Action Auto Leasing v. Boulding et al, 2011 ONSC 7253
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
Action Auto Leasing & Gallery Inc. Plaintiff (Appellant)
– and –
Charles Boulding; Nancy Ferreira Defendants (Respondents)
David S. Swift, for the Plaintiff (Appellant)
Self-represented Defendants (Respondents)
HEARD: December 5, 2011
THE HONOURABLE MR. JUSTICE P.B. HAMBLY
REASONS FOR JUDGMENT
Introduction
1This is an appeal by the plaintiff from a judgment dated May 5, 2010 of the Small Claims Court in Cambridge, Ontario, in which the trial judge awarded damages to the plaintiff of $2,347.25. The plaintiff called one witness, namely, Anne Trewartha. She was in its litigation and collections department. She was familiar with the transactions between the plaintiff and the defendants and the documents supporting those transactions. The defendants did not testify. The parties were self-represented at trial. At the appeal, the plaintiff was represented by a lawyer. The defendants did not appear and they filed no material on the appeal. The plaintiff raised several grounds of appeal. I will only analyze its central ground of appeal which was whether clause 14 in the plaintiff’s standard form lease is a penalty clause and hence unenforceable or a genuine pre-estimate of damages in the event of default by the lessee.
The Facts
2The defendants leased a 2001 Taurus from the plaintiff on August 13, 2003, which was to run until September 30, 2006. The payments on the lease were $92.50 per week. In June 2005, the defendants turned in the Taurus to the plaintiff. They leased a 2002 Ford Explorer from the plaintiff on June 14, 2005. The lease was to run until July 31, 2009. The payments were $125 per week. Interest on late payments was specified to be 18%.
3The lease for the Ford Explorer was the same standard form lease as the plaintiff used in the lease of the Taurus to the defendants. It provided in the “default” clause 14 that, subject to adjustments, if the defendants defaulted on the lease and turned the car back to the plaintiff the present value using a discount rate of 5% of the remaining lease payments, plus the residual value of the vehicle, less the wholesale value of the vehicle became owing. The wholesale value of the vehicle was defined to be the amount received at an auction, the Canadian Red Book value or the reasonably determined wholesale value.
4The amount owing applying the “early termination – purchase of vehicle” clause 13 of the Taurus lease was $9,341.50. This was the amount, subject to adjustments, of the present value of the lease payments owing plus the residual value of the vehicle. The plaintiff sold the Taurus at an auction for $5,100 minus a seller fee of $165.00. It, therefore, suffered a “loss” of about $4,300, which the defendants would have owed the plaintiff if clause 14 of the Taurus lease applied. This was described in the proceedings as a “deficiency”. The plaintiff added this amount to the amount on which it would otherwise have based the lease payments for the Ford Explorer. If the defendants had defaulted on the lease and surrendered the Taurus to the plaintiff they would have been liable to the plaintiff in this amount.
5The defendants terminated the lease for the Ford Explorer and turned the car back to the plaintiff on January 15, 2007. The amount to which the plaintiff was entitled under the “default” clause 14 of the Ford Explorer lease was $19,548. In determining this amount, the plaintiff used the wholesale value as determined by the Red Book in the amount of $7,949.86. On February 13, 2007 the plaintiff re-leased the Ford Explorer based on its having a value of $13,005. The difference between the effective sale price of the Ford Explorer and the wholesale price is $5,155.38. The plaintiff claimed the difference between $19,548 and $7,849.96 against the defendants. This amount with adjustments is $12,302.63. The plaintiff made a written demand to the defendants for this amount by letter dated March 16, 2007. The plaintiff claimed against the defendants the full amount of the jurisdiction of the Small Claims Court which is $10,000 and abandoned the excess.
The Trial Judgment
6The trial judge stated the following:
26 I find that clause 14 is a true penalty clause. It is premised on an amount becoming payable to the lessor premised on giving credit to the lessee for only the lowest realizable value for the vehicle, namely the wholesale value. All future payments under the lease become payable in full, subject only to discounting for present value. The calculation applies regardless of what proportion of the lease term has elapsed prior to default. The lessor effectively arrogates to itself a power to dispose of the vehicle by whatever means it may choose, while giving only the minimum credit to the lessee. To quote from part of clause 14 (Exhibit 5, Tab 2, page 5):
For greater certainty, the subsequent sale or lease by Action to a retail customer shall have no relevance in determining the Vehicle Wholesale Value of the Vehicle which value is limited to being determined as outlined above.
