You Have Breached a Contract: Can an Exclusion Clause Protect You From a Damage Claim?

The recent decision of the Ontario Court of Appeal in Chuang v. Toyota Canada Inc. provides a useful insight into the current state of the law relating to exclusion clauses.

In this case, Dr. Chuang entered into an agreement with Toyota to build and operate a Lexus dealership in downtown Toronto.

The agreement set out a number of deadlines that Dr. Chuang had to meet with respect to his obtaining financing, building the facility and opening the dealership for business.

The agreement also gave Toyota the right, in its sole discretion, to terminate the agreement if any of the deadlines were not met or if Toyota, in its sole opinion, determined that Dr. Chuang would not be able to meet any one or more of those deadlines.

In addition, the agreement contained an exclusion clause. It provided that in the event of the termination of the agreement, neither Toyota nor any of its personnel would be liable for any losses, damages or expenses of any kind.

Dr. Chuang, who was an experienced builder and operator of luxury car dealerships, ran into a number of difficulties. Many of them were not his fault. Nevertheless, deadlines were missed. Toyota terminated the agreement and Dr. Chuang sued Toyota for specific performance of the agreement and damages. By the time the matter had come to trial, he had been able to complete the construction of a showroom and open a different dealership on the site. As a result, he abandoned his claim for specific performance and pursued his damages claim only.

At trial, Toyota argued that it had acted reasonably in terminating the agreement. However, if it had not acted reasonably, thereby breaching the agreement, it was insulated from any damage claim by the exclusion clause.

The judge found that Toyota had not acted reasonably in terminating the agreement. However, he also ruled that Toyota was nevertheless entitled to the protection of the exclusion clause.

Dr. Chuang appealed to the Court of Appeal, arguing that the exclusion clause could only apply in cases where Toyota had acted reasonably. He argued further that the trial judge had not properly considered the nature of the relationship or the commercial efficacy of the clause. In essence he argued that the trial judge’s interpretation of the exclusion clause would lead to a commercial absurdity, in that no reasonable person would ever have agreed to a clause protecting Toyota from the consequences of its own unreasonable and arbitrary termination of the agreement.

The Court of Appeal dismissed the appeal. It pointed out that the Court will take a three-step approach to the interpretation of exclusion clauses:

  1. Does the clause apply to the facts?
  2. If so, is the clause unconscionable?
  3. If it applies and is not unconscionable, is there any public policy reason strong enough to outweigh the public interest in the enforcement of contracts that should persuade the Court to ignore the clause?

The Court pointed out that Dr. Chuang did not argue either that the clause was unconscionable or that there was any public policy reason against its enforcement. The only real issue was as to whether or not it could apply to excuse Toyota from any damage claim by reason of its own unlawful termination of the agreement.

The Court pointed out that parties to an agreement are free to allocate risk as they see fit. Exclusion clauses are a means of allocating risk. The beneficiary of an exclusion clause contracts out of the obligation that normally follows from the breach of a contract and puts that risk on the other party.

In this case, the clause was broadly written and made it clear that no damage claim could be brought as a result of any termination of the agreement. The Court rejected Dr. Chuang’s argument about commercial efficacy by pointing out that while Dr. Chuang would not be able to sue for damages, even though Toyota had breached the agreement, he could have sued for specific performance or other relief and, in fact, did not pursue such a claim to trial only because he had been able to open another dealership on the site. Accordingly, the appeal was dismissed.

The result of the case with respect to costs is also somewhat dramatic. At trial, the trial judge awarded Toyota costs of $1.21 million. Dr. Chuang appealed the amount awarded and the Court of Appeal dismissed that part of the appeal as well.

This case is a useful reminder of the fact that parties to a contract – particularly sophisticated parties bargaining on a relatively level playing field – will be held to the strict language of their written commitments. Unless they are unconscionable or void on public policy grounds, exclusion clauses will not be treated any differently.

Must an employee mitigate damages when a fixed term employment contract is terminated early?

