VICARIOUS LIABILITY OF A LESSOR UNDER THE MOTOR VEHICLE ACT

From an article published in the December 2001 edition of The Verdict

by Michael Slater

Introduction

In motor vehicle accident cases where the plaintiff has suffered serious injuries, the damages will often exceed the third party insurance coverage specified in the ownerâs certificate. If both the negligent driver and owner are impecunious, then the plaintiff is often left with no recourse but to rely on the Underinsured Motorist Protection (UMP) provisions in section 148.1 of the Regulations to the Insurance (Motor Vehicle) Act. Unfortunately since 1993, only $1 million in mandatory UMP coverage is available unless the optional $1 million in excess coverage has been purchased. The available UMP coverage is inclusive of interest and costs and is also subject to all of the deductible amounts under section 148.1(5).

In the last ten years there has been a significant increase in the number of leased vehicles that are insured in British Columbia. When a leasing company is the registered owner there will likely be extension insurance available in addition to the assets of the leasing company to pay a judgment in excess of the available coverage in the owner's certificate.

Lessor as "owner"

Lessees and lessors are owners as defined by both the Motor Vehicle Act and the Insurance (Motor Vehicle) Act.

Section 1 of the Motor Vehicle Act provides that in this Act:

"owner" includes a person in possession of a motor vehicle under a contract by which he may become its owner on full compliance with the contract.

Section 119(1) of the Motor Vehicle Act provides that an "owner as applied to a vehicle means":

the person who holds legal title to the vehicle,
a person who is a conditional purchaser, a lessee or a mortgagor, and is entitled to be and is in possession of the vehicle, or
the person in whose name the vehicle is registered.

Section 1 of the Insurance (Motor Vehicle) Act defines "owner" as:

...the person in whose name a motor vehicle or trailer is registered and licensed under the Motor Vehicle Act or the Commercial Transport Act

Section 8 of the regulations to the Insurance (Motor Vehicle) Act provides that the following information must be set out in the owner's certificate in relation to leased vehicles:

Leased vehicles
An applicant for an ownerâs certificate shall set out in the application form:

the name of the owner, followed by the word "lessor"

the name of the lessee of the vehicle, followed by the word "lessee"; and

the address in the province of either the owner or the lessee of the vehicle.

Vicarious liability under the Motor Vehicle Act

Section 86(1) of the Motor Vehicle Act imposes vicarious liability on the owner of a vehicle when the driver acquires possession of the vehicle with the owner's consent:

86(1) In an action to recover loss or damage sustained by a person by reason of a motor vehicle on a highway, every person driving or operating the motor vehicle who is living with and as a member of the family of the owner of the motor vehicle, and every person driving or operating the motor vehicle who acquired possession of it with the consent, express or implied, of the owner of the motor vehicle, is deemed to be the agent or servant of that owner and employed as such, and is deemed to be driving and operating the motor vehicle in the course of his or her employment.

Clearly, a lessee drives a leased vehicle with the consent of the lessor (as owner) and accordingly the lessor is vicariously liable under section 86(1) for damages arising from the lessee's negligent operation of the vehicle.

When an owner is not an owner: exemption from vicarious liability

However, section 86(3) of the Motor Vehicle Act provides that where a vehicle has been sold pursuant to a contract of conditional sale the seller, or his assignee, is not an owner:

86(3) If a motor vehicle has been sold, and is in possession of the purchaser under a contract of conditional sale by which the title to the motor vehicle remains in the seller until the purchaser becomes the owner on full compliance with the contract, the purchaser is deemed an owner within the meaning of this section, but the seller or the seller's assignee is not deemed to be an owner within the meaning of this section.

Clearly the seller, or the seller's assignee, escapes vicarious liability when the vehicle is sold under a contract of conditional sale. But what of the lessor who leases a vehicle to a lessee with an option to purchase? Is a lessor also exempt under section 86(3)?

In Huddleston v. Ramzan, 1988 CarswellBC 187, 26 B.C.L.R. (2d) 266 (B.C.S.C.) the issue was whether a long-term lease with an unexercised option to purchase constituted a contract of conditional sale thereby exempting the owner from vicarious liability under section 79(3) [now s. 86(3)]. Spencer, J. held that the lease agreement was a conditional sale as defined by the applicable legislation, the Sale of Goods on Condition Act, R.S.B.C. 1979, c. 373. He found that, because of the option to purchase, the vehicle could only be "sold" for the purpose of section 79(3) when the lessee exercised the option to purchase. Accordingly the lessor was not exempt from vicarious liability under this section. Spencer, J. stated:

8 The question now arises who is responsible vicariously for Esson's negligence. Certainly Caltron, his employer, is because he was driving on its business at the time of the accident and he was driving with its consent. But the question remains whether Docksteader, the registered lessor and, I find, the owner in fact of the vehicle, is liable vicariously. Docksteader retained the right to control who should drive this vehicle while it was in the hands of the hirer: see cl. 10 of the lease. It had the right to control what accessories might be added to the vehicle by cl. 8(s). It had the right to replace the vehicle with another of similar or more recent year under cl. 2 and to require re-delivery of the vehicle to itself under cl. 4. Those and other clauses preserved a degree of dominion over the vehicle which constitute Docksteader an owner. Mr. Hartshorne, however, argued that Docksteader should be exempt from liability pursuant to the provisions of s. 79(3) of the Motor Vehicle Act. Section 79(1) makes the owner vicariously liable for those who drive a vehicle with its consent, and subs. (3) sets up an exemption clause in the following words:
(3) Where a motor vehicle has been sold, and is in possession of the purchaser under a contract of conditional sale whereby the title to the motor vehicle remains in the seller until the purchaser becomes the owner on full compliance with the contract, the purchaser shall be deemed an owner within the meaning of this section, but the seller or his assignee shall not be deemed an owner within the meaning of this section. [The italics are mine.]

