RCAP Leasing Inc v Martin, 2016 ABQB 542

Court of Queen’s Bench of Alberta Citation: RCAP Leasing Inc v Martin, 2016 ABQB 542 Date: 20160929 Docket: 1601 06327 Registry: Calgary Between: RCAP Leasing Inc. Plaintiff - and - Aaron Martin and Irene Talma Defendants _______________________________________________________ Reasons for Judgment of J.T.

Prowse , Master in Chambers _______________________________________________________ [ 1 ] The issue to be determined is whether a provision in an equipment lease, allowing the lessor to charge the lessee an administrative charge on default, is a valid pre-estimate of damages or an unenforceable penalty clause. [ 2 ] For the reasons which follow, my conclusion is that the provision is an unenforceable penalty. Background [ 3 ] The defendant Irene Talma was a co-lessee under an equipment lease covering one used road grader dated June 1, 2012.

The lessor is the plaintiff RCAP Leasing Inc. (“RCAP”). [ 4 ] Payments under the lease went into default approximately 3 years after the lease commenced, beginning with the installment due on August 1, 2015. [ 5 ] RCAP filed a statement of claim against the lessees, including Talma, on May 11, 2016. She was noted in default on June 22,

2016. [6] On August 12, 2016, counsel for RCAP applied for judgment against Talma. [7] Included in the claim was an administrative fee in the amount of $37,319.03 pursuant to clause 13, quoted below: DEFAULT; REMEDIES. If Lessee fails to pay any rent or other amount herein provided within five days after it is due and payable, or... [list of other defaults] ... then this Lease Contract shall be in default. If the default is not remedied by Lessee within five days of anywritten notice, then Lessor or its agent shall have the right to exercise any one or more of the following remedies: (

a) to declare the entireamount of rent due or to become due under this Lease Contract immediately due and payable, without any further notice or demand toLessee: (

b) to sue for and recover from Lessee an amount equal to the unpaid balance of the rent due and to become due during the termof this Lease Contract; (

c) terminate this Lease Contract and (

d) to enter upon Lessee’s premises, with or without notice, court order orother process of law, to take possession of any or all items of the Equipment without demand or notice wherever same may be located.Upon retaking possession of any or all items of the Equipment, Lessor may, at its option ...[provisions regarding resale of equipment] ...All net proceeds of the foregoing shall be applied against amounts owing pursuant to the terms of this Lease Contract after deducting allreasonable costs incurred in connection with such disposition. Lessee shall remain liable for any deficiency.

Lessee hereby waives anyand all damages occasioned by such taking of possession. Any said taking of possession shall not constitute a termination of this LeaseContract and shall not relieve Lessee of its original obligations herein unless Lessor expressly notifies Lessee in writing. Should any legalproceedings be instituted by Lessor to recover any monies due and to become due herein or for the repossession of the Equipment,Lessee shall be liable for and pay for all reasonable attorney’s fees and costs incurred.

Additionally, Lessee shall pay to Lessor for compensation for additional administrative and clerical work, an amount equal to 15% of thetotal payable hereunder.

Interest on the total amount payable, at the rate of 18% per annum, will be calculated monthly from the date ofdefault. (emphasis added) [8] RCAP filed an affidavit in support of its claim for these administrative fees, which indicated that the RCAP employeeresponsible for this matter had, as a result of the lessee’s default: – repeatedly contacted the lessees by telephone and sent 12 letters demanding payment. – co-ordinated the seizure and sale of the equipment, including retaining and instructing a bailiff and sending 11 emails to the auctioneersand others to arrange the inspection, transfer, and transport of the equipment to the auctioneer. – sent a number of emails to resolve payment issues regarding the auctioneer and the trustee in bankruptcy of the corporate co-lessee.

Case law on penalties [9] A leading case on the law of penalties is Dunlop Pneumatic Tyre Co. v New Garage & Motor Co., [1915] A.C. 79 (U.K.H.L.), the relevant portions of which are as follows: Though the parties to a contract who use the words 'penalty' or 'liquidated damages' may prima facie be supposed to mean what they say,yet the expression used is not conclusive. The court might find out whether the payment stipulated is in truth a penalty or liquidateddamages...

The essence of a penalty is a payment of money stipulated as in terrorem of the offending party; the essence of liquidated damages is agenuine covenanted pre-estimate of damage. The question whether a sum stipulated is penalty or liquidated damages is a question of construction to be decided upon the terms andinherent circumstances of each particular contract, judged of as at the time of the making of the contract, not as at the time of the breach. [10] The Supreme Court of Canada addressed the topic of whether stipulated damage clauses constitute an unenforceable penaltyin H.F. Clarke Ltd. v.

