased tank, regardless of when the failure occurs, and the refusal to accept responsibility for the consequences of that failure. It is not enough for a lessor to take the after-the-fact measure of replacing a leaking tank. Breach of the implied conditions should result in liability for consequential harm or damage.

A lease payment for any particular rental period sensibly requires in return a product that is reasonably fit for its intended purpose during that rental period.

In summary form, other reasons why the implied conditions of fitness and merchantable quality are operative throughout the term of a lease are:

  1. The language of the CPA ("goods that are leased", meaning the implied conditions apply at all times when the goods "are" in the course of being leased).

  2. The statutory admonition that the CPA should be "interpreted as being remedial" and should be "given such fair, large and liberal interpretation as best ensures the attainment of its objects";3

  3. A lease payment for any particular rental period sensibly requires in return a product that is reasonably fit for its intended purpose during that rental period. That would accord with the objective reasonable expectations of the parties;

  4. If a lessee is paying the same amount for a 19-year-old tank as another lessee is paying for a new tank, the former should receive the same benefits, including implied conditions, as the latter;

  5. Business efficacy;

  6. The lease agreement should not be one-sided;

  7. The lessor should be obligated to honour its end of the bargain during the entire period of time in which the lessee is doing likewise. That would be "consistent with the equities of the situation"; and

  8. Silence as to the duration of the implied conditions creates, at a minimum, a rebuttable presumption that they remain in effect during the lifetime of the lease agreements, and there is no evidence to rebut that presumption.

As stated by the Divisional Court judge, the lessor's analogy to the difference between the sale of new and used products is inappropriate, both because of the differences between a sale and a lease as outlined in the passage quoted above, and for the following reasons as well. A used car costs less than a new car. A car that is 19 years old can be purchased for a fraction of the price of a new car. The lessor in these cases did not reduce the lease payments for the respectively 19- and 10-year-old tanks.

The adage "You get what you pay for" is instructive. The purchaser of a used car expects to receive a car that is not in the same condition, and will not last as long, as a new car. A lessee, on the other hand, expects to receive a product that will age but nevertheless will continue to function properly and safely at all times during the lease. Unlike a used car (or for that matter a new car), which the purchaser knows will no longer properly function at some point, the lessee of a hot water tank will expect it to be reasonably fit for its intended use during the whole time that the lease remains in force and lease payments are being made, regardless of its age.

A product that will inevitably fail and cause harm because of a lessor's policy to leave it in use indefinitely...

There was, in any event, a breach of the implied conditions from the start of the lease agreements. A product that will inevitably fail and cause harm because of a lessor's policy to leave it in use indefinitely, and that cannot be meaningfully inspected or maintained, is a product that is not reasonably fit for its intended purpose and is not of merchantable quality, not just at the time of failure, but from the time it is first leased.

Contrary to the submission of the lessor, this decision does not make a lessor an "insurer of the brand-new condition of leased goods for the duration of any fixed or open-ended lease". To begin with, a lessor must only comply with the conditions implied by the CPA; that does not make the lessor an "insurer". Second, compliance with those implied conditions is not a requirement that the leased product function as a "brand-new" product, but only that it will be reasonably fit for its purpose and will be of merchantable quality throughout the term of the lease.

As stated by the trial judge, "it has been economic for the defendant to act as it has." The lessor elected to implement a policy of leaving indefinitely in use uninspectable and unmaintainable hot water tanks, knowing they would inevitably fail due to internal corrosion. That amounted to a business decision to accept responsibility for the consequences of inevitable failure, rather than incur the presumably greater cost of replacing tanks after some specified period of use, such as 6 or 10 years (the former being the usual, and the latter being the longest, contractual warranty periods as deposed by the lessor's expert). The obvious implication from the evidence of the lessor's expert that he would be shocked to see a contractual warranty period longer than 10 years is that the likelihood of failure must be considerable after that period of time, yet the lessor maintained a policy of leaving tanks in place well past that time period, as exemplified by the 19-year-old tank at the Collett residence.

The basic underlying issue is: As between a lessor and a lessee, which of the two parties should be responsible for loss or harm resulting from a failure of the leased product to be reasonably fit for its intended purpose, or its failure to be of merchantable quality? The legislature has answered that question by enacting the CPA. Unless the contract provides otherwise (and is not prohibited by the CPA from so providing), the implied conditions will be effective throughout the term of the lease, regardless of how long a time has passed since the start of the lease, and not just during some relatively short period of time after that start date. A lessor, in other words, has an obligation to supply a safe and properly functioning product in each and every lease payment period, and will be liable for loss or damage resulting from a breach of that obligation, regardless of how far into the lease term that might occur.

1 2011 ONSC 6928. The decision includes the companion decision in Collett v Reliance Home Comfort.
2 The plaintiffs also rely on the implied condition of merchantable quality, but the focus of the litigation to date has been the implied condition of fitness for intended purpose.
3 Section 64(1) of the Access to Justice Act, 2006


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