Sherman, Irvin H.

English

York University, Osgoode Hall Law School

Osgoode Hall Law JournalVolume 3, Number 2 (April 1965) Article 55Knowles v. Anchorage Holdings Co. Ltd. (1964),46 W.W.R. 173, 43 D.L.R. (2d) 300Irvin H. ShermanFollow this and additional works at: http://digitalcommons.osgoode.yorku.ca/ohljCommentaryThis Commentary is brought to you for free and open access by the Journals at Osgoode Digital Commons. It has been accepted for inclusion inOsgoode Hall Law Journal by an authorized editor of Osgoode Digital Commons.Citation InformationSherman, Irvin H.. "Knowles v. Anchorage Holdings Co. Ltd. (1964), 46 W.W.R. 173, 43 D.L.R. (2d) 300." Osgoode Hall Law Journal3.2 (1965) : 399-404.http://digitalcommons.osgoode.yorku.ca/ohlj/vol3/iss2/55Case CommentKNOWLES V. ANCHORAGE HOLDINGS Co. LTD. (1964), 46 W.W.R. 173,43 D.L.R. (2d) 300-CONTRACT-SALE OF GOODS--EXCLUSION OF CON-DITIONS AND WARRANTIES-BREACH OF FUNDAMENTAL TERM-RIGHTTO DAMAGES DESPITE EXEMPTION CLAUSE.-In Knowles v. AnchorageHoZdings Co. Ltd.,' the Supreme Court of B.C. was faced with theproblem of interpreting the effectiveness of an exemption clause ina Sale of Goods contract where a diesel boat engine supplied by theseller was so defective that, in effect, the seller supplied somethingdifferent from that which was contracted for. The Court had also toconsider the effect of a provision in the contract of sale that thebuyer was relying on his own judgment. The term was designed topreclude the implied conditions as to quality or fitness of s. 20(a) ofthe British Columbia SaZe of Goods Act.2 The buyer used the enginefor six of the fourteen months during which he retained it prior tobringing the action.Verchere J. held that the seller (the defendant) supplied some-thing so different from that contracted for that it amounted to abreach of a fundamental term of the contract of sale which renderedthe exempting clause ineffective. The learned judge also held thats. 20 (a) of the Sale of Goods Act 3 did not apply as the complaint ofthe buyer was not as to the sufficiency or adequacy of the engine butrather that it did not function as an engine should. The buyer wasentitled to claim damages although he had not repudiated the con-tract or lost the right to terminate despite the fact that the buyer usedthe engine for six months.The facts of the case are as follows. In July, 1962, the plaintiffvisited the president of the defendant company regarding thepurchase of an engine for his boat. It was the defendant com-pany's business, inter aZia, to sell engines. On July 18, 1962, the plain-tiff ordered a 3M Ceriist Diesel complete with certain fittings for atotal price of $3,045.57. The learned judge found4 as a fact that thedefendant knew of the purpose for which the plaintiff required theengine (to salvage and tow logs) and that the plaintiff relied on theseller's skill and judgment.Knowles received the engine by August 15, 1962. Immediatelytrouble developed and he was forced to return the engine to thecompany several times for repairs. In addition, new parts had to beinstalled. In October, 1962, Knowles removed the engine from hisboat and gave it to the company for additional repairs. He did notuse the engine again until June, 1963. When he then used the enginehe found that its performance remained unsatisfactory. Lubricatingoil was somehow allowed to enter the combustion chamber, and re-sulted in the burning of excessive amounts of oil. This necessitated1 (1964), 46 W.W.R. 173, 43 D.L.R. (2d) 300.2 R.S.B.C. 1960, c. 344, s. 20(a); a parallel provision in Ontario is found inthe Sale of Goods Act, R.S.O. 1960, c. 358, s. 15(1).3 Ibid.4 (1964), 43 D.L.R. (2d) 300 at 301.1965]OSGOODE HALL LAW JOURNALthe frequent addition of extra oil and proper oil pressure could notbe maintained. Due to improper combustion the engine would notoperate under load at a speed high enough to permit it to use itsrated horsepower. The engine did not work properly despite theexpenditure by the seller of between $800-$900. The learned judgefound5 that the defendant had ample time to remedy the defects andthat the defects remained. Thereupon the buyer sought damages.In dealing with the effect of the exemption clause upon s. 20 ofthe Sale of Goods Act 6 the learned judge referred to the Canadiancase of Hayes Mfg. Co. v. Perdue & Cope7 as authority for the propo-sition that a clause in a contract expressly excluding all conditionsand warranties not therein set forth does not entitle the vendor tosupply something different from that which