David Burridge v. Richard Hardy, 2018 ONSC 202

CITATION: Burridge v. Hardy, 2018 ONSC 202

COURT FILE NO.: DC 1921/17 (Sarnia)

DATE: 20180109

ONTARIO

SUPERIOR COURT OF JUSTICE

DIVISIONAL COURT

BETWEEN:

David Burridge

Plaintiff (Respondent in Appeal)

– and –

Richard Hardy

Defendant (Appellant in Appeal)

Sean Flaherty, for the Plaintiff (Respondent in Appeal)

Jonathan de Vries, for the Defendant (Appellant in Appeal)

HEARD: July 12, 2017

On appeal from the judgment of Deputy Judge Westfall of the Sarnia Small Claims Court dated June 15, 2016.

reasons on appeal

Verbeem J.:

[1] This appeal raises issues concerning the interpretation and application of the exception to the statutory prohibition against an insured’s “right of action against a person under an agreement, other than a contract of automobile insurance, in respect of damages to the insured’s automobile or its contents or loss of use,” as prescribed by s. 263(5)(a.1) of the Insurance Act, R.S.O. 1990, c I.8, as amended (“the Act”). The primary issue is whether a right of action in bailment, premised on a gratuitous bailee’s failure to return a bailed automobile to its owner (qua bailor) in an undamaged condition, constitutes “a right of action against a person under an agreement” for the purpose of s. 263(5)(a.1) of the Act. For the reasons that follow, I conclude that it does. As a result, I am persuaded that the trial judge did not err in law or mixed fact and law, either in allowing the plaintiff’s action on the basis that his right of action in bailment was not prohibited by the provisions of s. 263 of the Act, or in finding that the defendant breached the terms of the parties’ bailment agreement. I will explain.

A. Background

[2] By judgment dated June 15, 2016 Small Claims Court Deputy Judge B.P. Westfall, awarded damages in the amount of $25,000, together with costs in the amount of $6,000, in favour of the respondent (plaintiff) David Burridge against the appellant (defendant) Richard Hardy on account of property damage occasioned to a pick-up truck owned by Burridge, during a collision with another automobile on May 16 (or early May 17), 2009. Hardy was operating the pick-up truck with Burridge’s permission. The parties agree that Hardy was completely at fault for the incident.

[3] The collision occurred in Ontario and both the Burridge vehicle and the other vehicle involved were respectively, insured under contracts evidenced by motor vehicle liability policies issued by insurers licenced to undertake automobile insurance in Ontario.

[4] Apart from the physical damage to the Burridge vehicle, Hardy’s passenger (his wife) and the occupants of the other vehicle suffered bodily injuries as a result of the collision. Hardy was correspondingly charged with and ultimately, convicted of impaired driving causing bodily harm, pursuant to the provisions of the Criminal Code, R.S.C. 1985, c. C-46.

[5] Burridge’s vehicle was damaged beyond repair. His insurer, State Farm Insurance Companies (“State Farm”) settled his property damage claim under optional “collision” coverage provided under his policy with State Farm (in accordance with section 7 of the Standard Ontario Automobile Policy (“OAP 1”)), for an amount in excess of $25,000. State Farm then commenced a subrogated action against Hardy for recovery of the amount it paid to Burridge, waiving any amount in excess of the monetary jurisdiction of the Small Claims Court ($25,000).

[6] Hardy defended the action, in part, on the basis that the “Direct Compensation – Property Damage” scheme prescribed by s. 263 of the Act precludes any right of action by Burridge against him for damages to the insured pick-up truck and therefore, there was no right of action to which State Farm could subrogate.

[7] Through Burridge, State Farm asserted that the manner by which Hardy obtained possession of Burridge’s vehicle prior to the loss, constituted “an agreement” and as a result, pursuant to s. 263(5)(a.1) of the Act, it was entitled to assert Burridge’s “right of action” against Hardy “under the agreement,” in respect of damages to the pick-up truck, to the extent that Hardy was at fault or negligent in respect of those damages.

[8] The trial judge accepted State Farm/Burridge’s position. Among other things, he found that a bailment relationship existed between Hardy and Burridge. He concluded that the circumstances in which Burridge delivered possession of the vehicle to Hardy impliedly obligated Hardy to return the vehicle to Burridge “basically in the same condition that it was loaned.” He found that the parties had “an understanding” that Burridge would loan the vehicle to Hardy and in return, Hardy would take care of it and return it to Burridge. He found that between them, there were implied terms that: Hardy would not damage the vehicle; that he would take good care of it; and he would return it to Burridge when he was done.

[9] The trial judge also determined that State Farm’s subrogated claim against Hardy was not prohibited by s. 263 of the Act because it was founded in its assertion of Burridge’s right of action under a “bailment contract”. Since the parties had agreed, among other things, that Hardy was “100% at fault for the accident”, the trial judge allowed the claim and awarded damages against Hardy in the amount of $25,000.

B. The Asserted Grounds for Appeal

[10] Hardy challenges the trial judge’s interpretation and application of s. 263(5)(a.1) of the Act and his findings with respect to the implied terms between Hardy and Burridge concerning Hardy’s possession of Burridge’s truck. The appellant asserts that the trial judge erred in law, in his interpretation of s. 263(5)(a.1) of the Act, because he adopted a definition of “an agreement in respect of damages” (which the appellant says is a requisite element of that subsection’s operation) that is overly broad and inconsistent with the judicially recognized purpose of s. 263 of the Act, which is designed to eliminate all rights of action in tort, whether by individuals or their insurers for property damage arising out of collisions between insured automobiles in Ontario. In so doing, the trial judge further erred by equating a “gratuitous bailment” of the pick-up truck with “a contractual relationship” between Burridge and Hardy that amounted to an “agreement with respect to damages”, for the purpose of s. 263(5)(a.1) of the Act.

[11] Finally, the appellant asserts that the trial judge erred by implying terms to the gratuitous bailment between the parties that did not exist and had been expressly repudiated by the parties, in their respective evidence.

[12] Prior to determining the issues on this appeal, I will review the provisions of the “Direct Compensation – Property Damage” regime, which generally governs the rights of insurers and insureds in respect of property damage sustained in collisions between two or more insured automobiles in the Province of Ontario. I will then summarize the evidence before the trial judge that is relevant to the issues raised by the appellant on this appeal, together with the relevant portions of the trial judge’s reasons for judgment. I will then review the parties’ respective positions, and the legal principles applicable thereto, followed by my reasons for disposition.

C. The Provisions of the “Direct Compensation – Property Damage” Regime Prescribed by s. 263 of the Act

[13] For more than 20 years property damage claims arising from the collision of two or more insured automobiles in Ontario have been subject to the provisions of a statutory regime known as “Direct Compensation,” the provisions of which are prescribed by s. 263 of the Act. Provided the statutory conditions set out in s. 263(1) of the Act (set out below) are met, s. 263’s provisions ostensibly operate to extinguish “any right of action” by persons insured pursuant to a contract of automobile insurance against “any person involved in the incident,” other than the insured’s insurer, “for damages to the insured’s automobile or its contents or, for loss of use of the automobile (“loss of use”),” except in the limited circumstances that are described in s. 263(5)(a.1) of the Act. The exception applies when the insured asserts a valid right of action “under an agreement,” against a person involved in the incident, but only to the extent that the person against whom it is asserted is at fault or negligent for the property damage or loss of use.

[14] The relevant provisions of s. 263 of the Act, for the purpose of this appeal follow:

Accidents involving two or more insured automobiles

263(1) This section applies if,

(a) an automobile or its contents, or both, suffers damage arising directly or indirectly from the use or operation in Ontario of one or more other automobiles;

(b) the automobile that suffers the damage or in respect of which the contents suffer damage is insured under a contract evidenced by a motor vehicle liability policy issued by an insurer that is licensed to undertake automobile insurance in Ontario or that has filed with the Superintendent, in the form provided by the Superintendent, an undertaking to be bound by this section; and

(c) at least one other automobile involved in the accident is insured under a contract evidenced by a motor vehicle liability policy issued by an insurer that is licensed to undertake automobile insurance in Ontario or that has filed with the Superintendent, in the form provided by the Superintendent, an undertaking to be bound by this section.

Exempt automobiles, undertaking to be bound

(1.1) This section applies, with necessary modifications, in respect of an automobile the owner, operator or lessee of which is exempt from the requirement to be insured under the Compulsory Automobile Insurance Act, if the organization that is financially responsible for the damages resulting from the accident involving the automobile files with the Superintendent an undertaking to be bound by this section.

Damage recovery from insured’s insurer

(2) If this section applies, an insured is entitled to recover for the damages to the insured’s automobile and its contents and for loss of use from the insured’s insurer under the coverage described in subsection 239 (1) as though the insured were a third party.

Fault-based recovery

(3) Recovery under subsection (2) shall be based on the degree of fault of the insurer’s insured as determined under the fault determination rules.

Dispute resolution

(4) An insured may bring an action against the insurer if the insured is not satisfied that the degree of fault established under the fault determination rules accurately reflects the actual degree of fault or the insured is not satisfied with a proposed settlement and the matters in issue shall be determined in accordance with the ordinary rules of law.

Restrictions on other recovery

(5) If this section applies,

(a) an insured has no right of action against any person involved in the incident other than the insured’s insurer for damages to the insured’s automobile or its contents or for loss of use;

(a.1) an insured has no right of action against a person under an agreement, other than a contract of automobile insurance, in respect of damages to the insured’s automobile or its contents or loss of use, except to the extent that the person is at fault or negligent in respect of those damages or that loss;

(b) an insurer, except as permitted by the regulations, has no right of indemnification from or subrogation against any person for payments made to its insured under this section.

[reproduction of ss. (5.1) – (5.3) omitted]

Other coverages not affected

(6) This section does not affect an insured’s right to recover in respect of any physical damage coverage in respect of the insured automobile.

[reproduction of ss. (7) – (10) omitted]

[15] The direct compensation regime replaced a “tort and subrogation for property damage” regime pursuant to which property damage actions were routinely commenced by one insurance company against another, in the names of their respective insureds. Section 263 of the Act was enacted with the intent of significantly limiting such claims (pursuant to s. 263(5)(b) of the Act, sections 6–8 of reg. 664, R.R.O. 1990, as amended, provide for very limited circumstances in which an insurer is entitled to indemnification from an at-fault party, despite the criteria of s. 263(1) of the Act being met).

[16] In McCourt Cartage Ltd. (c.o.b. Laser Transport) v. Fleming Estate (Litigation Administrator of), 1997 12297, 35 O.R. (3d) 795 (Gen. Div.), at p. 798 (cited to O.R.), Sharpe J. (as he then was) summarized the mechanics of the “tort and subrogation” regime that applied before the enactment of s. 263 of the Act, together with the intended effect of that section, as follows:

Before the enactment of s. 263, the common law tort regime applied to property damage claims. The result was that where an insured had purchased collision damage cover, and where the accident was caused at least in part by the fault of another driver, two insurers became involved. The insured would claim against his own insurer under the collision coverage, and that insurer would assert a subrogated claim against the insurer of the other driver to the extent of the other driver’s fault. The intended effect of s. 263 was to remove the insured’s right to sue for property damage and to confer the right to claim such losses not caused by the fault of the insured against one’s own insurer. In the words of Somers J. in 583809 Ontario Ltd. v. Kay, 1995 7080 (ON SC), 24 O.R. (3d) 445 at p. 499, [1995] O.J. No. 1626 (Gen. Div.), the section was intended

. . .to bring to an end claims which were really made by one insurance company against another in the names of their respective insureds strictly for the property damage that had occurred in an accident.

[17] The manner in which the direct compensation regime operates was concisely described by Juriansz J.A. in Clarendon National Insurance v. Candow, 2007 ONCA 680, 87 O.R. (3d) 728, at paras. 7–11:

[7] Section 263 of the Insurance Act replaced the tort system that resolved automobile damage claims prior to its enactment. In the new statutory scheme, insureds can no longer sue the tortfeasor driver whose negligence has caused damage to their cars. Rather, their own liability insurer pays for the damage, to the extent that they were not at fault, under the third party liability section of their motor vehicle liability policies. Insureds can recover the at-fault portion of their damage by purchasing collision coverage. Insurers have no right of subrogation for payments to their own insureds, but, on the other hand, do not have to pay the subrogated claims previously brought by other insurers in the tort system. The result is that the statutory regime eliminates the transactions costs that were inherent in the tort system.

[8] Section 263 is the heart of the regime. The section applies when three criteria are met.

[reproduction of the provisions of s. 263(1) of the Act omitted]

[9] When the section applies, s. 263(2) provides that the insured is entitled to recover property damage from his or her own insurer:

[reproduction of s. 263(3) of the Act omitted]

[10] Key to the regime is the insured’s inability to recover property damage from anyone other than his or her own insurer, except in the very limited circumstances described in s. 263(5) (a.1):

(5) If this section applies,

(a) an insured has no right of action against any person involved in the incident other than the insured’s insurer for damages to the insured’s automobile or its contents or for loss of use;

(a.1) an insured has no right of action against a person under an agreement, other than a contract of automobile insurance, in respect of damages to the insured’s automobile or its contents or loss of use, except to the extent that the person is at fault or negligent in respect of those damages or that loss.

