Defence & Indemnity - June 2016: II. LIABILITY ISSUES #3

by Field Law
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Both the legal/registered owner and lessor and the beneficial owner and lessor of a vehicle are vicariously liable for the lessee’s vehicular negligence but only to the liability cap for lessors

Graham (Litigation guardian of) v. Lemay, 2016 ONCA 55, per Pepall, J.A.

I. FACTS AND ISSUES

On May 18, 2006, the Plaintiff Graham was injured while a front seat passenger of a vehicle being operated by Lemay was T-boned on the passenger side by a vehicle leased to West End Tile Limited and Luciano Pietrantonio, being operated by Luciano’s son Mario Pietrantonio. It was alleged that Mario was speeding and on his cellphone at the time. The Plaintiff suffered traumatic brain injury and was left permanently disabled. Lemay carried $1,000,000 in third party auto liability coverage.

The Pietrantonio vehicle was registered to West End Tile Limited and Luciano Pietrantonio as lessees. The lessees carried $2,000,000 in third party auto liability coverage. The registered owner and lessor of the vehicle was Daimler Financial, which carried a standard lessors’ contingent auto policy and a standard excess insurance policy providing ten million dollars of coverage, extending only to the named insured Daimler Financial and which excluded coverage for any lessee or employee of a lessee. Furthermore, that coverage was available only to the extent that the lessees’ insurance was not collectable.

The Plaintiff’s damages would significantly exceed the limits of third party auto liability coverage on the two vehicles.

The beneficial owner of the Pietrantonio vehicle was the Defendant Chrysler Canada Inc. It had entered into agreements with the registered owner and lessor Daimler Financial. Specifically, Daimler Financial transferred ownership and a number of vehicles to Chrysler pursuant to a July 1, 1996 contract (1996 Gold Key Agreement).  The Agreement was structured so that Chrysler could claim tax benefits in its capacity as owner of the vehicles. The Court summarized the key terms of the Agreement (at paragraph 14):

  • Daimler Financial agreed to purchase vehicles as agent for Chrysler and to hold the related leases on behalf of and for the benefit of Chrysler in accordance with the terms of the 1996 Gold Key Agreement.
  • Daimler Financial would retain legal title to the vehicles and would be the registered lessor of the related leases as bare trustee and nominee for and on behalf of Chrysler. All indebtedness and liability due to Daimler Financial under the leases and all other benefits related to the vehicles including insurance were for the benefit of Chrysler.
  • Daimler Financial agreed to administer, for the account of Chrysler, the leases beneficially owned by Chrysler in return for which Chrysler would pay Daimler Financial a fee.
  • Chrysler’s role as beneficial owner of the vehicles and leases would not be disclosed except as required by law or by the 1996 Gold Key Agreement.
  • The terms of the 1996 Gold Key Agreement were binding on and ensured to the benefit of successors and assigns.

Daimler Financial and Chrysler also entered into a purchase and sale agreement and a bill of sale dated December 31, 2002, consistent with the 1996 Gold Key Agreement, carrying out the sales of the vehicles and leases to Chrysler. The Pietrantonio vehicle was governed by these contracts.

At the time of the accident, the lessee West End Tile Limited was co-owned by Luciano Pietrantonio and his son Mario Pietrantonio.  In November 2002, West End Tile and Mario executed a lease agreement on the Pietrantonio vehicle with the Chrysler dealership. Both Luciano and Mario submitted an application for credit with Daimler Financial. Daimler Financial approved the lease in favour of West End Tile and Luciano but did not approve Mario’s application. No reasons were provided for the rejection. Accordingly, the dealership entered into the lease only with West End Tile and Luciano as lessees. At Discovery, Luciano indicated that the reasons for the rejection of Mario as a lessee were “financial reasons.”  Daimler Financial provided the financing and was assigned the lease and title of the vehicle from the dealership. Daimler Financial became the registered owner and lessor of the vehicle.

Mario Pietrantonio was approximately 43 years of age at the time of the accident.  His driving record revealed that in 1981 (when he was 18) he had three speeding convictions, a careless driving conviction (with a license suspension) and a collision. He was found speeding again in 1985, 1991 and 1995. Also in 1995, he was found guilty of failing to properly use a seat belt. Additional collisions involving Mario occurred in 2001, 2003 and 2006, although “his driving record contains a ‘driving properly’ notation for each of those incidents.” In 2006 he was also convicted of having an inoperative or modified seat belt assembly.

