2019 QCCA 1150, 2019 QCCA 1150

Unofficial English Translation of the Judgment of the Court Capmatic Ltd. c. American Brands 2019 QCCA 1150 COURT OF APPEAL CANADA PROVINCE OF QUEBEC REGISTRY OF MONTREAL No.: 500-09-026473-165 (500-17-073576-129) DATE: June 28, 2019 CORAM: THE HONOURABLE GENEVIÈVE MARCOTTE, J.A. MARIE-JOSÉE HOGUE, J.A. GENEVIÈVE COTNAM, J.A. CAPMATIC LTD. APPELLANT - Defendant v. AMERICAN BRANDS S.A. and GRUPO POLYMER S.A.

RESPONDENTS - Plaintiffs JUDGMENT [ 1 ] The appellant appeals against a judgment rendered on October 24, 2016 by the Honourable Madam Justice Suzanne Courchesne of the Superior Court, District of Montreal, that allowed the application of the respondent, American Brands S.A. [“American Brands”], and ordered it to pay $464,599 in damages and $40,808 in experts’ costs. [1] CONTEXT [ 2 ] The appellant, Capmatic Ltd. [“Capmatic”], is a company that manufactures automated bottling systems for a variety of liquids. [ 3 ] The respondent, American Brands, a subsidiary of Grupo Constenla that is located in Costa Rica, manufactures bleach, among other products.

It has been in operation since June 2008. [ 4 ] At the end of 2007, Grupo Constenla was planning to automate its production of bleach in order to serve big-box stores and transfer these operations to American Brands. [ 5 ] It instructed two employees working for another one of its subsidiaries, Grupo Polymer [“Polymer”], which manufactures packaging products, to take steps for the acquisition of an automated bleach bottling system.

The two employees retained the services of a local packaging company, Tecni-Pack intl., to advise them. [ 6 ] In August 2008, after preliminary discussions with Tecni-Pack Intl., Capmatic sent Polymer a quote.

On August 27, 2008, American Brands issued a purchase order for the purchase of a Versafill automatic filler, a Beltstar capping system and two turntables located at the beginning and at the end of the production line [the “Equipment”] at a cost of US$150,000. [ 7 ] The exchanges between the parties clearly provided that the Equipment was to be used to bottle bleach. [ 8 ] The Equipment was delivered to American Brands in July 2009. In September 2009, a Capmatic technician went to Costa Rica for the commissioning.

At that time, he noted certain operating problems. [ 9 ] On September 17, 2009, American Brands informed Capmatic that it was having difficulties with the Equipment, which was already showing some signs of corrosion. [ 10 ] Capmatic denied any responsibility and blamed the problems on the quality of the bottles used and their fill level. Discussions between the parties continued. American Brands also complained about the breakage of certain components and about the fact that it was unable to run its production at the rate contractually agreed upon when the Equipment was purchased.

[ 11 ] Capmatic insisted on being paid the contractual holdback before providing replacement parts or considering sending a technician on site. American Brands therefore agreed to pay the balance under the contract. [ 12 ] Finally, on March 15, 2010, a Capmatic technician arrived in Costa Rica. He noted several problems with the Equipment. He replaced numerous parts and drew up a list of replacement parts to be sent to American Brands. Notwithstanding the technician’s intervention, American Brands continued to be dissatisfied with the way in which the Equipment functioned.

Certain operations which should have been automated, such as capping, had to be done manually. The promised productivity level was still not achieved. [ 13 ] After having formally notified Capmatic to take back the Equipment, American Brands ceased using it at the end of June 2011.

It purchased a new system, with which it was satisfied, from another company. [ 14 ] American Brands therefore claimed the following from Capmatic: - The reimbursement of the Equipment and of certain costs incurred (importing, etc.); - The additional maintenance costs incurred; - The loss of profits resulting from the Equipment’s lack of productivity.

THE JUDGMENT UNDER APPEAL [ 15 ] The trial judge allowed American Brands’ application and ordered the appellant to pay $464,599 in damages and $40,808 as experts’ costs. [ 16 ] After setting out the facts, the judge identified the following six issues in dispute: [ translation ] 1. Is there a contractual relationship between American Brands and Capmatic? 2. What is the nature of Capmatic’s obligations? 3. Is the Equipment affected by a latent defect that renders it unfit for the use for which it was intended? 4. Does American Brands’ use of the Equipment exceed the limits of the legal warranty? 5.

Is American Brands entitled to the resolution of the sale and the restitution of the selling price? 6. Is American Brands entitled to damages? 6.1. If so, are the financial documents submitted by American Brands in support of its claim admissible as evidence? 6.2. If so, what is the amount of the damages sustained by American Brands? 6.3. What is the applicable exchange rate for calculating the damages? [2] [ 17 ] She concluded that there was a legal relationship between American Brands and the appellant.

She ruled that the Equipment had a latent defect because of the problems experienced, its premature deterioration and the fact that it did not perform as promised. The appellant, in its capacity as manufacturer, was liable for the defects in the Equipment and the resulting damage. The judge found that Capmatic had not proven that American Brands had not behaved as a prudent and diligent buyer or had misused the Equipment. [ 18 ] She therefore ordered the resolution of the sale and the restitution of the selling price.

