COURT OF APPEAL FOR ONTARIO
CITATION: Chuang v. Toyota Canada Inc., 2016 ONCA 584
DATE: 20160721
DOCKET: C60102
Doherty, MacPherson and Miller JJ.A.
BETWEEN
Dr. Sylvester Chuang, HSC Holdings Inc., Transoriental Fine Cars Ltd., 1405768 Ontario Limited and Ontasian Enterprises Inc.
Plaintiffs (Appellants/Respondents by Cross-Appeal)
and
Toyota Canada Inc.
Defendant (Respondent/Appellant by Cross-Appeal)
John J. Adair and Gord McGuire, for the appellants/respondents by cross-appeal
Timothy Pinos and Colin Pendrith, for the respondent/appellant by cross-appeal
Heard: April 26, 2016
On appeal from the judgment of Justice James Spence of the Superior Court of Justice, dated February 10, 2015, with reasons reported at 2015 ONSC 885.
Doherty J.A.:
I
overview
[1] The appellants, Dr. Sylvester Chuang and various corporations he controlled (collectively referred to as “Dr. Chuang”), entered into an agreement with the respondent Toyota Canada Inc. (“Toyota”) to build and operate a Lexus dealership in downtown Toronto. Toyota terminated the agreement after Dr. Chuang failed to meet certain deadlines set out in the agreement. Dr. Chuang sued Toyota, initially claiming specific performance of the agreement and damages. By the time of trial, Dr. Chuang had opened a different dealership on the site. He limited his claim at trial to damages related to Toyota’s wrongful termination of the agreement.
[2] The trial judge held that, under the terms of the agreement, Toyota was required to act reasonably in exercising its rights of termination. The trial judge concluded that Toyota had not acted reasonably in terminating the agreement. He went on, however, to hold that an exclusion clause referring to Toyota’s exercise of its rights of termination protected Toyota from any obligation to pay damages or other losses caused to Dr. Chuang by the termination of the agreement. The trial judge dismissed the claim and awarded costs of $1,210,000 to Toyota.
[3] Dr. Chuang appeals, arguing that the exclusion clause, as properly interpreted, cannot protect Toyota against the consequences of an unreasonable termination of the agreement. Dr. Chuang also seeks leave to appeal the costs order, submitting that the reasons of the trial judge are inadequate and offer no explanation for the costs ordered by the trial judge. Dr. Chuang submits that the court should remit the question of costs to the trial court for reassessment.
[4] Toyota argues that the trial judge’s interpretation of the exclusion clause is entitled to deference in this court and that Dr. Chuang has failed to demonstrate any basis upon which the court should interfere with that interpretation. Toyota further submits that the trial judge’s reasons for his cost award, while brief, do adequately demonstrate the factors that drove that decision. Toyota submits that leave to appeal the costs order should be refused.
[5] Toyota also has a cross-appeal that need be considered only if Dr. Chuang is successful on the main appeal and this court concludes that the exclusion clause does not protect Toyota from losses caused to Dr. Chuang by the unreasonable exercise of its powers of termination under the agreement. On the cross-appeal Toyota argues that the trial judge erred in holding that Toyota did not act reasonably when it terminated the agreement.
[6] I would dismiss the appeal, both as it relates to liability and costs. I do not reach the cross-appeal.
II
facts
[7] In 2002, Dr. Chuang owned, or was a partner in, about 25 luxury car dealerships in Ontario and British Columbia. He wanted to open a Lexus dealership in downtown Toronto. Lexus is a car model manufactured and sold by Toyota. I will use the words Toyota and Lexus interchangeably in these reasons.
[8] There are two steps involved in setting up a new Toyota dealership. First, Toyota enters into a Letter of Commitment (“LOC”) with the proposed dealer. The terms of the LOC control the relationship between Toyota and the dealer from its inception through to completed construction of the dealership. When the dealership is ready to be opened, the dealer and Toyota enter into a Dealership Franchise Agreement governing their relationship after the dealership is in operation.
