What comes down the pipe: Knowledge of a product’s purpose founds basis of liability against manufacturer and distributor

1. Introduction

In a recent case from the Ontario Superior Court of Justice, Gordon. J considered a product liability action against both a distributor and manufacturer of copper tubing for use in a residential watermain, in the context of new regulations established following the Walkerton water crisis of 2000.

Ultimately, the Court’s finding of liability against both manufacturer and distributer may well have resulted from a striking underlying factual scenario, involving conduct on the part of the manufacturer verging on bad faith. 

Justice Gordon’s decision addresses the following legal issues:

• To what extent will a product that fails to meet its purpose be considered defective?
• When will a seller be held liable for a defective product based solely on a history of reliance between the buyer and seller?
• Is a distributor responsible to identify when a material specified for use by the owner’s representative is not fit for the owner’s purpose?

2. Background and Facts

SCS Consulting Group (“SCS Consulting”) were the project engineers responsible for designing a  watermain system to be installed in the City of Brantford. Two sections of the watermain were designed for the use of 2-inch Type K copper tubing (the “Copper Tubing”). In November 2006, SCS Consulting released a call for tender. As part of the tender package, it provided a list of the material required for the watermains, including the Copper Tubing

The plaintiff, Brantford Engineering and Construction Limited (“Brantford Engineering”) was awarded the contract for the installation of the watermains. Brantford Engineering contracted with Underground Specialities (the “Distributer”) for the specified materials. The Distributer in turn placed a purchase order for the materials with the manufacturer, Wolverine Tube (Canada) Inc. (the “Manufacturer”).

The Walkerton Water Crisis

Both the Walkerton water crisis and the judicial inquiry that followed it provided crucial context to the decision.¹ The inquiry concluded that the crisis could have been prevented by the use of continuous chlorine residual, a chemical used to kill bacteria in drinking water.²

Pursuant to legislative changes in the aftermath of the crisis, the city of Brantford (the “City”) implemented a two-step sterilization procedure: a chlorination test and a chlorine residual test. The watermain must pass both steps before being connected to the municipal water system.

Problems with the Copper Tubing

In June of 2007, Brantford Engineering installed the watermain and commenced the sterilization protocol. The Copper Tubing passed the first step of the test, but following repeated attempts, failed the chlorine residual test.

Uncertain as to the cause of the failure, Brantford Engineering consulted the Distributor and the Manufacturer. The Manufacturer in turn contacted a representative of Copper Canada, who suggested that a chemical reaction with chlorine could be causing the test failure. In the course of its correspondence, the Manufacturer acknowledged that, “whichever way you look at this it is pretty ugly and not good for copper.”³

The Manufacturer advised the Distributor that the chlorine content could be cause for concern. However, it did not explain why or disclose any of the information received from Copper Canada. Brantford Engineering was therefore given no explanation for why the Copper Tubing was not passing the second step of the test. Eventually, it ordered plastic tubing to replace the Copper Tubing. The plastic tubing passed both steps of the test.

Brantford Engineering brought a claim against the Distributer for breach of implied contractual warranties under the Sale of Goods Act (the “SGA”) and a claim in negligence against the Manufacturer for damages resulting from the failure of the Copper Tubing.

3. Reasoning of the Ontario Superior Court of Justice

(i) Liability of the Distributer under the Sale of Goods Act

Section 15(1) – Was there a Breach of the Implied Warranty of Reasonable Fitness?

The Court found the Distributer liable for a breach of implied warranty under s. 15(1) of the SGA. Fundamental to the judge’s decision was his finding that Brantford Engineering relied on the Distributer’s skill or judgment and was not merely contracting to purchase materials.⁴ Justice Gordon supported this conclusion on two grounds.

First, Gordon J. found that Brantford Engineering’s specialization was limited to the installation of watermains, while the Distributer’s expertise was in the material it supplies.⁵ Additionally, he relied on the testimony of the Distributor’s General Manager who professed he had knowledge of the relevant regulations of the City and admitted that he was aware of the sterilization process and the special purpose of the Copper Tubing.⁶ Accordingly, Gordon J. found that Brantford Engineering relied on the Distributor’s expertise in this regard.

Second, Gordon J. cited the historical relationship between the parties. He noted that Brantford Engineering had on previous occasions relied on the Distributor to scrutinize the materials list and provide advice on any issues with the material complying with municipal specifications.⁷ He based his finding of reliance on this past relationship, despite the fact that there were no specific discussions between the parties about the use of the Copper Tubing for this project when Brantford Engineering provided the Distributor with the materials list.⁸

The Distributor disputed liability on the grounds that it relied on the Manufacturer. Gordon J. stated that although a distributor can usually rely on the manufacturer to determine whether material is fit for the intended purpose, in this case such reliance was misplaced.⁹ He went on to state that where information is available, as it was in this case, the Distributor had an obligation to diligently obtain it.¹⁰ In this regard, the Court relied on expert opinion that a chemical reaction occurs when copper comes in to contact with chlorine.¹¹ Gordon J. held that the Distributor “cannot simply rely on the Manufacturer. It has an obligation to make inquiry. The information was available.”¹²

Justice Gordon’s decision raises some questions about this obligation as it is unclear when it is triggered. In this case, the Manufacturer failed to disclose information that would have provided much needed insight about the incompatibilities of the Copper tubing and Chlorine. However, at the time in question what further steps should the Distributor have taken? If a distributor is usually permitted to rely on the manufacturer of a product to determine whether it is fit for its intended purpose, what distinguishes the facts in this case from those normally encountered by Distributors? At what point in the process should the Distributor have abandoned its reliance on the Manufacturer, who was then one of the premier manufacturers of water distribution system products in North America?    

