Court of Appeal for Ontario

Date: September 10, 2019

Docket: C66043

Judges: Feldman, Paciocco and Fairburn JJ.A.

Between

Aviva Insurance Company Applicant (Appellant)

and

Wawanesa Mutual Insurance Company Respondent (Respondent)

and

Hy Kiet Liu Intervenor

Counsel:

• Dennis Ong and Christopher Scotchmer, for the appellant
• Steven Carlstrom and Genevieve Durigon, for the respondent

Heard: May 15, 2019

On appeal from: the order of Justice Shaun Nakatsuru of the Superior Court of Justice, dated October 1, 2018, with reasons reported at 2018 ONSC 5778, 89 C.C.L.I. (5th) 332.

Fairburn J.A.:

A. OVERVIEW

[1] On October 29, 2010, Hy Kiet Liu was driving a car that was rear-ended by a rental truck driven by Maroof Shah Mahamood. The rental company was New Horizons Car and Truck Rentals/Discount Rent-a-Car ("New Horizons"). At the time of the accident, Mr. Mahamood was delivering furniture for a company named Fine Furnishings. Mr. Liu sued Mr. Mahamood, New Horizons, and Fine Furnishings in a negligence claim. The insurers for New Horizons and Fine Furnishings, Aviva and Wawanesa respectively, cannot agree upon their insurance obligations.

[2] When a rental vehicle is involved in a collision and there is overlapping liability coverage, s. 277(1.1)(1)-(3) of the Insurance Act, R.S.O. 1990, c. I.8, sets out the following order in which the policies will respond:

1. any policy under which the "lessee of the automobile is entitled to indemnity" (emphasis added);

2. any policy under which the "driver of the automobile is entitled to indemnity" (emphasis added); and

3. any policy under which the "owner of the automobile is entitled to indemnity" (emphasis added).

[3] The purpose of s. 277(1.1) is to "relieve the insurer of the owner of a rented vehicle from being the first loss insurer where other insurance is available to the renter or driver of the rented vehicle": Enterprise Rent-a-Car Canada Limited v. Meloche Monnex Financial Services Inc., 2010 ONCA 277, 102 O.R. (3d) 87, at para. 4. It results in a cascading priority effect in relation to insurance claims arising in the rental vehicle context. Insurance "available" to drivers operates in excess to insurance available to lessees. And insurance available to owners operates in excess to insurance available to lessees and drivers.

[4] To determine who is the first loss insurer under s. 277(1.1), it is first necessary to determine the identity of the lessee and whether that lessee is entitled to indemnity under a motor vehicle liability policy. In this case, the parties cannot agree upon the identity of the lessee. Aviva says that Fine Furnishings was the lessee. Wawanesa says that Mr. Mahamood was the lessee.

[5] Aviva sought to resolve this dispute by bringing an application pursuant to rr. 14.05(3) and 38 of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194, effectively seeking two declarations:

a. that Fine Furnishings was the "lessee" of the rental truck driven by Mr. Mahamood; and

b. that at the time of the collision, Mr. Mahamood was acting as an employee of Fine Furnishings (as distinct from an independent contractor).

[6] The application judge found that Mr. Mahamood was the lessee but left the determination as to whether Mr. Mahamood was an employee or an independent contractor for trial in the main action. Since Mr. Mahamood had no motor vehicle liability policy of his own, the application judge made an order declaring Aviva, as the owner's insurer, the first loss insurer.

[7] This is an appeal from that order. The appellant maintains that the application judge erred by failing to take into account all relevant circumstances when determining the identity of the lessee. Alternatively, the appellant submits that the application judge erred by declaring Aviva to be the first loss insurer after finding that Mr. Mahamood was the lessee. The appellant contends that Mr. Mahamood was acting as an employee of Fine Furnishings when he rented the truck, which the appellant says would have entitled him to indemnity under the Wawanesa policy.

[8] For the reasons that follow, I would grant the appeal.