The recent decision of the Ontario Court of Appeal in Howard v. Benson Group Inc. clarifies the current state of the law on the duty to mitigate where a fixed term employment contract is terminated early.

In this case, Mr. Howard was employed at the Defendant’s auto service center as a manager. He had a written employment contract for a five-year term starting in September, 2012.  His employer terminated the contract after almost two years, without cause.

The contract included the following provision concerning the employer’s right to early termination without cause:

“Employment may be terminated at any time by the Employer and any amounts paid to the Employee shall be in accordance with the Employment Standards Act of Ontario.”

The employer took this to mean that it had the right to terminate the contract early at any time, at which point it would be liable to the employee only for statutory benefits.

Mr. Howard’s position was that he was owed the full amount that would have been payable for the balance of the employment contract, as a lump sum.

The matter went to trial. The trial judge concluded that the early termination clause was so ambiguous as to be unenforceable.  He then concluded that the employee was entitled to damages, but the damages were to be calculated on the basis of reasonable notice at common law.

Furthermore, the judge determined that in accordance with usual common law principles, the employee had a duty to mitigate those damages.

The employee appealed to the Court of Appeal both on the question of the applicability of common law reasonable notice in these circumstances, and on the question of his having a duty to mitigate.

The Court of Appeal allowed the appeal. It ruled that as the relationship was governed by a fixed term contract, the common law presumption of the employer having an implied obligation to provide reasonable notice of termination was completely displaced.  The judge’s characterization of the early termination clause in the agreement as ambiguous was not challenged by either party but the Court of Appeal considered that whatever it meant, it did not alter the fact that this was a fixed term contract.  Accordingly, the employer was liable for the immediate payment of everything that would have been paid to the employee over the balance of the term of the contract had it not been terminated.

The Court of Appeal went on to determine that in such circumstances, the employee was under no duty to mitigate. As a fixed term employment contract requires the employer to pay the employee to the end of the term, in effect this means that the parties have contracted out of the common law approach to reasonable notice subject to mitigation.

As a result, even if Mr. Howard had obtained another job the day after his employer terminated the fixed term employment contract, he would have been entitled to payment of the balance under the contract.

This points up the very serious consequences of a fixed term employment contract that does not have a clear and unambiguous provision for early termination, specifying the rights and obligations of the parties in that event. Clearly, a clause simply saying that the employer may terminate early, without specifying those consequences, cannot be relied upon by the employer to escape the obligation to pay the balance due under the contract.

Whose House Is It Anyway? The Latest on Resulting Trusts

At common-law, where a property is purchased with one person’s money and title is put in the name of another, there is a presumption that the title holder holds title in trust for the person who contributed the money.

This principle was at the basis of a recent Court of Appeal decision in the case of Andrade v. Andrade.

Luisa Andrade, a widow and mother of 7, immigrated to Canada from Portugal in 1969 accompanied by her oldest daughter who was then 17. She worked as a cleaner for a number of years saving money for plane tickets to bring over the rest of the children.  They finally arrived in 1972.

Luisa stopped working to look after her children. One by one each of the children left school and began working while they were teenagers.  While they continued to live at home they gave their earnings to their mother to support the family.  This continued until each got married and moved out.

The family lived in a series of apartments but by 1974 Luisa had decided to buy a house. She found a house that would be suitable for her family and bought it for $58,500.  She signed the offer to purchase and borrowed a cash deposit of $1,000 (which she subsequently repaid).  For the most part the balance of the purchase was paid with 2 mortgage loans.

She arranged for title to the house to be put in the names of her oldest son, Henry, and her second daughter, Maria Jesus, both of whom were employed. At the time, Henry was 19 and Maria Jesus was 18.  They signed the mortgages.

Five years later, in 1979, at Luisa’s direction, Maria Jesus transferred her registered interest to younger brother Joseph. The mortgages were renewed in the names of Henry and Joseph.

The house was large enough to include separate apartments. The apartments generated rental income which was collected by Luisa.  At one point Henry and his wife occupied one of the apartments and paid rent to his mother as well.