[11] In addition, s. 263(5)(b) prevents insurers from advancing subrogated claims for payments they have made to their insureds:

(b) an insurer, except as permitted by the regulations, has no right of indemnification from or subrogation against any person for payments made to its insured under this section.

[18] The mechanics of s. 263(5)(a.1) are notable. At first instance, the section prohibits “any right of action by an insured under an agreement,” in respect of damages to the insured’s automobile or contents or loss of use. It then provides for a limited exception to the prohibition that it otherwise prescribes against an insured’s right of action under an agreement, to the extent the other person is at fault or negligent.

[19] As set out above, subject to the specific circumstances prescribed by regulation, s. 263(5)(b) prohibits an insurer’s right of indemnification from, or subrogation against, any person for payments made to its insured, but the prohibition is not absolute. Section 263(5)(b) only eliminates an insured’s right of indemnification from, or subrogation against, any person for payments it makes to its insured under s. 263 of the Act, (i.e. the direct compensation regime). Where the insurer makes payments to its insured in respect of property damage to an automobile described in the subject policy of motor vehicle liability insurance under a form of insurance coverage other than “direct compensation,” the insurer retains any right of indemnification from, or subrogation against, any person that it otherwise has pursuant to s. 278(1) of the Act and the common law: see Lange v. 882819 Ontario Ltd. (c.o.b. Morrice Trans Ltd.), 2006 51175 (ON SC), 2006 51195, 85 O.R. (3d) 395 (S.C.).

[20] Section 278(1) of the Act provides:

An insurer who makes any payment or assumes liability therefor under a contract is subrogated to all rights of recovery of the insured against any person and may bring action in the name of the insured to enforce those rights.

[21] In accordance with the foregoing, the parties agree that s. 263(5)(b) of the Act does not apply in the circumstances of this proceeding because State Farm’s payment to Burridge for property damage to his pick-up truck was not made pursuant to s. 263 of the Act (direct compensation). Instead, it was made pursuant to optional collision coverage provided by State Farm to Burridge in accordance with section 7 of the OAP 1. Therefore, State Farm was not prohibited from advancing a subrogated claim, in Burridge’s name, against Hardy, to the extent that its insured, Burridge had a viable right of action against him. Whether Burridge had such a right of action, is the essence of the parties’ dispute.

[22] In that regard, the parties agree that the provisions of s. 263 of the Act preclude Burridge’s right of action in tort against Hardy, in respect of damage to the pick-up truck. Their contest lies in the correctness of the trial judge’s determination that the manner in which Hardy acquired possession of Burridge’s vehicle prior to the collision, constituted “an agreement” of the kind referred to in s. 263(5)(a.1) of the Act, thereby engaging the exception to the statutory prohibition against an insured’s right of action for property damage against any person, other than his or her own insurer, as prescribed by s. 263(5)(a) of the Act. If it does not, Burridge would not have a right of action against Hardy at all, and State Farm would have no basis upon which to subrogate.

[23] In resolving the parties’ dispute, it is helpful to review the evidence before the trial judge and the findings he made.

D. The Evidence Before the Trial Judge

[24] The evidence before the trial judge consisted, in part, of an Agreed Statement of Facts (“ASF”) and additional, viva voce evidence provided by Burridge, Hardy, and State Farm employees Chris Pajor and Wayne McLeod.

[25] The portions of the ASF that are relevant to the issues on this appeal follow (the complete ASF is set out in Schedule “A” of these reasons):

Background

1. The Plaintiff’s Claim is a subrogated claim against the Defendant, Richard Hardy, commenced by State Farm Insurance Companies (“State Farm”), for reimbursement of amounts paid by State Farm pursuant to an insurance claim made by the Plaintiff, David Burridge, with respect to the damages caused to the Plaintiff’s motor vehicle as a result of a motor vehicle accident, which occurred on May 16, 2009.

2. The Plaintiff’s Claim was issued on May 12, 2011. The Plaintiff amended the Plaintiff’s Claim on July 21, 2015. The Amended Plaintiff’s Claim added the following:

3. It was an expressed and/or implied term of the Plaintiff’s consent that the Defendant would operate the Plaintiff’s motor vehicle in a safe and prudent manner and would further operate the Plaintiff’s motor vehicle pursuant to the Highway Traffic Act, and all other applicable laws.

4. The Plaintiff states that the damages to the Plaintiff’s motor vehicle were caused as a result of the negligence and/or breach of contract of the Defendant, the particulars which are as follows:

5. The Plaintiff has waived any damages above the jurisdiction of the Small Claims Court.

6. The Plaintiff, David Burridge, resides in the City of London, Middlesex County and, at all material times, owned a 2003 Ford Pickup F150 bearing Ontario license number 805 5WB (the “Plaintiff’s motor vehicle”). At the time of the accident, the Plaintiff’s motor vehicle was insured under a policy held by State Farm Insurance Companies under Policy #1152-566-60A.

7. The Ontario Automobile Policy (OAP) is included under the policy of insurance with respect to the Plaintiff’s motor vehicle. Attached hereto at TAB “1” is a copy of the OAP that was in effect from January 1, 2007 until August 31, 2010.

8. The Defendant, Richard Hardy, resides in Alvinston, Ontario, Lambton County.

The Collision

7. On or about May 15, 2009, the Plaintiff provided his consent to the Defendant in which the Defendant was permitted to borrow and operate the Plaintiff’s motor vehicle for the weekend; being May 16 and 17, 2009, as the Defendant was attending a wedding in Tecumseh, Ontario.

8. On or about May 17, 2009 at approximately 00:05, after leaving the wedding, the Defendant was operating the Plaintiff’s motor vehicle travelling northbound on County Road 19, the nearest intersection being County Road 42 in the Municipality of Tecumseh in Essex County, when he turned left into an oncoming vehicle which was travelling southbound on County Road 19, which had the right of way (the “accident”). Attached hereto as TAB “2” is a copy of the Motor Vehicle Accident Report, Report #6E-09-00399.

9. The occupants of the other motor vehicle involved in the accident were Pak Yin Ho and Kimberly Rocheleau (the “Third Party vehicle”).

10. The Third Party vehicle was insured by Gore Mutual Insurance Company.

11. The Defendant was impaired by alcohol at the time of accident.

12. The Defendant was 100% at fault for the accident.

13. The Defendant had a valid “G” licence at the time of the accident.

14. As a result of the accident, the Defendant was charged with impaired driving, causing bodily harm under the Criminal Code of Canada. The Defendant’s driver’s licence was suspended until August 15, 2009.

15. On January 5, 2011, the Defendant was convicted of impaired driving causing bodily harm pursuant to the Criminal Code of Canada. Attached hereto as TAB “3” is a copy of the Motor Vehicle, Violation Information with respect to the conviction of the Defendant.

16. As a result of his conviction, the Defendant’s driver’s licence was suspended until January 5, 2013.

Insurance Claim

17. The Plaintiff filed an insurance claim with his insurer, State Farm.

18. On May 22, 2009, State Farm sent registered mail to its named insured, the Plaintiff, David Burridge, in which it notified David Burridge that it was reserving all of its rights under the policy of insurance, including the right to deny coverage. Attached hereto as TAB “4” is a copy of correspondence from State Farm to David Burridge, dated May 22, 2009.

19. On May 27, 2009, State Farm sent registered mail to the driver of the Plaintiff’s motor vehicle, the Defendant, Richard Harding, [sic] in which it notified Richard Hardy that it was reserving all of its rights under the policy of insurance, including the right to deny coverage. Attached hereto as TAB “5” is a copy of correspondence from State Farm to Richard Hardy, dated May 27, 2009.

20. In a coverage memorandum, dated May 27, 2009, State Farm determined that it would extend coverage for the damages to the Plaintiff’s motor vehicle to the named insured, the Plaintiff, David Burridge, and seek subrogation against the driver of the Plaintiff’s motor vehicle, the Defendant, Richard Hardy, in the event he is convicted of the criminal charges for impaired driving, or it is otherwise determined that he was unable to maintain control of the vehicle due to intoxicating substance. Attached hereto as TAB “6” is a copy of the State Farm Coverage Memorandum, dated May 16, 2009.

21. Richard Hardy was provided notice of State Farm’s intention to bring a subrogated claim against him for the damage to the Plaintiff’s motor vehicle. That notice was detailed in a State Farm “Activity Log” dated March 18, 2011 under Claim No. 60-C819-828. Attached hereto at TAB “7” is a copy of various entries from the Activity Log of the State Farm Claim File No. 60-C819-828, which documents conversations State Farm had with Richard Hardy.

22. Richard Hardy did not make an accident benefits claim with State Farm.

Damages to the Plaintiff’s motor vehicle

23. As a result of the accident, the Plaintiff’s motor vehicle was damaged beyond repair. Attached hereto as TAB “8” are copies of photographs of the damages to the Plaintiff’s motor vehicle.

24. The Plaintiff’s motor vehicle was valued at $25,940.00. Attached hereto as TAB “9” is a copy of a valuation of the Plaintiff’s motor vehicle prepared by Autosource Valuation.

25. The total loss calculation paid out for the Plaintiff’s motor vehicle was $28,581.30, which included the deductible in the amount of $500.00. Attached hereto at TAB “10” is a copy of the State Farm Subrogation Information, Balance Due Form.

26. On May 11, 2011, the Plaintiff’s Claim in this matter was issued to recoup the damages to the Plaintiff’s motor vehicle.

[reproduction of paras. 27–33 of the ASF omitted]

[26] The balance of the facts agreed to by the parties at trial relate to: the conduct of the bodily injury actions commenced against Burridge and Hardy by Hardy’s passenger and the occupants of the “Third Party vehicle” (as described in the ASF); and Hardy’s request for copies of various State Farm “claims files.”

[27] Both parties gave additional viva voce evidence at trial relating to: the circumstances of Burridge’s voluntary delivery of possession of the pick-up truck to Hardy; their respective expectations at the time Hardy acquired consensual possession of the pick-up truck; and their respective conduct after the accident.

[28] During the course of his evidence, Burridge testified that, among other things:

a) He loaned his pick-up truck to Hardy [his friend of over 40 years]: see transcript of proceedings at trial, at p. 11;

b) The day before Hardy borrowed Burridge’s truck, he asked Burridge, “Hey can I go to a wedding with your truck”? Burridge replied, “There’s the keys, go for it”. Burridge did not ask Hardy any follow-up questions. Burridge understood that Hardy wanted the truck for the weekend or “that night”. Hardy was supposed to return the truck to Burridge “whenever he was done with it”: see transcript of proceedings at trial, at p. 13;

c) Hardy did not provide Burridge with any payment or compensation when he borrowed the pick-up. Instead, Hardy was supposed to “Just leave the gas in it that was there”: see transcript of proceedings at trial, at p. 14;

d) When Hardy borrowed Burridge’s pick-up truck, Hardy left his own truck with Burridge, in case Burridge wanted to drive it. [Notably, the respondent does not suggest Hardy’s conduct in that regard constituted contractual consideration.] At the time Hardy borrowed the pick-up truck, Burridge did not turn his mind to whether he expected it to be returned to him in the same condition that it was in when Hardy took possession. Hardy had previously borrowed vehicles from Burridge, and always returned them without issue: see transcript of proceedings at trial, at pp. 15-16;

e) Similarly, Burridge did not turn his mind to whether he expected Hardy to drive the pick-up truck carefully, while he was in possession of it: see transcript of proceedings at trial, at p. 16;

f) Hardy and Burridge did not discuss “what would happen” in the event that Hardy caused damage to the pick-up, while it was in his possession. Burridge does not recall Hardy making a promise or a representation about the manner in which he would use Burridge’s pick-up truck: see transcript of proceedings at trial, at p. 16;

g) Hardy advised Burridge about the damage to the pick-up truck and the nature of the accident on the morning that it occurred: see transcript of proceedings at trial, at p. 16;

h) Burridge reported the accident and the resulting property damage occasioned to the pick-up truck, to his insurer, State Farm, on the Monday or Tuesday after the incident. Burridge does not recall receiving notification from State Farm about a potential “coverage issue” or that State Farm might pursue Hardy for damages to the truck: see transcript of proceedings at trial, at pp. 18-19;

i) When asked whether he and Hardy discussed Hardy paying for the damages to the truck, Burridge states: “Well, after he got in the accident, he says, whatever it is I’ll pay for it”: see transcript of proceedings at trial, at p. 19;

j) Hardy’s post-accident payment to Burridge for damage to the pick-up was not made at Burridge’s insistence. Instead, Hardy told Burridge he would pay him “some money for the truck” because Hardy was involved in an accident: see transcript of proceedings at trial, at p. 21;

k) Eventually, Hardy made a direct payment to Burridge on account of the physical damage to the pick-up caused by the accident. Sometime after that payment, Burridge received a cheque from his insurer, State Farm, totalling approximately $25,000, for property damage to the pick-up truck. On receipt of that cheque, Burridge contacted Hardy and said: “this ain’t my cheque because you already paid me some, so how much do you want?” Hardy told Burridge to make a cheque in the amount of $20,000 payable to his wife and Burridge did so: see transcript of proceedings at trial, at p. 20;

l) Had Burridge caused a collision resulting in damage to a vehicle owned by Hardy, Burridge would have paid for the damage: see transcript of proceedings at trial, at p. 21;

m) Burridge does not believe that there was a contract between Hardy and himself that related to Hardy’s use of the pick-up truck: see transcript of proceedings at trial, at p. 23;

n) Burridge is not certain about whether he ever advised State Farm that Hardy had paid him for property damage to the pick-up truck: see transcript of proceedings at trial, at p. 27.

