August 16 2007
An exemption clause can be used in a warranty to exclude, limit or restrict a party's liability. While there is nothing inherently objectionable about a clause in a warranty which limits liability, the courts have traditionally sought to limit the operation of such clauses. The tendency has been to interpret such clauses strictly. If any ambiguity is present, the courts usually interpret the provision against the party seeking to rely on the clause (the contra proferentem principle). A recent decision from the Ontario Divisional Court, however, suggests that the party which drafted the exclusion will not necessarily be held to a standard of perfection in the wording chosen, and that a more liberal approach should be taken to interpreting exemption clauses in order to avoid commercially unreasonable results.
Tetaka v BMW Canada Inc,(1) a decision released by the Ontario Divisional Court on January 15 2007, involved a claim on a warranty for defects in material or workmanship in respect of a leased vehicle that was modified without the lessor's approval. At first instance the plaintiff's breach of warranty claim succeeded after the trial judge employed the contra proferentem rule to defeat the defendant's reliance on a modification exclusion clause in the warranty. However, the defendant's appeal was allowed by the divisional court and the plaintiff's claim was dismissed. The majority held that the exclusion clause applied even though the wording of the exemption clause could have been clearer. Moreover, the court found that the exemption clause should be interpreted in the context of the contract as a whole and in a manner that was commercially reasonable. Whereas the trial judge's interpretation of the provision had resulted in the redundancy of other provisions in the warranty and would have required the defendant to insure damages that were caused or may have been caused by the workmanship of others, the majority of the divisional court's interpretation gave effect to all clauses in the warranty. In summary, it held that it was not commercially reasonable to require the defendant to provide a warranty for defects in the workmanship and/or materials of others.
From a defendant's perspective, the divisional court's decision in Tetaka is a welcome recognition by the court that the wording of exemption clauses in warranty agreements should not be held to too high a standard, but rather should be interpreted in a manner that is commercially reasonable. The decision is also noteworthy because it contains a discussion of the onus for establishing the cause of a defect. The majority decided that plaintiffs cannot rely merely on the existence of a defect to establish their case, but instead have the onus of proving a defect in the defendant's workmanship. It also imposes a burden on the plaintiff to demonstrate that it is improbable that the defect has been caused by his or her own actions.
BMW manufactured the BMW M5 car which was leased by the plaintiff. Shortly after leasing the vehicle, the plaintiff had extensive modifications carried out on the car, which were neither approved nor installed by BMW. These modifications included the installation of a stereo and DVD system, an in-dashboard television, a multi-function remote control and a variety of other items intended to enhance the performance of the vehicle. The plaintiff drove the modified vehicle for a number of months without incident. However, one day when the plaintiff was driving the car the driver's airbag and side impact head protection spontaneously deployed.
The plaintiff subsequently took the car to BMW for repair. BMW refused to replace the airbags under the warranty on the basis that the modifications to the vehicle may have contributed to the improper deployment of the airbags. The plaintiff then launched an action against BMW, claiming damages for negligence and breach of warranty.
The warranty agreement at issue was composed of a number of paragraphs, including
a general coverage provision which warranted that the vehicle was free of defects
in material or workmanship, and that coverage under the warranty required the
vehicle to be brought to the workshop of an authorized BMW dealer upon discovery
of a defect in the material or workmanship.(2)
The warranty also contained a number of exclusions. One paragraph provided that
the warranty did not apply to modifications of the vehicle or the installation
of any performance accessories or components which altered the original engineering
or operating specifications. Another paragraph provided that BMW would accept
no liability for parts or accessories that it had not approved.(3)
The trial judge dismissed the plaintiff's negligence claim and held that there had been a breach of warranty. He ordered BMW to pay for the cost of the airbag repairs.
In reaching this decision the trial judge found that the exemption clause concerning modifications in BMW's warranty agreement was "poorly drafted" and "ambiguous". In his view, the liability exemption clause was reasonably capable of having one of two interpretations. The first interpretation - the one argued by the plaintiff - was that the warranty excluded repairs on non-BMW after-market accessories that were not approved, manufactured or installed by BMW. The second interpretation - and one advocated by BMW - was that the warranty did not apply to performance accessories or components that had been installed or attached to the vehicle which resulted in damage to the original components. Applying the contra proferentem principle, the trial judge interpreted the liability exclusion clause in favour of the plaintiff, as applying only to accessories or components added to the vehicle that were not approved by BMW, such that the airbags at issue remained covered under the warranty.
The trial judge went on to find that the deployment of the airbags, in the absence of a collision, was a 'defect' within the meaning of the warranty. He noted that the warranty covered defects without any limitation as to how they were caused, even if the evidence did not permit their precise determination, unless they were otherwise excluded by a liability exclusion clause. The trial judge was therefore satisfied that the plaintiff had shown that the warranty did apply and that BMW should have repaired the airbags. The plaintiff was accordingly awarded the cost of those repairs.
BMW's subsequent appeal to the Ontario Divisional Court was allowed. The majority of the divisional court held that the trial judge had erred in his interpretation of the defects covered by the warranty and in failing to assess the cause of the defect as he was required to do under the language of the warranty. The majority further found that, by modifying the vehicle, the plaintiff had imposed upon himself the additional burden of having to exclude his own actions as the cause of the problem.