[9] Dr. Chuang first approached Toyota in March 2002 about the possibility of building a downtown Lexus dealership. At that time, Toyota chose to build the dealership with another individual. When that person abandoned the project, Toyota renewed discussions with Dr. Chuang. Those discussions led to an LOC in April 2003.
[10] The LOC placed many obligations on Dr. Chuang. He was required to put in place net working capital of not less than $1,000,000, obtain an operating line of credit of not less than $675,000, and open a wholesale line of credit of not less than $9,000,000. Dr. Chuang was also obligated to comply with Toyota-dictated standards pertaining to a wide variety of matters, including the design of the dealership, the construction of the sales and service facilities for Lexus vehicles, and the content of dealership advertising.
[11] Most significantly, s. 6 of the LOC required that Dr. Chuang begin construction on the dealership prior to December 31, 2003 and open the dealership for business by December 31, 2004. The LOC provided that if Dr. Chuang did not fulfill the terms and conditions of the LOC, he would be liable for any expenses he had incurred.
[12] Unfortunately, things did not go well for Dr. Chuang in his efforts to build the Lexus dealership. He encountered various problems, including unexpected demands from the City of Toronto that led to an OMB proceeding. By December 2004, when under the terms of the LOC the dealership should have been about to open, construction had not even started. Dr. Chuang wrote to Toyota in mid-December 2004 explaining the problems he had encountered and indicating that he could have the dealership substantially completed by March 2006, about 15 months after the agreed upon opening date for the dealership.
[13] On December 21, 2004, Toyota wrote to Dr. Chuang indicating that it was willing to extend the terms of the LOC as requested by Dr. Chuang. Toyota, however, demanded several amendments to the LOC. The amendments included a timeline identifying several specific dates by which Dr. Chuang had to have completed various tasks associated with the construction of the dealership. The timeline was set out in s. 6 of the amended LOC:
- On or before April 30, 2005, you shall deliver to Lexus c/o National Manager Dealer Facility Development, a schedule for the construction of the Facility which shall confirm that:
(a) Your architect will tender the project on or before February 28, 2005;
(b) You shall have a final financing commitment by March 30, 2005;
(c) Excavation at the site shall begin on or before April 30, 2005;
(d) Construction of the Facility shall begin on or before May 31, 2005; and
(e) Construction of the Facility shall be complete and the Dealership open for business to the public on or before March 31, 2006.
[14] The dates provided in s. 6 of the amended LOC were consistent with the dates suggested by Dr. Chuang in his request for an extension of time to complete the dealership.
[15] Toyota also inserted certain termination rights into the amended LOC which paralleled the timeline set out in s. 6 of the amended LOC. The termination rights are found in s. 7 of the amended LOC:
- Lexus has the option in its sole discretion to terminate this LOC if any of the following occurs:
(a) The project has not been tendered as of February 28, 2005;
(b) A final financing commitment is not in place as of March 30, 2005;
(c) Excavation of the site has not begun as of April 30, 2005;
(d) Construction of the Facility has not begun as of May 31, 2005;
(e) Construction of the Facility is not complete as of March 31, 2006;
(f) The Dealership is not open for business to the public as of March 31, 2006;
(g) You indicate to Lexus that you will not be able to meet one or more of the deadlines in Section 6 of this LOC; and
(h) Lexus, in its sole opinion acting reasonably, determines that you will not be able to meet one or more of the deadlines in Section 6 of this LOC.
[16] Sections 7(a)-(f) provided that Toyota could terminate if any of the specific timelines set out in s. 6 were missed by Dr. Chuang. Section 7(h) referred to potential future failures to meet those deadlines and allowed that Toyota could “in its sole opinion acting reasonably” terminate the agreement if it decided that one or more of those deadlines would not be met.
[17] In addition to setting out Toyota’s rights to terminate the amended LOC, s. 7 contained the exclusion clause that is the focal point of this appeal:
In the event of the termination of this LOC and/or the Lexus Dealer Agreement, Lexus and its directors, officers and employees shall not be liable for any losses, damages and/or expenses of any kind whatsoever suffered or incurred by you directly or indirectly in connection with this LOC and/or your Lexus Dealer Agreement.