The Defendants Chrysler, Daimler Financial and Capital Dodge, moved for summary dismissal of the action against them and the Plaintiffs brought a cross-application seeking summary judgment and a declaration that Mario Pietrantonio was an unnamed insured under Daimler Financial’s excess insurance policy and, further, that Chrysler and Daimler Financial were not entitled to the cap on liability for lessors pursuant to Ontario’s Insurance Act, R.S.O. c. I.8, section 267.12(1) [analogous to Alberta’s Traffic Safety Act, R.S.A. 2000, c. T-6, section 187(1)]. Chrysler argued that it was not an “owner” of the vehicle. Within the meaning of Ontario’s Highway Traffic Act, R.S.O. c. H.8, section 192(2), which provides that owners of a vehicle are vicariously liable for the vehicular negligence of drivers possessing the vehicle with consent [analogous to Alberta’s Traffic Safety Act, section 187(2)].

The motions judge found that Chrysler was an “owner” of the Pietrantonio vehicle, rejecting the argument that it was only an owner to the extent necessary to claim capital cost deductions. In any event, the motions judge held that such a restriction on ownership would not be effective. Thus, it was held that West End Tile Limited, Daimler Financial and Chrysler were vicariously liable for any vehicular negligence on the part of Mario Pietrantonio, rejecting Chrysler’s argument that it had no control or dominion over the vehicle.

The motions judge held that Chrysler and Daimler Financial were both lessors of the vehicle, and therefore were entitled to the liability cap for lessors. The motions judge found that there was no indication in the legislation of any “bifurcation for the purposes of limitation of liability between ownership and lessor ship,” such that Chrysler was a co-lessor of the vehicle. 

The motions judge also dismissed the Plaintiff’s claims against Chrysler and Daimler Financial for negligent entrustment, rejecting the suggestion that Mario Pietrantonio’s application to become a lessor was rejected because of his driving record, as opposed to his financial status. The motions judge drew the inference that Daimler Financial and Chrysler had done nothing to check on Mario’s driving record and that there was nothing in that record that should have alerted a potential lessor to any outstanding driving problems relating to Mario Pietrantonio. It was also held that any duty to inquire on the part of the potential lessors was “too remote,” since West End Tile and Luciano were the lessees, not Mario. The motions judge held that it was reasonable for Chrysler and Daimler Financial to rely on the third party insurance obtained by West End Tile and Luciano “to satisfy concerns about the competence of the eventual driver.”

The parties entered into a consent order declaring that Mario Pietrantonio was not an unnamed insured under Daimler Financial’s standard excess policy on the basis of Xu (Litigation Guardian of) v. Mitsui Sumitomo Insurance Co., 2014 ONSC 167; aff’d 2014 ONCA 805, reserving the right of the Plaintiffs to appeal on the basis that Xu had been wrongly decided.

The Plaintiff appealed from the findings that Chrysler and Daimler Financial were entitled to the lessor liability cap and that Mario was not an unnamed insured under Daimler Financial’s excess policy. The Plaintiff also appealed the dismissal of the negligent entrustment claim. Chrysler and Daimler Financial appealed the finding that Chrysler was an owner, vicariously liable for any vehicular negligence of Mario Pietrantonio.

II. HELD: Appeals and cross-appeals dismissed

1. The Court upheld the motions judge decision that Chrysler was a non-registered “owner” of the vehicle, vicariously liable for vehicular negligence on the part of Mario Pietrantonio, rejecting Chrysler’s argument that it did not exercise the necessary dominion and control over the vehicle. Citing Winne v. Dalby (1913) 16 DLR 710 (Ont.CA), Hayduk v. Pidoborozny [1972] SCR 879, Honan v. Gerhold [1975] 2 SCR 866 and Kerri (Guardian Ad Litem of) v. Decker, 2002 NFCA 11, the Court concluded as follows:

39      While these cases involved registered owners, the Supreme Court also looked to other factors to reflect ownership. I see no reason to adopt a different approach for non-registered owners. The language of s. 192(2) of the Highway Traffic Act speaks of an owner and does not reflect any distinction between non-registered and registered owners. Nor does it impose any dominion and control requirement. Such an approach is also consistent with the public protection purpose of s. 192(2). Dominion and control may result in a finding of ownership in the case of a non-registered owner but other factors may also lead to that conclusion.

40      In this case, Chrysler admitted that it was the non-registered owner of the Pietrantonio vehicle. Moreover, its conduct was consistent with that admission in that it had claimed significant tax deductions in its capacity as owner. The agreements between Daimler Financial and Chrysler explicitly state that Chrysler is the beneficial owner. In these circumstances, it was unnecessary for the motions judge to engage in any additional analysis on dominion and control. The motions judge did not err in concluding that Chrysler was an owner for the purposes of s. 192(2) of the Highway Traffic Act. Therefore, I would dismiss Chrysler’s cross-appeal.