She overruled the hearsay objection raised by the appellant with respect to the financial documents produced by the respondent and the testimony of its accountant. This evidence consists of tables prepared by the respondent using data extracted from its accounting system and its unaudited financial statements. Based on

article 2870 C.C.Q., the judge admitted the evidence, because she considered it necessary and reliable. However, she reduced the damages awarded to US$203,287 for the loss of profits and US$8,663 for the additional production and maintenance costs.

GROUNDS OF APPEAL [ 19 ] The appellant did not specifically state its grounds of appeal, but questioned all of the trial judge’s conclusions. [ 20 ] These grounds can be summarized as follows: - Did the judge err in concluding that there was a contractual relationship between American Brands and the appellant? - Did the judge err in concluding that the Equipment had a latent defect? - Did the judge err in admitting into evidence the documents establishing American Brands’ financial loss? * * * ANALYSIS 1.

Did the judge err in concluding that there was a contractual relationship between American Brands and the appellant?

[ 21 ] The appellant contends that the contract was not entered into with American Brands, but rather with Polymer and that the claim should be dismissed on that ground alone. [ 22 ] While the initial discussions were initiated with Polymer, at a time when American Brands was not yet in existence, and certain letters sent by the respondent refer indiscriminately to Polymer or American Brands as being the buyer, the evidence reveals that the first payments were made by Grupo Constenla, but were subsequently reimbursed to it by American Brands. [ 23 ] The trial judge correctly ruled that the contract was entered into with American Brands, which is the entity that issued the purchase order.

The parties’ conduct shows that the appellant knew perfectly well that the Equipment was intended for American Brands and that Polymer was negotiating on behalf of this entity. This first ground of appeal must therefore fail. 2.

Did the judge err in concluding that the Equipment had a latent defect? [ 24 ] The appellant is attempting to retry the matter on appeal and is repeating all of the arguments it pleaded, unsuccessfully, before the trial judge. [ 25 ] It argues that the judge failed to consider the fact that the Equipment was incorporated within a production chain containing certain parts that had not been supplied by it, and it argues that the respondent was required to show precisely which component of the Equipment had a defect. [ 26 ] The appellant also alleges that the problems experienced are the result of the very poor quality of the bottles used by the respondent and inadequate maintenance.

It also blames the respondent for not having followed its recommendation to move the labeller to the end of the production line. [ 27 ] This second ground must also fail because the appellant has not shown a palpable and overriding error by the trial judge.

On the contrary, in light of the evidence presented, the trial judge was well founded in concluding that there was a latent defect. [ 28 ] It bears reminding that in a sale by a professional seller, the buyer benefits from a triple presumption: (1) the presumption that a defect exists, (2) the presumption that the defect precedes the contract of sale, and (3) the presumption of causation between the defect and the deterioration or improper functioning of the thing. [3] This set of presumptions is akin to a presumption of liability. [4] [ 29 ] To benefit from the effect of the presumption, the buyer need merely show that (1) it acquired the thing from a person bound by the professional seller’s warranty and (2) the thing deteriorated prematurely when compared to an identical thing or a thing of the same type. [5] [ 30 ] It is then up to the professional seller or the manufacturer to rebut the presumption by demonstrating that the problem is related to a misuse of the thing by the buyer, to the causal fault of a third party or to superior force.

The judge was of the view that the appellant failed to provide such evidence. [ 31 ] In the present case, the respondent purchased Equipment intended to bottle and cap bleach, a corrosive product.

It was up to Capmatic to deliver a functional system that incorporated the labeller purchased from a third party, in such a manner as to be able to package and cap the bleach according to the specified filling conditions and the required production rate. [ 32 ] The evidence reveals that, even after the intervention of a second technician, the Equipment never functioned at the promised rate, thereby leading to the conclusion that the appellant failed to fulfil its contractual undertaking to deliver a functional system. [ 33 ] Moreover, corrosion problems appeared within the first week of use due to the spillage of bleach.

The appellant claims that these problems are related to the labeller. The evidence does not support this theory. The judge also dismissed the argument that the quality of the bottles was the source of the problems. Her assessment of the evidence in this regard is not unreasonable or tainted by a palpable error. Indeed, the appellant performed its tests with the bottles provided, at its request, by the respondent. It modified the Equipment to take the characteristics of these bottles into account.

That said, it was not obligated to proceed with the project if it was worried that it would not be able to deliver a functional system based on the tests performed in its own plant using those bottles. [ 34 ] The judge also quite rightly dismissed the argument that the pressure created by the bottling of the bleach caused the spillage. The appellant knew the properties of the product to be bottled.

It chose to perform its preliminary operating tests with regular water rather than bleach, without making sure that everything was calibrated based on the product being manufactured. [ 35 ] The judge accepted the testimony of the respondent’s expert who had the benefit of seeing the Equipment and witnessing the very poor condition in which it was less than two years after its commissioning.