[18] Toyota also required that Dr. Chuang provide a Certificate of Independent Legal Advice indicating he had obtained legal advice before agreeing to the terms of the amended LOC.
[19] Dr. Chuang, through counsel, replied to Toyota’s proposed amendments to the LOC suggesting changes in those proposals, including changes to s. 7. Toyota refused to make any of the proposed changes. On January 11, 2005, Dr. Chuang’s lawyer sent Toyota an executed copy of the amended LOC containing the terms as drafted by Toyota. Counsel also supplied the Certificate of Independent Legal Advice indicating that Mr. Chuang had received legal advice before executing the amended LOC.
[20] By letter dated April 20, 2005, Toyota advised Dr. Chuang that it was exercising its rights to terminate the amended LOC. In the letter, Toyota took the position that Dr. Chuang had failed to tender the project by February 28, 2005 as required in s. 6(a) of the amended LOC and had failed to have a final financing commitment in place by March 30, 2005 as required by s. 6(b) of the amended LOC. The letter went on, in language that tracked the termination right in s. 7(h) of the amended LOC, to state: “As a result of the foregoing, we have concluded that it is unlikely that you will be able to meet some, if not all, of the other conditions set forth in section 6 of the LOC.”
III
the trial judge’s reasons
[21] The trial judge held that Toyota had to act reasonably in exercising its rights of termination under s. 7 of the amended LOC (paras. 34-43). After an examination of the evidence, the trial judge concluded, at para. 75:
In view of all of the foregoing considerations the prospective delay in the final completion and opening [of the dealership] was such that the decision of Toyota to terminate the LOC was not a reasonable exercise of its discretion under subsection 7(a), subsection 7(b) or subsection 7(h) of the LOC. The termination did not comply with the terms of the LOC.
[22] For purposes of the appeal, I accept that the termination power in s. 7 had to be exercised reasonably and that Toyota did not act reasonably in terminating the agreement. I need not review the trial judge’s analysis or his findings.
[23] Having concluded that the termination was not a reasonable exercise of the power to terminate under s. 7, the trial judge turned to the exclusion clause set out above (para. 17). He rejected Dr. Chuang’s argument that the exclusion clause protected Toyota only if the termination was reasonable. The trial judge reasoned (paras. 105-106) that an interpretation of the exclusion clause limiting it to reasonable terminations would render the clause “redundant”. After observing that Dr. Chuang had not argued that the exclusion clause was unconscionable or unenforceable as contrary to public policy, the trial judge said, at para. 113:
The Plaintiffs say that Toyota has not put before the Court a case in which a party has repudiated a contract and sought to rely on an exclusion clause. The submission, in effect, is that repudiation is different from ordinary breach, in that it amounts to a fundamental breach of contract denying to the other party the benefit that it contracted for. However, the exclusion clause here applies by its terms to a termination. A repudiation is a termination and vice versa.
IV
the applicability of the exclusion clause
[24] Tercon Contractors Ltd. v. British Columbia (Minister of Transportation and Highways), 2010 SCC 4, [2010] 1 S.C.R. 69, is the leading Canadian authority on exclusion clauses. Binnie J., at paras. 122-23, speaking for the court on this issue, but in dissent in the result, described a three-step approach to the interpretation of exclusion clauses:
• Does the exclusion clause apply in the facts as found?
• If the clause applies, was the clause unconscionable at the time the parties entered into the agreement?
• If the exclusion clause applies and was not unconscionable, should the court for policy reasons which are sufficiently strong to outweigh the public interest in the enforcement of contracts, decline to enforce the contract?
[25] The argument in this case, both at trial and on appeal, focussed exclusively on the first step described in Tercon. Dr. Chuang did not suggest that the exclusion clause was unconscionable, or that public policy should override the enforcement of the exclusion clause. He argued that the exclusion clause did not apply in circumstances where Toyota acted unreasonably in terminating the agreement.