27 I am unable to accept that clause 14 involves a genuine pre-estimate of damages. It effectively fixes the amount payable at an inflated amount by giving credit for only the smallest amount attainable for subsequent disposition of the vehicle by the lessor. As in Peachtree, supra, the specific amount payable under the stipulated remedy clause could vary over the life of the agreement (see para. 11).
28 It may be that if clause 14 had attempted a realistic estimate of some mid-point between various potential means of disposition of a recovered vehicle, that could be viewed as a pre-estimate of damages. But here, what clause 14 does is to impose what is in substance a fine, which is tied to the highest possible damage and not the actual damage, anticipated as of the date of contract, in the event of default. I find that clause to be extravagant and unconscionable. I find that clause 14 is a penalty clause, which would be unenforceable on grounds of public policy by virtue of the common law rule.
30 In effect, clause 14 is designed to have the effect, and in fact had the effect in this case, of maximizing the amount of money charged by Action Auto Leasing and Gallery Inc. to lessees who can least afford to pay such monies. Clearly this contract language is designed to make for the plaintiff significant profits in the event of default, to an extent that departs entirely from any notion of compensation and amounts to a kind of profiteering that more than justifies the intervention of equitable principles.
31 I am satisfied the clause 14 is penal in nature and that it would be unconscionable for the plaintiff to recover the full amount it claims. Assuming for the sake of argument that there is a residual discretion to enforce a penalty clause at common law, I would decline to do so for the reasons just stated.
7The trial judge held that the defendants were entitled to a credit of $4,300 from the Taurus transaction, which he reduced to $2800, plus $5,155.38 from the Ford Explorer transaction, plus a security deposit of $2,000 which the defendants had made on the Taurus for which they had not been given credit for a total amount of $9,955.38.1 The difference between $12,302.63 and $9,955.38 is $2,347.25. The trial judge gave judgment to the plaintiff in this amount. He made no award of costs or of pretrial or post judgment interest.
Analysis
8In Dunlop Pneumatic Tyre Co. v. New Garage and Motor Co. [1915] A.C. 79 the House of Lords in the judgment of Lord Dunedin defined the factors for a court to apply in determining if a clause in a contract defining the consequences of a breach of the contract was a penalty clause as follows, at pages 86-87:
Though the parties to a contract who use the words “penalty” or “liquidated damages” may prima facie be supposed to mean what they say, yet the expression used is not conclusive. The Court must find out whether the payment stipulated is in truth a penalty or liquidated damages. This doctrine may be said to be found passim in nearly every case.
The essence of a penalty is a payment of money stipulated as in terrorem of the offending party; the essence of liquidated damages is a genuine covenanted pre-estimate of damage (Clydebank Engineering and Shipbuilding Co. v. Don Jose Ramos Yzquierdo y Castaneda (1) ).
The question whether a sum stipulated is penalty or liquidated damages is a question of construction to be decided upon the terms and inherent circumstances of each particular contract, judged of as at the time of the making of the contract not as at the time of the breach (Public Works Commissioner v. Hills (1) and Webster v. Bosanquet (2) ).