[29] At the conclusion of Burridge’s evidence, the trial judge and Burridge engaged in the following exchange, which is set out at p. 26 of the transcript of proceedings at trial:

THE COURT: What was – what would be your expectation if the insurance says we’re not covering the damage to the truck?

DAVID BURRIDGE: Well Rick [Hardy] had already paid me some money. There was no expectations. If he wanted to pay me fine. If he didn’t well, hey whatever. We’re friends. I wouldn’t stop him from borrowing another truck. Friends are friends. If he wanted to pay me for it, fine, if he felt like that. That’s good. It’s no big deal as far as I’m concerned. It’s a vehicle. I know I would pay him if I had borrowed a vehicle from him and crashed it. I would definitely come forward and say okay, simple as that. That’s a fact of good friends. I still would lend him anything if he needed it.

[30] In his evidence, Hardy testified to, among other things, the following:

a) He was involved in a motor vehicle accident on May 16, 2009 while operating a vehicle owned by Burridge: see transcript of proceedings at trial, at p. 59;

b) He borrowed the vehicle from Burridge prior to the accident: see transcript of proceedings at trial, at p. 59;

c) In accordance with a discussion that he had with Burridge, Hardy understood that he was responsible for filling up the vehicle with gas before he returned it. He did not recall any other conditions associated with his use of the pick-up truck: see transcript of proceedings at trial, at p. 60;

d) He did not engage in any discussions with Burridge about his responsibility for paying for damage to the vehicle, in the event that there was an accident: see transcript of proceedings at trial, at p. 60;

e) After the accident he gave Burridge $20,000, so that Burridge could purchase another truck. The payment was Hardy’s idea. Burridge did not demand the money: see transcript of proceedings at trial, at p. 60;

f) Hardy and Burridge did not expressly discuss whether Hardy would return the pick-up truck to Burridge in the same condition that it was in when Burridge lent it to him. However, Hardy agrees that Burridge wanted him to return the pick-up truck with a full tank of gas. Hardy also agrees that it could be inferred that Burridge was expecting to get his truck back with a full tank of gas and in the same condition as it was lent to Hardy: see transcript of proceedings at trial, at p. 61;

g) Hardy understood that Burridge trusted him with the vehicle and, as a result, Hardy wanted to “take care” of it. Hardy agrees that he did not “do a good job of taking care of the truck” primarily because of the circumstances of the accident. As a result of the foregoing, Hardy felt obligated to give Burridge $20,000, so that Burridge could purchase a new truck: see transcript of proceedings at trial, at p. 62.

E. The Trial Judge’s Findings

[31] At the opening of trial, counsel for Burridge advised the court about the subrogated nature of the action and indicated that the issue before the court was, essentially, whether the value of property damage to Burridge’s vehicle ought to be indemnified by Burridge’s own insurer, State Farm, which had already paid for the damage or Hardy’s insurer (presumably, pursuant to the third party liability section of Hardy’s own policy of motor vehicle liability insurance): see transcript of proceedings at trial, at pp. 3–4.

[32] The trial judge’s reasons for judgment are set out at pp. 136–147 of the transcript of proceedings at trial. The trial judge begins his reasons at pp. 136–137, by observing that:

This is a situation where the claim being made by the plaintiff against the defendant is for the plaintiff loaning his vehicle to the defendant and the defendant getting into an accident with the vehicle and was found to have consumed alcohol in excess and pleaded guilty to that and now the question is who should be responsible to pay for the damage to the automobile.

[33] At pp. 137–138 of the transcript of the proceedings at trial, the trial judge describes the content of the ASF relating to: the defendant’s consensual possession of the plaintiff’s pick-up truck during the weekend of May 16 and 17, 2009; the nature of the motor vehicle accident; the insured status of “Third Party vehicle” involved in the accident; the defendant’s impairment at the time of the accident; Hardy’s complete fault for the accident; and Hardy’s conviction for the offence of impaired causing bodily harm.

[34] At p. 138 of the transcript of the proceedings at trial, the trial judge briefly summarizes the bodily injury actions brought against both Hardy and Burridge, as a result of the accident and then goes on to state:

[T]he only outstanding matter is the damage to the insured’s vehicle and it was in fact paid by State Farm to the plaintiff because he had insurance coverage for that and now State Farm is trying to enforce its subrogated claim against the defendant Richard Hardy and that is being defended by the defendant’s insurance company.

[35] At pp. 138–139 of the transcript of the proceedings at trial, the trial judge sets out the issues that are to be determined, framing the issue that is relevant to this appeal as: “. . .whether the subrogated claim is allowed under the Insurance Act.”

[36] There were other issues before the trial judge that are beyond the scope of this appeal, including: issues related to the sufficiency of the pleadings (particularly, whether the existence of the bailment relationship, which the plaintiff advocated at trial, had been properly plead) and whether State Farm was estopped from subrogating against Hardy because it controlled his defence of the bodily injury actions brought against him.

[37] At pp. 139–140 of the transcript of the proceedings at trial, the trial judge summarizes the evidence of Burridge and Hardy and states, in part:

The evidence of the witnesses for the plaintiff included Mr. Burridge and he was quite frank and open in his evidence saying that he was a long, long time friend of Mr. Hardy, a very good friend, and when Mr. Hardy asked if he could borrow the truck, Mr. Burridge says well there’s the keys. Basically that was about the extent of it, with the understanding from Mr. Burridge that Mr. Hardy would return it with gas in the tank. He had known Mr. Hardy for a long time, had loaned him vehicles on other occasions and never had any doubt that Mr. Hardy would not return the vehicle and that there would be any problems.

[38] Later, he states, at pp. 140–141 of the transcript of the proceedings at trial:

So the wedding happened, and the accident happened. Mr. Hardy returned to the neighbourhood and at some point Mr. Hardy provides a cheque to Mr. Burridge because Mr. Hardy didn’t want Mr. Burridge to be without a car, without a truck. So he provided an amount to Mr. Burridge. Mr. Burridge didn’t know how much it was or when, but as it turns out when the insurance company paid Mr. Burridge for his loss, he wrote a cheque for $20,000 to return the money to Mr. Hardy. So we’ll assume that Mr. Hardy wrote him a cheque for $20,000 and said that he didn’t want him walking – that he wanted him to have a vehicle. That was Mr. Hardy’s understanding of the arrangement that he had with Mr. Burridge because of a long time friendship and the use of his vehicle. It gets damaged and he felt obliged to give Mr. Burridge money, enough to buy a vehicle.

. . . In any event, you see the arrangement between good friends. Can I borrow your vehicle? Yeah, sure go ahead. There are the keys. Expecting it to be returned with gas in the tank, and from that you can imply that the vehicle would be returned basically in the same condition that it was loaned and then when it doesn’t happen, because of this accident, Mr. Hardy feels obliged to compensate Mr. Burridge for the vehicle and in fact he does so.

This to me has all the hallmarks of a bailment arrangement. I lend you my vehicle. You take care of it, give it back to me. I don’t have any doubt at all that that was the understanding between the parties and there was an implied term relating to that, that you wouldn’t damage it. You’ll take good care of it. You’ll return it to me when you’re done with it and probably, if I have to ask you for the same favour, you’ll do the same for me because we’re good friends.

So that is how I have characterized the arrangement between the two parties. [Emphasis added.]

[39] At p. 141 of the transcript of the proceedings at trial, the trial judge concludes that although “there were some problems with respect to how the matter proceeded through adjusters and litigators” he could not find “that there is enough to warrant not awarding the damage to the vehicle, in the amount claimed, against the defendant, Richard Hardy.” In that regard he states at pp. 141–142 of the transcript:

He [Hardy] borrows the vehicle, consumes too much alcohol, makes an improper driving action and the vehicle is totalled. State Farm pays all the costs related to the bodily injuries and compensates Mr. Burridge for the lost vehicle, because that was part of the insurance contract. And because of technicalities in the law, to not have Mr. Hardy own up to some liability here is problematic.

So I’m going to find at the end of the day he is responsible for the amount claimed. The plaintiff has waived any excess over the maximum jurisdiction of $25,000. But let me just talk a little bit about why I have arrived at that conclusion.

[40] At p. 142 of the transcript the trial judge recounts the defendant’s position that s. 263 of the Act prohibits State Farm’s subrogated claim in negligence. He states that the parties agreed that if the subrogated claim was based on a contract, it could proceed.

[41] At pp. 142–143 of the transcript, the trial judge accepts the plaintiff’s asserted interpretation of s. 263(5)(a.1) of the Act and found that an “agreement” for the purposes of that section includes “a bailment contract.” In doing so, he expressly relied on the reasons set out in Chapman v. Robinson (1969), 1969 1196 (AB SCTD), 71 W.W.R. 515 (Alta. D.C.), in which the court determined that the plaintiff’s delivery of car keys to her daughter resulted in a bailment of the plaintiff’s car. Despite there being no formal arrangement between the plaintiff and her daughter (other than the plaintiff’s voluntary surrender of the car keys), the court found that the plaintiff’s bailment of the vehicle to her daughter was made on the implied term that the bailee would not permit other persons to drive the vehicle. The court then found that the plaintiff’s daughter breached the terms of the bailment by permitting someone else to drive the vehicle, on several occasions.

[42] Following Chapman, the trial judge concluded, at p. 143 of the transcript of the proceedings at trial, that “there are implied terms that go with bailment.” He then concluded that on the facts before him there was a “bailment contract” between Burridge and Hardy and therefore, State Farm’s subrogated action was properly based on “a contract”: see transcript of proceedings at trial at p. 143.

[43] At pp. 143–144 of the transcript, the trial judge addresses the defendant’s submissions that: the claim said to be founded in a “bailment contract” was not sufficiently pled by the plaintiff; and the plaintiff was, in effect, attempting to assert a new cause of action in contract, after the expiration of the relevant limitation period. In that regard, the trial judge observes that that claim was originally pled in negligence and was amended some five years later to assert a contractual claim. Although the amended statement of claim did not specifically refer to “bailment,” the trial judge found that the claim, as it was originally pled, asserted all the necessary facts to support a cause of action in bailment. He further concluded that the amendment to the claim asserting contractual liability did not “add a new claim.” Instead it “used additional words, probably to point out that the exception of the Insurance Act under s. 263(5)(a.1).” His determination of that issue is not challenged on this appeal.

[44] At pp. 145–147 of the transcript, the trial judge determines issues arising out of State Farm’s concurrent control of Hardy’s defence in the context of the bodily injury actions and its prosecution of the subrogated property damage claim against him. The manner in which he determined those issues is not challenged on this appeal.

F. Positions of the Parties

(i) Position of the Appellant

[45] The appellant submits that State Farm’s purported subrogated action against Hardy is precisely the type of claim that s. 263 of the Act is designed to prohibit. Hardy borrowed an insured automobile. The vehicle was involved in an accident in Ontario with another insured automobile. Each insurer then paid for property damage to their respective insured’s automobiles. That is where the matter must end pursuant to the provisions of s. 263 of the Act, which was enacted to prevent the multitude of “insurer versus insurer” actions that permeated the litigation–sphere, under the previous “pay and subrogate” tort regime.

[46] The appellant submits that State Farm’s subrogated action at trial was founded on its unsupported assertion that there was “a legally enforceable agreement in respect of damages” between Hardy and Burridge. The trial judge erred by finding that such an agreement did, in fact, exist despite the evidence of both Hardy and Burridge denying the existence of such an agreement and despite any evidence about such an agreement or its terms. In doing so, the trial improperly equated Burridge’s consent to Hardy’s use of the pick-up, with an enforceable contract, to which he implied a term “with respect to damages” that was not supported by the evidence.

[47] Finally, the trial judge erred by interpreting the exception to the prohibition on property damage claims set out in s. 263(5)(a.1) of the Act, in an overly broad manner that is inconsistent with the purpose of the legislation and seriously undermines the effectiveness of s. 263 of the Act.

(ii) Position of the Respondent

[48] The respondent characterizes the issue in this appeal as whether “a bailment contract between friends,” regarding Hardy’s use of Burridge’s automobile warrants an exception from the application of the direct compensation regime prescribed by s. 263 of the Act.

[49] The respondent submits that the trial judge essentially found that Hardy’s use of Burridge’s pick-up truck was a bailment contract in commodatum, a gratuitous bailment which arises when a person borrows an article from another for the sole benefit of the borrower. The respondent contends that the consideration for the bailment contract was “Hardy’s use and benefit of Burridge’s truck.”