[26] The first step in the three-step Tercon inquiry engages the general principles of contractual interpretation: see Rankin Construction Inc. v. Ontario, 2014 ONCA 636, 325 O.A.C. 201, at paras. 57-60; 1465152 Ontario Limited v. Amexon Development Inc., 2015 ONCA 86, 330 O.A.C. 344, at paras. 11-18. Contractual interpretation usually raises questions of mixed fact and law. Absent a clearly identifiable error in law, an appellate court will defer to the trial court’s interpretation of the agreement and will only intervene in the case of palpable and overriding factual error or an unreasonable interpretation: see Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, [2014] 2 S.C.R. 633, at paras. 49-52; Martenfeld v. Collins Barrow Toronto LLP, 2014 ONCA 625, 122 O.R. (3d) 568, at paras. 39-42; Iroquois Falls Power Corporation v. Ontario Electricity Financial Corporation, 2016 ONCA 271, at para. 93; 2123201 Ontario Inc. v. Israel Estate, 2016 ONCA 409, at para. 44; D’Antonio v. Monaco, 2015 ONCA 274, at para. 12.
[27] Dr. Chuang submits that the trial judge erred in law by failing to engage in an interpretation of the exclusion clause to determine whether it applied in the circumstances, but simply assumed that it applied to all terminations of the agreement under s. 7. He submits that by not considering the first step of Tercon, the trial judge failed to apply the principles of contractual interpretation to the exclusion clause. Dr. Chuang contends that the trial judge failed to consider the intention of the parties as revealed by the entirety of the agreement, failed to address the commercial context of the agreement, and failed to consider the agreement as a whole. I do not accept this argument.
[28] While it is true that the trial judge did not expressly refer to the first of the three steps identified in Tercon, he did address the arguments aimed at the interpretation of the exclusion clause (see paras. 104-114). He specifically considered the language of the exclusion clause, the competing interpretations put forward by Dr. Chuang and Toyota, the commercial efficacy of those interpretations and the impact of the interpretations on the entirety of the agreement. These considerations reflect the application of the principles of interpretation to the exclusion clause and demonstrate that the trial judge engaged in the first inquiry identified in Tercon.
[29] As I do not accept that the trial judge fell into the legal error alleged by Dr. Chuang, the trial judge’s interpretation of the exclusion clause stands unless counsel can demonstrate either some palpable and overriding factual error or that the trial judge’s interpretation is unreasonable.
[30] Dr. Chuang attacks the reasonableness of the trial judge’s interpretation of the exclusion clause in various ways. I think those submissions come down to two arguments:
• the trial judge’s interpretation of the exclusion clause did not give adequate effect to the requirement that Toyota act reasonably in exercising its rights of termination under s. 7 of the amended LOC; and
• the trial judge did not properly consider the nature of the commercial relationship between Dr. Chuang and Toyota or the business efficacy of his interpretation of the exclusion clause.
### (i) The Exclusion Clause Considered in the Context of the Rest of the Agreement
[31] Dr. Chuang submits that s. 7 of the amended LOC can only be read as referring to reasonable terminations. He submits that the interpretation of the exclusion clause favoured by the trial judge effectively negated Toyota’s obligation to act reasonably when terminating the agreement. Dr. Chuang argues that the trial judge should have read the word “terminate” at the beginning of s. 7 of the amended LOC as synonymous with the word “termination” used in the exclusion clause portion of s. 7.
[32] This submission assumes that the amended LOC can only reasonably be read by placing the responsibility for a breach of the term of the agreement on the party breaching the agreement. That symmetry is no doubt a feature of many, if not most, agreements. However, parties to an agreement, particularly when they are sophisticated entities operating on a level playing field and engaged in a commercial relationship, are free to allocate risk as the parties see fit. Exclusion clauses are a means of allocating risk. The beneficiary of an exclusion clause contracts out of the obligation that would normally follow from the breach of the contract and places the risk of the breach on the other party to the contract. The extent to which the risk of breach is reallocated to the non-breaching party will depend on the language of the specific exclusion clause considered in the context of the entire agreement: see Tercon, per Binnie J., at paras. 96, 102.
