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Case Law Update - International Law Office

International Law Office

Product Regulation & Liability - Canada

Case Law Update

August 14 2003

E-commerce and Jurisdiction
Strict Liability
Pure Economic Loss
Defective Design
Causation and the Learned Intermediary Rule
Costs in Class Actions
Comment


Product liability is a specialized area of tort law that is evolving in response to new developments in business and consumer transactions and the recent introduction of class actions throughout Canada.(1) Some of the recent developments in this field of jurisprudence may be encouraging to prospective product liability plaintiffs; for example, the courts appear to be willing to allow novel or questionable claims of economic loss or allegations of defective design to proceed to a determination on their merits, rather than striking them out at an early stage. Conversely, claimants may be discouraged by the Ontario courts' consistent rejection of strict liability for manufacturers or dissuaded from pursuing a product liability class action by the prospect of having to bear a large costs award if unsuccessful at the certification stage. This update discusses some of the highlights of recent Canadian product liability law with a particular focus on Ontario.

E-commerce and Jurisdiction

E-commerce has been a boon to the manufacturers and distributors of many products, making borders and distance irrelevant and thereby allowing them to contact consumers previously beyond their reach. However, along with these opportunities comes uncertainty about the new legal constraints and responsibilities to which businesses may be subject when dealing with foreign customers. To the extent possible, Canadian courts are applying traditional legal concepts to contracts formed by email or over the Internet, just as they adapted to the earlier technologies of postal mail, telex and fax. However, the old rules do not always fit neatly into this new context.(2)

One particularly important aspect of electronic contracting is the governing law of the transaction. In the absence of any express provision dealing with this issue, it has been suggested that the law of an online contract should be that of the jurisdiction where the consumer resides, since it will have the most real connection with the transaction and is most likely to correspond to the place of performance of the contract.(3) Most of the new ecommerce legislation in the various Canadian jurisdictions provides that electronic messages are deemed to be sent or received at the place of business of the sender or recipient.(4)

Some recent cases shed light on when a Canadian court will assume jurisdiction over e-commerce matters. In Braintech Inc v Kostiuk,(5) the plaintiff technology corporation was incorporated in Nevada, but domiciled in British Columbia. It had successfully sued the defendant, a British Columbia resident, in Texas, pursuant to an allegedly defamatory publication on an internet bulletin board that might have been accessed by Texas residents. Neither party had a meaningful connection to Texas, but a default judgment had been obtained there on the basis of a so-called 'long arm' statute, which deemed the defendant to have done business in Texas by virtue of having committed a tort there.

The plaintiff sought to have the judgment enforced in British Columbia. The British Columbia Court of Appeal refused to do so on the basis that no real and substantial connection to Texas existed. The 'real and substantial connection' test is used in Canada to determine whether foreign judgments will be enforced.(6) In Braintech(7) the defendant's comments had been posted on a 'passive' website and were not placed there for a commercial purpose. The court held that to recognize the judgment would encourage a multiplicity of actions in any jurisdiction where the Internet was available. The court also commented that British Columbia would have been a natural forum for this action. The Braintech decision may provide some comfort to those involved in internet commerce, supporting the view that a Canadian court will use established principles in enforcing judgments in e-commerce matters, where parties may have tenuous connections to the relevant jurisdictions. However, since the decision involved a passive website rather than one actively soliciting business, its application to those who contract with customers over the Internet should be considered with caution.

In Rudder v Microsoft Corp, an Ontario court permanently stayed a proposed class action against Microsoft on the basis of a forum selection clause in the membership agreement that was executed electronically by each prospective plaintiff. Before Microsoft would provide Rudder with membership services, he had been required to click on a button labelled 'I agree', to indicate his assent to the membership terms, one of which was the choice of Washington state law and submission to the jurisdiction of its courts. The evidence showed that Rudder had simply neglected to read all the terms of the agreement. The court found that Rudder had not met the burden of showing a 'strong cause' as to why the forum selection clause should not govern, and that to set it aside would defeat the goal of commercial certainty. In this case the proposed representative plaintiffs were both law school graduates and may have been held to a higher standard than lay plaintiffs might have been. Recently, an Ontario judge granted leave to appeal another decision in the e-commerce context, with a view to reconciling a perceived inconsistency between Rudder and other Ontario authority.(8) Accordingly, a higher court's reconsideration of Rudder may be expected in the near future.

