4) Product Quality Claims

The decision of Donoghue v. Stevenson [Note 114: 1 Above note 1. ] prompted a significant expansion of a manufacturer's liability for personal injury and property damage caused by defective products, but it was not until the decision in Hedley Byrne & Co. v. Heller & Partners Ltd. [Note 115: 1 Above note 64.] that serious attention was given to the liability of a manufacturer for product quality claims made by non-privity third parties. Some preliminary explanation of product quality claims may be helpful.

The majority of these claims have arisen in respect of the negligent construction of defective buildings. Most commonly the building has a latent defect caused by the negligence of the builder. If the original purchaser/owner discovers the defect, a claim for breach of the construction contract may be available against the builder. The building may, however, be sold before the defect is discovered. When the second owner discovers the defect, financial losses may be incurred in carrying out the needed repairs. The second owner cannot sue the builder for breach of contract because he is not a party to the contract between the builder and the first owner. At best the second owner is an incidental third-party beneficiary who has no personal right to sue on the construction contract. A claim for breach of contract by the second owner against the first owner is not likely to be successful because a contract for the sale of a second-hand building does not, normally, contain either an express or implied warranty of quality of construction. The old principle of caveat emptor (let the buyer beware) still applies to real estate transactions. These difficulties encourage the plaintiff to ignore the contractual links and to sue the builder directly in negligence.

This appears to be an attractive option given the wrongdoing of an insured builder and the innocence of the subsequent buyer who, normally, will not carry first-party insurance to cover the financial loss arising from latent defects in the premises. Furthermore, if the claim is not recognized, there is a loss of deterrence because the first owner has no loss and no interest in suing the builder.

This claim is, however, conceptually quite different from that recognized in Donoghue. A product quality claim seeks to recover compensation for damage to or in the building itself. It is not a claim for damage caused by the building, which might arise, for example, if the building or part of it collapsed and injured a person or property. The key points of difference are that the product quality claim is brought to recover economic loss (the cost of repairs) and the claim is one that traditionally has been available only in contract. It is contractual in nature because it seeks to secure for the second owner the benefit of the bargain between the builder and the first owner. It is, in reality, a claim for the breach of a warranty of quality by a non-contracting party. To allow a tort claim by a subsequent owner against the builder would subvert the contractual rules of privity. This is the conundrum of product quality claims in negligence.

The issue arose in Winnipeg Condominium Corporation No. 36 v. Bird Construction Co. [Note 116: [1995] 1 S.C.R. 85 [Bird].] The case involved an apartment block built by the defendant contractor that had been sold by the first owner to the plaintiff. Ten years after construction there was concern about the state of stone cladding on the exterior of the building and some modest remedial steps were undertaken. These remedial steps proved insufficient and some years later a large slab of cladding fell from the ninth storey. The entire cladding was replaced at a cost of $1.5 million. The plaintiff tried to recover this cost from the defendant. The defendant argued that it owed no duty of care to the plaintiff and the case went to the Supreme Court on this preliminary issue.

The Court held that the builder did owe a duty of care to the plaintiff. It drew a distinction between product quality defects that create a real and substantial danger to the occupants of the building and non- dangerous defects such as poor quality or shoddy construction. The Court held that the defendant owed a duty of care in respect of dangerous defects. LaForest J. stated:

[W]here a contractor (or any other person) is negligent in planning or constructing a building, and where that building is found to contain defects resulting from that negligence which pose a real and substantial danger to the occupants of the building, the reasonable cost of repairing the defects and putting the building back into a non-dangerous state are recoverable in tort by the occupants. [Note 117: Ibid. at 102.]

This duty of care is owed independently of any contractual provisions or exemptions of the contract of sale between the defendant and the first owner.

The Court applied the Anns test in establishing the duty of care. The foreseeability of damage to future occupants of the building created sufficient proximity to create a prima facie duty of care. The Court found no compelling policy reasons to negate the duty. Indeterminacy concerns were not severe. The class of plaintiffs was restricted to the future occupants of the building. The amount of money payable by the defendant was restricted to the cost of repairs. The duration of potential liability was restricted to the useful life of the building. This may be a considerable period of time, but it will be increasingly difficult to assign the need for repair to the builder's negligence rather than normal wear and tear. There were, moreover, several policy factors that strongly supported the imposition of a duty of care, including the encouragement of preventive measures to avoid future damage to persons or to property, the deterrence of poor construction, the availability of affordable third-party liability insurance for builders, and the purchaser's difficulties in detecting latent defects, negotiating contractual protection from the vendor, and securing first-party insurance.

a) Dangerous Defects

The Bird case has done much to clarify the law in respect of defects that create a real and substantial danger to the occupants of a building. Every new development of negligence law, however, ushers in a new set of issues and the Bird decision is no exception. In Bird there was a great deal of emphasis on the degree of danger of the defect. This condition was clearly met on the facts of the case. The danger was extreme and, given the fact that part of the cladding had already fallen off the building, the danger was imminent. Some of the occupants might have been killed. This is not, however, the typical situation that will present itself to the courts. The typical case involves a building that has an inadequate foundation which causes it to lean, sag, and crack, or a defective roof that leaks, or poor construction leading to premature rotting of the structure. There is no immediate danger but postponing the repairs will increase the ultimate expense and at some indeterminable time in the future, the building or part of it may collapse. In these cases, it will not be easy to draw the line between dangerous and non- dangerous defects. It may be anticipated, however, that the courts will be generous in their interpretation of the requisite danger. Many of these cases will involve private dwellings, and there is a heavy element of consumer protectionism in the Bird decision.