Thermidare Corp., (1974) (SCC), [1976] 1 S.C.R. 319, 1974 CarswellOnt 253. [11] In that case, one of the contracting parties agreed not to compete during the currency of the contract and for three years afterits lawful termination. The contract contained a formula fixing damages for breach of this covenant. The issue was whether that formulaconstituted a measure of liquidated damages, or whether it constituted a penalty against which relief should be given.

The court declinedto enforce the formula, ruling at paragraph 28 as follows: I regard the exaction of gross trading profits as a penalty in this case because it is, in my opinion, a grossly excessive and punitiveresponse to the problem to which it was addressed; and the fact that the appellant subscribed to it, and may have been foolish to do so,does not mean that it should be left to rue its unwisdom.

Snell's Principles of Equity (27th ed. 1973), at p. 535 states the applicabledoctrine as follows: The sum will be held to be a penalty if it is extravagant and unconscionable in amount in comparison with the greatest loss that couldconceivably be proved to have followed from the breach. (emphasis added). [12] The Supreme Court of Canada again addressed the issue in J.G. Collins Insurance Agencies Ltd. v. Elsley Estate, (SCC), [1978] 2 S.C.R. 916. [13] In that case the plaintiff purchased a general insurance business from the defendant, who had been a competitor.

Thedefendant agreed he would pay the plaintiff $1,000 if he breached a non-compete covenant. It was disputed whether this was $1,000 perbreach or $1,000 total for all breaches.

[ 14 ] Although the Court held that the contract provided for $1,000 total for all breaches, it noted that, had it decided that the specified amount was $1,000 per breach, it would have enforced that provision. [ 15 ] In the course of its reasons, at para 47, the Court made the following observation: It is now evident that the power to strike down a penalty clause is a blatant interference with freedom of contract and is designed for the sole purpose of providing relief against oppression for the party having to pay the stipulated sum. It has no place where there is no oppression.

Analysis [ 16 ] In my view, it would have been within the contemplation of the parties to the lease, at the time it was signed, that a payment default by the lessee would cause the lessor to incur additional administrative expenses, of the type which in fact resulted. [ 17 ] It is also reasonable for the lease contract to provide for compensation to the lessor for incurring such expense.

Some type of fixed fee or formula would likely be needed, as it is not reasonable to expect an equipment lessor to structure its business so as to be able to track its employees’ time in the manner as is done by certain legal or accounting firms. [ 18 ] Therefore, the only question is whether the provision for an award of administrative fee of $37,319.03 under the lease in question was a genuine pre-estimate of damages or a penalty. [ 19 ] Compare this claim for $37,319.03 with the solicitor and client costs which were awarded to the lessor of $12,009.15.

Those legal fees included time entries by the law firm on 24 separate dates. [ 20 ] Another way to look at it would be as follows: even if the salary and overhead of the RCAP employee in charge of this file was $110,000 per year, an award of $37,319.03 would cover 1/3 of that employee’s annual cost to RCAP, notwithstanding that RCAP’s 7 collection associates manage a total of 42,000 leases. Each collection associate administered approximately 300 files per month. [ 21 ] The main flaw with clause 13 is its broad scope.

It is not to be evaluated from what actually occurred in this particular case, but from the possible outcomes that existed when the lease was created. [ 22 ] Clause 13 does not restrict the 15% administrative fee to situations where the lessor has seized and liquidated the security.

It allows the fee whenever the lessee is in default and has not cured that default within five days of demand. [ 23 ] If the lessee cures the demand out of time (say six days after notice of default) the lessee owes $37,319.03, even if it thereafter cures the payment default without the necessity of the lessor liquidating the security. [ 24 ] In my view, this is an extravagant, unconscionable and oppressive provision, and I strike it down as a penalty. [ 25 ] At para. 53 of the Elsley decision, supra , the Court noted that, where a stipulated sum is a penalty, the plaintiff may only recover such damages as it proves, but the amount recoverable may not exceed the sum stipulated. [ 26 ] The evidence provided by RCAP persuades me that a fair award for damages actually suffered by way of increased administrative expenses would be $5,000, and I hereby award that amount to RCAP as proven damages relating to the enforcement and disposition of collateral regardless of the inapplicability of the penalty clause. [ 27 ] Given the outcome of this decision, I direct that the solicitor and client fees incurred in arguing the penalty issue shall not be added to the amount of judgment already awarded.

Dated at the City of Calgary, Alberta this 28 th day of September, 2016. J.T. Prowse M.C.C.Q.B.A. Appearances: Jonathan H. Selnes Burnet, Duckworth & Palmer LLP

for the Plaintiff