In another Ontario case decided in 2002 the issue was whether unilateral changes to an internet service user agreement were binding on a potential class of plaintiffs.(9) The defendant, Rogers Cable Inc, provided in its user agreement that the agreement could be amended by posting changes on its website, or notifying its customers by email or by regular mail. Rogers added a clause to the agreement specifying that any dispute was to be resolved by arbitration, excluding any recourse to the courts. It posted this change on its website. The court found that the plaintiffs were obliged under the user agreement to check the Rogers website for amendments and by continuing to use Rogers' services after the amendments had been made, were deemed to have accepted them. A requirement to locate and scroll through the terms of the user agreement on the website was held to be neither unfair nor unduly cumbersome. The court commented that a consumer wishing to avail himself or herself of electronic services must accept the consequences of having that relationship governed through an electronic format. There was no reason not to uphold the requirement to arbitrate; therefore, the proposed class action was stayed.

In response to these decisions, the Ontario government has introduced legislation that will allow a consumer to bring an action in the Ontario Superior Court of Justice, despite an agreement to arbitrate made in advance by the consumer. The legislation will also preserve consumers' rights to commence or participate in class proceedings in Ontario, despite any agreement to the contrary.(10)

Strict Liability

The Ontario courts continue to reject the principle of strict liability in tort for manufacturers of defective products. In Andersen v St Jude Medical Inc(11) the plaintiffs had pleaded that the defendant manufacturer of mechanical heart valves was strictly liable for the damages caused to patients who had had the valves implanted. It was alleged that the devices had been released into the marketplace before clinical trials investigating their safety had been completed. The defendant was successful in having this claim struck out. The court acknowledged the adoption of statutory strict liability against manufacturers in other jurisdictions, including New Brunswick, Saskatchewan and Qu├ębec, but rejected the plaintiffs' argument that Ontario courts should allow such claims. The claim of strict liability was not a novel one; it had been rejected by the Court of Appeal for Ontario on numerous occasions. On its review of recent authorities and academic commentary, the court concluded that the imposition of strict liability would have important and far-reaching consequences for manufacturers and consumers, such as making a manufacturer the effective insurer of its products with the consequent effects on research and development, particularly in the health products area. As such, the decision to impose strict liability was found to be best left to the legislature or the Supreme Court of Canada. It remains to be seen whether either body will take steps to introduce strict liability in tort in Ontario.

Pure Economic Loss

Traditionally, it has been difficult for plaintiffs to recover damages in tort for pure economic loss in Canada (ie, economic loss not accompanied by personal injury or property damage). The restriction on the availability of damages for economic loss alone was recently reconfirmed by the Supreme Court of Canada on four grounds:

  • Economic interests are less in need of protection than bodily or proprietary interests;
  • Economic loss raises the oft-cited worry of indeterminate liability;
  • Economic losses are frequently incurred in a business context and can be protected against by purchasing adequate insurance; and
  • Tort is an inappropriate vehicle for recovery of economic loss because it encourages excessive litigation.(12)

Recovery for pure economic loss in tort is now limited to claims of the following kinds:

  • independent liability of statutory public authorities;
  • negligent misrepresentation;
  • negligent performance of a service;
  • negligent supply of shoddy goods or structures; and
  • relational economic loss.(13)

In September 2002 the Court of Appeal for Ontario handed down the important decision of Hughes v Sunbeam Corporation (Canada) Limited,(14) which involved a proposed class action against three smoke detector manufacturers, as well as Underwriters' Laboratories of Canada (ULC), an independent endorser and tester of smoke detectors. The plaintiff alleged that his C$20 smoke detector contained an unreliable component and therefore the manufacturers had breached their duty by selling it. Also, ULC was alleged to have been negligent for endorsing the smoke alarms. The plaintiff had not been the victim of a fire and thus had suffered neither personal injury nor property damage.

Following Supreme Court of Canada jurisprudence on the negligent supply of defective products, the plaintiff's claim against the manufacturer of his smoke detector was allowed to proceed. An unreliable smoke detector fell on the borderline between a dangerously defective product (in respect of which economic loss claims are permitted) and a defective product that is not inherently dangerous (in respect of which such claims are not generally available). Following the precedent established by Hunt v Carey Canada Inc,(15) the court considered itself unable to state that the plaintiff could not succeed in the claim against the smoke detector manufacturers. However, the court did not express optimism regarding the plaintiff's chance of ultimately succeeding with this claim. In light of the low price of the smoke detectors in question, it viewed the plaintiff's claim as perhaps more a question of product quality than product defect. The claim against ULC was dismissed outright because there was not sufficient proximity between it and the ultimate consumer to justify imposing a duty of care. The court's major concerns arising out of the claim against ULC included imposing indeterminate liability on a defendant who may not have profited from the defective products and effectively creating a free insurance plan for dissatisfied purchasers.