2. It was held that Chrysler and Daimler Financial were both lessors entitled to the benefit of the lessor liability cap under Ontario’s Insurance Act, section 267.12(1) [analogous to Alberta’s Traffic Safety Act, section 187(2.1)].

(a) The Court commented behind the lessor liability cap:

49      In Xu, McEwen J. considered whether s. 267.12 prevented a lessee from obtaining coverage under a lessor’s insurance policy beyond the liability cap. At para. 31, McEwen J. discussed the policy rationale for the statutory cap on liability for lessors:

The legislative intent behind Bill 18 is clear from Hansard. Lessors were, according to the Government of Ontario, experiencing unfairly high costs of doing business given the fact that awards for personal injury had become exorbitant. This was increasing lessors’ insurance rates and affecting their ability to obtain insurance at a reasonable price. The cost of this would be passed on to the consumer. The purpose of the legislation was to protect lessors by reducing their exposures in personal injury lawsuits, thus reducing their insurance rates.

50      At para. 29, McEwen J. quoted from Hansard:

This is about fairness. Leasing and rental companies do not have control over the actions of the drivers. Those vehicles are in the hands of the driver for an extended period of time, and there’s no direct business relationship, save and except the rental, between the owners of the company and the actual drivers. Continuing to impose uncapped vicarious liability on the basis of ownership may unfairly drive up the cost of doing business for the leasing and rental companies. This would, in turn, drive up the cost of those leased or rented vehicles and thus the cost to the consumer who is choosing that form of auto usage.

51      Section 267.12 was designed to reduce insurance costs and the cost of doing business for leasing and rental companies in the automotive arena — an industry of significant importance in Ontario — and hence those of the consumer. This was the legislative context. The legislative objective was clearly expressed in s. 267.12 by the introduction of the cap on liability available to a lessor or lessors.

[footnotes omitted]

(b) The Court rejected the argument that the Chrysler-Daimler Financial agreements effectively divided ownership and leasing between Chrysler and Daimler Financial. It was held that both Chrysler and Daimler Financial were lessors (and that there can be more than one lessor) and that the lessor liability cap should apply to both:

56      The appellants argue that the agreements between Chrysler and Daimler Financial effectively divided ownership and leasing between Chrysler and Daimler Financial respectively. I disagree. The effect of the agreements was to divide legal title and beneficial ownership. Canadian law has long recognized a division between legal and equitable property rights: Bruce Ziff, Principles of Property Law, 5th ed. (Toronto: Carswell, 2010) at pp. 78 and 211.

57      A lease is a contract by which the lessee obtains a right to use the property leased in exchange for consideration. The proprietary interest in the property is not changed, but remains in the owner: Canadian Acceptance Corp. v. Regent Park Butcher Shop Ltd. (1969), 3 D.L.R. (3d) 304 (Man. C.A.). Put differently, an owner has the right to lease the vehicle owned.

58      Daimler Financial assigned to Chrysler beneficial ownership in the Pietrantonio vehicle, the related lease, and all indebtedness and liability due and to become due to Daimler Financial under or in respect of the related lease. It is clear from the agreements that Daimler Financial and Chrysler intended that Chrysler have the benefit of the debt assigned, Daimler Financial would act as agent to administer the leases, and the transfer was made for good consideration. The lease with West End Tile Limited and Luciano permitted a sale or assignment of both the motor vehicle and the lease to a third party — in this case, Chrysler. As such, at all material times, Chrysler was a lessor.

59      I would also note that the presence of the bare trustee language found in the 1996 Gold Key Agreement and Purchase and Sale Agreement does not detract from the vesting of the beneficial ownership of the vehicle and the lease in Chrysler. The agreements reflected intertwined but separate promises: Chrysler would purchase the beneficial ownership in the vehicles and the related leases and Daimler Financial would retain legal title and remain registered lessor as bare trustee for Chrysler. Both the assignment and the trust served to vest in Chrysler the beneficial ownership of the Pietrantonio vehicle and the related lease.

60      In conclusion, the language of s. 267.12(1), its legislative purpose, and the agreements between Chrysler and Daimler Financial all supported the motions judge’s conclusion that Chrysler was a lessor within the meaning of that subsection and was therefore entitled to the cap on liability. There is nothing that would cause one to conclude that a beneficial owner of the motor vehicle and the lease is not, or should not be considered, a lessor.