Joseph died in 2007. At the time he was married to the plaintiff in this action, Manuela Andrade.  In 2008, she demanded that the house be sold and that half of the sale proceeds be paid to her, as the beneficiary of Joseph’s estate, saying that Joseph had been a beneficial owner of half of the house since it was purchased.

Luisa, supported by everyone else in the family, insisted that Luisa was actually the beneficial owner of the house and that Henry and Maria Jesus, at first, and Joseph, subsequently, only held title as trustees for Luisa.

During the litigation, Luisa passed away. The action continued to trial against Henry and Luisa’s estate.

At trial, Manuela was successful. The trail judge ruled that at the time of the purchase, Luisa had no money of her own.  She had paid the expenses involved in the house with her children’s money and not her own.  He found no evidence of a joint intention on the part of Luisa on one hand and Henry and Maria Jesus on the other hand that the latter two would hold title in trust for their mother.  The trial judge ordered that the house be sold, the half the proceeds be paid to Manuela, and that the estate pay Manuela over $237,000 in costs.

The matter was appealed to the Court of Appeal. The Court of Appeal reversed the decision, holding that the trial judge had made a number of mistakes.

Firstly, the trial judge erred in concluding that Louisa had no money of her own at the time of the purchase. In fact, she was the one who had borrowed the deposit and she was the one who paid it back.  The money that was in her account and used to pay the expenses relating to the purchase and subsequent expenses for maintaining the home may well have been provided to her by her children but the trial judge was wrong in concluding that therefore, this was her children’s money.  Once her children gave their paycheques to Luisa, it became her money.

Secondly, the trial judge erred in concluding that in order to determine whether or not a trust existed, the court would look for an intention of both Luisa and her children that a trust would exist. In fact, only Luisa’s intention was relevant since she was the one paying the money and directing that the title be taken in the names of other people.  There was ample evidence in this case that Luisa intended to be the beneficial owner of the property.  The evidence obtained from Luisa prior to her death was that she had directed title to be taken into the names of Henry and Maria Jesus because mortgage financing was needed to make the purchase and she could not qualify for a mortgage.  As both Henry and Mariah Jesus were employed at the time, they could and did qualify for a mortgage.  There simply was no other reason for this arrangement.

As a result, the presumption of resulting trust prevailed and Luisa’s estate was declared to be the sole beneficial owner of the house.

Unfortunately, it took years and hundreds of thousands of dollars to get this straightened out. It probably also cost this family at least one relationship.  The lesson to be learned, as usual, is to make sure these types of arrangements are recorded in writing – if not right at the outset, then as soon as possible thereafter.

Wrongful Dismissal Cases: When Can Members of Management be Sued Personally?

The idea of adding members of management as defendants in wrongful dismissal cases against corporate employers is not a new one.  The case of Watson v. TrojanOne Ltd., Harrison and Lee is a useful reminder of the current status of the law in this area.

In this case, the Plaintiff, Watson, sued his former employer, TrojanOne, as well as two individuals named Harrison and Lee.  Harrison was TrojanOne’s President and CEO and Lee was its Chief Creative Officer.

The matter came before the court by way of a motion brought by Harrison and Lee to have the action dismissed as against them on the basis that Watson did not have the right to sue them personally.

The judge summarized the law on the point by indicating that the officers of a corporation are not liable personally for what they do within their authority and on behalf of their corporation.  However, they may be liable in an action against the corporation if there is some conduct on the part of the officer that is either tortious in itself, or that amounts to misconduct that is independent from that of the corporation.

Historically, this point has come up rather frequently in cases in which a Plaintiff sues an officer of the corporate employer for inducing the company to breach the contract of employment with the Plaintiff by terminating the employment without reasonable notice.  It is clear in such cases that unless the officer can be said to have acted in bad faith and against the company’s best interests, he or she cannot be sued for inducing breach of contract where a claim for breach of contract is available against the company.