Defective Design

An allegation of defective design can be a key issue in a products liability claim. However, in view of recent Ontario case law, plaintiffs must take care to plead and support such an allegation sufficiently. In 2000 the Court of Appeal for Ontario confirmed that a bald assertion of defective design, without corroboration, will not be allowed to stand against a motion for summary judgment for dismissal. In Kreutner v Waterloo Oxford Cooperative Inc,(16) the plaintiff claimed that the defendant manufacturer's propane tank valve had contributed to an explosion at his home which had caused extensive damage. However, the plaintiff had not led any evidence on the motion to show that the design of the valve was defective, that the alleged defect created a substantial likelihood of harm or that there was a reasonable, effective alternative design available. Without this evidence, a court could not go on to consider whether the valve contributed to the accident or whether the defendant had a duty to warn the plaintiff about the dangers of using its product. There was, therefore, no genuine issue for trial.

Kreutner does not, however, set as high a standard as might be wished for. In a subsequent case the plaintiff defeated a summary judgment motion seeking to dismiss a claim based on defective design by introducing an expert report addressing the factors described in Kreutner. Even though the credibility of the plaintiff's assertions was questionable, it was held that that was a matter for the trial judge to assess.(17)

Mayburry v Ontario (Minister of Consumer and Commercial Relations)(18) provides an example of a successful defective design claim at trial. Bacardi was found liable for 40% of the damages to the plaintiff resulting from injuries she sustained when she dropped a bottle of its product. The beverage in the bottle was carbonated, which caused a bottle fragment to fly five feet into the air and lodge itself in the plaintiff's eye. The trial judge found that Bacardi's bottle design was faulty because it did not make reasonable efforts to minimize the foreseeable risk of injury from flying glass. Expert evidence was adduced to describe a long history of explosive incidents involving carbonated beverages. Alternative designs were available to the manufacturer, including coating the bottle with polymer or making containers from plastic or aluminium. The trial judge found that the 'normal use' of alcoholic beverages includes the handling of bottles by people in "varied states of inebriation" and as it was reasonably foreseeable that breakage would occur from time to time in the course of normal use, the manufacturer was required to take this risk into account in making its design decisions.

Causation and the Learned Intermediary Rule

Under Canadian law, manufacturers have a duty to warn consumers of any dangers incurred in the ordinary or intended use of their products. The standard of care is determined with reference to the dangers that the manufacturer knows of, or ought to know of, and with regard to the knowledgeability of the end consumers of the product and the uses to which the product is put. In duty-to-warn cases the plaintiff must establish causation by convincing the court that he or she would have read and followed an appropriate warning, had it been given.(19)

In situations where the product is provided to a professional, such as a doctor, who will assist the ultimate consumer in using it, the manufacturer is largely unable to warn the consumer directly. Canadian courts have adopted the 'learned intermediary' rule, which provides that a manufacturer can discharge its duty of care to the consumer by adequately warning the learned intermediary of the dangers of its product. In Hollis v Dow Corning Corp(20) the Supreme Court of Canada determined that the defendant was liable for failing to inform the plaintiff's surgeon of a material risk that breast implants manufactured by the defendant could rupture. The court departed from the previous law on causation by refusing to require proof that the surgeon would have conveyed the appropriate warnings to the plaintiff had they been provided to him by the defendant. In fact, the defendant was not even permitted to rely on a hypothetical possibility that the surgeon would not have discharged his duty to disclose the risks of the treatment, on the basis that its failure to warn the surgeon eliminated any possibility of his passing on the warning to the plaintiff. It was considered unfair to expect the plaintiff to prove what her doctor would have done in such a hypothetical situation.

To the consternation of some commentators,(21) the Court of Appeal for Ontario relied on Hollis for its causation analysis in Walker Estate v York Finch General Hospital.(22) The court determined that the failure of the Canadian Red Cross Society (CRCS) adequately to screen blood donors constituted adequate causation and, in the absence of any evidence of extraneous conduct by the donor, the CRCS was not permitted to lead evidence to show that proper screening measures would not have prevented the infected donor in question from donating blood. On appeal to the Supreme Court of Canada, this application of Hollis was found to be incorrect.(23) The Supreme Court clearly stated that the causation analysis in Hollis applies to the situation where there is a learned intermediary, which was not the case in Walker. Although the court appeared to comprehend the temptation to extend the Hollis principle to cases where a third-party donor's hypothetical negligence might have been a significant factor, it held it was inappropriate to do so. Rather, the proper test for causation in cases such as Walker, where multiple independent causes could have led to the plaintiff's harm, was whether the CRCS' negligence materially contributed to the plaintiff's injury. The court found that this threshold had been met.

Costs in Class Actions

The general rule under Canadian law is that the unsuccessful party in an action will be liable for at least some significant part of the costs of the successful party. Although the Ontario Class Proceedings Act does not expressly contemplate that class actions will be treated any differently in this respect, many lawyers were doubtful that unsuccessful representative plaintiffs in a class action would be held liable for any significant costs of successful defendants. Recently, however, an Ontario Superior Court judge made substantial cost awards in two cases where representative plaintiffs had been unsuccessful in having their actions certified as class proceedings.

