“You’re making a bad deal”: Tilden Rent-a-Car rides again!

When do parties have an obligation to point out onerous contractual terms during contractual negotiations? In the recent case of MacQuarie Equipment Finance Ltd. v. 2326695 Ontario Ltd. (Durham Drug Store), the Ontario Court of Appeal addressed how “extremely onerous or unfair” contract terms may be unenforceable if inadequate notice of those terms was provided to the other contracting party at the time of contract formation.¹

What you need to know

• Potentially expanded the scope of obligations for negotiating parties. In certain circumstances, contracting parties have an obligation to bring “extremely onerous or unfair” contract terms to the attention of the other party. Failing to do so may result in such terms being unenforceable.
  • While this obligation was previously confined to consumer contracts of adhesion (such as a rental car contract), it is possible that MacQuarie may have extended this obligation to circumstances involving negotiated deals between sophisticated parties.
• The scope of this obligation is uncertain. MacQuarie involved extreme facts in the context of fraud (although neither party to the contract at issue had participated in the fraudulent activities). Therefore, this principle may not be applied with the same force to more traditional contractual negotiations.
• Context is key. Courts will look to the surrounding circumstances of the negotiation in deciding whether there was an obligation to point out a term to a counterparty. It may be that the contractual term is reasonable on its face, yet unenforceable when viewed in light of the interactions among the parties during the negotiations.

Background

In 2015, MedviewMD Inc. agreed to supply Durham Drug Store with a telemedicine studio to provide remote medical services to the public. Medview then emailed Ms. Abdulaziz, the owner of Durham Drug Store, a written Master Service Agreement (MSA), which set out the terms between them.

A few days later, a representative from an equipment leasing company, Macquarie, attended Durham Drug Store and provided Ms. Abdulaziz with a proposed lease between Macquarie and Durham Drug Store for the telemedicine equipment. Unlike the MSA with Medview, the lease contained a broad term that purported to eliminate Durham Drug Store’s ability to terminate or cancel the lease.

Ms. Abdulaziz did not review the lease in detail, believing it to be a copy of the MSA. Although she noticed Macquarie’s name on the document, she believed it was another business name for Medview. She signed the lease.

Durham Drug Store paid Macquarie the stipulated fees under the lease for almost a year. However, in February 2017, Durham Drug Store learned that Medview had failed to disclose that its telemedicine services lacked the necessary regulatory approvals. Durham Drug Store then stopped making payments under the lease.

Macquarie sued Durham Drug Store, claiming $90,057.14 under the lease.

The lower court awarded summary judgment in favour of Macquarie. Although Durham Drug Store may have been the victim of a fraud perpetrated by Medview, there was no evidence that Macquarie was aware of or complicit in this fraud. Because the lease was signed by Ms. Abdulaziz, it was enforceable against Durham Drug Store, which did not allow the drug store to cancel it.

Analysis by the Court of Appeal: Sometimes the terms are not enough

The Ontario Court of Appeal concluded that the no-cancellation provision should have been brought to Ms. Abdulaziz’s attention, and it should have “been explained to her that she would remain obligated to pay for the telemedicine equipment under the lease even if Medview defaulted on its obligations.”² As a result, the no-cancellation provision was unenforceable.

In arriving at this conclusion, the Court considered the seminal case of Tilden Rent-A-Car Co. v. Clendenning.³ In Tilden, the Court of Appeal refused to enforce a limitation of liability provision in a car rental agreement that purported to exclude the rental company’s liability for a collision where the customer had driven the car after consuming alcohol. In this case, the Court highlighted that a rental transaction was typically concluded in a hurried, informal manner, and that the liability exclusion provision was on the back of the contract in particularly small type and so faint in the customer’s copy as to be hardly legible. In these circumstances, “something more should be done by the party submitting the contract for signature than merely handing it over to be signed.”⁴ Rather, reasonable measures must be taken to draw harsh and oppressive terms to the attention of the other party.

The Court decided that the “unusual circumstances” of this case brought it within the principle in Tilden. Even though there was no intention to mislead Ms. Abdulaziz, the no-cancellation provision should have been brought to her attention.

Implications for contractual negotiations

The Ontario Court of Appeal confirmed that no-cancellation clauses are not, on their face, unenforceable. In fact, such clauses are “commonplace.”⁵ Rather, it was circumstances of the contractual negotiation that led the court to find the clause unduly onerous and unfair:

• the dramatic difference between the non-cancellation provision in the lease juxtaposed with the early-termination provision in the Medview MSA;
• the only document that had been sent to Ms. Abdulaziz was the Medview MSA;
• the lease was signed in a hurried manner;
• there was no opportunity to negotiate the terms of the lease;
• the lease was signed without the benefit of legal advice;
• the lease was contained in “two tightly-packaged pages in extremely small font”⁶; and
• there was an “apparent failure of communication” between the parties which led Ms. Abdulaziz to an “understandable confusion and consternation” when Macquarie contacted her about her default under the lease.⁷

Interestingly, the Court reached these conclusions despite the fact the lease arose in the context of a negotiated business arrangement between two sophisticated parties. The circumstances in this case are distinct from the situation in Tilden, which involved a consumer contract for a rental car. This case may be interpreted, therefore, as extending the rule in Tilden to circumstances involving two commercial parties in the context of a negotiated arrangement.

That said, the circumstances in this case were described by the court as “highly unusual.”⁸ Further, although Macquarie had not itself committed fraud, the Court considers the fact that Medview had committed fraud as part of the overall context in which the lease was executed.

Therefore, the extent to which this case has extended the principle in Tilden remains unclear. However, when entering into contractual negotiations, parties should be aware that where negotiations are rushed, where the execution version contains terms that differ from previous discussions, or where it is reasonable that a contractual counterparty may be confused, it is possible that Canadian courts will expect parties to draw onerous or unfair terms to the other party’s attention. Parties may be able to draw attention to such terms by placing them in larger font, different colours, or by requiring additional initials or signatures.

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¹ MacQuarie Equipment Finance Ltd. v. 2326695 Ontario Ltd. (Durham Drug Store), 2020 ONCA 139 [MacQuarie]

² MacQuarie at para. 37.

³ Tilden Rent-A-Car Co. v. Clendenning (1976), 18 O.R. (2d) 601 (C.A.) [Tilden].

⁴ Tilden at p. 609.

⁵ MacQuarie at para. 38.

⁶ MacQuarie at para. 28.

⁷ MacQuarie at para. 41.

⁸ MacQuarie at para. 37.