Hot Pursuit. TEXT SIZE By: Mark Mason and Hillel David, McCague Borlack LLP

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1 Hot Pursuit Ontario's appeal court was recently the latest stop for two subrogation claims that began their years-long journeys in Small Claims Court to obtain direction regarding who is responsible for damages caused by leaking hot water tanks - the homeowner (or his property insurer) or the company supplying the tank. TEXT SIZE By: Mark Mason and Hillel David, McCague Borlack LLP The Court of Appeal for Ontario in the companion cases, Collett v. Reliance Home Comfort Limited Partnership and Szilvasy v. Reliance Home Comfort Limited Partnership dismissed Reliance Home Comfort s appeal, and ordered the company to pay costs of $16,000 to the respondents in both appeals. The cases involve application of section 9(2) of Ontario s Consumer Protection Act (CPA) to the rental of a hot water heater, following separate incidents in which Shirley Szilvasy, and Geoffrey and Sandra Collett, brought subrogated claims on behalf of their insurers in Small Claims Court, seeking compensation for resulting property damage. The rulings establish that consumers who lease or rent products will generally receive the protection afforded by the CPA throughout the terms of the leases. The ramifications for the insurance industry are very significant given that insurers pay millions of dollars in claims each year as a result of damages caused by such products. THE CIRCUMSTANCES The appeals for damages arising from leaking hot water tanks were heard October 23, 2012 and the decisions were released November 27, These claims are among the very few that have travelled from Small Claims Court all the way to the Court of Appeal for Ontario. At the time of loss, the hot water tank in the Szilvasy claim was nine years old and 19 years old in the Collett claim. In both cases, the loss was caused by internal corrosion in the tank, and in each case, the plaintiff homeowner had assumed the lease entered into by the original lessee (although both were subrogated claims made by the plaintiffs insurer). In the Szilvasy claim, the hot water heater in an unfinished furnace room in the basement, equipped with a floor drain, leaked while the homeowner was on vacation and soaked the basement carpet. Reliance Home Comfort replaced the heater without charge, as per the rental agreement s Terms and Conditions, and Szilvasy was later awarded damages at trial of almost $6,000, plus disbursements, costs and interest. With regard to the Collett claim, the heater leak damaged the carpet and baseboards, again prompting free replacement of the heater and, as part of the subrogated claim, the homeowners were awarded damages of almost $4,000, plus disbursements, costs and interest.

2 The evidence in both cases indicated it was virtually impossible to detect the internal corrosion and that there was no practical way of maintaining the tank so as to avert the type of failure that took place. Reliance Home Comfort had sent out a document, titled Water Heater Rental Agreement, to its customers as a billing insert. The document contained self-described Terms and Conditions, including a limitation of liability/exemption clause, although it was conceded by the company that the document did not constitute the contract made between the parties, there being no evidence that Reliance Home Comfort s customers had agreed to the Terms and Conditions. Even had there been such evidence, the company would have been faced with the provision within the CPA that renders void any contract term that purports to negate or vary any implied condition or warranty under Ontario s Sale of Goods Act (SGA). Reliance Home Comfort had also sent out a warning notice reminding customers there is always a possibility that the product may leak. The company did not inspect the heaters, nor would an inspection have been meaningful because the key elements of a heater cannot be assessed without destroying the unit. Furthermore, inspections would not assist in predicting when a particular tank might leak or in averting that eventuality. All hot water tanks will eventually fail if left in service indefinitely, and it is not possible to predict the life expectancy of any individual tank. THE ARGUMENTS The basic underlying issue on the appeals was reflected in the following statement: This appeal decides who should bear the cost of the property damage the homeowner (or her property insurer) or the company that supplied the heater, Justice Eileen Gillese writes on behalf of the court in Szilvasy. The central issue on the appeals was noted as being whether s. 9 of the CPA applies to the water heater rental arrangement between the parties. Section 9(2) of the CPA provides that the implied conditions applying to the sale of goods by virtue of the SGA are deemed to apply to goods that are leased or otherwise supplied under a consumer agreement. That term is defined in the CPA to mean an agreement between a supplier and a consumer in which the supplier agrees to supply goods or services for payment. The plaintiffs were both residential users of the hot water tanks; the tanks were supplied for (rental) payments; and the agreements with Reliance Home Comfort, therefore, were consumer agreements. The company argued the CPA was inapplicable because the lease agreements had been entered into prior to the enactment of the CPA, and retroactive application of the statute was impermissible. That argument was rejected on the ground that the legal effects of the rental agreements were ongoing when the CPA came into force, and the loss-creating events (the leaks) occurred after that time.