was bargained for. There-upon the learned judge introduces the concept of fundamental breachby quoting Crossley Vaines on Personal Property,8... this freedom of contract preserved by the Act is subject to the so.called doctrine of fundamental breach, namely that an exempting clausemay nowadays be held governed by the overriding proviso that it onlyavails to exempt a party when he is carrying out his contract: not whenhe goes outside its four corners by breaking a fundamental term.It was then necessary to determine whether the engine deliveredwas in fact the thing contracted for. After repeating the difficultiesto which the plaintiff was subjected as a result of the defective engine,the learned judge quoted Lord Dunedin's remarks in W. & S. Pollockc&. Co. v. Macrae:9Now, when there is such a congeries of defects as to destroy the work-able character of the machine, I think this amounts to a total breach ofcontract, and that each defect cannot be taken by itself separately soas to apply the provisions of the conditions of guarantee and make Itimpossible to claim damages.This proposition was verified by quoting words to the same effectfrom the judgment of Holroyd Pearce, L.J. in Yeoman Credit Ltd. v.Apps.10 Charterhouse Credit Co. v. Tolly" was referred to as author-ity for the proposition that there could be a breach of a fundamentalterm although the condition could have been made good at consid-erable expense. The learned judge then concluded that there was abreach of a fundamental term to provide an engine of workablecharacter.The defendant's submission that the plaintiff's expressed relianceqn his own judgment predluded any of the implied terms of s. 20 ofthe Sale of Goods Act 2 from arising was dismissed thus:5 Id. at 302.6 Supra, footnote 2.7 [1931] 2 D.L.R. 610, 43 B.C.R. 545.8 Crossley Vaines, Personal Property, 3rd ed., 1962, pp. 295, 296.9 [1922] S.C.(H.L.) 192 at 200.10 [1961] 2 All E.R. 281 at 289.11 [1963] 2 All E.R. 432.12 Supra, footnote 2.[VOL. 3:377Case CommentThe answer lies in my opinion in the lack of any inconsistency betweenthe plaintiff's reliance on the defendant's skill or judgment to providean engine that would meet the fundamental obligation of an engine ofworkable character and his reliance on his own judgment that a properlyperforming engine of the capacity supplied would be suitable for hispurpose.13The plaintiff's "acceptance" of the engine and any subsequentdenial of his rights to claim damages was dismissed on the basis ofDonovan, L.J.'s remarks in Charterhouse Credit Co. v. Tolly'4 to theeffect that it was significant that the House of Lords, in decidingcases1 5 similar to the one at bar, never considered the "acceptance"by a buyer a valid reason for denying the buyer damages where theseller was in breach of a fundamental term of the contract. Massey-Harris Co. v. Skeldingl6 was cited as authority for awarding damagesin the case of a breach of contract where otherwise it would be toolate for the buyer to claim rescission. In that case the Supreme Courtof Canada 17 held that damages would be the amount of the full pur-chase price.The Knowles case represents in part the adoption in Canada ofthe doctrine of breach of fundamental term as expounded by theEnglish courts in recent years. This doctrine has developed from adictum of DeVlin J. in Smeaton Hanscomb & Co. Ltd. v. Sassoon I.Setty18 where that learned justice defined a fundamental obligationas "something fundamental to the whole contract, so that if it is notcomplied with, the performance becomes totally different from thatwhich the contract contemplates."This is not a new doctrine, but has been in existance for manyyears.19 This use of the doctrine as a weapon against exemptionclauses is, however, of fairly recent vintage. As Cheshire and Fifootstate:•.. in comparatively recent years it has been generalized so as to counterthe undue rise of exemption clauses in any type of contract.20As far back as 1834, Lord Abinger said:If you contract to sell peas you cannot oblige a party to take beans. Ifthe description of the article tendered is different in any respect it is notthe article bargained for and the other party is not obliged to take it.21One could go back as far as 181222 and find that where the descriptionin a lease did not correspond to the actual condition of the land, thelease was void.13 (1964), 43 D.L.R. (2d) 300 at 304 per Verchere J..14 Supra, pp. 438, 439 per Donovan L.J..15 Donovan L.J. referred to Poflock & Co. v. Macrae, supra, and WalisSon and We~ls v. Pratt & Haynes, [1911] A.C. 394.16 [19341 3 D.L.R. 193, [1934] S.C.R. 432.17 [1934] 3 D.L.R. at 194, [19341 S.C.R. at 435 per Duff C.J.C..18 [1953] 2 All E.R. 1471 at 1473.19 See Anson, Law of Contract, Guest 22 ed., 1964, p. 153.20 Cheshire and Fifoot, Law of Contracts, 6th ed., p. 117.21 Chanter v. Hopkins (1834), 4 M. & W. 399 at 404; see also Bowes v.Shand, [1877] 2 A.C. 456 at 480 per Lord Blackburn.22 Jones v. Edney (1812), 3 Campb. 