9 I am of the view that this lease agreement amounts to a conditional sale because it contains a handwritten clause which says, "may purchase vehicle after forty-eight months for $3,269.00 plus tax". In my opinion, if Caltron had sought to buy the vehicle at the end of the 48 months at that price, and if Docksteader had refused, the court would enforce that clause as an option, provided Caltron was not in default under the lease. It would require the implication of reasonable terms, such as a term that the option must be exercised within a reasonable time after the end of 48 months, but in my opinion the court would do that. Such a term would fall within the test of one which was within the parties' intention, and necessary to lend business efficacy to the contract. See Lyford v. Cargill Co., 59 B.C.R. 492, [1944] 1 W.W.R. 273, [1944] 1 D.L.R. 696 (C.A.), and Luxor (Eastbourne) Ltd. v. Cooper, [1941] A.C. 108, [1941] 1 All E.R. 33 (H.L.). That being an enforceable option, this contract of hiring therefore becomes a conditional sale within the definition of the Sale of Goods on Condition Act, R.S.B.C. 1979, c. 373, s. 1, where "conditional sale" is defined to mean a contract:

(b) for the hiring of goods by which it is agreed that the hirer shall become, or have the option of becoming, the owner of the goods on full compliance with the terms of the contract.

In my opinion it does not matter that Docksteader had the right to replace this vehicle. The option would apply to whatever vehicle was in the possession of the hirer pursuant to the contract at the end of the 48 months. However, the exemption provided by s. 79(3) of the Motor Vehicle Act only applies "where a motor vehicle has been sold". Under the ordinary conditional sale contract, a vehicle is immediately subject to an agreement for purchase and sale. In that sense it is sold, although title does not pass until the final payment is made. Under this contract of hiring, with its included option, the vehicle might never be sold to the hirer. It would only be sold in the event the hirer exercised the option. Therefore, in my opinion, the leased vehicle could not, on the date of this accident, be described as one which "has been sold" and therefore s. 79(3) has no application to this case. Section 79(1) sets up a statutory form of vicarious liability applicable to all owners. Subsection (3) then goes on to provide an exemption to that statutory liability and can only be effective with respect to those who bring themselves strictly within the words of the exemption. It follows that in my opinion the defendant Docksteader Investments Inc. is vicariously liable for the negligence of Mr. Esson, who acquired possession of it with the express or implied consent of Docksteader.

In Schoenbach v. Truong, 1996 CarswellBC 928, 19 B.C.L.R. (3d) 313 the Court of Appeal held that Huddleston v. Ramzan was wrongly decided. The lessor, Ford Credit, applied under Rule 18A to determine whether it was vicariously liable for the negligence of the driver and lessee. In the majority judgment, Chief Justice McEachern concluded the Legislature intended to define "owners" in such a way as to exclude those who hold legal title under conditional sales agreements. He held that the word "sold" in section 79(3) refers to an arrangement where the purchaser or lessor acquires possession of the vehicle on terms that permit legal title to be transferred when later specified events occur. He referred to Huddleston:

8 In Huddleston, the court distinguished between two types of conditional sales agreements: the "ordinary" and the "lease option". The court then found that s. 79(3) exempted only those sellers under an "ordinary" conditional sales agreements; sellers under "lease option" agreements continued to be liable as "owners" under s. 79(1). The court drew the distinction based on a literal interpretation of the word "sold". I cannot agree that the Legislature intended to divide the conditional sales agreements in s. 79(3) into two categories, one of which would be exempt from vicarious liability and one of which would not, on the basis of a literal interpretation of the word "sold".

9 This court decided in Re Nishi Industries Ltd., [1978] 6 W.W.R. 736 (B.C.C.A.), that a lease option agreement is a conditional sales agreement, which is defined in the Sale of Goods on Condition Act, R.S.B.C. 1979, c. 373:

"conditional sale" means a contract
(b) for the hiring of goods by which it is agreed that the hirer shall become, or have the option of becoming, the owner of the goods on full compliance with the terms of the contract.

10 I agree with counsel for Ford that this is a case where s. 8 of the Interpretation Act, R.S.B.C. 1979, c. 206, must be applied. It provides:

Every enactment shall be construed as being remedial, and shall be given such fair, large and liberal construction and interpretation as best ensures the attainment of its objects.

11 With respect, I do not read s. 79(3) as an exemption to s. 79(1), but as part of the definition of "owner" for the purposes of that section. Section 79(3) defines "owner" in a way which excludes sellers under contracts of conditional sale. Although I have no doubt that s. 79 was enacted to extend vicarious liability to legal owners in certain circumstances, I do not believe that it was the intention of the Legislature to extend that liability to legal "owners" under certain kinds of commercial paper but not others. I believe that the Legislature intended to define "owners" in such a way as to exclude those who hold legal title under conditional sales agreements.

12 I am not persuaded that the inclusion of the word "sold" is an indication that the Legislature intended to depart from the definition of "conditional sale" found in the Sale of Goods on Condition Act. In my view, and contrary to the view of the court in Huddleston, the context of s. 79(3) indicates that the word "sold" refers to an arrangement where the purchaser or lessor acquires possession of the vehicle on terms that permit legal title to be transferred when later specified events occur. I do not agree that "sold" should be read in this context in its literal and legal signification, involving the completion of a purchase and sale including the transfer of legal title.

Cases Considering Schoenbach

Following Schoenbach leases containing an option to purchase have allowed lessors to escape vicarious liability. Typically in cases involving multimillion-dollar claims counsel for the lessor threatens an application under Rule 18A unless released from the action. The only way for the plaintiff to oppose the application was to attempt to distinguish Schoenbach on the basis that the lease agreement did not contain an "option to purchase" and was therefore not a "contract of conditional sale".¹

Heringa v. Mah, [2000] B.C.J. No. 2751 (B.C.S.C.) is an extreme example of the consequences of failing to successfully distinguish Schoenbach. Mr. Heringa was struck by a van while walking in a crosswalk. He suffered a mild traumatic brain injury and was diagnosed a few months later with Parkinsonâs disease. He claimed damages of over $7 million on the basis that the Parkinsonâs disease was caused by the injuries sustained in the accident. The van was driven by an employee of Clarkâs Audio Visual Ltd. who had leased the vehicle from GMAC. Counsel for GMAC was also counsel for the lessee and driver and initially admitted that GMAC was an owner of the vehicle.

