Syncrude ordered 32 mining gearboxes from Hunter which were fabricated by a subcontractor. The specifications were provided by Syncrude, but Hunter designed the gearboxes. The second contract, between Syncrude and Allis-Chambers, was for the supply of an extraction conveyor system and included four extraction gearboxes to drive the machinery. Those gearboxes were built according to the same design as the mining gearboxes supplied by Hunter and were fabricated by the subcontractor. The gearboxes entered service on November 24, 1977. Both contracts included time-limited warranties. The Allis-Chambers warranty also stated it represented the only warranty given, and no other warranty or conditions, statutory or otherwise, were to be implied. The warranty was for 24 months, or for 12 months after the gearboxes entered service. Both contracts provided that the laws of Ontario were to apply.
In September and October of 1979 defects were discovered in the gearboxes which were repaired at a cost of $400,000. Allis-Chambers denied responsibility due to the expired warranty. Syncrude sued claiming a fundamental breach, but failed at trial. The Court of Appeal found that there was a fundamental breach and that the warranty clause was not intended to exclude liability for fundamental breach, which was appealed to the Supreme Court.
- Is Hunter liable for repairs to the gearboxes?
- Is the exemption clause effective?
- Is Allis-Chambers liable under the doctrine of fundamental breach?
Appeal of Hunter dismissed, appeal of Allis-Chalmers and cross-appeal of Syncrude allowed.
Wilson (with L'Heureux-Dubé concurring) held that a fundamental breach is a breach that deprives a party of substantially the whole benefit of the contract. As the gearboxes in this case were repairable, this was not a fundamental breach. She considers two options the court has:
- adopt strict construction entirely (Photo Production Ltd. v Securicor Transport Ltd.) which would discard the concept of fundamental breach, or
- adopt a reasonableness approach.
Wilson rejects the notion that the exclusion clauses would have to per se be fair and reasonable at formation as this would be too subjective, however the courts can easily analyze a clause after a breach has occurred to see whether the result has been unfair, allowing courts to avoid complicity in unfair bargains and balancing freedom, paternalism and fairness to find a standard of commercial reality.
She briefly addresses the doctrine of unconscionability, holding that unconscionability rests on inequality of bargaining power between the parties; there can be no unconscionability if the parties are equal. On deciding which doctrine to apply she holds if there is a situation of unequal bargaining power, then unconscionability applies; else fundamental breach applies.
Dickson (with La Forest concurring) agrees with Wilson's outcome, but not her reasoning. Mirroring Photo Production, he finds that fundamental breach is a matter of contract construction. He points out the extreme difficulty in identifying what constitutes a fundamental breach, with different parties pointing to different sections. He rejects Wilson's reasonableness approach unless the agreement is unconscionable, preferring to allow the parties complete freedom of contract.
The rule of law approach ignores the fact that not all exclusion clauses are unreasonable, but acknowledges that the "price" of the clause may be reflected in the contract price. Further, exclusion clauses are not the only provisions that may lead to contractual unfairness. Because of this, Dickson prefers to lay the doctrine of fundamental breach aside and focus only on the doctrine of unconscionability and the contract construction, believing this will come to the same results but by actually addressing the issues at hand.
Both parties (and McIntyre in a generally concurring judgment) agree that the parties should be held to the terms of the agreement and that Allis-Chambers is free of any liability. Hunter was held to be liable for the repair of the gearboxes even though failure was discovered after the contractual warranty period had expired, because of a breach of implied warranty of fitness contained in s.15(1) of the Sale of Goods Act.
- Fundamental breach should be available as a residual regulative mechanism where:
- there is equal bargaining power;
- substantially the whole benefit of the contract is deprived;
- there is an unfair act by the other party; and
- it is determined the court wants to help by enforcing the exclusion clause.
- Fundamental breach should be abandoned; the unconscionability doctrine should be used to determine if an inappropriate allocation of risk between parties should be struck down.