[50] The terms of the bailment contract as found by the trial judge were that: Hardy would operate the truck in a safe and prudent manner; Hardy would return the truck in the same condition that it was in when he borrowed it and with a full tank of gas; and Hardy would pay for any damages if the truck was damaged while in his possession. Hardy then operated the pick-up truck while impaired by alcohol and was involved in an accident, for which he was completely at fault. The trial judge had little difficulty concluding that Hardy had breached the terms of the bailment contract and that he was liable for damages caused to the truck as a result of his breach.

[51] The trial judge appropriately concluded that the arrangement between Hardy and Burridge fell within s. 263(5)(a.1) of the Insurance Act and that State Farm was not barred from maintaining a subrogated action against Hardy for the damages to Burridge’s vehicle, pursuant to their bailment contract.

[52] The respondent submits that the trial judge’s interpretation and application of s. 263(5)(a.1) of the Act is consistent with appellate authority concerning the exceptions to the direct compensation regime under s. 263 of the Act. The trial judge made no errors of law or fact and the appeal ought to be dismissed with costs.

G. Standard of Review

[53] The principles guiding the standard of review for appeals of judicial decisions are set out by the Supreme Court in Housen v. Nikolaisen, 2002 SCC 33, [2002] 2 S.C.R. 235, at paras. 8, 10 and 36. Specifically, questions of law are reviewed on a standard of “correctness.” Questions of fact or mixed fact and law are reviewed on a standard of “palpable and overriding error,” unless they involve an extricable question of law. The identification of the legal principles applicable to the determination of an issue is an extricable question of law. However, the application of the law to the facts as found, is a question of mixed fact and law: see Housen, at paras. 27 and 31.

[54] With respect to the standard of review applicable to questions of fact or mixed fact and law, a palpable error is one that is obvious, plain to see, or clear. Examples of such an error include: findings made in the complete absence of evidence; findings made in conflict with accepted evidence; findings based on a misapprehension of the evidence; and findings of fact drawn from primary evidence that are the result of speculation rather than inference: see Housen, at paras. 6 and 23; Waxman v. Waxman, 2004 39040 at para. 296, 186 O.A.C. 201.

[55] An error is overriding when it carries with it sufficient significance so as to vitiate the challenged finding of fact. Where the challenged finding of fact is based on a constellation of findings, the conclusion that one or more of those findings is founded on a palpable error does not automatically render the error an “overriding” one. To be “overriding,” the error must go to the root of the challenged finding of fact, such that the fact cannot safely stand in the face of that error: see Schwartz v. Canada, 1996 217 (SCC), [1996] 1 S.C.R. 254, at paras. 34–35.

[56] With the applicable standards of review in mind, I turn to a consideration of the issues raised by the appellant.

H. Disposition

[57] Below, I will determine the appellant’s asserted grounds for appeal through the disposition of two broad questions:

(i) Did the trial judge err in his interpretation and application of s. 263(5)(a.1) of the Act?; and

(ii) Did the trial judge err in his determination of the terms of the parties’ bailment agreement?

(i) Did the trial judge err in law in his interpretation of s. 263(5)(a.1) of the Act?

[58] To dispose of the question above I will first identify the legal principles applicable to the operation of s. 263(5)(a.1) of the Act in the context of a gratuitous bailment of an automobile. I will then apply those principles to the circumstances disclosed by the evidence before the trial judge.

I The Applicable Legal Principles

[59] The parties agree that the trial judge correctly characterized the nature of the relationship between the plaintiff and the defendant as one of bailment. They dispute whether a voluntary gratuitous bailment in general, and the circumstances surrounding the bailment of Burridge’s pick-up truck in particular, are sufficient to constitute “an agreement” for the purpose of s. 263(5)(a.1) of the Act.

[60] In that regard the appellant asserts that the trial judge erred by equating the parties’ voluntary gratuitous bailment relationship with “an agreement in respect of damages”, which the appellant submits is a necessary pre-requisite to the application of s. 263(5)(a.1) of the Act, and the exception set out therein. The appellant submits that the requisite “agreement in respect of damages,” as he identifies it, is comprised of two essential elements.

[61] First, he says the evidence must establish the existence of “an agreement” between the party purporting to assert the right of action and the party against whom the right of action is asserted. The term “agreement” is not defined in the Act. The appellant submits that, at law, “an agreement” means a contract supported by valuable consideration and enforceable at law: see Goldsack v. Shore, [1950] 1 K.B. 708, at p. 713 (C.A.). The appellant correctly observes that the term “contract” was not available to the Legislature when drafting s. 263(5)(a.1) because pursuant to s. 224(1) of the Act, it has a specified meaning (generally, “a contract of automobile insurance”) for the purpose of Part VI of the Insurance Act, which applies to automobile insurance.

[62] Second, the appellant contends that the evidence must establish that the agreement, as found, is one “in respect of damages”. The appellant submits that “damages,” should be construed as the compensation or indemnity awarded to a person injured by the actions of another person: see Brockton (Municipality) v. Frank Cowan Co., [2000] O.J. No. 4455, at para. 78 (S.C.).

[63] The appellant, therefore, says that before the provisions of s. 263(5)(a.1) can be found to apply in any particular circumstances, there must be a legally enforceable contract for valuable consideration between the parties, in respect of compensation or indemnity payable to one of the parties to the contract who has been injured by the actions of another party through damage to the party’s automobile or its contents or loss of use. Absent such a contract, an insured has no right of action against any person involved in an incident, in circumstances that otherwise meet the criteria set out in s. 263(1) of the Act.

[64] The appellant posits that the gratuitous bailment relationship created when a person loans her automobile to another does not, without something more, constitute such a contract. Relying on Duet Marketing Corp. v. Spetifore, 1986 909, 32 B.L.R. 148 (S.C.), the appellant submits that a right of action in bailment is distinct from a right of action in contract or in tort. Duet Marketing involved what was ultimately determined to be an involuntary bailment. In describing the nature of bailment, Southin J. states, at para. 7 (cited to):

No useful purpose would be served by my attempting to understand all the judicial and academic differences of opinion upon what a bailment is. Suffice it to say that I accept that an action for breach of bailment is sui generis, i.e., neither an action in contract (although a bailment may arise from a contract) nor an action in tort (although the facts in any given case may give rise to both an action for breach of bailment and an action in tort).

[65] Following that approach, the appellant posits that a right of action in bailment is not synonymous with a right of action in contract and therefore, it does not constitute a right of action under “an agreement in respect of damages” for the purpose of s. 263(5)(a.1) of the Act.

[66] Finally, the appellant correctly observes that it is an accepted principle of statutory interpretation that validly enacted legislation is paramount over the common law. As a result, courts are bound to give effect to the purpose and meaning of legislation regardless of its impact on the common law: see R. Sullivan, Sullivan on the Construction of Statutes, 6th ed (Toronto: LexisNexis Canada, 2014), at pp. 538–8. Mindful of that principle, the appellant contends that the provisions of both the Act and the OAP 1 utilize the word “consent” instead of the word “bailment” to express the concept of an automobile’s owner/insured voluntarily permitting another to use or operate the insured’s automobile.

[67] For example, s. 239 of the Act generally provides that every contract evidenced by an “owners policy” insures the person named therein and any other person who with the named person’s consent drives or is an occupant of a vehicle owned by the insured named in the contract against liability imposed by law upon the insured named in the contract or that other person for loss of damage: arising from the ownership or directly or indirectly from the use or operation of any such automobile; and resulting from bodily injury to or the death of any person and damage to property.

[68] The appellant submits that the Legislature’s resort to the language of “consent” in order to refer to the “gratuitous bailment” of an automobile informs the nature and scope of the exception set out in s. 263(5)(a.1). Section 263(5)(a.1) does not include an express reference to “agreements” arising from an insured owner’s consent to a third party’s use of an insured automobile and there is nothing in s. 263(5)(a.1) that suggests that mere consent is sufficient to constitute an “agreement in respect of damages.” Had the Legislature intended to include a gratuitous bailment of the insured’s automobile as “an agreement in respect of damages” for the purpose of s. 263(5)(a.1) it could have (and would have) done so through clear and unequivocal language expressed in terms of “consent.” Instead, the Legislature chose not to include provisions related to consent in s. 263(5)(a.1), and in doing so it expressed its intent that gratuitous bailments do not fall within the scope of that section.

[69] For the foregoing reasons, the appellant submits that the trial judge erred, in law, in concluding that a gratuitous bailment of an insured’s automobile by the insured constitutes an “agreement in respect of damages” for the purpose of s. 263(5)(a.1) of the Act and finding that the exception to the general prohibition on Burridge’s ability to maintain a right of action against Hardy (as a person involved in the incident) for damages to Burridge’s automobile applied. I do not agree. Below, I will explain my conclusion with reference to the various propositions put forth by the appellant.

1. Is the application of s. 263(5)(a.1) of the Act contingent on the existence of an agreement in respect of damages?

[70] At the outset, to be clear, I do not share the trial judge’s apparent view that the gratuitous bailment of an automobile, in itself, results in a contract between the bailor and the bailee as the term is understood, at law. However, it is clear that the trial judge determined the action on the basis of Hardy’s breach of his obligations as a bailee. In that regard, I do not find that the trial judge erred in concluding that a bailor’s right of action founded in a bailee’s breach of the terms of a voluntary bailment of an automobile, in circumstances where the bailee fails to return the automobile in the same condition that it was in when he took possession, constitutes a right of action “under an agreement” for the purpose of s. 263(5)(a.1) of the Act (where the criteria of s. 263(a) of the Act are otherwise met).

[71] In explaining that conclusion, I will first consider whether the operation of s. 263(5)(a.1) of the Act is contingent on the existence of an “agreement in respect of damages”[emphasis added] between the insured and the person against whom the insured’s right of action is asserted, as the appellant urges. I am not persuaded that it is. By its express terms, in circumstances that meet the criteria set out in s. 263(1) of the Act, s. 263(5)(a.1) generally prohibits “an insured’s” right of action for property damage or loss of use “under an agreement”. Section 263(5)(a.1) also prescribes the extent to which an insured retains a right of action against a person “under an agreement,” which is a function of the extent to which the other person is at fault or negligent in respect of the subject damage or loss.

[72] In my view, the phrase “in respect of damages to the insured’s automobile or its contents or loss of use” as it is used in s. 263(5)(a.1) of the Act does mandate or limit the type of agreement to which the section is intended to apply. Rather, on plain reading of the section’s language, that phrase describes the nature of the right of action that is circumscribed by the section’s application, namely “a right of action in respect of damages to the insured’s automobile or its contents or loss of use, against a person under an agreement.”

[73] The foregoing interpretation is consistent with the reasoning in Clarendon, where Juriansz J.A. observes, at para. 20, that s. 263(5)(a) of the Act prevents an insured from suing anyone other than his own insurer for damages to his car. He then states: “That general rule is subject to the exception in s. 263(5)(a.1), which permits a right of action where an action is brought under an agreement, other than a contract of automobile insurance” [emphasis in original]. There is nothing in Clarendon that suggests that the application of s. 263(5)(a.1) is limited to an insured’s assertion of a right of action under “an agreement in respect of damages.”

[74] In addition, the court, in Clarendon, accepted that the exception to the general prohibition against an insured’s right of action under an agreement set out in s. 263(5)(a.1) of the Act could be engaged in circumstances in which the provisions of a lease require the lessee to return the leased vehicle to the lessor in an undamaged state, at the end of the lease’s term. If the lessee fails to do so, the lessor is in a position to assert a right of action “under an agreement,” in accordance with s. 263(5)(a.1) of the Act (to the extent the leasee is otherwise at fault or negligent).

[75] In my view, a lease term that requires the leased vehicle to be returned to the lessor in an undamaged state is not an express “agreement in respect of damages,” rather it is an agreement that obligates the lessee to return the vehicle in a certain condition, in circumstances where a breach of that term enables the lessor to assert “a right of action in respect of damages to the insured vehicle.” In that event, the lessee is not obliged to pay damages arising from the vehicle’s damaged condition because he entered into “an agreement in respect of damages”. Rather he is obliged to do so as a remedy for the breach of his contractual obligation to return the vehicle, undamaged.

[76] Although I do not give effect to the appellant’s submission that a permissible right of action under s. 263(5)(a.1) of the Act is restricted to one brought pursuant to “an agreement in respect to damages,” the type of agreement that founds a right of action for the purpose of s. 263(5)(a.1) is not boundless.

[77] Specifically, the agreement under which the insured asserts a right of action must be of a kind that entitles the insured to a remedy in damages from another party to the agreement, in the event of physical damage to the insured’s automobile or its contents or loss of use, whether as a primary obligation (such as a tortfeasor’s post-accident promise to pay the insured an amount on account of such damage or loss, in exchange for the insured’s promise not to claim from his or her own insurer) or in circumstances that remedially entitle the insured party to “damages” on account of such damage to the insured automobile or its contents or loss of use, as a consequence of another party’s breach of an obligation imposed upon him by the terms of the agreement (such as the lessee’s failure to return the vehicle in an undamaged state to the lessor at the end of the lease). The parties may enter into such an agreement before the incident that results in damage to the vehicle (such as a lease) or after the incident (such as the tortfeasor’s promise to pay for the damage).