With respect to the issue of cause, BMW had submitted at trial that it was not liable to the plaintiff because he had failed to prove a defect in BMW's material and workmanship. The trial judge, however, rejected this submission by employing a dictionary definition of the term 'defect' to conclude that it meant any shortcoming or failing of the airbags. He found that there was a defect because the airbags had not worked as they should have. The majority of the divisional court disagreed. It found that the trial judge had erred by not considering the cause of the defect. It held that the language of the warranty required him to perform that analysis. In particular, the opening paragraph of the warranty made it clear that BMW warranted defects only in its workmanship and materials. Therefore, the cause of the defect was an issue in the warranty claim. In the circumstances, the modifications meant that the plaintiff could not rely merely on the existence of the defect to establish his case. Rather, for the purposes of establishing a warranty claim, the onus was on the plaintiff to prove a defect in BMW's workmanship or materials. The plaintiff had put into issue the possibility that his modifications had caused the problems. Therefore, the plaintiff also had to prove that it was improbable that the defect had been caused by the modifications he had made.
Second, the majority of the divisional court concluded that the clause was not ambiguous. While the majority agreed with the trial judge that the exemption clause could have been more clearly drafted, the majority found that, when the paragraph was read as a whole, the exclusionary clause did apply to modifications or performance accessories "which may result in damage to the other original components". While the trial judge had narrowly interpreted the paragraph such that it excluded only repairs on non-BMW after-market accessories, the majority pointed out that a subsequent paragraph in the warranty expressly excluded coverage for damage that could have been caused by the installation of parts and accessories not approved by BMW. As such, the trial judge's interpretation resulted in the redundancy of another provision of the warranty. Under the majority's analysis, its reasoning was to be preferred since this allowed both terms of the contract to be given meaning reasonably if the exclusion at issue was found to apply to modifications that resulted in damage to the original components.
The majority further noted that it is a basic principle of contract interpretation that a clause is to be interpreted in the context of the contract as a whole. In this case the opening paragraph of BMW's warranty made it clear that BMW was providing a warranty to cover defects in its own workmanship and materials. The interpretation of the trial judge, however, required BMW to warrant damages which were or may have been caused by the workmanship of others. In the majority's view, it would be a commercially unreasonable result to hold manufacturers liable for damages that may have occurred from alterations to an original product after it had left the control of the manufacturer, if that alteration was not reasonably foreseeable. In light of the fact that BMW's expert had testified that the modifications to the plaintiff's vehicle may well have contributed to the deployment of the airbags - a conclusion which the trial judge had accepted - the majority found that the exclusion in the warranty applied to exclude BMW from liability to the plaintiff for the repair of the airbags.
Justice Matlow would have dismissed BMW's appeal, but for reasons different from those of the trial judge. His conclusions centred on the issue of cause. In his view, there was ample evidence before the trial judge to justify the finding that the deployment of the airbags was caused by a defect which fell within the scope of the warranty. While BMW's expert had testified that the modifications to the vehicle 'may' have caused the airbags to deploy, Matlow concluded that the trial judge was entitled to find that this did not displace the burden of proof that the plaintiff had already satisfied. In addition, Matlow disagreed with the majority's interpretation of the modification exclusionary clause. In his view, if that exclusion was to be interpreted "so that the mere possibility that the modification and installations had caused the deployment" was sufficient to defeat the plaintiff's claim, "the warranty was of a very different quality to what a reasonable vehicle purchaser would expect and of much less value". His conclusion was that it would be commercially unreasonable to interpret the exclusion in such a manner.
Several lessons concerning the operation of exemption clauses in warranty agreements can be taken from this decision. First, a party wishing to protect itself against liability should always strive to use clear and unambiguous language in order to achieve its purposes and avoid litigation. The decision of the Ontario Divisional Court in Tetaka certainly does not purport to displace the contra proferentem rule. However, the decision in Tetaka confirms that, even where an exemption clause could have been worded more effectively, the court will look to the contract as a whole in determining whether the limitation of liability is fair in the circumstances and whether upholding the exclusion clause accords with commercially reasonable results. Finally, the decision acts as a reminder that once a product has been modified, a plaintiff cannot simply rely on the existence of an imperfection in a product to establish his or her case. Rather, the burden is on the plaintiff to prove that the defect was caused by the defendant's conduct within the terms of the warranty.
For further information on this topic please contact Susan Wortzman or Christine Snow at Lerners LLP by telephone (+1 416 867 3076 ) or by fax (+1 416 867 9192) or by email (firstname.lastname@example.org or email@example.com).
(2) Under the heading "Warrantor" the following clause appeared: "BMW Canada Inc (BMW Canada) warrants to the first retail purchaser, and each subsequent purchaser, of Canadian specification vehicles imported by BMW Canada, or sold through the BMW Canada European Delivery Programme to be free of defects in material or workmanship." In addition, the general coverage provision of the warranty provided: "To obtain coverage under this warranty, the vehicle must be brought, upon discovery of a defect in material or workmanship, to the workshop of any authorized BMW dealer, during normal business hours. The dealer will, without charge for parts or labour, either repair or replace the defective part(s) using new or authorized remanufactured parts."
(3) Specifically, the exclusion clauses provided, in part, as follows: "This warranty does not apply to the following: Damage which results from negligence, improper operation of the vehicle, improper repair, lack of or improper maintenance, environmental influences, flood, accident or fair damage, road salt corrosion, use of improper or contaminated fuel [Paragraph one]... Modifications of the vehicle or installation or any performance accessories or components attached to the vehicle which alters the original engineering and/or operating specifications or which results or may result in damage to the other original components, electrical interference, electrical short, radio static, water leaks and wind noise [Paragraph four]... BMW Canada will not accept any liability for any parts and accessories not approved by BMW Canada [Paragraph eight]."
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