Following the release of the Reasons for Judgment of the Court of Appeal in Schoenbach, GMACâs new counsel (who not coincidentally was counsel for the lessor in Schoenbach) succeeded in amending their statement of defence to withdraw the admission of liability. GMAC then applied under Rule 18A to have the action dismissed on the basis that the lease contained an "option to purchase", which under Schoenbach was a contract of conditional sale, thereby exempting GMAC from vicarious liability under section 86(3) of the Motor Vehicle Act.

The driver and the lessee obviously wanted to keep GMAC in the action to reduce their exposure to a judgment in excess of the policy limits as GMAC would have additional insurance coverage and of course very deep pockets. Clearly the plaintiff also wanted to keep GMAC in the action. Counsel for the driver and the lessee tried to distinguish Schoenbach on the basis that, notwithstanding the "option to purchase" in the lease, the parties intended the agreement to be a "true lease". We represented Mr. Heringa and were unable to advance an argument on which to distinguish Schoenbach. The court rejected the lessee's argument and, applying Schoenbach, found that the lease in question was a contract of conditional sale and dismissed the action against GMAC on the basis that they were not vicariously liable under section 86(3).

Satanove, J. stated:

On May 8th, 1993 the defendant, Clark's Audio Services Ltd. and Les Lloyd Clark, obtained a 1993 GMC from Calgary Motor Products Ltd. pursuant to a lease agreement with an option to purchase. GMAC then purchased the vehicle from Calgary Motors, and the lease agreement was assigned to GMAC.

On January 12, 1995, the vehicle was involved in a serious accident giving rise to this application. The plaintiff sued GMAC, amongst others, in accordance with the extended definition of owner under s. 86(1) of the Motor Vehicle Act.

GMAC has brought this application for summary dismissal pursuant to Rule 18A. The plaintiff does not oppose but the other defendants do.

GMAC relies on s. 86(3) of the Motor Vehicle Act which states:
Where a motor vehicle has been sold and is in possession of the purchaser under a contract of conditional sale whereby the title to the motor vehicle remains with the seller until the purchaser becomes the owner in full compliance with the contract, the purchaser shall be deemed an owner within the meaning of this section, but the seller or Isis assignee shall not be deemed an owner within the meaning of this section.

GMAC also relies on the decision of Schoenbach v. Truong (1996), 19 B.C.L.R. (3d) 313 wherein the British Columbia Court of Appeal held that as the words "contract of conditional sale" are not defined in the Motor Vehicle Act, the definition in the now repealed Sale of Goods on Condition Act should be used to determine whether a motor vehicle lease arrangement exempts the legal owner from vicarious liability under the Motor Vehicle Act.

This definition under the Sale of Goods on Conditions Act states:
A contract for the hiring of goods by which it is agreed that the hirer shall become or has the option of becoming the owner of the goods upon full compliance with the terms of the contract

The key element in this definition is that the lessee has the unilateral right to compel the sale of the goods at the end of the term for the price stipulated in the agreement, as long as all other conditions of the option and the agreement have been met. This is to be distinguished from other rights which a lessee may have, such as a right of first refusal, or right to extend the term of the lease, etc.

A review of the subject lease indicates that the lessee does have this unilateral right to compel sale for $5,367 after 36 months, or for fair market value before that time.

However, counsel for the other defendants points to a number of provisions in the lease which he says were not in the lease before the Court of Appeal in the Schoenbach case. He says these provisions show the intent of the parties that this lease be a true lease only, not a conditional sales contract.

If I were deciding the rights and obligations between the parties under the lease agreement, that is, the rights between the lessee and the lessor, then there might be an estoppel raised by the words used in the waiver clause, which is clause 29 of the lease. But estoppel cannot apply here.

The issue before me is one of statutory interpretation. The Court of Appeal has interpreted s. 86(3) of the Motor Vehicle Act to incorporate the definition of the Sale of Goods on Condition Act. GMAC has shown it falls within that definition and, therefore, is entitled to be exempt from vicarious liability.

I add that the Supreme Court of Canada in Mitsui and Co. Canada Ltd. v. Royal Bank of Canada, [1995] 2 S.C.R. 187, held that any lease containing an option to purchase fell within the definition of conditional sale in the Ontario act, which definition was identical to the one I have quoted above.

In the case before me, the payments were made strictly for the use of the vehicle rather than instalments towards the eventual purchase, because the buy-out price was for fair market value, not a nominal sum. In that sense it is a lease but the tacking on to the lease of the option to purchase, in my view, brings it under the auspices of the conditional sales legislation and, therefore, under s. 86(3) of the Motor Vehicle Act.

14 I will allow the application of GMAC and dismiss the claim against it.
In the course of the 18A application GMAC divulged that the policy limits on the certificate of ownership were $2 million. The failure to keep GMAC in the action was unfortunate for the plaintiff as the final judgment was close to $7 million and the lessee did not have the financial means to pay anything in excess of the $2 million in policy limits.

Can the lessor have it both ways?

Since the judgment in Heringa, counsel for lessors have continued to threaten to apply under Rule 18A to have their clients released on the basis of Schoenbach. In speaking with persons in the automobile leasing business, I was surprised to learn that they considered a lease with an "option to purchase" to be a "true lease" and not a "contract of conditional sale".

They directed my attention to the parties' clear intention as expressed in clauses like the following contained in the lease:

VEHICLE OWNERSHIP: This Lease is intended to be treated as, and constitutes, a true lease for all purposes, including, for example, for the purpose of personal property security and credit laws and income and other tax law. Accordingly, the lessor will remain the owner of the vehicle and retain the benefits of owning it.