61      It remains to be considered whether Daimler Financial was also a lessor. The appellants submit that s. 267.12(1) does not speak of an administrator of a lease and as such, Daimler Financial was not entitled to benefit from the cap on liability.

62      I do not agree. Daimler Financial retained legal title to the Pietrantonio vehicle. Section 267.12 (1) speaks of “the maximum amount for which the lessor or lessors of the motor vehicle are liable in respect of the same incident in their capacity as lessors of the motor vehicle.” Clearly the statute contemplates multiple lessors.

63      Furthermore, by virtue of the assignment to Daimler Financial from Capital Dodge, the lease itself described Daimler Financial as lessor.

3. The Court held that Xu had been properly decided such that Mario Pietrantonio was not an unnamed insured under Daimler Financial’s standard excess policy.

4. The Court upheld the dismissal of the Plaintiff’s negligent entrustment claim.

(a) The Court noted that it was unclear whether or not such a tort existed in Ontario but proceeded to decide the case as if it did, without deciding the point:

79      The parties and the motions judge proceeded on the basis that the tort of negligent entrustment exists in Ontario and in that regard relied on Cella. While the tort exists in the United States and arguably in British Columbia (Schulz, at p. 105) and has been advanced in Ontario (Vynckier v. Brown, 2015 ONSC 376 (Ont. S.C.J.); Persaud v. Suedat, 2012 ONSC 5232, 96 C.C.L.T. (3d) 147 (Ont. S.C.J.); Ladouceur v. Zimmerman, [2009] O.J. No. 4777 (Ont. S.C.J.); and Ahmetspasic v. Love, 2002 CarswellOnt 4475 (Ont. S.C.J.)), no definitive statement on the existence of the tort has been enunciated by either the Supreme Court of Canada or by this court. As the appeal was not argued on the basis that the tort does not exist, I propose to address this ground of appeal assuming, without deciding, that such a tort does exist.

(b) The Court held that it was open to the motions judge to conclude that Mario’s rejection as a lessee had to do with financial issues but, more significantly, it was held that there was an absence of any duty of care between the Plaintiffs and Daimler Financial:

81      The test for a duty of care is well-established in Canadian law. As noted in Knight v. Imperial Tobacco Canada Ltd., 2011 SCC 42, [2011] 3 S.C.R. 45 (S.C.C.), at para. 41, a duty of care requires both foreseeability and “a relationship of sufficient closeness, or proximity, to make it just and reasonable to impose an obligation on one party to take reasonable care not to injure the other.” In particular, when the claim at issue alleges a failure to act, foreseeability alone cannot be enough and the facts must disclose a justification for imposing on a defendant a positive duty to act: Childs v. Desormeaux, 2006 SCC 18, [2006] 1 S.C.R. 643 (S.C.C.), at para. 31. In Childs, at para. 31, the court noted that “[generally], the mere fact that a person faces danger, or has become a danger to others, does not itself impose any kind of duty on those in a position to become involved.”

82      In Cella, a decision the appellants rely upon, this court stated, at p. 331, that “[liability] for a negligent act or omission will be imposed in situations where there is a sufficient relationship between the injured party and another person, which makes it reasonable to conclude that the other person owed a duty towards the injured party.”

83      In the case under appeal, the vehicle was leased not to Mario but to West End Tile Limited and Luciano. The motions judge concluded that a duty on Daimler Financial to ascertain the competency of the driver of the vehicle was too remote. It was reasonable for the lessors to rely on the insurance that had been obtained by the lessees. On this basis, the motions judge correctly concluded that there was no genuine issue requiring a trial on the issue of negligent entrustment. He wrote:

Moreover the vehicle was not leased directly to the driver; it was leased to the company [West End Tile Limited] for whom the driver worked. It would seem, therefore, that a duty to inquire about the eventual driver would be one that would be far too remote. Indeed, the lessors would have no ability to ascertain who the driver was at a particular time even if the driving record of the eventual driver was suspect. It would be entirely reasonable for them to be satisfied with regard to the fact that insurance had been granted.

84      As noted by the motions judge, in the present case, Daimler Financial leased the Pietrantonio vehicle to Luciano and West End Tile Limited. Finding a duty of care in the present case would lead to the conclusion that the lessor had an obligation to inquire into who would be driving it. The relationship between the appellants and Daimler Financial does not disclose proximity sufficient to justify imposing a duty. The motions judge properly concluded that Daimler Financial had met its evidentiary burden and that there was no genuine issue requiring a trial on the claim of negligent entrustment.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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