[78] In arriving at the foregoing conclusion I am mindful of the reasoning of Deputy Judge Kilian in McClinton v. Estien, [2003] O.J. No. 5680 (Sm. Cl. Ct.), at para. 19, in which the court determined that the purpose of s. 263(5)(a.1) of the Act was not merely to qualify and quantify the claim an insured can make against his own insurer. Instead, it acts as a limited exception to s. 263(5)’s prohibition of a right of action between two insureds, where the following two conditions are met:

1. There must be an agreement for the damage, content and loss of use; and

2. The agreement must be between the plaintiff and the person at fault or negligent (emphasis added).

[79] I am also mindful that the court’s reasoning in McClinton was cited with approval by this court in Hafeez v. Sunaric, 2015 ONSC 4065, at paras. 20–30.

[80] Respectfully, in my view, the pre-conditions to s. 263(5)(a.1)’s application as identified in McClinton, apply to the specific type of agreement at issue in that case, which was made after a motor vehicle collision, between the at-fault driver and the innocent motorist whose vehicle was damaged in the collision. The at-fault driver agreed to pay for the cost of repair to the innocent driver’s vehicle in exchange for the other driver not reporting the accident to her own insurer (thus, preventing a negative impact on the at-fault driver’s premiums). When the at-fault driver failed to pay for the repairs as promised, the court concluded that the innocent party was entitled to maintain an action against him, in contract, pursuant to s. 263(5)(a.1) of the Act.

[81] The types of “agreement” that may fall within the scope of s. 263(5)(a.1) of the Act are broader than those that are made post-accident between the involved parties for payment on account of damage to a vehicle arising from that accident. McClinton did not concern the type of agreement for which a cause of action may be asserted under s. 263(5)(a.1) that is made between the parties before the subject automobile or its contents sustains physical damage. As illustrated by the “lease” example in Clarendon, such an agreement is not necessarily required to be “for the damage, content or loss of use,” in order for it to qualify as “an agreement” for the purpose of s. 263(5)(a.1).

[82] As a result of the foregoing, I conclude that as it is used in s. 263(5)(a.1), the phrase “in respect of damages to the insured’s automobile or its contents or loss of use” describes the nature of the right of action referred to in that section. It is not a qualification limiting the nature of the agreement to which s. 263(5)(a.1) of the Act may apply.

[83] I now turn to consider whether a bailor’s right of action arising from a bailee’s breach of the terms of the gratuitous bailment of an automobile, constitutes a right of action “under an agreement” for the purpose of s. 263(5)(a.1) of the Act. In order to determine that issue, consideration must first be lent to the nature of such a bailment relationship, at law.

2. Is an insured’s right of action in bailment absolutely prohibited by the provisions of s. 263 of the Act?

[84] A bailment concerns the delivery of personal property by one person, the bailor, to another, the bailee, who holds the bailed property for a certain purpose. A bailment relationship usually, but not always, arises from the voluntary delivery of possession of the subject personal property by the bailor to the bailee.

[85] In Punch v. Savoy’s Jewellers Ltd., 1986 2759, 54 O.R. (2d) 383 (C.A.), the nature of bailment was described at pp. 388–89 as follows:

It may be helpful to first consider the nature of bailment and the duty of bailees. Bailment has been defined as the delivery of personal chattels on trust, usually on a contract, express or implied, that the trust shall be executed and the chattels be delivered in either their original or an altered form as soon as the time for which they were bailed has elapsed. It is to be noted that the legal relationship of bailor and bailee can exist independently of a contract. It is created by the voluntary taking into custody of goods, which are the property of another. Such is the situation in cases of sub-bailment. See Halsbury’s 4th ed., Vol. 2, p. 689, para. 1501.

In Morris v. C.W. Martin & Sons Ltd., [1965] 2 All E.R. 725, Lord Denning M.R. confirmed that when goods are damaged or lost while in the possession of a bailee, the bailee must prove either that he took appropriate care of them or that his failure to do so did not contribute to the loss. If the goods are lost or damaged while they are in possession of the bailee, the burden is on the bailee to show that the damage occurred without any neglect, default or misconduct on the part of himself or any of his servants to whom he delegated a duty. The escape liability, he must demonstrate that the loss was without any fault on his part or the part of his servants. Only if he satisfies the owner that he took due care to employ trustworthy servants and that he and his servants exercised all diligence will he be excused from liability.

[86] In Lawton v. Dartmouth Moving and Storage Ltd., 1975 1155, 21 N.S.R. (2d) 605, (S.C. (T.D.)), at para. 13, the court cited with approval, the following definition of bailment taken from Paton on Bailment in the Common Law (London: Stevens & Sons Ltd., 1952), at pp. 4–5:

. . .any person is to be considered as a bailee who otherwise than as a servant either receives possession of a thing from another or consents to receive or hold possession of a thing for another upon an undertaking with the other person either to keep and return or deliver to him the specific thing or to (convey and) apply the specific thing according to the directions antecedent or future of the other person.

[87] In Coggs v. Bernard (1703), 2 Ld. Raym. 909, at pp. 912–13, 92 E.R. 107, at p. 109, Holt C.J. identified six distinct forms of bailment, which may be summarized as follows:

1. Depositum – a bare bailment of goods, delivered by one individual to another to keep for the use of the bailor;

2. Commodatum – when goods are loaned gratis by the bailor to the bailee for the latter’s use, where the goods are to be restored in specie to the bailor;

3. Locatio et conductor – when goods are left with the bailee to be used for him for hire;

4. Vadium – where goods are delivered to another as security for money borrowed by the bailor from the bailee;

5. where goods are delivered to the bailee, who is to do something to or with the goods for reward to be paid by the bailor; and

6. where goods are delivered to the bailee who is to carry them or do something with them without any reward for such carriage or work.

[88] A bailment relationship combines elements of tort and contract (see Punch at para. 29), however a right of action in bailment remains sui generis (see Duet Marketing, at para. 16). In circumstances where the bailee is unable to return the subject property to the bailor in the same condition as he received it, the bailor’s right of action against the bailee for breach of the bailment remains distinct from any right of action in tort. In certain circumstances, the bailor may enjoy concurrent rights of action against the bailee in tort and bailment, respectively: see Chapman, at para. 11 and Duet Marketing, at para. 16. Similarly, although a bailment relationship can arise from a contract, such a relationship may also arise in the absence of a contract: see Duet Marketing, at para. 16.

[89] The specific type of bailment relationship that exists in any particular circumstances, informs the level of care required of the bailee while the bailor’s personal property is in his or her possession. In circumstances of a gratuitous bailment, the liability of the bailee is stringent. While the bailee is using the bailed property in accordance with the terms of the bailment, he must exercise the utmost degree of care in regard to the property. Generally, to escape liability in circumstances where the bailed property is lost, destroyed or injured to an extent that the bailee is unable return the property to the bailor in the state in which he or she received it, a gratuitous bailee carries the onus to prove that he was not guilty of even slight negligence: see Riverdale Garage Ltd. v. Barrett Bros., 1930 400 (ON CA), [1930] 4 D.L.R. 429 (on at 1930 400), 65 O.L.R. 616 (C.A.), at pp. 430 and 432; Jenkins v. Smith, 1969 867, 6 D.L.R. (3d) 309, at pp. 319–20. However, if the bailee breaches the terms of the bailment he or she becomes the insurer of the bailed property irrespective of negligence: see Chapman, at para. 11.

[90] With the legal principles applicable to a gratuitous bailment identified, I turn to consider whether the provisions of s. 263 of the Act deprive a gratuitous bailor of a right of action in bailment.

[91] In Clarendon, the Court of Appeal unequivocally concludes that the provision of s. 263 of the Act prohibit all tort actions for recovery of property damage against a negligent party. The prohibition applies to both claims of individuals and to subrogated actions by insurers: see Clarendon, at paras. 1, 20 and 26. The court further determines that s. 263(5)(a.1) of the Act provides for a limited exception which “permits an action in contract and does not permit an action in tort”: see Clarendon, at para. 21. A right of action in bailment does not fit neatly within that dichotomy since it is neither a right of action in contract nor a right of action in tort. Recognizing its distinctiveness, the issue remains whether a right of action arising from a bailee’s breach of the terms of a gratuitous bailment is absolutely prohibited by the provisions of s. 263 of the Act, in circumstances that meet the criteria set out in s. 263(1) of the Act.

[92] Despite the patently unequivocal prohibition against all rights of action for property damage to an insured’s automobile that is set out in s. 263(5)(a) of the Act, that section has previously been interpreted as a prohibition against an insured’s right of action in tort, and not as a universal prohibition of all manner of rights of action that may arise as a consequence of physical damage to an automobile or its contents (or loss of use), in circumstances that otherwise meet the criteria set out in s. 263(1) of the Act. In other words, the applicability of the prohibition set out in s. 263(5)(a) of the Act has been found to be, in part, dependent on the nature of the right of action that is asserted by the insured, as informed by the relationship between the parties.

[93] For example, in 583809 Ontario Ltd. v. Kay, 1995 7080 (ON SC), [1995] O.J. No. 1626, 24 O.R. (3d) 445 (Gen. Div.), which was decided before the enactment of s. 263(5)(a.1) of the Act, the defendant, Kay, leased an automobile from the plaintiff pursuant to a written lease agreement with a number of pre-printed terms, including the following: “customers shall be liable for all collision damage to the vehicle by striking overhead objects and is responsible for all damages and insurance” [the italicized portion was hand-written]. The defendant signed the lease agreement. While the vehicle was in the defendant’s possession, it was involved in a collision with another motor vehicle and sustained damage estimated in an amount in excess of $10,000.

[94] The plaintiff commenced an action on the lease, framed in contract, for compensation for the damage to the leased vehicle. In response, the defendant advanced two positions: (1) the action was commenced after the expiration of the two-year limitation period prescribed by the Highway Traffic Act, R.S.O. 1990 C. H.8, as amended; and (2) the claim was barred pursuant to the provisions of s. 263 of the Act.

[95] In disposing of the first issue, the court determined that the two year limitation period prescribed by the Highway Traffic Act did not apply. The action was brought by the plaintiff in its capacity as a lessor, pursuant to the provisions of the lease. The two-year limitation period relied upon by the defendant applied to “proceedings against a person for the recovery of damages occasioned by a motor vehicle.” The court reasoned that although the damage to the leased vehicle was “occasioned by a motor vehicle, ‘the damages being sought in [the] action were [not]’”: see 583809 Ontario Ltd., at para. 9. Instead, the damages sought resulted from the defendant’s failure to return the vehicle to the plaintiff in an undamaged state and defendant’s failure to compensate the plaintiff for the damages to the car.

[96] In determining the second issue, the court accepted the defendant’s position that generally, the provisions of s. 263 of the Act applied because the circumstances met the criteria set out in s. 263(1) of the Act. Despite s. 263’s application, the court rejected the defendant’s submission that regardless of the capacity in which the plaintiff brought its action, the plaintiff was still “an insured” (within the meaning of the Act) and as a result of the plain wording of s. 263(5)(a), it had no right of action against the defendant, (who was a person involved in the incident), for property damage to the plaintiff’s “insured vehicle.” Instead, the court found that s. 263(5)(a) of the Act did not deprive the plaintiff of its right to bring a contractual action against the defendant.

[97] The court observed that that s. 263(5)(a) of the Act was: “one of a group designed by the Legislature to bring an end to claims which were really made by one insurance company against another in the name of their respective [insured’s] strictly for property damage that had occurred in an accident”: see 583809 Ontario Ltd., at para. 16. That was not the nature of the plaintiff’s purported contractual action. The plaintiff brought the action not as an “insured,” but as a “contracting party” and the owner of a vehicle that was damaged while under lease to and in the care of the defendant.

[98] The court was not persuaded that s. 263 was designed to deprive a right of action to the owner of a vehicle from bringing a claim for damages to the vehicle pursuant to its contractual rights. Instead, it found that s. 263(5)(a) was designed to prevent the owner from bringing an action in negligence against the party who did damage to the vehicle. In applying the statutory interpretive principle “that where the intended purpose of an Act is to restrict or remove a right that existed prior to it being passed, it should say so in clear and unambiguous terms,” the court reasoned that if it was the Legislature’s intent to deprive a contracting party of its right to claim that to which it is entitled under the terms of the contract, it would have said so and it did not. In the result, the court determined that plaintiff’s action was not barred by s. 263(5)(a) of the Act.

