Canada: Made In Canada, But Sold South Of The Border: A Cautionary Tale For Supply Chain Participants

In Canada, liability for a defective product can attach to all participants in a supply chain to varying degrees, including retailers, suppliers, wholesalers, distributors, importers and manufacturers of the product. This liability is derived from consumer protection and sale of goods legislation, as well as the Canadian common law. However, a recent decision from the U.S. District Court for the Western District of Michigan may herald increased risk for Canadian manufacturers in product liability class actions south of the border. In Kellogg Co. et al. v. FPC Flexible Packing Corp. and The International Group, Inc., Justice Maloney held that an Ontario-based supplier who contracted exclusively with another Canadian entity was nonetheless a proper third-party defendant to a product liability claim that is ongoing before the U.S. District Court in Michigan. In assuming jurisdiction over an action in relation to a contract formed in Canada between two Canadian parties, the U.S. District Court has signaled a willingness to assume jurisdiction over disputes between Canadian entities doing business in Canada whose product (in this case, packaging) forms part of a product that is ultimately distributed and sold in the United States.

Facts

Kellogg Co. and Kellogg USA Inc. ("Kellogg") recalled more than 1.5 million boxes of cereal due to customer complaints of an "off" odour and taste, which allegedly resulted in five cases of illness. According to Kellogg, the odor and taste arose from defective cereal box liners supplied by FPC Flexible Packaging Corp. ("FPC"). FPC is a Canadian corporation organized under the laws of Ontario.

Kellogg commenced a claim against FPC for breach of express and implied warranties. The liners at issue were sold to Kellogg and sent to its cereal manufacturing plant in Omaha, Nebraska. FPC alleges that that the liners contained excessive hydrocarbons in the wax, and therefore moved to add the wax manufacturer, The International Group, Inc. ("IGI"), as a third party to the claim. IGI is also a Canadian company with its headquarters in Toronto. FPC and IGI had entered into an oral contract in Canada for the supply and purchase the wax used to make the liners, which was carried out on an "order-by-order" basis through the issuance of purchase orders. Kellogg subsequently amended its statement of claim to include claims against IGI.

Choice of Law

After being named as a defendant in the action, IGI moved for summary judgment against both Kellogg and FPC.

The court found that Michigan law governed the claims as between IGI and Kellogg. Applying Michigan law, the court found that the various FPC purchase orders constituted individual offers and that each acknowledgement sent by IGI constituted an acceptance of the specific offer to purchase wax. Justice Maloney also found that there were sufficient factual uncertainties regarding the terms of the contracts to preclude a finding on summary judgment. IGI's motion for summary judgment against Kellogg was therefore dismissed.

In determining whether Michigan law should also apply to the relationship between FPC and IGI, the Court considered "the place the contract was executed, the place where the contract was to be performed by the breaching party, and the locations of the parties' headquarters and incorporation". In light of these factors, the Court concluded that Canadian law must apply. Nevertheless, in so ruling, it also concluded that Michigan courts could assume jurisdiction over the dispute as a result of the fact that the third party claim "shares a 'common nucleus of operative fact' with the case already before the court." The Court also found that "judicial efficiency" considerations militated in favour of assuming jurisdiction over the action.

Applying Ontario law to the third-party complaint as between IGI and FPC, Justice Maloney found that, similar to the contractual dispute between Kellogg and IGI, there were sufficient factual uncertainties relating to the precise terms of the contract, and therefore a full trial was required.

After a number of preliminary motions for summary judgment and evidentiary motions to strike various portions of the record, the case is currently scheduled to be heard by a jury in July of 2015.

Key Take-Aways for Participants in a Supply Chain:

• Be aware of the players in any supply chain with which you are involved, including where a particular material, product, ingredient, or component is sourced, as well as the ultimate destination of your own product.
• Suppliers and distributors should be mindful of potential defects or hazards associated with materials, products, ingredients or components by virtue of past experience in the marketplace or which, through inspection, ought reasonably to have been discovered. Furthermore, suppliers and distributors should be mindful of any particular product uses that may have been communicated by counter-parties to a supply contract so as to ensure that the material, product, ingredient or component is fit for such purpose.
• Protect yourself contractually by formalizing all business relationships through formal written agreements, which may include protections such as indemnity provisions, limitations of liability, and possible disclaimers of warranty (where appropriate). Sellers should ensure (where appropriate) that purchasers of materials, products, ingredients, and components represent and warrant that they have inspected the goods, to ensure that obvious defects that can be revealed by an inspection are caught. Purchasers should consider what types of defects can be reasonably be revealed during an inspection, and include contractual protections to limit liability accordingly.
• To the extent possible, protect yourself "procedurally" through the use of choice of law and choice of forum provisions. Although such provisions may not ultimately preclude adjudication by a foreign court (as the Kellogg case illustrates), they will at least provide the courts with a clear statement of intention of the governing law and intended forum. In this regard, parties may also wish to consider specifically referencing applicable sale of goods or consumer protection legislation.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.