It is also not clear if the Bird principle extends to dangerous chattels. A strong indication of its applicability to chattels is the reliance by LaForest J., in Bird, on the dissenting judgment of Laskin C.J. in Rivtow Marine Ltd. v. Washington Iron Works. [Note 118: Above note 103.] In that case, Laskin C.J. favoured the imposition of liability on the manufacturer for the costs of repairing a defective and dangerous crane that was affixed to a floating barge leased by the plaintiff. The repairs were prompted when a crane of identical design collapsed, causing a loss of life. An extension to chattels is also supported by a few recent authorities [Note 119: See Privest Properties Ltd. v. Foundation Co. of Canada Ltd. (1995), 128 D.L.R. (4th) 577 (B.C.S.C.), aff'd (1997), 143 D.L.R. (4th) 635 (B.C.C.A.); and Del Harder v. Denny Andrews Ford Sales Inc. (1995), 173 A.R. 23 (Q.B.).] and by the common practice of manufacturers, particularly in the automobile industry, to recall and repair defective and dangerous chattels.

b) Non-dangerous Defects

The Supreme Court in Bird did not categorically rule out recovery in respect of non-dangerous defects in buildings and products. The issue was deliberately left to a case that raised the point directly. Such a case has recently been decided by the High Court of Australia. In Bryan v. Maloney, [Note 120: (1995), 182 C.L.R. 609 (H.C. Austl.). ] the plaintiff was the third owner of a house that was negligently built by the defendant. Soon after the plaintiff purchased the house, cracks appeared in the walls. The cracks were caused by the insufficiency of the foundation. It was not able to withstand the pressure of the expansion and contraction of the clay soil. There was no evidence that the house was in danger of collapse. It was purely a case of shoddy construction. Nevertheless, the High Court allowed recovery of the cost of repair against the defendant. The Court, in essence, created a transmissible builder's warranty of reasonable and competent workmanship running with the building to future owners.

The decision of the High Court in Bryan alters the conventional boundaries of contract and tort liability much more significantly than the Supreme Court's decision in Bird. Bird is broadly compatible with the traditional function of negligence law, which is to provide compensation for the consequences of risky or dangerous conduct and to promote accident prevention by encouraging the abatement of future risks of personal or property damage. Bryan, on the other hand, protects the reasonable expectations of non-privity third parties in respect of the quality of the premises that they have purchased. This extension of tort law into the heart of contract law was largely prompted by the failure of contract law to modify its privity rules to secure some consumer protection for the purchasers of second-hand houses. This use of tort to supplement the inadequacies of contract law, however, raises some difficult issues.

Tort law has little experience with setting standards, not of reasonable safety, but of reasonable quality. That standard may be set by the initial contract between the builder and the first owner. In that case, the plaintiff would be viewed as a third-party beneficiary whose rights would be coextensive with those of the original purchaser. An alternative approach is to formulate an independent standard of quality on the basis of the reasonable expectations of the reasonable person. Reference would need to be made to all the surrounding circumstances, including the reputation of the builder, the initial price paid for the building, the nature and purpose of the building, and the construction standards and trade practices at the time of construction. One danger with this approach is that, in situations where there is an exemption clause in the first contract of sale, the independent obligation owed by the builder to the plaintiff may be more onerous than that owed by the builder to the first purchaser. [Note 121: A third approach has been suggested by C. Chisick, "Winnipeg Condominium Co. No. 36 v. Bird Construction Co.: The Death of the Contractual Warranty?" (1998) 25 Man. L.J. 393 at 407: "[T]he standard of care would be defined on a case-by- case basis, based on the reasonable expectations of the subsequent purchaser." [emphasis added.]]

Other aspects of the builder's duty to provide a reasonable standard of quality also remain to be resolved. It is not clear, for example, if the principle in Bryan will be restricted to serious quality flaws in buildings such as defects that make the building uninhabitable. There may be a reluctance to extend it to trivial defects and cosmetic defects. There may also be a reluctance to extend this duty to chattels. Chattels are subject to a wide variation in quality, which is usually reflected in the price, and many chattels have a short life and a planned obsolescence.

CHAPTER 3, SPECIAL TOPICS IN NEGLIGENCE