One of the main commercial reasons for lessors wanting the agreement treated as a "true lease" is that the lessor is able to write off the capital cost allowance on the original cost of the vehicle, which the lessor could not do if the agreement was a "contract of conditional sale". This is a huge economic advantage for the lessor, but one that depends on the agreement being construed by the Canada Customs and Revenue Agency as a "true lease". Lessors have taken this position before the courts in tax cases.

Another advantage for the lessor is that Part 5 of the Personal Property Security Act, R.S.B.C. 1996, c. 359 does not apply to true leases with a term of more than one year. Accordingly, the lessor is not restricted to the remedies provided under section 67 of the Act and therefore can take advantage of common law remedies that, if provided for in the agreement, permit the lessor to both seize the vehicle as well as sue for any deficiency.²

A recent decision provides an example of why the lessor might want the lease agreement treated as a "true lease" rather than as a "security interest" (i.e. a conditional sale) under the Personal Property Security Act. In Newcourt Financial ltd. v. Frizzell, 2000 CarswellBC 1710, 2000 BCSC 1196 (B.C.S.C.) the lessor commenced an action against the lessee for failure to make payments under a lease. The lessor argued that the vehicle lease was a "true lease" and that it was therefore entitled to recover the vehicle and to also recover all unpaid lease payments and costs incurred to enforce its rights under the lease. If the agreement were considered to be a security interest under the Personal Property Security Act then it would be governed by part 5 of the Act, which would allow the lessee or debtor to pay the arrears and reinstate the lease. The lessor would also not be entitled under section 67(2) of Part 5 of the Act to both seize the vehicle and sue for any deficiency. The lessor argued that clause 16 of the lease provided that the "lease is intended to be treated as, and constitutes, a true lease for all purposes, including for the purpose of personal property and security and credit laws." The Court placed more reliance on clause 25 which provided that the option price was a genuine pre-estimate of the vehicle's fair market value in concluding that the lease was a "true lease".³ Accordingly, the Court found that the common law applied and under the lease the lessor could seize the vehicle and recover all amounts owing under the lease including costs due to collection, legal fees, and repossession.

I always found it troubling that the lessor could successfully take diametrically opposed positions with regard to the interpretation of identical leases when it suited their particular purpose. How can the lessor take the position in one case that a lease containing an option to purchase is a "true lease" for income tax purposes or to both seize the vehicle and sue for deficiencies when the lessee is in default under the lease, but in another case argue that the same lease is a "contract of conditional sale" to avoid the consequences of vicarious liability as an owner under section 86(1) of the Motor Vehicle Act?

Further, if the lessor litigated the issue of the lease in one action and it was found to be a "true lease" would the lessor be estopped from taking the position in another action that the identical lease was now a "contract of conditional sale"? In Saskatoon Credit Union Ltd. v. Central Park Enterprises Ltd., 1988 CarswellBC 16, 22 B.C.L.R. (2d) 89, 47 D.L.R. (4th) 431 (B.C.S.C.) McEachern, C.J.S.C. held that a litigant could be prevented from relitigating an issue in another action that has been decided against the litigant in an earlier action on the basis of issue estoppel or abuse of process notwithstanding that the opposing party in each action was different.

Schoenbach distinguished

I am indebted to Professor Bruce MacDougall of the Faculty of Law at the University of British Columbia for the argument that, in view of the enactment of the Personal Property Security Act, the Schoenbach decision may no longer be applicable to a lease with an "option to purchase".

The Schoenbach decision can be distinguished on the basis that following the enactment of Personal Property Security Act on October 1, 1990 the definition of "conditional sale" from the repealed Sale of Goods on Condition Act no longer has any application to the issue of whether a lease agreement containing an option to purchase is a contract of conditional sale.

The argument can be summarized as follows:

Section 86(3) of the Motor Vehicle Act provides an exemption from vicariously liability for an owner if the motor vehicle has been sold under a "contract of conditional sale".
The exemption only applies to a "contract of conditional sale".
The term "conditional sale" is not defined in the Motor Vehicle Act.
The Court of Appeal in Schoenbach relied on the definition of "conditional sale" in section 1 of the Sale of Goods on Condition Act to find that a lease with an option to purchase was a conditional sale under section 79(3) [now 86(3)] of the Motor Vehicle Act.
The Personal Property Security Act became law on October 1, 1990, the same day as the repeal of Sale of Goods on Condition Act.
Section 2 of The Personal Property Security Act provides that the Act applies to both leases and conditional sales.
Section 75(1) of the Personal Property Security Act provides that any reference in an Act, regulation, agreement or document to the Sale of Goods on Condition Act that relates to a security interest is deemed to be a reference to the Personal Property Security Act.
Section 75(2) of the Personal Property Security Act provides that any reference in an Act, regulation, agreement or document to a conditional sale is deemed to be a reference to the corresponding kind of security agreement under the Personal Property Security Act.
Section 75 of the Personal Property Security Act does not permit the term "contract of conditional sale" in section 86(3) of the Motor Vehicle Act to be defined by reference to the definition of "conditional sale" in section 1 of the repealed Sale of Goods on Condition Act.⁴
The term "conditional sale" is not defined in the Personal Property Security Act.
Section 68(1) of the Personal Property Security Act provides that the principles of the common law continue to apply.
The agreement in Schoenbach was executed on February 2, 1990. The motor vehicle accident in Schoenbach occurred on August 29, 1990.
The Sale of Goods on Condition Act was in effect when the agreement between the lessor and the lessee in Schoenbach was entered into and when the accident involving the lessee occurred.
The Schoenbach case does not apply to any agreement made after the repeal of the Sale of Goods on Condition Act and the enactment of the Personal Property Security Act.
The determination of whether the agreement in question is a "true lease" or "a conditional sale" should be determined by reference to the common law principles as required by the Personal Property Security Act, and not by reference to the repealed definition of "conditional sale" under the Sale of Goods on Condition Act.