[99] In my view, the result in 583809 Ontario Ltd. assists in determining the effect of s. 263(5)(a.1) of the Act. Since its enactment, the decided cases have consistently held that s. 263(5)(a.1) operates as an exception to the general prohibition against an insured’s right of action as set out in s. 263(5)(a): see Clarendon, at para. 20; Hafeez, at paras. 20-24. However, the result in 583809 Ontario Ltd. establishes that despite s. 263(5)(a)’s broad prohibiting language and even prior to the enactment of s. 263(5) (a.1) of the Act, an insured person retained the right to bring an action in contract, against a person involved in the incident, for damage to an insured automobile (or its contents or loss of use) sustained in a collision with another vehicle, in circumstances where the criteria set out in s. 263(1) are otherwise met. The enactment of s. 263(5)(a.1) was, therefore, unnecessary in order to specifically create “a contractual right of action exception” to the application of s. 263(5)(a) of the Act, as a right of action of that nature was found to be undisturbed by the provisions of s. 263(5)(a) of the Act.

[100] It may be that s. 263(5)(a.1) was enacted, in part, to codify the result in 583809 Ontario Ltd., but it remains the section is not limited to that effect in its application. By its terms, s. 263(5)(a.1) deprives an insured of any right of action under an agreement, as it relates to damage to the insured’s automobile or its contents or loss of use, but only to the extent to which the party against whom the right of action under the agreement is not at fault or negligent in respect of those damages or that loss. In that sense, s. 263(5)(a.1) of the Act circumscribes the extent of an insured’s contractual right of action that was found to be otherwise unaffected by the provisions of s. 263(5)(a) in 583809 Ontario Limited.

[101] In my view, the same approach adopted by the court in 583809 Ontario Ltd. in determining that an insured’s contractual right of action is not extinguished by the operation of s. 263(5)(a) of the Act, applies in determining whether a right of action in bailment is prohibited by s. 263(5)(a). Based on the reasoning in 583809 Ontario Ltd., I conclude that in circumstances that meet the criteria set out in s. 263(1) of the Act, s. 253(5)(a) of the Act does not prohibit an insured’s right of action in bailment as against a bailee for damages to the insured’s automobile, when the bailee fails to return the automobile to the bailor/owner in the same condition that it was in when the bailee took possession of it. I will explain.

[102] In circumstances where the criteria of s. 263(1) of the Act are otherwise met, s. 263(5)(a) of the Act operates as a restrictive statutory provision that deprives an insured of a right of action against any person involved in an incident in which the insured’s automobile is damaged, to recover for such damage. Where the intended purpose of an Act is to remove a right that existed prior to it being passed, as is the case with s. 263(5)(a) of the Act, the Legislature must express that intent in clear and unambiguous terms: see 583809 Ontario Ltd., at para. 17. The purpose of s. 263 of the Act is to prevent owners from bringing claims framed in tort, for recovery on account of property damage to an automobile in circumstances where the criteria of s. 263(1) are met: see 583809 Ontario Ltd., at para. 17; and Clarendon, at para. 1. A right of action in bailment is separate and distinct from a tortious action founded in negligence. The deprivation of such a right of action appears to be outside the scope of the “tort prohibiting” purpose of s. 263 of the Act, as it has consistently been found in the decided cases. Had the Legislature intended to circumscribe a bailor’s right of action against a bailee for a breach of the bailment founded in the bailee’s failure to return the automobile in the same condition that it was in when the bailee took possession, it would have said so. It did not.

[103] Therefore, following the reasoning in 583809 Ontario Ltd., I am not persuaded that s. 263(5)(a) of the Act deprives a bailor/insured of a right of action in bailment, in circumstances where the criteria set out in s. 263(1) of the Act are met. Nonetheless, for the reasons set out below, I am satisfied that the voluntary bailment (including a gratuitous bailment) of an automobile constitutes “an agreement” for the purpose of s. 263(5)(a.1) of the Act and accordingly, a right of action in bailment is subject to the limitation set out in that section. In the result, an insured qua bailor is deprived of a right of action under the bailment agreement, in respect of damage to her automobile or its contents or loss of use, except to the extent that the bailee is at fault or negligent in respect of those damages or that loss.

[104] In arriving at the conclusion stated above, I am mindful that the decided cases have consistently referred to s. 263(5)(a.1) as recognizing a “contractual right of action,” or an “exception for contracts”: see Clarendon, at para. 20; and Hafeez, at paras. 20-24. However, the relevant jurisprudence has, for the most part, developed in circumstances in which it was only necessary to draw a distinction between a right of action in tort (prohibited by s. 263(5)(a) of the Act) and a right of action in contract (exempted from prohibition, to some extent, by s. 263(5)(a.1) of the Act). Generally, in those cases it was unnecessary to determine or even consider precisely where the legally distinct “right of action in bailment,” fits within that dichotomy. That issue essentially turns on whether a gratuitous bailment constitutes “an agreement” for the purpose of s. 263(5)(a.1) of the Act.

[105] In that regard, I was not directed to any decided authority that expressly recognizes the voluntary gratuitous bailment of an automobile as “an agreement” for the purpose of s. 263(5)(a.1) of the Act. Similarly, with the exception of a single decision of the Ontario Small Claims Court, which I will address later in these reasons, I was not directed to any decided authority that expressly determines that a bailor and bailee’s mutual assent to the gratuitous bailment of an automobile is not “an agreement” for the purpose of s. 263(5)(a.1) of the Act.

[106] Relying on dicta in Chapman, the respondent posits that all voluntary bailments, whether gratuitous or otherwise (including the bailment of the Burridge’s truck in this instance) are “contracts” and therefore, fall within the meaning of “agreement” for the purpose of s. 263(5)(a.1) of the Act. I do not agree. The applicable authorities clearly draw a distinction, in law, between “contract” and “bailment”. As a result, I am not persuaded that a gratuitous bailment is automatically synonymous with an enforceable contract, as the respondent urges. That does not end the matter. I do accept that in some circumstances, it is appropriate, as a matter of interpretation, to construe the word “agreement” in accordance with a legally enforceable contract, as posited by the appellant. However, consistent with its plain and ordinary meaning, I also accept that the word “agreement” is capable of being construed as the voluntary mutual assent and understanding between two or more parties with respect to their relative rights and obligations concerning a particular relationship, transaction or thing.

[107] In the context of the statutory scheme prescribed by s. 263 of the Act, I am satisfied that a voluntary gratuitous bailment of an automobile for the sole benefit of the bailee, whereby the bailor delivers possession of the automobile in exchange for the bailee’s express or implied undertaking, in law, to return the automobile to the bailor in an undamaged condition at the end of the term of the bailment, constitutes “an agreement” within the meaning of s. 263(5)(a.1) of the Act. Similar to contract and unlike tort, in order for the parties to enter and give effect to a gratuitous bailment arrangement, they must as between themselves reach an accord with respect to the terms that apply to the bailor’s delivery of possession of the automobile to the bailee. In accordance with their mutual assent, the bailor delivers possession of the automobile to the bailee, typically by providing the bailee with keys to the bailed automobile. The parties may expressly agree to terms concerning the manner in which the automobile may be used while it is in the bailee’s possession and the extent to which the bailee may deliver possession of the automobile to a sub-bailee. In the absence of the parties’ agreement to the contrary, the bailee is, by the nature of the bailment relationship, obligated to take care of the automobile while it is in his possession and to return it to the bailor, on demand or as agreed, in the same condition as he received it. In essence, in a gratuitous bailment, the bailee acquires possession of the bailor’s automobile in accordance with and subject to the parties’ agreement governing the temporary transfer of possession of the automobile.

[108] Therefore, in my view, a bailee’s breach of the terms of the parties’ bailment agreement constitutes a right of action under an agreement for the purpose of s. 263(5)(a.1) of the Act. In arriving at that conclusion, I am not persuaded that for the purpose of s. 263(5)(a.1), the word “agreement” should be given the same meaning as it was by U.K. Court of Appeal (King’s Bench Division) in Goldsack, as the appellant urges. Goldsack does not support the proposition that as a matter of law, the term “agreement” is synonymous with the term “contract”. In Goldsack, the issue before the court concerned the interpretation and application of a specific section of the Agricultural Holdings Act, 1948 (11 & 12 Geo. 6 c. 63), S. 2 and the corresponding legislative intent expressed through the word “agreement,” as it was used in that section. The court’s reasons make clear that its interpretation of the word “agreement” was a function of the specific wording of the section under consideration, when read as a whole, together with the title of the cross-heading immediately preceding the impugned section (namely, “Provisions as to Contracts of Tenancy”): see Goldsack, at p. 713. The court acknowledged that had the impugned section been worded in a more general manner, it would have been possible to construe the word “agreement” as meaning “the giving of a purely voluntary licence, without any consideration whatever, prima facie by the law revocable at will”: see Goldsack, at p. 713. In the result, Goldsack illustrates that the appropriate manner in which to interpret the word “agreement”, as it appears in any particular statutory provision, will be a function of the specific circumstances and context in which the term is to be interpreted.

[109] In this instance, the interpretation of “agreement” must be made in the context of a statutory scheme that prohibits all individual insureds and their respective insurers from pursuing actions in tort for damage to an automobile or its contents, or loss of use, against other negligent or at fault insured drivers of other automobiles, in circumstances that otherwise meet the criteria set out in s. 263(1) of the Act. The statutory scheme also recognizes that individuals may agree, as between themselves, to a set of circumstances that obliges the at-fault party to indemnify the other party for such loss or damage, even where no right of action would otherwise exist against the at-fault party because of the operation of s. 263 of the Act. The scheme permits “an insured” to assert a right of action “under such agreement”, but only to the extent that the party against whom it is asserted is at fault.

[110] In my view, recognizing a right of action founded in the bailee’s breach of a gratuitous bailment, in circumstances where the bailee fails to return the bailed automobile in the same condition as he received it, as a right of action “under an agreement” for the purpose of s. 263(5)(a.1), is consistent with that statutory scheme prescribed by s. 263. The parties enter into the bailment voluntarily and consensually through their mutual assent that the bailor delivers temporary possession of the vehicle to the bailee. Absent the parties’ express agreement to the contrary, the bailee’s obligation to return the vehicle in an undamaged condition arises from the nature of the relationship to which the parties agree and presumptively, it is the quid pro quo for the bailee gaining possession of the automobile from its owner. If the bailee does not return the vehicle to the owner in an undamaged condition, he is prima facie liable on the bailment agreement. The circumstances that result in the bailee’s inability to return the automobile to the bailor, undamaged, may give rise to a concurrent right of action by its owner in tort (for example, where the bailee’s negligence causes a collision in which the automobile is damaged). Where that is the case, then in accordance with the provisions of s. 263 of the Act, the right of action in tort is prohibited, but to the extent the bailee is at fault, the right of action in bailment is permitted.

[111] Additionally, I am persuaded that the provisions of the Direct Compensation coverage set out in section 6 of the OAP 1 support the conclusion that through its enactment of the direct compensation regime set out in s. 263 of the Act, the Legislature did not intend to deprive an owner/bailor of a right of action in bailment, in the foregoing circumstances. I will explain.

[112] Section 6 of the OAP 1 provides for direct compensation coverage, in part, as follows:

6.1 Introduction

This Section of your policy covers damage to the automobile and certain trailers not shown on the Certificate of Automobile Insurance, their equipment, contents, and loss of use of the automobile or contents caused by another person's use or operation of an automobile in Ontario.

The coverage under this Section applies only if the accident takes place in Ontario and at least one other automobile involved is insured under a motor vehicle liability policy. The policy covering the other automobile must be issued by an insurance company licensed in Ontario, or one that has filed with the Financial Services Commission of Ontario to provide this coverage.

It is called direct compensation because you will collect from us, your insurance company, even though you, or anyone else using or operating the automobile with your consent, were not entirely at fault for the accident.

6.2 What We Will Cover

We will pay the cost of damage to the automobile, its equipment, contents and for loss of use of the automobile or contents arising from an accident for which another person would have been legally responsible in the absence of section 263 of the Insurance Act (Ontario). Section 263 takes away your right to sue the other person for these losses. We will pay no more to repair or replace the automobile or property than its actual cash value at the time it was damaged, less the applicable percentage of the deductible shown on your Certificate of Automobile Insurance.

If a part needed to repair the automobile is no longer available, we will pay an amount equal to the manufacturer’s latest list price for the part.

Note: You should be aware that this coverage does not apply if the automobile is described in another motor vehicle liability policy.

We will not pay for damage to, or loss of use of, contents that are being carried for reward.

6.3 Who is Covered

In a claim for damage to the automobile, the owner of the automobile is covered for damage.

In a claim for damage to the contents of the automobile, the owner of the contents is covered for damage.

6.4 How Much We Will Pay

6.4.1 Determining Fault

The amount we pay under this Section of your policy will be determined by the degree to which you or the driver were not at fault in the accident.

Responsibility for an accident is determined by the Insurance Act (Ontario) and the Fault Determination Rules. These may find you or the driver wholly or partially responsible.

