A Good Liability Exclusion Clause Can Protect You From A Bad Termination Of Contract

Break-ups are often expensive, but they do not always have to be. A recent Ontario Court of Appeal case provides clarity to those seeking to terminate a business relationship and avoid exposure to a claim in the process. In Chuang v Toyota Canada Inc.,1 the Ontario Court of Appeal upheld a contractual liability exclusion clause in circumstances where the defendant had terminated a contract improperly.

Chuang v Toyota Canada Inc. dealt with Toyota's decision to terminate a Letter of Commitment (“LOC”) it had entered into with the plaintiff, a prospective dealer. The LOC stated that Toyota would make the plaintiff a Lexus dealer if it built a new facility by a certain date. When the dealer failed to reach certain project milestones, Toyota terminated the LOC. The prospective dealer sued, alleging that the LOC was terminated improperly and in bad faith.

This bulletin summarizes the trial and appeal decisions in Chuang v Toyota and identifies some important takeaways, including how to exercise a discretionary termination right; insights on the developing duty of good faith; and the importance of including a robust liability exclusion clause in commercial contracts.

The Facts

Toyota and Chuang entered into a LOC pursuant to which Toyota agreed to appoint Chuang as a Lexus dealer if he built a new dealership facility within a certain time frame. The LOC required Chuang to, among other things, tender the project by February 28, 2005, obtain financing by March 30, 2005 and complete the new facility by March 31, 2006. It also expressly permitted Toyota to terminate the LOC “in its sole discretion” if these deadlines were not met and provided further that Lexus is not liable for any losses, damages or expenses in the event of the termination of the LOC or the Lexus dealer agreement. When Chuang missed the deadlines for tendering and obtaining the financing commitment by a few weeks, Toyota terminated the LOC on April 20, 2005.

In its termination letter, Toyota also noted that the financing Chuang secured after the deadline for doing so had passed required him to personally fund any cost overruns (which Toyota believed would occur, in part because the property needed extensive environmental remediation). So, Toyota cited as a further ground for termination that it believed that construction was unlikely to commence in a timely manner, and that there would likely be additional problems that might further delay or jeopardize the project.

Chuang claimed that Toyota unlawfully terminated the LOC and sued Toyota for $20 million.

The Trial Result

The trial court dismissed Chuang's case. In doing so, the court considered three issues: (1) whether Toyota improperly terminated the LOC without a lawful basis for doing so; (2) whether Toyota terminated the LOC in bad...