As a result, for an officer of an employer company to be liable, the claim against that individual must specifically identify the cause of action that is asserted against the officer and explain why he or she is being sued separately from the company.

It is to be kept in mind that this matter came before the court as a procedural attack on the statement of claim as against Harrison and Lee.  The only question before the Court was as to whether or not a case against those individuals had been properly pleaded.

The statement of claim contained the usual pleadings as against TrojanOne.  With respect to both Harrison and Lee, it contained a series of quotes allegedly attributable to each of Harrison and Lee in which they are alleged to have made a variety of degrading and humiliating statements to Watson and others.  Some of the statements even had racist overtones.

The Plaintiff’s allegation was that this conduct created a poisoned and hostile work environment causing the Plaintiff to suffer from severe anxiety and depression for which he sought and received medical treatment and therapy.

At some point, a public altercation took place in which the Plaintiff was physically threatened and verbally abused.  The Plaintiff alleges that as a result, he had to stop work and take a leave of absence immediately for medical reasons.

According to Watson’s Statement of Claim, this all amounted to constructive dismissal.  Watson alleged that the conduct of Harrison and Lee was flagrant and outrageous, they intended to harm Watson or, at least, knew that their conduct would cause harm, and Watson suffered a visible and provable illness.  As a matter of law, these are the elements of the tort of intentional infliction of mental distress.

Accordingly, the Court concluded that Watson had adequately pleaded that independent actionable wrongs had been committed by Harrison and Lee. The case was permitted to proceed against them as well as against TrojanOne.

It would seem to follow logically that where a member of management is verbally abusive or conducts himself or herself in a manner that creates a poisoned work environment, and that conduct causes visible and measureable harm, that conduct will never be considered to be in the best interests of the company and may well serve as the basis of a claim against him or her personally.


The Latest on Invasion of Privacy

The recent case of Stevens v. Walsh provides a useful reminder about the current status of the tort of intrusion upon seclusion, more commonly thought of simply as invasion of privacy.  In one respect, however, this case may push the boundary of the tort to a new level.

The tort of intrusion upon seclusion requires proof of three elements.  Firstly, the defendant’s conduct has to be intentional.  Secondly, the defendant must have invaded the plaintiff’s private affairs or concerns without lawful justification.  Thirdly, a reasonable person would regard that invasion as highly offensive causing distress, humiliation or anguish.

In this case, both the plaintiff, Mr. Stevens, and the defendant, Ms. Walsh, were Air Canada pilots.  Mr. Stevens was in the process of getting a divorce from Mrs. Stevens.
Ms. Walsh and Mrs. Stevens were friends.

There is an Air Canada password protected website accessible only to Air Canada employees showing pilots’ schedules.  A pilot can add another pilot to a “friends list” so that friends can check that pilot’s schedule is.  Mr. Stevens had added Ms. Walsh as a friend so that Ms. Walsh could access Mr. Stevens’ calendar.

In this case, Ms. Walsh testified that her friend, Mrs. Stevens, had called her. Mrs. Stevens was very upset and indicated that the extent to which her estranged husband worked was an issue in her divorce case.  Ms. Walsh assumed that Mrs. Stevens would have access to her husband’s schedules but Mrs. Stevens was so frantic that Ms. Walsh, wanting to keep her friend calm, accessed the site and sent Mr. Stevens’ scheduling information to Mrs. Stevens.  Ms. Walsh subsequently swore an Affidavit setting out the same information.

Mr. Stevens subsequently sued Ms. Walsh.  Mr. Stevens’ complaint was not that Ms. Walsh had accessed Mr. Stevens’ flight schedule but rather that Ms. Walsh had passed that information along to someone else.

The Court found that the tort of intrusion upon seclusion had been committed by Ms. Walsh.  The Court was satisfied that for an employee to obtain information under the guise of review for legitimate work related purposes and then use it by sharing it with her colleague’s estranged wife for use against the colleague in a divorce proceeding, amounted to a significant invasion of personal privacy which, on an objective basis, was highly offensive.