Once Shoenbach has been distinguished, it will still be necessary to establish, in accordance with the principles of the common law, that the lease with an option to purchase is in fact a "true lease" and not a "contract of conditional sale". The common law principles were developed in cases where the governing legislation did not provide a definition of "conditional sale". The source of the law on the distinction between a "conditional sale" and a "lease with option to purchase" (hire-purchase agreement) is Helby v. Matthews, [1895] A.C.471 (H.L.).

Sample Outline for an application under Rule 18A

The argument is more fully developed in the following sample Outline which can be utilized in an application under Rule 18A to oppose the dismissal of an action against the lessor. I have incorporated the particulars of the lease from the Newcourt Financial ltd. v. Frizzell case to use as an example. For illustrative purposes, I have also assumed that instead of defaulting on the lease payments, the lessee was involved in an accident involving the leased vehicle and was liable to pay damages to a third party. Would the lessor still argue that the lease in Frizzell was a "true lease"? Clearly they would not. The lessor would now want to establish that the lease was actually a "contract of conditional sale" and not a "true lease" and would apply to have the action dismissed against the lessor on the basis of the Schoenbach decision.

The argument developed in this Outline may assist counsel for the plaintiff in establishing that a lease with an "option to purchase" may in fact be a "true lease" and not a "contract of conditional sale" in which case the lessor would not be entitled to the exemption under section 86(3) of the Motor Vehicle Act and would be vicariously liable as an owner under section 86(1) of the Act.

Outline

Position of the Plaintiff/Respondent:

The Plaintiff opposes the application of the Defendant Company ("the Lessor") seeking an order that the Lessor is not vicariously liable pursuant to Section 86(3) of the Motor Vehicle Act, R.S.B.C. 1996, c. 318.

Basis for opposing relief:
The Lessor is the owner of the motor vehicle pursuant to Section 86(1) of the Motor Vehicle Act and as such is vicariously liable for the actions of the Defendant driver, (the "Lessee") who was driving the motor vehicle at the time of the accident with the consent of the Lessor.
The Lessee had been driving a 1999 Jeep (the "Vehicle") which she had leased from the car dealer (the "Dealer") pursuant to an agreement entitled "Vehicle Lease" (the "Agreement") dated November 20, 1998.
The Agreement was assigned by the Dealer to the Lessor pursuant to the terms of the Agreement.
The term of the Agreement was for 60 months commencing on December 1, 1998. The retail price of the Vehicle was $25,748.00. The down payment was $0.00. The monthly payments were $464.60 and would total $16,725.60 at the end of the three-year term. Clause 25 of the Agreement gave the Lessee the option to purchase the Vehicle at the end of the term for $17,728.68 (the "Purchase Option Price") if she was not in default of the Agreement at that time. The Purchase Option Price was deemed by clause 25 of the Agreement to be "a fair estimate of the fair market value on that date".

The relevant clauses in the Agreement are:

1. RETAIL SELLING PRICE of Vehicle (including additional equipment, accessories, freight, air tax and pre-delivery inspection but not GST or PST)	$25,748.00
...
5. TOTAL COSTS AND CREDIT DUE UPON SIGNING
a) Cash down payment	$0.00
+ b) Net Trade-in allowance	$0.00
+ c) Taxes on 5(a) and 5(b)	$0.00
+ d) Advance payment (3(d)) plus, if applicable, pro-rata payment for adjustment to payment date and taxes	$154.87
+ e) Security Deposit	$2,500.00
+ f) Registration and License Fees	$413.12
+ g) Administration and Other Fees (describe)	$0.00
= h) Total Costs and Credits Due Upon Signing	$3,267.99
6. Total Costs of Lease Transaction upon completion excluding charges for excess wear and tear, excess kilometers and late payment (3(f) + 5(h) – 3(d) – 5(e)	$17,493.59
7. OPTION TO PURCHASE/BUY-OUT OPTION
You have the option to purchase the vehicle during the Term of this lease or at the end of the Term for the price and in accordance with the terms set out in this Lease.
a) Option Price	$17,728.68
b) Total transaction costs if you elect to purchase the vehicle at end of the term (6 + option price in Lease plus applicable taxes on option price at time of purchase)	$35,222.27
c) Total transaction costs if you elect not to purchase the Vehicle at end of the Term (same as 6)	$17,493.59

16. VEHICLE OWNERSHIP: This Lease is intended to be treated as, and constitutes, a true lease for all purposes, including, for example, for the purpose of personal property security and credit laws and income and other tax law. Accordingly, AT&T [the assignee] will remain the owner of the Vehicle and retain the benefits of owning it.

...

25. OPTION TO PURCHASE AT END OF TERM: At the end of the Term, if you wish you may purchase the Vehicle for the Option Price shown in Section 7 (which is a genuine pre-estimate of the Vehicleâs fair market value on that date) PLUS all fees, taxes, costs, and expenses in connection with your purchase. PLUS any other amounts which may be due and unpaid under this Lease. You are not entitled to exercise this option if you are in "Default" under this Lease (see Section 28, below, for the meaning of "Default"). If you wish to exercise this option, you must give AT&T at least 35 days prior written notice and must pay the Option Price to AT&T before the end of the last month of the Lease Term. Once you have notified AT&T, you cannot cancel your purchase. The purchase of the Vehicle by you shall be on an as is, where is" basis without any condition, representation or warranty by AT&T, express or implied, except that such Vehicle is free and clear of liens and encumbrances caused by AT&T.