B. BACKGROUND FACTS

[9] Mr. Mahamood immigrated to Canada in 2000 as an international student. He remained in the country under a work permit after he graduated. Under that permit, he was only authorized to work for Fine Furnishings.

[10] Mr. Mahamood began working for Fine Furnishings in 2009. While he initially worked in an administrative position, he later asked Mr. Rajiv Mehta, the owner of Fine Furnishings, whether he could take on additional responsibilities to increase his income. Mr. Mehta offered Mr. Mahamood a job delivering furniture for the company. He asked Mr. Mahamood to sign a subcontract agreement which set out the amount he would be paid for each delivery and required Mr. Mahamood to arrange his own insurance. Mr. Mahamood signed the agreement but maintains that he did not understand its terms. Mr. Mahamood has never worked for anyone other than Fine Furnishings.

[11] Mr. Mahamood did not have his own vehicle or credit card. When delivering furniture for Fine Furnishings, Mr. Mahamood always obtained his rental trucks from New Horizons. This was because Fine Furnishings had a standing arrangement with New Horizons under which Fine Furnishings authorized New Horizons to charge the cost of vehicle rentals directly to a credit card on file. Without a credit card to obtain the rental trucks, Mr. Mahamood had no option but to obtain the vehicles from that location. Mr. Mahamood gave evidence that he was told that he could only use the rental trucks to make furniture deliveries for Fine Furnishings.

[12] On October 29, 2010, Mr. Mahamood picked up a truck from New Horizons to complete his deliveries. Mr. Mahamood was the sole signatory to the New Horizons rental agreement. In the course of delivering furniture to Fine Furnishings' customers, Mr. Mahamood rear-ended Mr. Liu's vehicle.

C. THE APPLICATION JUDGE'S DECISION

[13] Early in his reasons for decision, the application judge expressed the view that the identity of the first loss insurer would depend on the identity of the "lessee". In approaching this issue, the application judge observed that the Insurance Act defines "lessee" as "a person who is leasing or renting the automobile for any period of time": s. 277(4). For the application judge, this definition pointed toward the "primacy of the contractual arrangement in determining the identity of the lessee." Accordingly, the application judge adopted the test set out in Intact Insurance Company of Canada v. American Home Assurance Company of Canada, 2013 ONSC 2372, 115 O.R. (3d) 708, at para. 18 for determining who is the lessee under the Insurance Act:

Who is the lessee can be tested and determined by asking the following question: Who can the lessor (Budget Car Rental) sue to enforce the car rental contract? [Emphasis added.]

[14] The application judge acknowledged that there may be cases where it is appropriate to look beyond the four corners of the rental agreement to determine the identity of the lessee, especially if the contract is ambiguous in nature. However, he found that this was unnecessary in the case before him and held as follows:

In my opinion, I need not go further than the rental agreement in this case. Mr. Mahamood signed it. He rented the truck. He is the person New Horizons must sue to enforce the car rental contract. He is therefore the lessee. It does not matter why he was renting it or what he was going to use the truck for. It does not matter how the rental would be paid for and by whom. The focus of the inquiry should be on the contractual arrangement made to rent or lease the vehicle. [Emphasis added.]

[15] The application judge concluded that Mr. Mahamood was the lessee because there was nothing on the face of the two-page rental agreement that signalled Fine Furnishings' involvement apart from its phone number, which Mr. Mahamood listed as his contact number. Instead, the rental agreement contained Mr. Mahamood's name, home address, and signature.

[16] The application judge did not consider it necessary to resolve whether Mr. Mahamood was acting as an employee or an independent contractor at the time that he rented the vehicle. He decided not to do so because resolving these issues would require him "to make specific findings of fact based on conflicting evidence; findings which raise credibility assessments." Although he concluded that the resolution of that issue "may be germane to some issue at trial", he held that it was immaterial to determining the priority of insurance policies.

[17] Ultimately, the application judge declared Aviva, as the insurer of the owner of the rental truck, the first loss insurer.