The degree of responsibility is expressed as a percentage. [Emphasis added]

[reproduction of ss. 6.4.2 – 6.7 excluded]

[113] Pursuant to s. 6.4.1 of OAP 1, the insured (owner) of an automobile is not entitled to any indemnity or payout under direct compensation coverage from her insurer, for property damage to a vehicle described in the policy (or its contents, or loss of its use) in circumstances in which a gratuitous bailee, while driving the automobile, is involved in a collision with another insured automobile, caused entirely by the bailee’s fault. If the provisions of s. 263 of the Act deprive the owner of the automobile of a right of action in bailment against the bailee in those circumstances and optional “collision” coverage provided under section 7 of the OAP 1 is not in effect, the bailor/owner would be compelled to personally bear the entire loss resulting from the damage to her automobile despite the bailee’s breach of the terms of the bailment. The owner would be left without any source of indemnity from her own insurer and without any right of action for compensation against the breaching bailee. Conversely, the breaching bailee would be completely immunized from any right of action by the bailor arising from the bailee’s failure to return the vehicle to the bailor in the same condition as it was in when he took possession of it.

[114] The foregoing result appears to be inconsistent with one of the fundamental premises of the direct compensation regime, namely that the insured recover damages from her own insurer for property damage sustained by the insured automobile in a collision with another insured automobile, to the extent that the insured is not at-fault for the accident. There are likely sound policy justifications founded in the concept of vicarious liability or otherwise, for circumscribing the owner/insured’s ability to recover directly from his own insurer in circumstances where the subject automobile sustains damage as a result of the fault of a person who drives it with the owner/insured’s consent. However, to compound the owner/insured’s inability to recover indemnity from her own insurer in those circumstances, with a statutory provision in s. 263 of the Act that deprives the owner of her common law right of action in bailment qua bailor against the breaching bailee would produce an especially harsh result, particularly considering that the nature of the impugned right of action is not tortious. Had the Legislature intended to achieve that result, it could have expressed its intention in clear and unequivocal language. For example, the Legislature could have specified in s. 263(5)(a.1) of the Act that:

An insured has no right of action against any person under an enforceable agreement made for valuable consideration, other than a contract of automobile insurance, in respect of damages to the insured’s automobile or its contents or loss of use, except to the extent that the person is at fault or negligent in respect of those damages or that loss.

It did not do so.

[115] For the foregoing reasons, I am of the view that pursuant to s. 263(5)(a.1), a right of action founded in a bailment agreement may be asserted by a bailor/owner against a bailee in circumstances that otherwise meet the criteria of s. 263(1), but only to the extent that the bailee is at fault or negligent for the damage or loss. In such a case, the bailor’s right of action is not founded in the bailee’s breach of a duty of care in tort. The bailee is, by virtue of his voluntary acceptance of possession of the bailor’s automobile, a person obliged, in law, to return the automobile to the bailor in the same condition as he received it. On a breach of that obligation, whatever the cause (i.e. regardless of whether the vehicle was damaged by fire, collision conditions or some other peril), the bailee is prima facie liable to the bailor for damages. Although a gratuitous bailee is bound to exercise the strictest care and diligence in respect of the bailed property, his liability in bailment, does not depend on the bailor’s ability to prove his or her neglect.

[116] However, s. 263(5)(a.1) of the Act limits the bailor’s right of action in bailment to the extent that the person against whom it is asserted is at fault or negligent in respect of the property damage to the bailor’s automobile or its contents or loss of use. For example, where a bailee is 50% at fault for a motor vehicle accident, s. 263(5)(a.1) prohibits the bailor from recovering 100% of the value of the property damage from the bailee. Instead, the bailor would be limited to recovery of 50% of the value of the property damage from the bailee, which is consistent with the bailee’s inability to assert a tort-based negligence claim for contribution and indemnity from the partially at-fault driver of the other insured vehicle involved in the incident (in accordance with s. 263’s prohibition against such claims). In those circumstances and subject to the applicable deductible, the bailor would also be entitled to indemnity for 50% of the value of the damage or loss from his own insurer, pursuant to the provisions of direct compensation coverage.

[117] In determining that a bailor’s right of action for a bailee’s breach of the terms of a gratuitous bailment constitutes “a right of action under an agreement” for the purpose of s. 263(5)(a.1) of the Act I have had the benefit of considering the reasoned decision of Deputy Judge J.C.F. Hunt in Keyhani v. Downsview Chrysler Toronto, [2016] O.J. No. 20 (Sm. Cl. Ct.), in which the court expressed a contrary view. In that case, the plaintiff left a near-pristine Dodge Viper automobile with a dealership for servicing. While it was in the dealership’s possession, the Viper was struck and damaged by a vehicle owned by another dealership customer and operated by a dealership mechanic. The dealership accepted responsibility for the damage to the Viper and offered to repair it, with the costs borne by its own liability insurer. The plaintiff was not satisfied with that result. He subsequently sued the dealership for the alleged diminution in value of the vehicle, secondary to the collision.

[118] The plaintiff ultimately framed his claim in bailment. The court determined that the action was barred by operation of s. 263 of the Act, concluding at para. 36:

[A]s a matter of law, the bailment argument of the plaintiff fails. As a question of fact, the bailment existed, but to frame the action and assert the claim on the basis of bailment when the true damage and civil wrong was a tort, a motor vehicle accident, renders the former derivative of the latter and subverts the legislative scheme which exists to deal with it.

[119] With respect, I do not share the view that an owner/bailor’s assertion of a right of action in bailment, in circumstances similar to those in Keyhani (or those before the trial judge in this proceeding) is equivalent to an assertion of a right of action that is derivative of a right of action in tort. Instead, the bailor/owner’s right of action in bailment is concurrent with, but independent of, his right of action in tort.

[120] The basis of liability, at first instance, in respect of a right of action in tort is the tortfeasor’s failure to act in accordance with a reasonable standard of care, where that unreasonable breach of care results in a motor vehicle collision in which the insured automobile sustains damage. The onus is on the plaintiff (owner) to prove the alleged tortfeasor’s negligence.

[121] Conversely, the basis for liability, at first instance, in respect of a right of action in bailment is bailee’s failure to return the automobile to the bailor in the same condition as he received it. That right of action arises from the nature of the parties’ consensual relationship and the corresponding obligations that their relationship imposes on the bailee and not from a proximity based duty of care, as is the case with tortious negligence.

[122] Although a bailee may escape liability by demonstrating that he exercised the requisite care mandated by and in all of the circumstances, including the type of bailment between the parties (something which does not inform the standard of care in tort), it remains that the injection of a fault-based analysis in the determination of whether an individual is liable in respect of a right of action that is otherwise distinct from tort, does not, by necessity render that cause of action derivative of and thereby subsumed within a tortious right of action. For instance, an insured’s right of action under an agreement that is framed in contract does not become one that is derivative of and subsumed within a right of action in tort because s. 263(5)(a.1) of the Act mandates a fault or negligence-based inquiry in order to determine the extent to which that right of action is allowed. There is no compelling reason to view a right of action in bailment any differently, in similar circumstances.

[123] For the foregoing reasons, the result in Keyhani does not persuade me that “a right of action under an agreement” does not include a right of action in bailment.

3. Is the overall purpose of s. 263 of the Act subverted by recognizing a “right of action in bailment” as a “right of action under an agreement” as a purpose of s. 263(5)(a.1) of the Act?

[124] Contrary to the concerns expressed by the appellant, I am not persuaded that recognizing a “right of action in bailment” as a “right of action under an agreement,” for the purpose of s. 263(5)(a.1) of the Act will subvert the overall purpose of s. 263 of the Act through the proliferation of a vast number of subrogated actions for recovery in respect of property damage to automobiles in circumstances in which the criteria prescribed by s. 263(1) of the Act otherwise exist. Instead, in those circumstances, the ability of the bailor’s insurer to subrogate to its insured’s right of action in bailment against a gratuitous bailee is extremely limited. I will explain.

[125] An insurer’s right to bring a subrogated action under both the common law and s. 278 of the Act is dependent upon the existence of a valid right of action by the insured. If the insured has no right of action then the foundation of the insurer’s right to bring a subrogated action is removed: see Clarendon, at paras. 23–24; McCourt Cartage Ltd., at p. 799.

[126] Under the Direct Compensation coverage set out in section 6 of the OAP 1, in circumstances where the criteria set out in s. 263(1) of the Act are met and the insured’s automobile is being operated by a gratuitous bailee at the time that it suffers damage, an insurer is obligated to indemnity the insured for such damage to the extent that the bailee is not at fault for the incident. The insurer has no further obligation to indemnify the insured for property damage to the automobile (or its loss of use), unless optional “collision” or “all perils” coverage in accordance with section 7 of the OAP 1, is in effect in respect of the subject automobile. Further, s. 263(5)(b) of the Act prohibits an insurer from subrogating against the bailee for any amount paid to the insured under the direct compensation coverage set out in section 6 of the OAP 1.

[127] Even in circumstances where optional collision coverage is in effect, the insurer’s ability to maintain a subrogated claim asserting its insured’s right of action in bailment against the “at-fault” bailee is exceptionally circumscribed by the provisions of section 7 of the OAP 1. In accordance with s. 7.1.1 of the OAP 1, coverage under section 7 applies “only to the extent that a claim for damage to an automobile and its equipment would not be covered under section 6, Direct Compensation – Property Damage Coverage of a motor vehicle liability policy.” Accordingly, where the criteria of s. 263(1) are met, the provisions of optional “collision” coverage under section 7 of the OAP 1 will only be engaged to the extent that the insured or a person who drives the described automobile with permission (i.e. a bailee) is at fault for the incident.

[128] Where it applies, the scope of the optional “collision” coverage available to an insured under s. 7 of the OAP is set out at s. 7.1.2 as follows:

7.1.2 Coverage Options

You may choose from among the four types of protection listed below. Your choice will be shown on the Certificate of Automobile Insurance.

Note: All of the following coverages are subject to 7.2.

. . . [reproduction of A. and B. omitted]

C. Collision or Upset - we will pay for losses caused when a described automobile is involved in a collision with another object or tips over. Object includes:

• another automobile that is attached to the automobile,

• the surface of the ground, and

• any object in or on the ground.

. . . [reproduction of D. omitted]

Coverage “C” for “collision or upset” is also included in optional “all perils” coverage available pursuant to s. 7.1.2 of the OAP 1.

[129] In circumstances where the insured has obtained optional “collision” or “all perils” coverage and subject to the applicable deductible, the insurer will, among other things, pay for damages to the insured’s automobile that are sustained in a collision with another insured automobile to the extent that the insured or the driver of the insured’s vehicle is at fault for the collision.

[130] As a result of the foregoing, in circumstances in which the insured’s automobile is being operated by gratuitous bailee and it sustains property damage in a collision with another insured automobile for which the bailee is solely at-fault, the insurer is not obligated to indemnify the insured for such damage under direct compensation coverage. If the insured does not have the benefit of optional “collision” or “all perils” coverage at the time of the loss, the insurer is not obliged to make any payment to the insured in respect of the property damage occasioned to the insured’s automobile. Conversely, if optional “collision” or “all perils” coverage is in effect at the time of the loss, the insurer is required to pay for the loss or damage to the insured’s automobile, subject to the applicable deductible. Nevertheless, the insurer will generally not be in a position to subrogate against the bailee for such payments as a result of s. 7.4.2 of the OAP 1.

[131] Pursuant to s. 7.4.2 of the OAP 1, the insurer covenants to forego its right of recovery against anyone who permissibly uses the insured’s automobile when an insured loss occurs. Therefore, notwithstanding the provisions of s. 278(1) of the Act, absent the limited exceptions that are set out in s. 7.4.2 of the OAP 1, the insurer has no ability to advance a subrogated right of action against the bailee (whether in tort, bailment, or otherwise) to recover any amount paid to or on behalf of its insured under optional “collision” or “all perils” coverage. Section 7.4.2 provides:

7.4 Additional Benefits

Whatever Loss or Damage Coverage you choose under this Section, your coverage will include the following additional benefits.

. . . or [7.4.1. omitted]

7.4.2 Foregoing Our Right to Recover

If someone else is using a described automobile with your permission when an insured loss occurs, we will pay for the resulting claim. We will also forego our right to recover the money from that person.

However, we will keep the right to recover payment:

• if the person has the automobile in connection with the business of selling, repairing, maintaining, storing, servicing or parking automobiles; or

• if the person using the automobile violates any condition of this policy, or operates it in circumstances referred to in 7.2.2.

[132] Section 7.2.2 of the OAP 1 provides:

7.2.2 Illegal Use

We won't pay for loss or damage caused in an incident:

• if you are unable to maintain proper control of the automobile because you are driving or operating the automobile while under the influence of intoxicating substances;

• if you are convicted of one of the following offenses under the Criminal Code of Canada relating to the operation, care or control of the automobile, or committed by means of an automobile, or any similar offence under any law in Canada or the United States: P causing death by criminal negligence

• causing bodily harm by criminal negligence

• dangerous operation of motor vehicles

• failure to stop at the scene of an accident

• operation of motor vehicle when impaired or with more than 80 mg of alcohol in the blood

• refusal to comply with demand for breath sample

• causing bodily harm during operation of vehicle while impaired or over 80 mg of alcohol in the blood, or

• operating a motor vehicle while disqualified from doing so;

• if you use or permit the automobile to be used in a race or speed test, or for illegal activity;

• if you drive the automobile while not authorized by law; and

• if another person, with your permission, drives or operates the automobile under any of these conditions.