The interesting aspect of this particular case has to do with the nature of the information itself.  If the extent to which Mr. Stevens spent time doing his job was an issue in the divorce case, one would have thought that his work schedule would have to have been produced in the litigation itself.  Ms. Walsh provided a copy of the schedule, or the information in it, only to Mrs. Stevens.  She did not make the information available to anyone else.  In this case, it would seem that Mrs. Stevens ultimately would have been able to obtain that information anyway and indeed, that Mr. Stevens would have been obliged by law to provide it.

According to this case, however, this additional aspect of the matter is not relevant.  Furthermore, the fact that Ms. Walsh had been given permission by Mr. Stevens to access this information was similarly irrelevant.  According to this case, if a person obtains information through lawful means and then disseminates it to someone who otherwise would be entitled to it anyway, this can still amount to unlawful conduct.

Can a Will be Disregarded for Public Policy Reasons?

In the recent case of Spence v. BMO Trust Company et al., the Ontario Court of Appeal dealt with the interesting question as to whether or not the court can set aside a bequest in a Will because it may have been motivated by racism.

Rector Emanuel Spence was born in Jamaica and died in Ontario 71 years later. He had two children, Verolin and Donna. Both are in their 50’s.

Spence became separated in about 1965 after which Verolin lived with him and Donna lived with her mother. It appears that Donna had no further communication with Spence from that point onward.

According to Verolin, she and Spence enjoyed a positive relationship for many years. That changed in 2002 when she informed Spence that she was pregnant. When Spence learned that the father of Verolin’s child was white, he ended his relationship with his daughter permanently.

About 8 years after Spence ended his relationship with Verolin, he made a Will. The will made no provision for Verolin or Verolin’s child. Instead, the will left most of Spence’s Estate to Donna. In fact, the will specifically stated that Spence was leaving nothing to Verolin “as she has had no communication with me for several years and has shown no interest in me as her father”.

Verolin challenged the will, saying that it was void because it was contrary to public policy. In support she filed an Affidavit alleging that Spence’s decision to exclude her from the will was racially motivated. An individual who had acted as Spence’s occasional care giver submitted an affidavit, stating much the same thing.

When the matter first came up for hearing by way of Application, the Application Judge determined that on its face the will did not offend public policy. However, given the clear evidence that Spence’s reason for disinheriting Verolin was based on a “clearly stated racist principle”, the will offended both human sensibilities and public policy. The will was set aside in its entirety.

The case was appealed to the Court of Appeal.

The Court of Appeal began its analysis by focusing on what it described as the “important principle of testamentary freedom”. The Court pointed out that in Ontario at least, there was no statutory duty on a competent testator to provide in his or her will for an adult independent child, whether based on an overriding concept of an alleged moral obligation on a parent to provide for his or her children or otherwise. That is not to say that testamentary freedom is absolute. For example, where a Trust is established to provide scholarships but the terms of the Trust stipulate that the scholarships are only available to one or another gender or people of a certain racial background, that may well be the type of a violation of public policy that will justify interference by the Court.

In this case, however, the will did not impose any conditions that offended public policy. It provided for the estate to go to Donna and not to Verolin because of what it described as a lack of communication for several years and a lack of interest on her part in Spence as a father. The Court observed that this is “not the language of racial discrimination”.

The Court of Appeal distinguished this case from previous cases in which, for example, bequests were made to what had described as “unworthy heirs”, such as terrorists groups, beneficiaries whose reasons for existence involve illegal activities, and the like. Nor would the implementation of testamentary intentions require the estate trustee to engage in discriminatory conduct in order to carry out his wishes, such as in the case of a Trust that discriminates by, for example, gender or race. Most significantly, the Court asked the question as to whether or not Spence should be entitled to disinherit Verolin on discriminatory grounds if he chose to do so. This was a bequest of a private rather than a public nature. So even if his intentions were repugnant, according to the Court of Appeal, the principle of testamentary freedom overrides a testator’s distasteful intentions unless there are legally offensive conditional terms in the will. A testator has the right to choose his or her beneficiaries. Accordingly, the Court of Appeal determined that the Application Judge was wrong to go beyond Spence’s expression of his clear intentions.

