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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Misrepresentation in the Sale of an Automobile Dealership

The recent decision of the Ontario Superior Court in Butera v. Mitsubishi features a number of interesting points, not the least of which involves the importance of doing one’s homework before opening a new automobile franchise.  From a legal perspective, the case is interesting because it highlights the difficulty in pinning liability for negligent misrepresentation on a manufacturer entering a new market. 

In 2002, Mr Butera, a young lawyer working in St. Catharines, applied to Mitsubishi Canada for a Mitsubishi dealership which he wished to open in Niagara Falls.  In the proforma sales forecasts that he included with his application, he forecast that he would sell 180 new and 120 used vehicles in his first year of operation and 350 new and 125 used vehicles in an average year. 

Ultimately, he signed a Dealer Agreement with Mitsubishi and opened for business. 

By 2005, less than three years later, he claimed that his losses to date were about $500,000 and growing.  His dealership stopped selling cars in October, 2005, but maintained a service business.  It stopped carrying on business altogether in late 2007.

His sales figures were nowhere near his forecasts.  In 2002, he sold 14 new vehicles.  He sold 127 in 2003, 100 in 2004 and 29 in 2005. 

After closing, he sued various Mitsubishi entities for damages arising out of alleged misrepresentations which he claimed had induced him to enter into the Dealer Agreement. 

Mitsubishi had disclosed its sales levels in the United States and made comments about greatly expanded sales of their cars in the United States and Canada.  Mr. Butera claimed that the statements were flawed and misleading because they did not distinguish between fleet sales and actual sales.  He also claimed that many US sales resulted from a promotion to customers involving favourable credit terms (zero down payment, zero interest and zero payments for one year).  He insisted that all of these statements misled him into entering into the transaction as a result of which he and his companies lost over $3 million. 

On a factual basis, the Court found against Mr. Butera on a number of important points.

Firstly, the Court was satisfied that there was no evidence the statements presented to him of actual US sales were false. 

Secondly, the Court found that Mr. Butera knew or should have known of the distinction between fleet and customer sales and bore the burden of making further inquiry if he felt that it was important.

Finally, the Court determined that less than 1% of total sales of Mitsubishi cars in the United States during the relevant period were sold under the zero, zero, zero financing program. 

The important legal issue of the impact of a possible misrepresentation by Mitsubishi as to projected sales was determined with reference to a clause in the Dealer Agreement usually referred to in legal circles as an “entire agreement” clause.  This provision, which is now almost universal in these types of cases, specifically provided that the written agreement constituted the entire agreement between the parties and superseded any and all prior written or oral agreements or understandings.  This particular clause even provided that:

“Dealer agrees that any oral statements of any MMSCAN personnel shall be of no force or effect and that Dealer has not relied on any such oral statements in entering into this Agreement.”

The Court found that this clause directly impacted the heart of Mr. Butera’s claim, which was that Mitsubishi misrepresented the future prospects of sales of its cars in Canada based on its past performance in the United States.  As a result of the entire agreement clause, the Court found that this was not a viable argument even if Mitsubishi’s representatives had made misrepresentations.

There is another aspect of the case relating to the alleged misrepresentations which is worth noting.

In law, a misrepresentation can only form the basis of a claim if it is a statement relating to an existing and ascertainable fact.  Statements about prospective sales or other future events are regarded by the Court merely as expressions of opinion about the future.  If a vendor provides a forecast and the forecast results are not achieved, the forecast will not constitute an untrue statement of a material fact as a matter of law.  It probably will not constitute a misrepresentation giving rise to liability.  If the vendor negligently misrepresents existing facts, that may be a different story – unless an entire agreement clause applies.  But even an entire agreement clause won’t shield a vendor from an outright lie.

This case highlights the following points:

  1. When a manufacturer provides a forecast as to future results, don’t assume that this will give rise to liability in the event that the forecasts are not met; and
  2. An entire agreement clause will protect a vendor from liability for negligent misrepresentation.

Mr. Butera was buying into what was essentially a new venture.  Had he been buying an existing store and had misrepresentations been made to him about the sales results for the store to date, the result may well have been different if that information had been false.  When starting up a new venture, however, extra care should be taken. 

Employees and Independent Contractors: How to Create the Relationship You Want

Automotive retail is among those classes of businesses in which it has become common for business owners to attempt to create independent contractor relationships with individuals providing service, such as sales representatives, rather than employment relationships.  The distinction between these two categories of service providers creates significant consequences for both sides to the relationship in a number of areas, including employment legislation, wrongful dismissal actions, priorities and insolvency and contractual rights and above all, EI, CPP, and income tax.  In many cases, both company and service provider find it advantageous to categorize their relationship as that of independent contractor. 

The court will make a comprehensive assessment of the entire relationship and take into account a wide variety of relevant factors.

By the same token, because of the tax consequences, Canada Revenue Agency can be rigorous in examining such relationships to be absolutely certain that they involve genuine independent contracts.  CRA takes a dim view of attempts to characterize as an independent contract a relationship which is obviously that of employer-employee. 

Adverse decisions by CRA can be appealed by business owners to the Tax Court of Canada, but obviously, the business owner’s best course of action would be to avoid the problem by putting into place as many features of an independent contractor relationship as possible.  Doing so requires an understanding of the general principles that a court would apply in deciding the point. 

As one might expect, there is no one factor that will define the relationship.  The court will make a comprehensive assessment of the entire relationship and take into account a wide variety of relevant factors.  Continue reading

Dealer Agreement Renewals: Ask Not for Whom the Bell Tolls…

The scenario is an ominous one, and all too frequent.  You are an Ontario car dealer under a dealer agreement with the manufacturer that goes back for a number of years.  Over that time frame, relations have been good although in the last few years, it has hit a few bumps.

Renewal time is approaching.  For you, it is business as usual.  But sales are slow, and you have an uneasy feeling because you heard of a few experienced operators sniffing around for an opportunity to open a competing location uncomfortably close to your territory. 

Notwithstanding anything to the contrary contained in the dealer agreement, manufacturers have an obligation to renew their dealer agreements unless there is “cause” to refuse to do so.

The manufacturer notifies you, out of the blue, that it does not plan to renew your dealer agreement.  You quickly realize that the rumors are true:  another dealer has pulled enough strings to put himself into a position to replace you in your territory, presumably in that empty building down the road from which he used to carry on business with a competing brand.

As far as you are concerned, you have done nothing wrong.  Nevertheless, you are about to be put out of business.

You go to your lawyer for advice.  He has been acting for you for years, having incorporated your business and kept your minute books up to date annually.  Maybe he has looked after some filings for you, and written the occasional letter to an irate consumer.  He looks at your dealer agreement, points out to you that nothing in the agreement makes it mandatory for a manufacturer to renew, and suggests that you start looking for a sub-tenant for your building. 

Is that good advice?  Don’t you have any options at all?

Well, yes you do. Continue reading