[133] Thus, an insurer’s right to maintain a subrogated action against a gratuitous bailee for amounts the insurer has paid in respect of property damage to the insured’s automobile under section 7 “collision” or “all perils” coverage is restricted to circumstances in which: the bailee has possession of the insured’s automobile in connection with one of the commercial purposes set out in s. 7.4.2 of the OAP 1; the bailee violates any condition of the policy; or the bailee operates the described automobile in circumstances constituting an “Illegal Use”, as specified in s. 7.2.2 of the policy.

[134] In the context of the foregoing, I am not persuaded that recognizing an insured’s right of action, qua bailor, against a gratuitous bailee for breach of the terms of the bailment as a “right of action under an agreement” for the purposes of s. 263(5)(a.1) of the Act will generate a substantial volume of “insurer versus insurer” subrogated litigation. In situations where the criteria set out in s. 263(1) are otherwise met, the potential for such litigation will only arise when each of the following circumstances exist:

1. The bailee is partially or wholly at fault for the collision (in accordance with the fault determination rules);

2. At the time of the incident, the bailor is insured under optional “collision” or “all perils” coverage pursuant to section 7 of the OAP 1, with respect to the bailed automobile;

3. The bailee: has possession of the insured’s automobile in connection with a commercial purpose specified in s. 7.4.1 of the OAP 1; violates the terms of the policy; or uses the automobile in any of the circumstances set out in s. 7.2.2 of the OAP 1; and

4. The bailee is insured for third party liability under the provisions of a separate contract of automobile insurance, in circumstances where such coverage is available to respond to the property damage claim asserted by the subrogating insurer.

In the absence of any of the foregoing criteria, “an insurer versus insurer” subrogated action for property damage cannot result.

[135] Given the atypical circumstances set out in s. 7.2.2 of the OAP 1, in most “day to day” incidents in which a gratuitous bailee is wholly or partially at fault for a collision between the insured’s automobile and another insured automobile, the insurer will forego any potential subrogated right of recovery against the at-fault bailee in accordance with s. 7.4.2 of the OAP 1.

[136] As a result of all of the foregoing, I am not persuaded that recognizing a “right of action in bailment” as a “right of action under an agreement” for the purpose of s. 263(5)(a.1) of the Act subverts the legislative scheme enacted by s. 263 of the Act.

4. Does the Legislature’s use of the word “consent” in various sections of the Act other than s. 263, preclude an interpretive finding that a “right of action in bailment” constitutes a “right of action under an agreement” for the purpose of s. 263(5)(a.1) of the Act?

[137] Contrary to the appellant’s submission, I do not find that the provisions of ss. 239 and 244 of the Act, assist in the determination of the issues on this appeal. Section 239 of the Act operates to confer certain rights under a contract of automobile insurance to persons who, with the insured’s consent, drive or occupy a vehicle described in the policy (“unnamed insureds”) in relation to third party liability for bodily injury, death and property damage arising out of the unnamed insured’s use, operation or occupancy of that vehicle. Section 244 of the Act provides that in the circumstances to which s. 239 applies, an unnamed insured may recover indemnity in the same manner and to the same extent as if named in the contract of insurance. Unnamed insureds are deemed to be parties to the contract and to have given consideration therefore, for that purpose. Thus, these sections prescribe certain rights and obligations between unnamed insureds and insurers. They do not expressly or by implication, purport to apply to, or otherwise prescribe, define or restrict the common law rights and obligations of bailors and bailees that arise from the gratuitous bailment of an automobile.

5. Conclusion Regarding the Applicable Legal Principles

[138] For all of the reasons set out above, I am satisfied that in circumstances in which the criteria set out in s. 263(1) of the Act are otherwise met, a right of action in bailment asserted by the owner of an automobile, in her capacity as a bailor, against a gratuitous bailee, that is founded in the bailee’s failure to return the automobile in the same condition as it was in when he took possession of it constitutes “a right of action under an agreement” for the purpose of s. 263(5)(a.1) of the Act. In those circumstances the bailor’s insurer has no right of subrogation with respect to any amounts it pays to or on behalf of the insured (bailor) under s. 263 of the Act and section 6 of the OAP 1 (direct compensation) for damage to the insured’s automobile or its contents or for loss of use. If optional “collision” or optional “all perils” coverage for the insured’s (bailor’s) automobile was in effect at the time of the loss, an insurer will only be able to assert a subrogated right of recovery against the bailee for amounts it pays under that coverage, in respect of physical damage to the insured’s automobile or its equipment, in the limited circumstances described in ss. 7.4.2 and 7.2.2 of the OAP 1. In the majority of such cases, s. 7.4.2 of the OAP 1 will prohibit the insurer from subrogating against a gratuitous bailee of the insured’s vehicle.

II The Principles Applied

[139] In accordance with the foregoing principles and for the following reasons, I do not give effect to the appellant’s position that the trial judge erred in law in his interpretation and application of an insured’s “right of action under an agreement” for the purpose of s. 263(5)(a.1) of the Act, nor did he err in concluding that the insurer, State Farm, could subrogate to Burridge’s right of action against Hardy under the bailment agreement between Hardy and Burridge, in the particular circumstances of this case.

[140] There is no dispute that the provisions of s. 263(1) of the Act apply to the circumstances that were before the trial judge. The Burridge automobile suffered damage directly from the use or operation of another automobile in Ontario; the Burridge automobile was insured by a contract evidenced by a motor vehicle liability policy issued by an insurer that is licenced to undertake automobile insurance in Ontario; and the other vehicle involved in the incident was similarly insured.

[141] Hardy was operating Burridge’s automobile at the time of the accident. Hardy was in possession of the automobile as a gratuitous bailee. At law, Hardy was obliged to take care of the automobile while it was in his possession and to return it to Burridge in the same condition that it was in, when he assumed possession. Hardy’s failure to return the automobile in an undamaged state constituted a breach of his obligations qua bailee, and therefore, a breach of the bailment agreement. Burridge’s right of action arising out of Hardy’s breach of the parties’ bailment agreement constituted “a right of action under an agreement” for the purpose of s. 263(5)(a.1) of the Act.

[142] The parties agree that Hardy was completely at fault for the accident in which Burridge’s automobile was damaged. In those circumstances, Burridge’s right of action against Hardy under the bailment agreement was not limited to any extent by s. 263(5)(a.1) of the Act.

[143] Since Hardy, as the driver of the insured’s automobile, was completely at fault for the incident in which the insured’s automobile was damaged, Burridge’s insurer, State Farm, was not obligated under the direct compensation provisions of the Act and related coverage under section 6 of the OAP 1, to pay any amount in respect of the property damage to Burridge’s vehicle.

[144] Conversely, State Farm was required to pay Burridge in respect of the damage to his vehicle pursuant to the provisions of the optional collision coverage that Burridge carried, in accordance with section 7 of the OAP 1. Although the prohibition against subrogation set out in s. 263(5)(b) of the Act does not apply to such a payment because it was not made under the direct compensation scheme (i.e. s.263 of the Act), in ordinary circumstances, State Farm would still have foregone its right of recovery (on a subrogated basis) against Hardy, in accordance with the provisions of s. 7.4.2 of the OAP 1. However, since Hardy operated the vehicle in circumstances set out in s. 7.2.2 of the OAP 1 (Hardy was convicted of causing bodily harm during the operation of a vehicle while impaired), the general prohibition against an insurer’s subrogated right of recovery against a person using the insured’s automobile with the insured’s permission as set out in s. 7.4.2 of the OAP 1 was not operable in this instance.

[145] As a result of the foregoing, the trial judge did not err in law, by concluding that State Farm enjoyed a right of recovery against the bailee, Hardy, by subrogating to its insured Burridge’s right of action under an agreement, in accordance with s. 263(5)(a.1) of the Act.

(i) Did the trial judge err in his determination of the terms of the parties’ bailment agreement?

[146] For the following reasons I do not give effect to the appellant’s assertion that on the record before him, the trial judge engaged in a palpable and overriding error of mixed fact and law when arriving at his findings with respect to the terms of the parties’ bailment agreement. The trial judge correctly identified both the nature of the parties’ relationship as one of voluntary bailment and the respective rights and obligations that enured to the parties as a result of their agreement in that regard. Although he referred to the parties’ relationship as a “bailment contract,” it is clear that he determined the action on the basis of Hardy’s obligations qua bailee. In my view, there was evidence before him to support his findings in that regard.

[147] In arriving at the conclusion set out above, I have considered the appellant’s submission that Hardy and Burridge were clear in their evidence that there was never any expectation, discussion, negotiation or agreement in respect of any damage that might occur to Burridge’s pick-up while it was in Hardy’s care. The appellant submits that there was simply no express term between Hardy and Burridge, in respect of damages.

[148] Further, the appellant submits that a court may only imply a term of a contract where such a term is necessary to give business efficacy to the contract, or in circumstances where the implied term was one that was “obviously arrived at by the parties.” Even then, implied terms must be based on actual evidence. To the extent, there is evidence of a contrary intention by either party, the term may not be implied: see Venture Capital USA Inc. v. Yukon Securities Inc., 2005 15708, 75 O.R. (3d) 325, at paras. 14, 25 and 31 (C.A.).

[149] In short, the appellant submits that in the absence of an express term of the parties’ bailment agreement concerning Hardy’s obligation to pay damages, Burridge could not have a right of action against Hardy “under an agreement”, in that regard. He asserts that the trial judge erred in finding otherwise.

[150] In my view, the appellant’s position fails to recognize the obligations imposed on him, as a matter of law, in his capacity as a bailee of the respondent’s pick-up truck. I have previously set out the law that obligates a bailee to return the bailed property to the bailor in the same condition as he received it. If he fails to do so, the bailee will be liable to the bailor for the damage occasioned to the bailed property while in his possession, subject to his ability to show that the damage was caused despite his exercise of the requisite level of care over the property during the course of the bailment, as determined with reference to all of the circumstances. That obligation arises from the nature of the bailment relationship itself, without the necessity of the parties definitively expressing their mutual assent in that regard, either prior to, or at the time that possession is delivered to the bailee. That term will apply to the bailment, unless there is evidence of a mutual accord between the bailor and the bailee that the bailee is not so obliged.

[151] As the appellant observes, the evidence indicates that Hardy and Burridge did not expressly discuss the extent of Hardy’s obligation to return the bailed pick-up truck to Burridge, undamaged. Therefore, there was no evidence before the trial judge that the parties expressly agreed that Hardy would not be under such an obligation, as a term of the bailment. It was open to the trial judge to conclude, in all of the circumstances, that the nature of the bailment itself imposed that obligation on Hardy.

[152] Further, the appellant’s own evidence confirms that he understood that: he was obligated to return Burridge’s vehicle to him, with a full tank of gas and in the same condition; he had an obligation to take care of the truck while it was in his possession; and when he failed to do so he paid Burridge for the damage that he caused. In the context of the foregoing, the trial judge cannot be said to have engaged in a palpable and overriding error of mixed fact and law by failing to conclude that the parties agreed that Hardy was not so obliged.

[153] Finally, the appellant submits that the fact that Burridge returned the $20,000 payment made by Hardy, once Burridge received payment from State Farm, evidences that if the parties agreed that Hardy would pay for damages, it was only to the extent that the loss was not paid by State Farm. He contends that the trial judge erred by not finding otherwise. I do not give effect to that submission.

[154] There was no evidence before the trial judge indicating that at the time the parties entered into the bailment agreement or at the time that Burridge delivered possession of the vehicle to Hardy, they agreed that any obligation that Hardy had, in the event of his breach of the terms of the bailment agreement, was contingent on the availability of an indemnity payment from Burridge’s insurer. To the contrary, Hardy testified that he paid Burridge because he caused damage to his truck. He did not depose that he paid Burridge because he caused damage to the pick-up and Burridge’s insurer did not or would not indemnify him. There was also evidence before the trial judge that could support a finding that Hardy made the $20,000 payment to Burridge before the parties even knew whether State Farm would indemnify Burridge for the property damage to his vehicle.

[155] Given the evidence before the trial judge, it was open to him to conclude that Hardy’s obligations in bailment (and Burridge’s right of action in respect of Hardy’s breach of those obligations) were not contingent on the availability of indemnity to Burridge from State Farm. The trial judge’s judgment suggests that he was satisfied that it was not. He is entitled to deference with respect to that finding.

[156] This aspect of the appeal, therefore fails.

Final Disposition

[157] For the foregoing reasons the appeal is dismissed. In accordance with the parties’ agreement, costs are awarded to the respondent in the amount of $5,000 payable within 30 days of today’s date.

[158] I once again thank both counsel for their excellent oral and written advocacy in this matter.

Original signed “Verbeem J.”

Gregory J. Verbeem

Justice

Released: January 9, 2018

CITATION: Burridge v. Hardy, 2018 ONSC 202

ONTARIO

SUPERIOR COURT OF JUSTICE

BETWEEN:

David Burridge

Plaintiff (Respondent in Appeal)

– and –

Richard Hardy

Defendant (Appellant in Appeal)

REASONS ON APPEAL

Verbeem J.

Released: January 9, 2018