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.

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