Gariepy v Shell Oil Co(24) involved claims arising from defects in polybutylene piping and acetal insert fittings supplied by the two defendant corporations. In large-scale class actions such as this, where well-funded Canadian plaintiffs' counsel are working together with those in the United States, the judge concluded that "the David against Goliath scenario does not necessarily represent an accurate portrait of the real conflict". Therefore, he held that access to justice concerns did not preclude a large award of costs against class plaintiffs, especially in a scenario arising from a commercial dispute that did not involve a novel point of law. Costs of C$80,000 and C$95,000 respectively were granted to the two defendants, an amount far exceeding that which had previously been granted in unsuccessful certification motions, but comparable to what successful class plaintiffs had received from unsuccessful defendants.

An award in Pearson v Inco Ltd,(25) a 'toxic tort' case arising from alleged environmental pollution for which certification had also been refused, was released 10 days after Gariepy. The four defendants were awarded a total of nearly C$185,000, based on the same principles applied in Gariepy.

The impact of these costs decisions on class actions in Ontario remains to be seen. Several other Canadian provinces have statutory provisions that preclude cost awards of this kind against representative plaintiffs. Pending clarification of the position in Ontario, it may well be that the centre of gravity for national class actions will move out of Ontario.

Comment

Product liability, like all areas of the law, adapts to recognize the demands of litigants. However, in the face of novel claims and new contexts such as e-business and class proceedings, the message from the judiciary appears to be quite consistent: longstanding legal principles must be respected and will be applied to new circumstances as they arise, with incremental change as needed.


For further information on this topic please contact John Lorn McDougall QC or Meghan L Thomas at Fraser Milner Casgrain by telephone (+1 416 863 4511) or by fax (+1 416 863 4592) or by email (john.lorn.mcdougall@fmc-law.com or meghan.thomas@fmc-law.com).


Endnotes

(1) Some Canadian provinces have legislation expressly authorizing class actions. In its recent decision in Western Canadian Shopping Centres Inc v Dutton [2001] 2 SCR 534, the Supreme Court of Canada held that class actions were also possible in those provinces without such legislation.

(2) Michael Geist, Internet Law in Canada, 2nd ed (Toronto: Captus Press Inc, 2001) at 544ff.

(3) JG Castel and J Walker, Canadian Conflict of Laws, 5th ed (Markham: Butterworths Canada Ltd, 2002) at chap 31.2e.

(4) See, for example, the Ontario Electronic Commerce Act 2000, SO 2000, c17, s 22(4), which applies unless the parties agree otherwise.

(5) [1999] 171 DLR (4th) 46 (BCCA); application for leave to appeal to SCC dismissed, [1999] SCCA 236.

(6) Morguard Investments Ltd v De Savoye [1990] 3 SCR 1077.

(7) (1999), 2 CPR (4th) 474, 40 CPC (4th) 394 (Ont SCJ).

(8) Koolatron, a Division of Urus Industrial Corp v Icode Inc [2002] OJ 1709 (SCJ).

(9) Kanitz v Rogers Cable Inc (2002), 58 OR (3d) 299 (SCJ).

(10) Consumer Protection Act 2002, SO 2002, c30, Sched A, ss 7-8 (unproclaimed as of July 14 2003).

(11) [2002] OJ 260 (SCJ).

(12) Martel Building Ltd v Canada [2000] 2 SCR 860 at para 37.

(13) Ibid at para 38.

(14) [2002] OJ 3457, 61 OR (3d) 433 (CA); leave to appeal to SCC refused, [2002] SCCA 446.

(15) [1990] 2 SCR 959.

(16) [2000], 50 OR (3d) 140 (CA).

(17) Nadeau v Nexacor Realty Management Inc [2002] OJ 2095 (SCJ).

(18) [2001] OJ 1494 (SCJ), aff'd [2002] OJ 1177, 163 OAC 192 (CA).

(19) Philip H Osborne, The Law of Torts (Toronto: Irwin Law, 2000) at chap 3 (online: QL, DB TOPA).

(20) [1995] 4 SCR 634.

(21) See, for example, V Black and D Klumchul, Lost Cause in the Ontario Court of Appeal: A Comment on Walker Estate v York Finch General Hospital (1999/2000) 8 Health L Rev 24 (online: QL, DB TOPA).

(22) [1999], 43 OR (3d) 461 (Ont CA).

(23) [2001] 1 SCR 647.

(24) [2002] OJ 3495 (SCJ).

(25) [2002] OJ 3532 (SCJ).



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