To assist this task of construction various tests have been suggested, which if applicable to the case under consideration may prove helpful, or even conclusive. Such are:
(a) It will be held to be penalty if the sum stipulated for is extravagant and unconscionable in amount in comparison with the greatest loss that could conceivably be proved to have followed from the breach. (Illustration given by Lord Halsbury in Clydebank Case. (3) )
9I respectively disagree with the trial judge that clause 14 of the plaintiff’s standard lease agreement for a motor vehicle does not provide a genuine pre-estimate of damages to the plaintiff when a lessee defaults under the agreement. The trial judge referred to 869163 Ontario Ltd. v. Torrey Springs II Association Ltd. Partnership (2005), 76 O.R. (3d) 362. This is a decision of the Court of Appeal which dismissed an appeal from a judge who had upheld an arbitration award. The issue in the case was whether a clause in the contract which provided for a forfeiture of promissory notes following a breach of the contract was a penalty clause. The Court of Appeal in the judgment of Justice Sharpe held that it was not. He approved the reasoning of the trial judge who held that “…it has not been established that the clause in question was extravagant, extortionate, unconscionable or unreasonable ...” (para. 16.) Justice Sharpe also set out the following principle:
As I have already noted, in Elsley, supra, Dickson J. labeled the penalty clause doctrine as "a blatant interference with freedom of contract" a sentiment echoed by the English Court of Appeal in Else. The arguments favouring the enforcement of stipulated remedy clauses on this score are recognized by Fridman, The Law of Contract in Canada, 4th ed. (Toronto: Carswell, 1999) at 817 and are especially well put by Waddams, supra, at para. 8.330:
It is useful to remember that the jurisdiction to strike down penalty clauses represents an exception to a general principle of freedom of contract. The force of the general principle should not be underestimated. There are strong arguments for enabling parties to set their own value on performance. The power to do so gives flexibility to the contracting process; it enables the promisor to offer an assurance of performance while limiting liability for consequential damages and thereby making the cost of breach predictable. It enables the promisee to avoid the cost of securing compensation by litigation and the risks of undercompensation that may be caused by the legal restrictions on damages, such as remoteness, certainty of proof, mitigation, and failure to recognize intangible losses; it reduces the cost to the parties and to the state of settling a dispute after breach; it enables the promisee to purchase insurance against default from the party in the best position to provide it at the lowest cost. A further point is that the striking down of the clause may represent an injustice to the promisee for the price of performance will have been agreed in the light of all the promisor's obligations, including the promise to pay an agreed sum on breach; if that promise is struck down, the promisee does not receive what has been paid for. (Footnote omitted.)
10In this case, when the plaintiff was unable to sell the Taurus for an amount equal to the amount resulting from the formula in the default clause 14 of the lease, it added the difference to the price of the Ford Explorer. It was on this price that the lease payments were calculated. The defendants would have been liable to the plaintiff under the lease agreement for the amount that the plaintiff added to the Ford Explorer lease. It was able to sell the Ford Explorer for an amount that substantially exceeded its wholesale value as determined by the Red Book. The trial judge refused to give the plaintiff damages calculated in accordance with the “default” clause 14 for the lease of the Ford Explorer. He held that it was a penalty clause.
11What the trial judge failed to take into account is that the plaintiff in retailing a motor vehicle has expenses – maintenance of a lot on which the vehicle is displayed, carrying costs of the vehicle prior to its ultimate sale, maintenance of an office to service the lot and the vehicles on it, payment of a salespersons to market the vehicle and the like. (see paras. 35 and 36 of the decision of Shaughnessy J. in Scarborotown Chrysler v. Shark, 2007 CarswellOnt 4085). In my view clause 14 of the plaintiff’s standard form lease for a motor vehicle provides a fair pre- estimate of the plaintiff’s damages in the event of default by a lessee.
Result
12The plaintiff shall have judgment against the defendants in the amount of $10,000 plus prejudgment interest at 18% from April 16, 2007 (30 days after the demand letter of March 16, 2007) to the date of this judgment plus post judgment interest from the date of this judgment at the rate prescribed by the Rules of Civil Procedure. The judgment may be issued without approval as to form by the defendants.
Costs
13Counsel for the plaintiff filed a bill of costs in which it sought $18,773.70, including disbursements and HST. He said that he would be content with half this amount in the sum of $9,300. The plaintiff provided a helpful factum and case brief. Counsel for the plaintiff in his oral submissions was fully conversant with the relevant cases and their application to the facts. The matter was of some complexity. The outcome was important to the plaintiff because it dealt with the validity of clause 14 of its standard form lease agreement for motor vehicles. Applying the principles of proportionality and reasonableness and the factors in Rule 57.01, I fix costs as requested by the plaintiff to be paid by the defendants in the amount of $9,300.
P. B. HAMBLY J.
Released: December 9, 2011
CITATION: Action Auto Leasing v. Boulding et al, 2011 ONSC 7253
COURT FILE NO.: DC-4-10
DATE: 2011-12-09
ONTARIO
SUPERIOR COURT OF JUSTICE
B E T W E E N:
Action Auto Leasing & Gallery Inc. Plaintiff (Appellant)
– and –
Charles Boulding; Nancy Ferreira Defendants (Respondents)
REASONS FOR JUDGMENT
P.B. Hambly J.
Released: December 9, 2011