284, 170 E.R. 1384.1965]OSGOODE HALL LAW JOURNALThe cases indicate that Canadian Courts have applied similarreasoning to the type of problem raised in the Knowles case. TheBritish Columbia Supreme Court could have arrived at a similardecision without specifically referring to the modem English cases.Cases such as Hayes Mfg. Co. v. Perdue &, Cope,23 Massey-Harris Co.Ltd. v. Skelding24 (which were cited in the Knowles case) and Alabas-tine Co. of Paris Ltd. v. Canada Producer and Gas Engine Co.25 indi-cate that an exemption clause will not permit a seller to provide goodsof such inferior quality that the purchaser would, in effect, receivegoods of a totally different nature from those which he contracted tobuy. In Cork v. Greavette Boats Ltd.,26 a case of a sale of a faultyengine in which the seller sought to rely on an exemption clause,Greene J. after referring to the Alabastine27 case and other Englishcases, said, ". . . in all these cases there was a fundamental failure inthe article supplied which went to the substance of the Contract."28(Italics mine). It must be remembered, however, that the Canadiancases adopted the principle of breach of fundamental term from theEnglish cases on sale of goods. These English cases in turn adoptedtheir reasoning from sale of land transactions and shipping casesinvolving deviation from course.29Exculpatory clauses will not avail a seller who has not lived upto his fundamental contractual obligations. The problem is how todistinguish fundamental terms from those that are merely collateral.Montrose has stated that an... autonomic policy underlines the doctrine of fundamental terms. Theparties themselves distinguish between terms which are fundamental ....terms which are 'definitive' of the goods and terms which do not havethis fundamental quality even though they may operate as conditions orpromises.30Melville has referred to conditions and warranties as "desirable orcdllateral provisions, express or implied".31 These provisions are sub-sidiary to the main purpose of the contract. On the other hand thereare three fundamental terms.32 These include the parties to the con-tract, the price or consideration and the main purpose or core ofthe contract. This list is not, however, all inclusive. Regard must behad to the intentions of the parties and the circumstances surround-ing the making of the contract.To establish a breach of a fundamental term, which vitiates theoperation of the vendor's exculpatory clause, the purchaser must23 Supra, footnote 7.24 Supra, footnote 16.25 (1914), 300 L.R. 394.26 [1940] O.R. 352.27 Supra, footnote 25.28 Id. at 395.29 See F. M. B. Reynolds, Warranty, Condition and Fundamental Term,79 L.Q.R. 534 at 546 where the deviation theory is criticized. See also Cross-ley Vaines, Personal Property, at 295-296 (cited in the Knowles case).30 J. L. Montrose, Some Problems about Fundamental Terms, 1964 C.L.J.at 264.31 L. W. Melville, The Core of the Contract, 19 M.L.R. 26 at 33.32 Ibid.[VOL. 3:377Case Commentprove the breach was of a flagrant nature.33 It has been held34 thatminor breaches collectively considered constitute a fundamentalbreach of contract. "The inability of a thing to function in the wayintended is considered a breach of an implied term. '35The effectiveness of the Knowles case is weakened by the learnedjudge's failure to state in precise terms the factors which lead to hisfinding of the fundamental breach. Verchere J. found a fundamentalbreach of contract when he considered collectively the followingfactors:(a) the inconvenience and bother to which the purchaser wassubjected as a result of purchasing an engine with whatappears to be "incurable" defects,(b) the defects themselves,(c) the loss of income attributable to the inefficient working ofthe engine.It is noted that the learned judge compared the efficiency of the oldengine and the income that engine gave the purchaser with the effi-ciency and income derived from the new engine.The case law indicates that the court in using its discretion willfind a fundamental breach if, from the facts of the case, the defectsof