3 The application of the CPA in those circumstances was retrospective, not retroactive. There is no bar to the retrospective application of a statute unless the statute expressly or impliedly prohibits that, which is not the case with the CPA. Reliance Home Comfort then argued one of the preconditions set out in the SGA for the implication of the conditions of reasonable fitness for purpose and merchantable quality had not been met, that being the plaintiffs had informed the company of the particular purpose for which the tanks were required so as to show that [the plaintiffs] relie[d] on [Reliance s] skill or judgment. The court rejected that argument. The plaintiffs were ordinary homeowners. Reliance Home Comfort was in the business of supplying hot water tanks to residences in fact, it had approximately 1.2 million tanks on lease to its customers. There was no doubt it knew the purpose for which the plaintiffs rented the tanks, namely to produce hot water at their homes, or that the plaintiffs were each relying on the company s skill or judgment to provide to them a properly functioning water heater. There was, therefore, an implied condition in each instance that the water heater would be reasonably fit for its intended purpose of providing hot water in the homes. In view of the fact that the tanks leaked, they were not reasonably fit for that intended purpose. Reliance Home Comfort argued such an interpretation amounted to a warranty that the tanks would be as good as new throughout the lifetime of a lease. That argument, too, was summarily rejected with Justice Gillese s comment: The water heater need not be in the same condition as a new heater. It can be worn, rusted or otherwise in a less than pristine condition so long as it is reasonably fit for the purpose of heating water without leaking. THE IMPACT The court did not expressly address Reliance Home Comfort's position that the implied conditions of fitness and merchantable quality do not remain in force throughout the term of a lease, but rather only for a reasonable period of time after having entered into the lease. Given the dismissal of the appeals, the effect is that the implied conditions do remain in force throughout a lease s full term. It was the breach of the implied condition of reasonable fitness for purpose even years after lease agreements had been made that was the basis for the company s liability. A person who pays for the use of a product is entitled to a working product during the payment period, regardless of when that may be. There are sound and compelling reasons why the implied conditions should remain in force throughout the term of a lease, not the least of which is that the CPA is remedial legislation whose whole purpose is to protect consumers.

4 Any interpretation that would deprive a consumer renting a product of the protection of the implied conditions at a time when the consumer is making a rental payment could hardly be said to be protecting the consumer. To the contrary, any such interpretation would defeat, rather than promote, the consumer protection purpose of the statute. These two cases establish the basic principle that consumers who lease or rent products such as hot water tanks, which can be leased for long periods of time, will generally receive the protection afforded by the CPA (unless the preconditions for such protection have not been satisfied, which likely will only rarely occur) throughout the terms of the leases. A mere warning is not sufficient compliance with the implied conditions. Lessors such as Reliance Home Comfort that leave their products in place indefinitely do so at their own risk. The question of whether or not some types of leased products (one example might be cars) will have the CPA protection or will have a more limited or different form of protection awaits further clarification. Reliance Home Comfort has until the end of January 2013 to bring a motion for leave to appeal the decision to the Supreme Court of Canada. Photos Larger photo & full caption File size: 51.1 KB (144px X 209px) Caption: Mark Mason, Partner, Chair, Subrogation & Product Liabi...

5 Larger photo & full caption File size: 80 KB (216px X 288px) Caption: Hillel David, Associate Lawyer, McCague Borlack LLP