Section 86(1) of the Motor Vehicle Act provides that the owner of a motor vehicle is vicariously liable for the actions of a person who drives the motor vehicle with the consent of the owner:
Responsibility of owner in certain cases
(1) In an action to recover loss or damage sustained by a person by reason of a motor vehicle on a highway, every person driving or operating the motor vehicle who is living with and as a member of the family of the owner of the motor vehicle, and every person driving or operating the motor vehicle who acquired possession of it with the consent, express or implied, of the owner of the motor vehicle, is deemed to be the agent or servant of that owner and employed as such, and is deemed to be driving and operating the motor vehicle in the course of his or her employment.
Section 86(3) of the Motor Vehicle Act provides an exemption from vicarious liability for an owner if the motor vehicle has been sold under a "contract of conditional sale":
(3) If a motor vehicle has been sold, and is in possession of the purchaser under a contract of conditional sale by which the title to the motor vehicle remains in the seller until the purchaser becomes the owner on full compliance with the contract, the purchaser is deemed an owner within the meaning of this section, but the seller or the seller's assignee is not deemed to be an owner within the meaning of this section.
The issue in this case is whether the Agreement is a "contract of conditional sale" which would exempt the Lessor and owner of the motor vehicle, from vicarious liability under section 86(3) of the Motor Vehicle Act.
The term "conditional sale" is not defined in the Motor Vehicle Act.
The Lessor in the case at bar relies on the decision in Schoenbach v. Truong, 1996 CarswellBC 928 (BCCA) to establish that the Agreement is a conditional sale and not a true lease.
The law and facts of this case are distinguishable from the law and facts considered by the British Columbia Court of Appeal in Schoenbach.
The agreement in Schoenbach was executed on February 2, 1990. The motor vehicle accident occurred on August 29, 1990.
The Sale of Goods on Condition Act R.S.B.C. 1979, c.373 was in effect when the Agreement between the lessor and the lessee in Schoenbach was entered into and when the accident involving the lessee occurred.
In Schoenbach, the Court of Appeal relied on the definition of "conditional sale" in section 1 of the Sale of Goods on Condition Act to find that a lease with an option to purchase was a conditional sale under section 79(3) [now 86(3)] of the Motor Vehicle Act.
The definition of "conditional sale" under section 1 of the Sale of Goods on Condition Act provided:
"conditional sale" means a contract

(a) for the sale of goods under which possession is or is to be delivered to the buyer, and the property in the goods is to vest in him at a subsequent time on payment of the whole or part of the price or the performance of any other condition; or

(b) for the hiring of goods by which it is agreed that the hirer shall become, or have the option of becoming, the owner of the goods on full compliance with the terms of the contract;
The Sale of Goods on Condition Act was repealed on October 1, 1990. The definition of "conditional sale" under section 1 has been repealed with that Act.
The Personal Property Security Act R.S.B.C. 1996, c. 359 was brought into force on October 1, 1990, the same day as the repeal of Sale of Goods on Condition Act.
As the Agreement in the case at bar was executed on November 20, 1998, it is governed by the provisions of the Personal Property Security Act.
The Personal Property Security Act clearly applies to both leases and conditional sales. Section 2 of the Act provides:
2(1) Subject to sections 4, this Act applies to

(a) to every transaction that in substance creates a security interest, without regard to its form and without regard to the person who has title to the collateral, and

(b) without limiting paragraph (a), to a chattel mortgage, a conditional sale, a floating charge, a pledge, a trust indenture, a trust receipt, an assignment, a consignment, a lease, a trust, and a transfer of chattel paper if they secure payment or performance of an obligation.
Section 75(1) of the Personal Property Security Act provides that any reference in an Act, regulation, agreement or document to the Sale of Goods on Condition Act that relates to a security interest is deemed to be a reference to the Personal Property Security Act.
(1) A reference in an Act, regulation, agreement or document to the Book Accounts Assignment Act, the Chattel Mortgage Act, the Company Act, the manufactured Home Act or the Sale of Goods on Condition Act that relates to a security interest is deemed to be a reference to this Act or to the corresponding provisions of this Act.
Section 75(2) of the Personal Property Security Act provides that any reference in an Act, regulation, agreement or document to a conditional sale is deemed to be a reference to the corresponding kind of security agreement under the Personal Property Security Act.
(2) A reference in an Act, regulation, agreement or document to a chattel mortgage, conditional sales contract, floating charge, pledge, assignment of book accounts or other similar agreement is deemed to be a reference to the corresponding kind of security agreement under this Act.
Accordingly, section 75 of the Personal Property Security Act does not permit the term "contract of conditional sale" in section 86(3) of the Motor Vehicle Act to be defined by reference to the definition of "conditional sale" in section 1 of the repealed Sale of Goods on Condition Act.
The term "conditional sale" is not defined in the Personal Property Security Act. The Legislature clearly intended the definition of "conditional sale" in the common law to apply to transactions after October 1, 1990 by virtue of section 68(1) of the Act:
68(1) The principles of the common law, equity and the law merchant, except insofar as they are inconsistent with the provisions of this Act, supplement this Act and continue to apply.

Common law principles
The cases and texts in the field of personal property security law suggest that there are many factors to consider in the determining whether the agreement at issue in a particular case is in essence a "true lease" or a "conditional sale" or "disguised sale". Each case must be decided on its own facts. Dale Doan and Paul Bradley in the text, British Columbia Personal Property Security Act Practice Manual, 2000 Update state, at p. 5-8:
"The leading Canadian cases on this issue are a trilogy of Ontario decisions by Henry J.: Re Speedrack Ltd. (1980), 1 P.P.S.A.C. 109 (Ont. H.C.), Re Ontario Equipment (1976) Ltd. (1981), 1 P.P.S.A.C. 303 (Ont. H.C.), affirmed (1982), 6 P.P.S.A.C. 229 (Ont. C.A.), and Gatx Corporate Leasing Inc. v. William Day Construction Ltd. [1986] O.J. No. 806 (Ont. H.C.).
The common law principles from the "core" cases in this field suggest that the court must review evidence of the role of the parties, the effect of the transaction, and the intent of the parties to determine whether the agreement is a "true lease" or a "conditional sale". Some of these elements are apparent on the face of the agreement, while others elements will only become known following the discovery of documents and the parties to the transaction.
In Speedrack (supra at paragraph 25) Henry, J. said, at paragraphs 10 and 15:
The nature of the transaction may be apparent on the face of the instruments, but if it is not, the court must determine its nature ... from the surrounding circumstances. It is not merely a question of construing the agreement between the parties which may be quite clear. It is a question of determining the intention of the parties, notwithstanding the form used in setting up the transaction. For this, extrinsic evidence may be relevant and admissible and it is so in this case. The courtâs task is to determine the essence of the transaction in spite of its form.... It must determine, on the balance of probabilities, and on a practical and commonsense view of the evidence, whether the parties negotiated a loan or advance on security or a standard lease of property....