the goods seem flagrant. The cost of repairing the goods appearsto be irrelevant.When construing exemption clauses the courts have been boundby such rules of construction as the "Main Purpose" rule whichstates that a party to a contract cannot exempt himself from a failureto perform the main purpose of the contract and the "Four Corners"rule which provides that any liability for damage sought to be coveredby exemption clauses must fall within the four corners of the contractand not outside it. The ejusdem generis rule and the contra preferen-teum rules are also used by the courts in strictly construing theexemption clause, usually in favor of the buyer. It would seem thatthe doctrine of breach of a fundamental term is merely another wayof phrasing the idea contained in the "Main Purpose" and "Four Cor-ners" rules. Where an article supplied is so defective as to be inessence a different article than that contracted for, it would be con-sidered a breach of a fundamental term, as it was here, or alterna-tively to be a failure to perform the main purpose of the contract, orto fall outside of the four corners of the contract.The rule may be said to be founded upon some "principle of jus-tice"36 or upon some grounds of public policy which declares that:33 Schmidt v. Intermationa Harvester Co. of Canada Ltd. (1962), 38W.W.R. 180.34 Yeoman Credit Ltd. vi. Apps, supra, footnote 10; W. & S. Poilock c Co.v. Macrae, supra, footnote 9.35 Melville, supra, footnote 31.36 Montrose, op. cit., p. 67.1965]OSGOODE HALL LAW JOURNAL... the intention of the parties is subordinate to higher considerations ofjustice. The policy is not confined to doctrines such as those of illegality,based on the conduct of the parties entering into the contract but extendsto the regulation of the consequences to the parties after they haveentered into the contract. This is the heteronomic concept which under-lines the doctrine of fundamental breach.37Indeed, "the doctrine of fundamental breach does offer the public anew hope of protection against injustices perpetrated by abuse ofcontract".38Some learned writers have claimed that fundamental breachmust be specially pleaded.39 It is interesting to note that in theKnowles case, fundamental breach was not pleaded by the plaintiff(buyer). The plaintiff sought damages for breach of an implied con-dition of the Sale of Goods Act or alternatively that the engine wasnot delivered as specified. The defendant-seller sought to rely on theexemption clause and the buyer's admission of reliance upon his (thebuyer's) own judgment. Nonetheless, Verchere J. found there wasa breach of a fundamental term. It is not clear whether he based hisfinding upon the plaintiff's alternative claim that the engine wasnot delivered as specified or whether he employed the "heteronomic"theory of Montrose. It could be argued that the engine was not deliv-ered as specified. This, it is submitted, would be in breach of theSale of Goods Act which provides, inter alia, that the seller mustdeliver goods in accordance with the contract of sale. However, nomention of this section of the Sale of Goods Act was to be found inthe Knowles case. Therefore, we could assume that as a matter ofpublic policy the learned judge would not allow the seller of whatthe judge found to be defective goods, to rely on the exemptionclause in the contract of sale regardless of whether breach of afundamental term was pleaded or not.In conclusion, we can agree with Devlin J. who said that afundamental term is "something less than a condition". 40 It is thevery pith and substance of a contract. In analysing the concept offundamental terms, in earlier years the courts adopted rules of con-struction to vitiate the harshness of exemption clauses. In moderntimes, the courts have used the same doctrine, but this time clothedin the image of public policy or rule of law, to achieve the same result.Regardless which method is employed, the consumer is affordedprotection.IRVIN H. SHERMAN37 Id. p. 264.38 A. G. Guest, Fundamental Breach of Contract, 77 L.Q.R. 118.39 See Hunt & Winterbottom (West of England) Ltd. 'v. B.R.S. (Parcels)Ltd., [19621 1 All E.R. 111.40 Smeaton Hanscomb & Co. Ltd. v. Sassoon I. Setty, Son & Co., [195312 All E.R. 1471 at 1473.[VOL. 3:377

Knowles v. Anchorage Holdings Co. Ltd. (1964), 46 W.W.R. 173, 43 D.L.R. (2d) 300

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Knowles v. Anchorage Holdings Co. Ltd. (1964), 46 W.W.R. 173, 43 D.L.R. (2d) 300

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