This expert stated that the materials used for several components were not compatible with corrosive products or were not built with the materials specified in the service proposal. [ 36 ] Moreover, the capping system was not working. The respondent had to add employees to tighten the caps manually. [ 37 ] In light of these facts, the trial judge did not err when she concluded that the Equipment had a latent defect and cancelled the sale. 3.

Did the judge err in admitting into evidence the documents establishing American Brands’ financial loss? [ 38 ] The appellant contests the conclusions of the trial judge who, even though she reduced the amount of the claim substantially, nevertheless recognized that the respondent had suffered financial losses due to the very poor functioning of the Equipment. [ 39 ] Relying on the rule of proportionality, the respondent chose to prove its claim by filing various accounting documents as well as unaudited financial statements, and by having its president and an accountant testify.

[ 40 ] The appellant contests the quality and reliability of the documentary evidence comprised of the tables prepared internally by the respondent based on the data generated by its accounting system and based on unaudited financial statements. It considers that the evidence presented violates both the best evidence rule and the hearsay rule. It is of the view that the testimony of the expert, who relied on these documents, must also be rejected. [ 41 ] The trial judge exercised her discretion, allowing into evidence the financial documents presented by the respondents.

She noted that the data originated from the accounting system used by American Brands in the ordinary course of its operations. The employees in charge of entering data in the system live in Costa Rica.

It is difficult to see how their testimony could have shed further light on the matter, given that they performed the data entry three years earlier in the ordinary course of the company’s operations. [ 42 ] In these circumstances, it was not unreasonable for the judge to conclude that there was no reason to require their presence in Court and therefore to ask them to travel from Costa Rica. [6] This is all the more so given that the company’s president came to explain the context within which the data was entered and the circumstances surrounding the implementation of the “Enterprise Resource Planning” [ERP] system which makes it possible to group all of the company’s invoices, cheques and purchase orders into a single database.

He indicated that American Brands is related to Grupo Constenla, which is considered a large company in Costa Rica. Grupo Constenla is subject to certain tax and accounting standards which it imports within all of its subsidiaries, including American Brands. [ 43 ] The expert retained by the respondent also confirmed that he had taken steps to ensure that the data in the accounting system was reliable and that he could use it as a basis for his opinion. [ 44 ] In short, there is nothing that casts doubt on the reliability of these documents and the president’s testimony regarding this financial data.

The best evidence rule would undoubtedly have justified the production of [ translation ] “all of the supporting documents for the data” that appears in the accounting documents, but the judge did not exercise her discretion in a non-judicial manner by concluding that the production of such evidence in the circumstances would have been unreasonable.

Her analysis regarding the admissibility of the financial documents calls for deference, particularly since it is consistent with the principle of proportionality. [ 45 ] The appellant contends that the claim for lost profits must be dismissed because the respondent did not produce audited financial statements. Its argument relies on the decision in Pierre Giguère Consultants c. Pierre Landry Électrique inc. , [7] where the Court stated that evidence of a loss of future profits may be made by filing financial statements, and on the decision in CHLSD juif de Montréal c.

Entreprises Francer inc. , [8] which disregarded evidence based on unaudited financial statements because they [ translation ] “may be likened to hearsay, [given that they are] prepared based solely on the representations of certain directors or officers”. [ 46 ] In the latter judgment, the only evidence of the financial loss relied on the unaudited financial statements, without [ translation ] “the respondent [having been] able to defend the validity of its financial statements”. [9] That is not the case here. [ 47 ] It is true that American Brands did not file audited financial statements to establish its claim, because it did not prepare such statements in the course of its operations.

The content of the unaudited financial statements, however, was corroborated by its president who testified, without going into the technical details, about the information contained therein, particularly the company’s sales figures and actual profit margin for 2009, 2010 and 2011. Furthermore, they were prepared in accordance with generally accepted accounting principles. The expert also confirmed that the figures set out in the financial statements matched the financial data extracted from the accounting system.

It is not unusual for a smaller company not to prepare audited financial statements. [ 48 ] The judge did not commit an error warranting the intervention of this Court when she concluded that the unaudited financial statements of American Brands gave a sufficiently reliable picture of its financial position to be admitted into evidence, subject to their probative value. [ 49 ] Similarly, she allowed the filing of the expert report that was based on this financial data. [ 50 ] The judge assessed the probative value of all the financial documents and the unaudited financial statements in light of the testimony of the witnesses.

At the end of her analysis, she significantly reduced the damages awarded. The Court is of the view that there is no need to intervene regarding the financial loss she recognized. FOR THESE REASONS, THE COURT: [ 51 ] DISMISSES the appeal; [ 52 ] THE WHOLE with the legal costs and the experts’ costs, both on appeal and in first instance. GENEVIÈVE MARCOTTE, J.A. MARIE-JOSÉE HOGUE, J.A. GENEVIÈVE COTNAM, J.A. m tre Éric Azran M tre Marjorie Bouchard STIKEMAN ELLIOTT

For the appellant Mtre Martin F. Sheehan Mtre Nikolas Blanchette FASKEN MARTINEAU DUMOULIN For the respondents Date of hearing: January 15, 2019