CONTRACTS / TORTS

Due to a dearth of commercial appellate decisions around the holiday season, a tort decision from the Ontario Divisional Court has caught my attention. Swern v Amazon Hardwood Centre Inc, 2015 ONSC 7590 [Swern] is a Small Claims Court decision appealed by the Defendants to the Divisional Court on a number of well-reasoned points of law and fact. While Small Claims Court decisions carry little weight from the standpoint of stare decisis, this decision is an example of how the judicial exercise of characterizing facts can profoundly influence the outcome of a case and create legal duties where they might otherwise not exist. By dealing with the facts as it did, the lower court in Swern found what amounted to be a duty of care in the context of an ordinary contractual relationship between a merchant and customer. The Divisional Court then deferred to the Deputy Judge’s factual findings. Is this an example of clever results-based reasoning or a confusing legal analysis?

Facts and Reasoning of the Case

Amazon Hardwood Centre Inc. (“Amazon”) is a retailer of flooring products that it sources from various distributors and manufacturers. In June of 2011, Amazon sold a hardwood product manufactured by Mercier Wood Flooring Inc. (“Mercier”) to Mr. and Mrs. Swern (“Swerns”). Hardwoods have humidity levels that must be maintained in the environment where the flooring product is installed on an ongoing basis. The product had humidity requirements that differed from industry standards. The standard humidity requirement for a hardwood flooring product is 30% relative humidity. The product purchased by the Swerns had a humidity requirement of 40-55%.

In September of 2011, the Swerns installed the hardwood in their condominium, however, their humidifier was out of service until December of that year. When it was eventually repaired, it was set at 30% relative humidity. The flooring product began to deform and crack in January of 2012, a month later. The Swerns commenced a lawsuit in the Small Claims Court against Amazon, Mercier and the installer of the product, Joe Presta (“Presta”).

The Deputy Judge dismissed the claim against Mercier for lack of privity of contract. In contrast, Amazon was found to be liable, not for breach of contract, but in tort. The Deputy Judge held that Amazon took insufficient steps to advise the respondents of the need to maintain higher than ordinary levels of humidity in their condominium to protect the integrity of their flooring product. The basis for this finding was that the pieces of paper that were in circulation regarding the product in question failed to warn both of the actual issue and its severity.

The claim against Presta was also dismissed on the basis that Presta, who directly contracted with the Swerns, had no knowledge of the enhanced humidity requirement of the particular flooring product. Thus, Presta could not have communicated such information. Presta was purportedly a knowledgeable expert at installing flooring products and was directly in a position to ascertain that the jobsite had a lack of sufficient humidity for the product he was installing. However, it is unclear what Presta could have done, had he known of the enhanced requirements, above and beyond passing on the manufacturer’s literature warning of the enhanced requirement.

The remaining question is what knowledge did Amazon possess that created a duty of care? Amazon knew only the manufacturer’s warnings based on the literature the manufacturer had published regarding the product. Amazon had passed that information on to the Swerns. But Amazon could not have told the Swerns more than what was in the manufacturer’s literature unless it analyzed, extrapolated from and drew its own conclusion from this information with respect to the Swerns’ specific situation and then advised accordingly. However, the evidence reviewed by the Divisional Court does not show that Amazon had any specific knowledge or indicators that there might be a problem with the humidity at the Swerns’ condominium. Moreover, there are no facts that it undertook to provide such advice.

On appeal, the Divisional Court deferred to the Deputy Judge’s treatment of the facts and agreed that Amazon’s failure to warn of the product’s enhanced humidity requirements amounted to a breach in its duty to disclose. While the Appellants argued that the Swern’s possession of the manufacturer’s information meant they knew or ought to have known of the humidity requirements, the Divisional Court held that the Swerns lacked knowledge of the requirement because the manufacturer’s literature was inadequately clear. The Court deferred to the Deputy Judge’s findings of credibility over whether the Swerns actually knew of the requirement or understood it.

Why Should Amazon Have a Duty of Care to the Swerns?

The tort of negligence or negligent misrepresentation requires a duty of care to exist flowing from one party to the other. In the case of negligent misrepresentation the proper test can be found in Krawchuk v Scherbak, 2011 ONCA 352 [Krawchuk]. The five steps of the test are laid out at pararaph 68 of Krawchuk as follows:

1. The Defendant owed the Plaintiff a duty of care based on a “special relationship”;
2. The Defendant made statements that were untrue, inaccurate or misleading to the Plaintiff;
3. The Defendant acted negligently in making the statement;
4. The Plaintiff reasonably relied on the statement;
5. The Plaintiff sustained damages as a result

The negligent statements in Krawchuk were made in the context of a real-estate transaction where the sellers filled out a Seller Property Information Sheet (“SPIS”) attempting to disclose the state of the property. When asked about certain deficiencies, the sellers answered in the negative without ascertaining the true state of those items. The Court in Krawchuk found this to be a negligent misrepresentation because a special relationship had formed due to the nature of the inquiry and the SPIS that amounted to an inducement to rely. However, the Court in Krawchuk also noted that buyers must still make their own enquiries notwithstanding the information contained in the SPIS.

The relationship between Amazon and the Swerns was one of merchant and customer. There was no evidence that Amazon extended any expert advice on the suitability of the product and that the Swerns were relying on Amazon to provide such advice. Why should such a relationship be assumed by default in the absence of evidence that Amazon created such reliance by its conduct? Based on the limited evidentiary record reviewed on appeal, it appears that Amazon had no knowledge or warning of the product’s lack of suitability to the respondents’ condominium. It further appears that Amazon could not have done more than to pass on the warnings printed by the manufacturer pertaining to the humidity specifications. An obligation, in the context of an ordinary product transaction, to interpret and further explain what these warnings meant is more akin to a duty owed by Amazon to direct purchasers to prudent purchases. In other words, it resembles the type of duty owed by a professional (such as a lawyer) to his client. However, the accepted facts on appeal reveal that the Deputy Judge endeavoured to explicitly steer clear of such a finding. Instead, the lower court reasoned that the duty imposed is the “disclosure of information that is unique to a particular product and therefore would not be known to a reasonable consumer.”

The Divisional Court did not comment on the failure of the Deputy Judge to analyze the facts surrounding whether a special relationship existed. There was no evidence of any representation made or any inducement to rely let alone facts to support the contention that Amazon was made aware of any possible indictors of a problem with the humidity at the job site.

Conclusion

It is not surprising that judges, in seeking to work some sort of equity between the parties, often resort to results-based reasoning to effect a fair and reasonable outcome. One way of achieving this is by placing emphasis on particular facts while giving less weight to others. This is especially true in a negligence analysis where facts often determine whether a party has a duty of care or whether they properly discharged that duty. However, the authorities show that negligent misrepresentation requires the existence of a special relationship, which gives rise to a duty of care in the first place. Although finding such a special relationship ultimately depends on finding certain facts, such as statements made to induce reliance, a legal standard must be satisfied. A duty does not arise merely because a middleman has knowledge of a product’s characteristics that might be of consequence, when that knowledge was simply passed onto him by the manufacturer and subsequently passed onto the consumer. More is needed in the analysis. However, it is difficult for a reviewing court to find that a lower court judge should have found more facts on which to base their analysis. Since the standard for reviewing findings of fact is one of palpable and overriding error, lower courts arguably have flexibility to determine which elements of a tort a fact will correspond with.

BY DEZSO FARKAS · JANUARY 5, 2016

PUBLISHED AT thecourt.ca