... I proceed by considering three factors – the role of the parties, the intent of the parties and the effect of the transaction.
In Re Ontario Equipment Henry, J. identified several significant factors including whether the agreement transfers ownership of the asset to the lessee, whether that transfer was mandatory or if an option to purchase had to be exercised, and, if so, whether the purchase option was for a nominal amount or for fair market value. Henry, J. stated at paragraph 8:
8 It is of the essence of a lease intended as security within the meaning of the Personal Property Security Act that the property in the subject of the lease is to pass ultimately to the lessee, who is obliged to pay the lessor what might be reasonably regarded as the purchase price with interest and carrying charges over the life of the lease. In such a case the transaction is not unlike a conditional sale agreement or hire-purchase agreement.

9 What I consider to be a practical definition of the distinction between a true lease and a lease by way of security was adopted in Re Crown Cartridge Corp. (1962), 220 F. Supp. 914 at p. 916, by Croake D.J. from the decision of Herzog, Referee:

'The test in determining whether an agreement is a true lease or a conditional sale is whether the option to purchase at the end of the lease term is for a substantial sum or a nominal amount ... If the purchase price bears a resemblance to the fair market price of the property, then the rental payments were in fact designated to be in compensation for the use of the property and the option is recognized as a real one. On the other hand, where the price of the option to purchase is substantially less than the fair market value of the leased equipment, the lease will be construed as a mere cover for an agreement of conditional sale.'

10 The critical issue in every case is the intention of the parties and this depends upon the facts of the case. In Re Speedrack Ltd. (1980), 33 C.B.R. (N.S.) 209, 11 B.L.R. 220, 1 P.P.S.A.C. 109 (Ont. S.C.), for example, the facts led to the conclusion that the lease was a security for the financing of the ultimate purchase of the subject matter, and the failure to register a financing statement left the security interest unperfected and subordinate to the interest of the trustee in bankruptcy.

11 Each case must stand on its own facts. In the case at bar the terms of the lease assure to the lessor recapture of its cost plus a profit, with the guarantee that it will recoup $2,500 on the final sale at market price. As I interpret the lease agreement, the lessee is not obliged to take title at the end of the term. I am aware that Mr. Peacock in his affidavit says that under the open-end lease "the lessee agreed to purchase the leased vehicle at the agreed upon price". That, however, is not my interpretation of the agreement; clearly the lessee has an option. It may elect to purchase or not. It cannot be said that the final transaction is such that no reasonable lessee would refuse to purchase the vehicle, which would be some evidence that the intention of the parties was that the transaction from the beginning was in reality an agreement of purchase and sale. The prospect of the lessee reaping a profit on final liquidation of the vehicle is not conclusive of this intention. It is quite consistent with the lessor holding out an incentive to the lessee to maintain the value of the asset during the term of the lease by proper maintenance, repair and careful use.

12 Parties must be free to contract as they see fit without restraint, except as clearly imposed by law. It is only if on a reasonable view of the agreed arrangements the lessor has financed the purchase of the vehicle, under the guise of a lease which is in reality a security instrument, that the Act requires registration to protect the interest of the lessor-owner against creditors.

13 In the present case I am not persuaded that the lease is anything more than a straightforward leasing arrangement which recovers for the lessor, as owner, over the effective life of the vehicle, his cost, together with a reasonable profit. The lessor is entitled to do that. That is no additional evidence, as there was in Re Speedrack Ltd., supra, to lead to the conclusion that the true nature of the transaction was a sale of the asset financed on the security of the lease.
Some of the factors apparent on the face of the Agreement in the case at bar which point to the Agreement being a "true leaseâ rather than a "conditional sale" are:⁵
1. The Agreement is called "Vehicle Lease".
2. Clause 16 provides that "this Lease is intended to be treated as and constitutes, a true lease for all purposes...." If the Lessor who has drafted the Agreement states that it is to be considered a "true lease" for "all purposes, including... for personal property security", then the Agreement cannot be a conditional sale as the two terms are mutually exclusive.
3. The down payment in the Agreement was $0.00.
4. The Lessee paid no GST and PST on the price of the Vehicle, which is required in a conditional sale agreement.
5. The retail price of the Vehicle was $25,748.00. The option price to buy out the Vehicle at the end of the term of the leases was $17,728.68 or 68.85% of the retail price. Clause 25 provided that this was a "genuine pre-estimate of the Vehicleâs fair market value on that date." ⁵
6. If the Lessee returned the Vehicle at the end of the term, the Lessee did not share in any profit beyond the residual value of the Vehicle nor was the Lessee required to make up any deficiency in the event that the Vehicle was sold by the Lessor at less than the residual value.
7. There is no clause in the lease granting the Lessee an equity or property interest in the Vehicle.
8. By clause 9 the Lessee is precluded from driving more than 60,000 and suffers a penalty of $0.10 per kilometer driven above that distance.
9. Clause 18 restricts the use of the Vehicle and precludes modifications to the Vehicle.
10. Clause 21 provides that the Lessee must at the request of the Lessor disclose the location of the Vehicle and permit the Lessor to inspect the Vehicle.
11. Clause 31 provides that the Lessee may not transfer, sublease, or rent the Vehicle without the Lessorâs permission.
These are all apparent on the face of the Agreement which indicate that the Agreement is a "true lease" and not a "conditional sale."
Material to be relied on:
Affidavit of Jane Doe.
Authorities:
Alexander v. Bertram and Ford Credit Canada Ltd., 2000 CarswellBC 175 (B.C.C.A.), 2000 BCCA 72.

Schoenbach v. Truong, 1995 CarswellBC 54 (B.C.S.C.)