Finally, Gordon J. states that it was of no consequence that SCS Consulting specifically listed the Copper Tubing as material to use for the project.¹³ Unfortunately, he does not elaborate on this any further. This leaves some questions unanswered. As currently articulated, this reasoning would hold a seller liable to the buyer for failure to provide a product fit for its purpose, when the product was expressly specified by the buyer for that purpose. This would be less of a concern if the issue in this case was that there was something defective about the Copper Tubing. However, the “defect” was arguably not a defect at all, but the use of an incorrect item entirely. No copper tubing could have passed the test.

Section 15(2) – Was there a Breach of the Implied Warranty of Merchantable Quality?

In addition to holding the Distributor liable under s. 15(1), the Court also found the Distributor liable under s. 15(2) of the SGA for a failure to provide goods of a merchantable quality.

Goods must be saleable in the market. Goods must also be reasonably fit for their general purpose in order to be merchantable.¹⁴ Gordon J. determined on a balance of probabilities the Copper Tubing failed to meet the sterilization test because of the chemical reaction with chlorine.¹⁵ As a result, the Copper Tubing was not able to meet the requirements of the municipality and was consequently defective.¹⁶

The issue of whether the copper product would be merchantable in other municipalities came up in one witnesses’ testimony. The witness for the manufacturer complained about the reasonableness of the city’s two-step test, insinuating that the product would have been merchantable in other municipalities that did not have the same standards. Gordon J. dismissed this argument on the basis that the municipality had the right to impose higher standards. This argument had no impact on the Judge’s eventual finding of liability.

Section 15(4) – Was the Application of the Sale of Goods Act precluded by virtue of the contractual limited warranty?

The Court also considered whether the presence of a seven-day limited warranty precluded the application of the implied warranties in the SGA. The limited warranty in this case was not included in the contract document, but was in the packing slips and invoices the Distributor issued to Brantford Engineering.¹⁷

In determining whether the limited warranty constituted a term of the sale contract, the Court looked at the historical dealings of the parties. The Court assessed instances where Brantford Engineering  received packing slips and invoices that contained the limited warranty clause and did not contest receiving them in this form. The Court determined that the impact of the inclusion of the limited warranty provision in past documents was unclear, but emphasized that it should not be ignored.¹⁸

Ultimately, the Court concluded that the warranty was not sufficiently clear to preclude the application of the SGA. The Court provided the following example as a provision that would be clear enough to preclude the SGA: “no other warranty or conditions, statutory or otherwise shall be implied.”¹⁹

(ii) Liability of the Manufacturer in Tort

The Court went on to consider Brantford Engineering’s claim of negligence against the Manufacturer. Gordon J. strongly condemned the actions of the Manufacturer and found them liable for the full extent of the claim.  

The Manufacturer conceded that it owed a duty of care to Brantford Engineering, the ultimate consumer of its product.²⁰ Indeed, to deny such a duty in the face of Donoghue v Stevenson²¹ and decades of product liability jurisprudence would have been futile. Instead, the Manufacturer argued that to meet its standards of care it only needed to comply with ATSM 88²² standards, which it complied with.²³ Gordon J. rejected this argument, stating that such a position ignores the shift in standards that occurred following the findings of the Walkerton inquiry.

Gordon J. articulated the test to establish a breach of the standard of care in product liability cases  as requiring the negligent conduct to create an unreasonable risk of harm.²⁴ In this case, harm would occur when the Copper Tubing came in contact with the concentrated chlorine, precluding a chlorine residual from forming. This, in turn, would have prevented chlorine from destroying pathogens in the watermain, placing consumers in a very real and significant harm. Based on the testimony, and the information from Copper Canada, the Court found that the Manufacturer had sufficient knowledge to be aware of the potential risk.²⁵

Additionally, Gordon J. stated that the Manufacturer had a due diligence obligation to ensure its product met applicable regulatory and municipal standards.²⁶ This obligation was in place as soon as the legislative changes were made in 2002, following the Walkerton inquiry.²⁷ Gordon J. went as far as to say that the Manufacturer breached the standard of care before the project even commenced.²⁸ This proposition suggests that a manufacturer could be held liable if its product does not meet the standards in a particular jurisdiction, but would satisfy the requirements in other areas.

(iii) Duty to Warn

Lastly, Gordon J. concluded that upon receiving the information from Copper Canada the Manufacturer had a duty to warn Brantford Engineering, but does not elaborate on these reasons.²⁹

4. Conclusion

Justice Gordon granted judgment against the Distributor and the Manufacturer on a joint and several basis. Additionally, he allowed the cross-claim by the Distributor against the Manufacturer. 

Ultimately, Gordon. J found that both a distributor and a manufacturer may be held liable for a product that fails to meet its intended purpose, even if the product was specifically requested by the purchaser. Gordon J. supported this by establishing reliance as between the distributor and the purchaser. The manner in which Gordon. J establishes reliance in this case is important. His conclusion hinges on the specific expertise of the parties and the past relationship between the parties, where the Distributor had speculated on the adequacy of the materials list for the specified purpose. In this case, however, there was no specific discussion between the parties concerning the product being fit for its intended purpose.

This case expands the circumstances in which reliance may found liability in a product liability case. This may have been the result of the unusual factual circumstances underlying the case, and the Court’s concern regarding the gravity of harm which could have resulted.  In any event, the case stands as a warning for greater diligence on the part of manufacturers and distributers alike in considering the use to which their products are to be put.