D. ANALYSIS

(1) Did the Application Judge Fail To Take All Relevant Circumstances into Account When Determining the Identity of the Lessee?

(a) Overview

[18] In my view, the application judge erred in determining the identity of the lessee by restricting himself to the face of the two-page rental agreement. By deciding that he had to go "[no] further than the rental agreement in this case", the application judge failed to grapple with whether Mr. Mahamood was acting as an authorized representative, or agent, of Fine Furnishings when he signed that agreement. Taking agency principles into account, I conclude that Fine Furnishings was the lessee.

(b) Intact and Lloyds

[19] The parties rely on two decisions of the Superior Court that deal with how to determine the identity of a lessee for purposes of s. 277(1.1): Intact and The Insurance Corporation of British Columbia v. Lloyds Underwriters, 2017 ONSC 670, [2017] I.L.R. I-5949. The parties suggest that Intact and Lloyds stand in conflict with each other, unsusceptible to reconciliation. I do not agree. Considered against their factual backdrops, the principles from these cases are clear and support the finding that Fine Furnishings was the lessee.

(i) Intact

[20] In Intact, an employee was driving a rental vehicle for work-related purposes when he collided with another vehicle and injured its passenger. As in this case, the insurers for the employer and the employee disputed who was the "lessee" for the purposes of s. 277(1.1). The employee had signed the rental agreement and paid for the rental vehicle with a credit card provided to him by his employer. His employer ultimately reimbursed him for the cost. However, the credit card was in the employee's name alone. He was also permitted to use the card for both business and personal expenses.

[21] Perell J. rejected the argument that the employer was the "de facto lessee" of the rental vehicle. He saw no reason to introduce the concept of a "de facto" lessee into s. 277(1.1) and preferred a "straightforward interpretation" of the provision: at paras. 17-18. He reasoned that it was inadvisable to encourage factual and legal disputes over the identity of a lessee for the purposes of the Insurance Act. Ultimately, Perell J. found that the identity of the lessee could be determined by asking the following question: "who can the lessor … sue to enforce the car rental contract?": at para. 18.

[22] The answer was the employee. There was no need for Perell J. to go beyond the rental agreement to understand the identity of the contracting parties: Intact, at para. 18. Apart from its policy of reimbursing employees who rented vehicles for work-related purposes, there were no facts that suggested that the employer had authorized the employee to contract with the rental agency on its behalf.

(ii) Lloyds

[23] A similar dispute arose in Lloyds. In resolving that dispute, Penny J. adopted the same test for determining the identity of a lessee as that set out in Intact: Lloyds, at paras. 14-15. However, the facts before him required a more expansive approach, one that engaged principles of agency. As Penny J. determined at para. 17:

(i) the employee was required to rent the car to "fulfill her employment obligations";

(ii) the employer kept an account with the rental agency;

(iii) the employee was required by company policy to rent from that rental agency;

(iv) the rental car was rented on the employer's account;

(v) the rental was paid for on a corporate credit card;

(vi) the employee was not permitted to use the credit card for personal expenses;

(vii) the credit card bill went directly to the employer; and

(viii) the rental agency was "entitled to collect, and did collect, from [the employer] reimbursement for the cost of repairing accident damage to the rented car."

[24] In considering the Intact question – "who can the lessor … sue to enforce the car rental contract" – Penny J. looked for what he described as the true "counterparty" to the rental contract: at para. 15. In doing so, Penny J. looked beyond the four corners of the contract to factors that would indicate whether the employee was acting as an agent of her employer when she signed the rental agreement. Based on the facts before him, Penny J. concluded that the employee signed the agreement as a mere "authorized representative" of her employer: Lloyds, at para. 18. The employer being the true "counterparty" to the agreement, Penny J. declared that the employer's insurer was the first loss insurer.

