Two recurring issues in construction law are the authority of agents and liquidated damages.

The agency issue is this:  if the principal is to be made liable on a contract made by the agent, must the principal, and not the agent, be the one that promotes the agent’s authority?

The damage issue is this:  can a lease or other contract calling for periodic payments during the term require the acceleration of those payments upon default?

In Hav-A-Kar Leasing Ltd. v. Vekselshtein, the Ontario Court of Appeal recently answered Yes to both of these questions.

The Background Facts

Hav-A-Kar was a car leasing case but these two issues are very relevant to construction law.  Agency relationships commonly arise on construction projects because the parties involved in those projects contract and act through agents.  When that occurs, must the existence or scope of the agency be made known by the principal?  Or are the agent’s own statements about his agency sufficient to create the authority of the agent to bind the principal?

The damage issue is also important for construction law because building contracts often provide for liquidated damages. Contract law says that liquidated damages are valid but penalties are not.  But what is a penalty and what are liquidated damages?  May a contract lawfully provide for the acceleration and forfeiture of payments made under a contract? Is that a penalty clause or liquidated damages?

In Hav-A-Kar, the defendant went to a car dealership and arranged to lease a car.  He leased the vehicle from another company, Hav-A-Car, which was a leasing company which bought the car from the dealership.  The defendant said that the car dealership told him that if he didn’t like the car he could return it and would have no further obligations under the lease. He later decided he didn’t want the leased car and preferred another car, so he took the leased car back to the car dealership and bought the other car.  He failed to pay the remaining lease payment to Hav-A-Car, which repossessed the car and sued him for the accelerated lease payment due under the liquidated damages clause in the lease.  The accelerated payments were calculated inter alia as follows:

…the total proceeds of (i) [the re-sale of the car], less the value of the Vehicle at the end of the term …and… (ii) [the re-leasing of the car] with respect only to the balance of the term provided for herein, shall be subtracted from the total rentals provided for herein then remaining unpaid. The remainder shall be liquidated damages…

In effect, the liquidated damages were calculated on the basis of the accelerated lease payments minus the proceeds of sale (less the value of the car at the end of the term) or the proceeds of releasing for the balance of the term.

In defending Hav-A Car’s action, the defendant asserted that the representation by the car dealership – that he could return the car to it and have no further obligations under the lease  – was made as the agent of Hav-A-Car and binding upon it. He also asserted that the acceleration clause amounted to a penalty and was unenforceable. The Court of Appeal dismissed both aspect of his defence.

The Court of Appeal’s decision

The Court of Appeal held that the alleged principal, in this case, Hav-A Car, was not liable unless there was some representation or other act by it that supported the existence of the agency relationship:

“It is well-established that the actual authority of an agent requires a “manifestation of consent” by the principal to the agent that the agent should act for or represent the principal…Further, apparent or ostensible authority in favour of an agent only arises where the alleged principal has impliedly represented that another person has the authority to act on the principal’s behalf. The implied representation must be that of the principal, not that of the agent.” (emphasis added)

In the present case, Hav-A-Car had done nothing to represent that the car dealership had authority to do anything on its behalf.

The Court of Appeal held that the accelerated damage clause was a valid liquidated damages clause, for the following reasons:

..the accelerated amount provided for in the challenged provision of the Lease, clause 16, “is not excessive or unconscionable”… it “merely puts [HAK] in the position it would have been in if [ZV] had performed his obligations under the contract”…… These findings accord with the standard measure for compensatory damages in contract, under which the plaintiff is entitled to the value of the promised performance of the contract…. The accelerated rent provision in clause 16 of the Lease reflects the parties’ bargain at the time the Lease was entered into regarding the reasonably anticipated damages that HAK would probably suffer if ZV were to breach the terms of the Lease.”

This conclusion by the Court is based on two findings.

First, the accelerated lease payments, when diminished by the amount recovered for the car, represented what a court would have awarded to Hav-A-Car in the absence of a liquidated damage clause.

Second, the accelerated lease payments, so diminished, represented what the parties anticipated, and reasonably anticipated, would be suffered by Hav-A-Car in the event of a default by the lessee.

Reflections on the decision

While these conclusions are not surprising, they are worth remembering and emphasizing.

On the agency issue, there is a difference between the existence of agency and the ambit of the agency. If the principal does nothing to put the agent in motion, and does nothing to create the impression that the agent has any authority to act for it, then there is nothing to support the allegation of agency against the principal

This situation is different from two other agency principles.

First, there is a difference between the existence of the agency and the scope of the agency. The conduct or representations of the agent may not be able to create the basis or the existence of the agency.  But, if the principal does clothe the agent with some authority, the conduct or representations of the agent may affect the scope of the apparent authority of the agent. These two issues must be carefully distinguished.

Second, there is a difference between the enforcement of a contract by, and the enforcement against, an undisclosed principal. An agency contract can be enforced by a principal who did not disclose its existence during the negotiation of the contract. But it cannot be enforced against a principal who undertook no conduct which demonstrated, and made no representation, that the contracting party was his agent.  These consequences may seem contradictory but they are part of the law of agency.

Finally, the accelerated payment clause would not have been valid if it had simply accelerated all contract payments and did nothing more. It was valid because the clause provided for the deduction of the amounts recovered upon the sale or lease of the vehicle.  In doing so, it provided a reasonable pre-estimation of what the lessor suffered from the breach. It may have somewhat over-compensated Hav-A-Car by not allowing for the time value of money on the lease payments over the period of the lease. But the court is willing to provide some reasonable leeway for the parties’ bargain.

See Heintzman and Goldsmith on Canadian Building Contracts (4th ed.), Chapter 1, Part 1(a)(ii)

Hav-A-Kar Leasing Ltd. v. Vekselshtein, 2012 ONCA 826 

Agency –  Liquidated Damages Clause  -  Undisclosed Principal  -  Apparent Authority  

Thomas G. Heintzman O.C., Q.C., FCIArb                                                 January 26, 2013