Verolin is now seeking leave to appeal to the Supreme Court of Canada.

Wrongful Dismissal On Summary Judgments: What If Judgment Is Rendered Before The Notice Period Expires?

The new judicial policy promoting summary judgment motions as a way of disposing of law suits, rather than trials, has become all the rage in lawful dismissal litigation. Counsel acting for wrongfully dismissed employees, who often operate on a contingency basis, have welcomed this development for obvious reasons.  The courts appeared to be totally receptive. However, there is still one aspect of a typical wrongful dismissal case that may require a special treatment where the case is brought to court on a summary judgment motion.

In most wrongful dismissal cases, mitigation is raised by the former employer as part of its defence.  Terminated employees have a duty to make reasonable efforts to mitigate their loss of income by finding new employment.  If a plaintiff fails to make reasonable efforts to find new employment, the court may reduce what would otherwise have been a reasonable notice period.

This may give rise to a problem under the following scenario.  Assume that an employee loses his job and sues promptly for damages for wrongful dismissal fairly promptly.  The action is defended and the plaintiff brings a motion for summary judgment.  Assume that the motion for summary judgment is heard only a few months after the actual termination has taken place.

At that point, the motions judge will be asked to determine the notice that should have been provided to the plaintiff by the former employer. Now assume that the period of reasonable notice as set by court extends beyond the period of time between the termination and the hearing of the motion.  The court may rule that up to the date of the motion, the plaintiff has made reasonable attempts to find another job.  What is the court to do about the fact that the period of reasonable notice will extend into the future?  How is the court to make sure that the plaintiff continues to seek new employment? And what happens to the judgment if the plaintiff actually does find new employment before the end of the notice period?

This is a relatively new problem. Historically, wrongfully dismissed plaintiffs did not bring motions for summary judgment because the courts were not interested in hearing them.  This problem did not arise.

The recent case of Lalani v. Canadian Standards Association summarizes the law on the point and adds a new option for the court to consider.

Traditionally, the court employed 3 different approaches to the problem of a motion being heard before the end of the notice period.

Firstly, the court could order that the plaintiff’s damages would be discounted by a contingency for re-employment during the balance of the notice period.

Secondly, judgment could be granted subject to a trust in favour of the employer. In the event that the employee did find a new job during the notice period, he would have to account to the employer in the sense that portion of the judgment covering the period in which the employee now had a new a job would have to be refunded.

Thirdly, the court could grant the employee a partial summary judgment for the period up to the date of the motion. The parties would then have to return to court on a subsequent date, either once the employee had a new job or following the end of the notice period, for a determination of the balance payable to the employee.

In the Lalali case, the motion court judge put forward a fourth approach, which a judge described as a hybrid between the second and third approaches previously used by courts.

In this case, the judge granted a judgment for the full amount. The funds paid to the plaintiff during the balance of the notice period were impressed with a trust in favour of the employer.  However, the plaintiff was ordered to account to the employer on a monthly basis with respect to his mitigation efforts and any mitigation income earned during the notice period from a new job.  The judge’s hope was that in the way, the parties might be able to avoid the time and expense involved in returning to court on a future date to deal with any refund to which the employer was entitled.

Each of these approaches brings with it advantages and disadvantages. When it comes to mitigation, regardless of the approach taken, much will depend the honesty and good faith of the former employee in terms of his willingness to report on his or her having found new employment, and the legitimate start date of that employment.

There is yet a further approach, of course, which is to develop a policy of refusing to entertain motions for summary judgment in wrongful dismissal cases where the hearing date is likely to pre-date the expiry of the reasonable period of notice. That would avoid the problem but, on the other hand, it would also deprive a terminated employee of what might be much needed income during a period of unemployment.  It is also inconsistent with the current policy encouraging motions for summary judgment.