[33] In the amended LOC, Dr. Chuang and Toyota agreed:
In the event of the termination of this LOC … Lexus … shall not be liable for any losses, damages and/or expenses of any kind whatsoever, suffered or incurred by you directly or indirectly …
[34] The clause is broadly written. The inclusion of the word “damages” is particularly telling. Damages occur as a consequence of a breach of an agreement. The exclusion of liability for “damages … of any kind whatsoever, suffered or incurred” in addition to the exclusion of liability for “losses”, or “expenses” indicates that the exclusion clause reaches beyond terminations that complied with the terms of s. 7. At a minimum, the broad language of the exclusion clause and, in particular, the reference to “damages” renders the trial judge’s interpretation of the clause reasonable.
### (ii) Commercial Efficacy
[35] Dr. Chuang also argues that the trial judge’s interpretation of the exclusion clause leads to a commercial absurdity. He submits that a reasonable person in his position would never have agreed to an exclusion clause that protected Toyota from the consequences of its own unreasonable and arbitrary termination of the agreement. Dr. Chuang stresses that he was a sophisticated successful businessman with a great deal of experience in owning and operating car dealerships. Dr. Chuang was prepared to commit to a long-term relationship with Toyota that required him to spend millions of dollars to build and operate the dealership. He contends that a person in his position would never agree that Toyota could arbitrarily terminate the agreement and then invoke the exclusion clause to “escape all liability” for the unlawful termination of the agreement.
[36] I cannot accept this argument for several reasons. First, and most importantly, the exclusion clause does not allow Toyota to “escape all liability” for improperly terminating the agreement. The exclusion clause speaks to “losses, damages and/or expenses” flowing from the termination. The exclusion clause did not affect Dr. Chuang’s right to seek other remedies for improper termination, including specific performance. In fact, Dr. Chuang initially sought specific performance, but abandoned that claim after he entered into an agreement with another car manufacturer to operate a dealership on the same site.
[37] Nor can the possibility of specific performance be dismissed as a fanciful remedy. Indeed, in the example posed by counsel in his factum and relied on by him to demonstrate the commercial absurdity of the trial judge’s interpretation, specific performance would have been an ideal remedy. Counsel posited a hypothetical in which Toyota improperly terminated the dealership as it was on the verge of opening and after Dr. Chuang had spent millions of dollars preparing the dealership. In that situation, Dr. Chuang would presumably advance a specific performance claim, combined with a request for some form of injunctive relief against Toyota. The exclusion clause would provide no safe harbour for Toyota.
[38] I would also reject the commercial efficacy argument because, in my view, that argument overstates the negative effect on Dr. Chuang of the trial judge’s interpretation of the exclusion clause. While it is true that Dr. Chuang had spent a great deal of money purchasing the land and taking steps to ready the land for construction of the dealership, it is not as if those investments were irretrievably lost by Toyota’s termination of the agreement. Dr. Chuang still owned the land and could still take advantage of the improvements made in the land. As the post-termination events demonstrate, Dr. Chuang was able to take the property he had purchased for the Toyota dealership, and the investments he made in improving that property, and use them to make a deal with a different manufacturer of luxury cars.
[39] Finally, the submission about the commercial efficacy of the trial judge’s interpretation of the exclusion clause ignores the immediate commercial dynamic at play when the exclusion clause was inserted into the contractual relationship. Dr. Chuang had failed to even commence construction on the dealership by the time he had agreed he would have the dealership open for business. Dr. Chuang had explanations for those delays. No doubt, much of the delay was beyond his control. However, from Toyota’s perspective, Dr. Chuang’s failure to perform as promised required significant alterations to the agreement if Dr. Chuang was to be given a further opportunity to build and open the dealership. In the circumstances, it was not surprising that Toyota would drive a hard bargain in its proposed amendments to the LOC. That hard bargain included rights of termination for Toyota and the allocation to Dr. Chuang of the financial risks flowing from termination. The bargain demanded by Toyota was sufficiently severe that Toyota required that Dr. Chuang acknowledge the receipt of independent legal advice. Dr. Chuang, having received that advice, chose to accept the terms and take on the risks associated with termination of the LOC. Presumably, based on his experience and expertise, he was confident he would meet the timeline he had suggested to Toyota and Toyota had inserted in the amended LOC.