Schoenbach v. Truong, 1996 CarswellBC 928 (B.C.C.A.)

Re Speedrack Ltd. (1980), 1 P.P.S.A.C. 109 (Ont. H.C.)

Re Ontario Equipment (1976) Ltd. (1981), 1981 CarswellOnt 186, 1 P.P.S.A.C. 303 (Ont. H.C.)

Re Ontario Equipment (1982), 6 P.P.S.A.C. 229 (Ont. C.A.)

Gatx Corporate Leasing Inc. v. William Day Construction Ltd. [1986] O.J. No. 806 (Ont. H.C.)

Statutes:

Motor Vehicle Act, R.S.B.C. 1996, c. 318.

Personal Property Security Act, R.S.B.C. 1996, c. 359

Texts:

Doan, D. and Bradley, P. British Columbia Personal Property Security Act Practice Manual, 2000 Update.

Cuming, Ronald and Wood, Roderick. British Columbia Personal Property Security Act Handbook, 4th ed., (Toronto: Carswell), 1998.

Sullivan, Ruth; Drieger on the Construction of Statutes, 3d ed. Butterworths,Toronto.

McLaren, Richard. Personal Property Security: An Introductory Analysis, 5th ed. Toronto, Carswell, 1992.

Cuming, Ronald. True Leases and Security Leases under Canadian Personal Property Security Acts (1983), 7 CBLJ 251.

References

¹ The following cases distinguished Schoenbach: Alexander v. Bertram, 2000 CarswellBC 175, 2000 BCCA 72 (B.C.C.A.); Forrest (Guardian ad litem of) v. Johnson, 1997 CarswellBC 1081 (B.C.S.C.); Nickel v. Happy Auto Sales Inc., 1997 CarswellBC 2641 (B.C.S.C.)

² Part 5 deals with the rights and remedies in default. Section 55(2) provides that Part 5 does not apply to (a) a transaction referred to in section 3 which includes a lease with a term of more than one year.

³ The fact that the option to purchase was deemed to be fair market value is a major factor at common law in the determination of whether the lease was intended to be a true lease or a disguised sale akin to a conditional sale.

⁴ In Alexander v. Bertram, supra, n. 1, the Court of Appeal distinguished the Schoenbach decision on the basis that the "option to purchase" did not form part of the original agreement and the lessor was not entitled to the exemption under section 79(3) [now 86(3)]. The judgment of the Court was delivered by Prowse, J.A. who stated:

With respect, I agree with the chambers judge that the facts of this case are materially different from those in Schoenbach and that the reasoning in Schoenbach does not support a finding that the "arrangement" between Ford, Melody and Bertram precludes Ford from being found an owner under s. 79(3) of the Act. Schoenbach involved one contract (the lease) which included an option to purchase that was directly enforceable against Ford. The only issue in that case was whether there was any rationale for treating security instruments differently for the purpose of a s. 79(3) analysis depending on whether they fell under definition (a) or (b) of "conditional sale" under the Sale of Goods on Condition Act. This Court held that a contract which fell under either definition exempted the "seller" from liability as an owner under s. 79(3). It did not purport to deal with an "arrangement" similar to that between Ford, Melody and Bertram. (As a matter of historical interest, I note that the Sale of Goods on Condition Act was repealed by s. 106 of the Personal Property Security Amendment Act, 1990, S.B.C. 1990, c. 11, on October 1, 1990, the same day that the Personal Property Security Act, S.B.C. 1989, c. 36, was brought into force. The Personal Property Security Act does not contain a definition of "conditional sale". That being the case, there is no reason to doubt that the reference to "conditional sale" in s. 79(3) continues to be to the definition in the Sale of Goods on Condition Act.)

The parenthetically added comments at the end of the paragraph are clearly obiter. The Personal Property Security Act was not referred to in the Factums in the Bertram appeal and there is no reference by the Court of Appeal in Schoenbach to the Personal Property Security Act. The only reference to the Act in the factums in the Schoenbach appeal was a reference to the fact that the Sale of Goods on Condition Act was repealed and replaced by the Personal Property Security Act on October 1, 1990, with the proviso that the 'Sale of Goods on Condition Act was still in force at the time the parties entered in to the Agreement and when the motor vehicle accident occurred.

There was no argument made in either appeal that the Personal Property Security Act applies to "conditional sales" [s. 2(1)(b)]; that any reference in an Act, regulation, agreement or document to the Sale of Goods on Condition Act that relates to a security interest is deemed to be a reference to the Personal Property Security Act [s. 75(1)]; that any reference in an Act, regulation, agreement or document to a conditional sale is deemed to be a reference to the corresponding kind of security agreement under the Personal Property Security Act [s. 75(2)]; or that the principles of the common law continue to apply [s. 68(1)].

⁵ Additional factors not apparent on the face of the agreement to consider include:

Was the Lessor intending to deduct the capital cost of the Truck for income tax purposes and has it done so in similar leases? The deduction would be 15% in the first year and 30% in the remaining years. The Lessor cannot do so if the transaction is a conditional sale.
Did the Lessor have a master lease agreement with the Dealer?
What is the usual business of the Lessor? Is it in the business of leasing vehicles or does it buy and sell vehicles.
What does the correspondence between the parties disclose?
What was the acquisition cost of the Truck? Did the monthly payments over the term of the lease allow the Lessor to recover the acquisition cost of the Truck plus interest, or was there a shortfall?
Was the Agreement for the economic life of the Truck or was there residual value in the Truck after the expiration of the lease term.
Does the Lessor require the realization of the residual value of the Truck to make the transaction more profitable?
Did the Lessor insure the residual value of the Truck in the event that it was worth less than the option price in the Agreement?

⁶ Where the option to purchase is not deemed to be at fair market value in the lease, then there should be evidence presented to establish that the option price is more than a nominal sum. If the economic reality is that a lessee would clearly exercise the option because the price was far less than the fair market value of the vehicle, then the lease could be construed as a "disguised sale" or a "contract of conditional sale"

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