(c) The Test for Determining Who Is the "Lessee"

[25] The appellant says that Lloyds was correctly decided and the application judge should have applied the reasoning from Lloyds to this case by looking beyond the actual rental agreement to determine the identity of the lessee.

[26] The respondent counters that Intact was correctly decided and applied by the application judge when he refused to consider factors beyond the four corners of the rental contract in determining the identity of the lessee. In support of that argument, the respondent contends that car rental agreements are contracts of adhesion which should be interpreted without regard to the circumstances surrounding their formation, absent ambiguity: Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co., 2016 SCC 37, [2016] 2 S.C.R. 23, at paras. 27-32. The respondent maintains that there is no ambiguity on the face of the rental agreement in this case and that the application judge was right to focus upon who signed that agreement.

[27] I do not agree with the parties that the judgments in Intact and Lloyds stand in conflict, one with the other. Although stated somewhat differently, at their core, both decisions correctly focus upon identifying the lessee by determining the identities of the actual contracting parties. Importantly, the parties to a contract are not always those who sign it. Determining the identity of the "lessee" for the purposes of s. 277(1.1) may require courts to apply agency principles where the face of the agreement and the surrounding circumstances show that one of the signatories was signing on behalf of another person. As G.H.L. Fridman explains in his text, The Law of Contract in Canada, 6th ed (Toronto: Thomson Reuters, 2011) at p. 192:

Under the law of agency, a principal may contract with another party through an agent. In such circumstances, even though the contract is negotiated between the agent and the third party (and may even be signed by the agent, not the principal), the contract which comes about is held to be between the principal and the third party, not the agent and the third party …. [Ordinarily,] the principal, on whose behalf the agent contracts, is the one entitled to take the benefit of the contract so negotiated, as well as being the one liable in the event of default. [Emphasis added.]

[28] In Intact, there was no indication that the employer had authorized the employee to contract with the rental agency on its behalf. Not so in Lloyds. In essence, the application judge in Lloyds concluded that the employer had given its employee authority to deal with the rental car company on its behalf: Hav-A-Kar Leasing Ltd. v. Vekselshtein, 2012 ONCA 826, at para. 42. In those kinds of situations, ones raising relationships of agency, I agree with Penny J.'s observation, at para. 18, that:

I do not think the fact that [the employee] signed the rental contract is necessarily evidence that she was the lessee. This is because corporations like [the employer] are legal fictions. While [the employer] could enter into a contract it could not sign a contract other than through an authorized representative. [The employee] was that authorized representative. [Emphasis added.]

[29] Although the contracting parties will typically be identified by ascertaining the identities of the signatories to a rental agreement, in those situations where a relationship of agency is raised, like in Lloyds, it may be necessary to go beyond the four corners of a rental agreement to understand the identities of the actual contracting parties.

(d) The Decision Below

[30] In my view, it was an error of law to simply rely upon the face of the two-page rental agreement to determine the lessee status in this case. By doing so, the application judge failed to grapple with the fact that Mr. Mahamood was acting as Fine Furnishings' agent when he rented the truck. Mr. Mehta impliedly authorized him to do so by telling him that he could rent a vehicle from New Horizons and have that vehicle billed to the credit card on file for Fine Furnishings. New Horizons was aware of this grant of authority and dealt with Mr. Mahamood on that basis.

[31] Mr. Mahamood's evidence was that:

a. Fine Furnishings instructed him to rent vehicles from New Horizons for the purposes of completing Fine Furnishings' deliveries;

b. Fine Furnishings did not permit him to use the rental vehicles for any purpose other than making deliveries to its customers;

c. Fine Furnishings paid for the cost of fuelling the rental vehicles;

d. Mr. Mahamood never paid New Horizons directly for the rental vehicles, as they were always billed to the credit card on file for Fine Furnishings; and

e. when he called to reserve the rental vehicle for October 29, 2010, Mr. Mahamood told New Horizons that he would be picking it up on behalf of Fine Furnishings.