[40] The trial judge’s interpretation of the exclusion clause is not unreasonable and was not tainted by palpable and overriding error. That is as far as this court can go in reviewing his interpretative exercise. I would dismiss the appeal.
V
the costs appeal
[41] Dr. Chuang seeks leave to appeal the costs order and, if leave is granted, appeals the costs order. He submits that the trial judge’s reasons offer virtually no insight into the reasons for the costs order made. He claims the reasons are so deficient as to constitute an error in law warranting appellate review.
[42] The cost reasons are brief and somewhat conclusory. They must, however, be examined in the context of the lengthy cost submissions made by the parties and the issues raised in those submissions. Toyota was entirely successful at trial. Dr. Chuang’s action was dismissed. Toyota was clearly entitled to its costs and, given the length of the proceedings, those costs would inevitably be significant.[^1]
[43] Toyota claimed costs totalling about $1,629,000. That amount was based on a claim for costs on a partial indemnity basis up to the time of Toyota’s offer to settle and costs on a substantial indemnity basis from that point forward. Alternatively, Toyota claimed costs of $1,405,744 on a partial indemnity basis throughout the proceedings. The trial judge awarded costs of $1,210,000.
[44] In his brief reasons, the trial judge, after referring to the relevant Rules of Civil Procedure, explained that Toyota was not entitled to costs on a substantial indemnity basis after the date of its offer. He did, however, indicate he would exercise his discretion to award costs to Toyota “above the partial indemnity scale” from the time of the offer. The trial judge did not quantify that amount.
[45] Having determined the scale of costs, the trial judge considered the specific claims made by Toyota. He noted that some were excessive, and also identified the limited value of the expert opinions. Once again, the trial judge did not place a numerical value on the amount by which the claims exceeded the amount the trial judge was prepared to grant.
[46] In the end, despite the brevity of the reasons, the parties knew that Toyota had been awarded costs on a partial indemnity basis, the usual scale for a successful defendant, but with two qualifications. One, the higher scale for post-offer costs worked to the advantage of Toyota. The other, a deduction for excessive costs claimed, worked to Dr. Chuang’s advantage. Combined, the two variations yielded a costs award that equalled about 85 percent of the partial indemnity costs claimed by Toyota.
[47] I am satisfied that the reasons do reveal the basis for the trial judge’s costs award and do permit effective appellate review. The reasons are not so inadequate as to constitute an error in law. I see no other potential error in principle that could warrant leave to appeal from the order. I would refuse leave to appeal costs.
VI
toyota’s cross-appeal
[48] In light of my disposition of the main appeal, Toyota’s cross-appeal is moot. I would dismiss the cross-appeal on that basis.
VII
conclusion
[49] I would dismiss Dr. Chuang’s appeal on liability, refuse leave to appeal from the costs order made by the trial judge, and dismiss Toyota’s cross-appeal as moot. If counsel cannot agree on costs of the appeal, they may exchange and submit written submissions of no more than five pages within 30 days of the release of these reasons.
Released: “DD” “JUL 21 2016”
“Doherty J.A.”
“I agree J.C. MacPherson J.A.”
“I agree M. Tulloch J.A.”
[^1]: At trial, counsel for Dr. Chuang (not Mr. Adair) argued that Toyota should not receive any costs because it had succeeded by virtue of the exclusion clause in the contract and despite its unreasonable termination of the agreement with Dr. Chuang. With respect, that argument is devoid of any merit. The exclusion clause is as much a part of the agreement between the parties as any other part of the contract. The trial judge cannot be faulted for failing to specifically address that submission.