[32] The evidence also shows that Mr. Mahamood entered into the rental agreement pursuant to a longstanding arrangement between Fine Furnishings and New Horizons. The car rental agency says that it was contracting with Fine Furnishings and not Mr. Mahamood, as evidenced by their decision not to enforce the contract against Mr. Mahamood.

[33] Moreover, the Fine Furnishings' phone number was the contact number on the face of the rental agreement. As well, the rental agreement contains an "R.A." number that is the same number that appears on a document with the corporate account number assigned to Fine Furnishings. Under this account, New Horizons had recorded Fine Furnishings' address and phone number, as well as a credit card number that belonged to the owner of Fine Furnishings, Mr. Mehta. Mr. Mehta acknowledges that he "authorized New Horizons to keep [his] personal credit card on file for independent contractors to use in the event that they did not have their own credit card." He paid for car rentals from New Horizons with some regularity. And while Mr. Mehta maintains that he would always deduct the cost of the truck rental from the amount he paid Mr. Mahamood for the furniture deliveries, it is agreed that his credit card was billed for Mr. Mahamood's rentals.

[34] These factors all point toward the fact that Mr. Mahamood entered into the rental agreement as an authorized representative of Fine Furnishings. On this basis, I conclude that Fine Furnishings was the lessee.

(2) Did the Application Judge Err by Determining that Aviva Was the First Loss Insurer?

[35] On appeal, Aviva also argued in the alternative that Wawanesa should have been declared the first loss insurer even if Mr. Mahamood was found to be the lessee. Aviva contends that Mr. Mahamood was acting as Fine Furnishings' employee at the time of the accident, which Aviva says would have entitled him to indemnity under the Wawanesa policy. Wawanesa counters that Mr. Mahamood was an independent contractor at the time of the accident and, even if he was Fine Furnishings' employee, the Wawanesa policy did not necessarily provide coverage relating to his alleged negligence. Importantly, we have not been provided with the Wawanesa policy.

[36] Bearing in mind the credibility assessments that would be required to determine whether Mr. Mahamood was acting as an employee or an independent contractor at the time that the vehicle was leased, the application judge understandably declined to determine that factual issue and left it for determination on the main action. In light of my conclusion that Fine Furnishings was the lessee, it is unnecessary to determine Mr. Mahamood's employment status. I would simply say this: priority under s. 277(1.1) can only be determined after determining the identity of the lessee, driver and owner, and the sources of insurance available to each. In other words, priority depends upon whether there is a right to indemnity under the policy and who has that right to indemnity.

[37] For that very reason, despite my finding that Fine Furnishings was the lessee, I would decline the appellant's request to make a declaration that Wawanesa is the priority insurer. During oral submissions there was some dispute about the content of that policy and its reach. As we have not been provided with the Wawanesa policy, we are not in a position to determine the issue of priority, particularly where there remains some dispute about the extent of coverage.

[38] I also note that the initial application did not ask for a declaration of priority. Rather, it asked for a declaration as to the identity of the lessee and a declaration as to whether Mr. Mahamood was acting as an employee or independent contractor at the time of the lease. As for the latter issue, I agree with the application judge that, if the issue remains important, it will have to be determined in the main action. Alternatively, the employee/independent contractor issue could be determined by way of trial of an issue if considered advisable and if all necessary parties agree to be bound by the result.

E. CONCLUSION

[39] I would allow the appeal and make a declaration that Fine Furnishings was the lessee.

[40] On consent, I would vacate the costs order from below, except to the following extent. The costs made payable to Mr. Liu as the intervenor in the original action are not vacated. He did not appear in this court and we heard no submissions as to those costs. Accordingly, that costs order remains in place.

[41] In accordance with their agreement, the respondent will pay the appellant $20,000 in costs for the appeal, inclusive of G.S.T. and disbursements.

Released: September 10, 2019

"K.F." (Fairburn J.A.)

"I agree. K. Feldman J.A."

"I agree. David M. Paciocco J.A."