BC Court of Appeal Reverses Self on Vicarious Liability of Vehicle Leasing Companies

In British Columbia, drivers who have possession of a motor vehicle with the express or implied consent of its owner are deemed by BC's Motor Vehicle Act to be the owner's "agent or servant". At law this makes the owner vicariously liable for the driver's negligent operation of the vehicle. However, the Act makes an exception for vendors under "conditional sales contracts". Before the British Columbia Court of Appeal issued its recent decision in Yeung v. Au, this exception had also allowed leasing companies using option-to-purchase contracts to escape vicarious liability. Not anymore.

Sections 86(1) and 86(3) of the BC Motor Vehicle Act state,

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.

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.

At common law, a conditional sale contract is an arrangement under which the purchaser agrees to buy the goods and pays the purchase price by installments, and under which the seller is obliged to transfer formal ownership upon receipt of full payment. This would not capture a typical lease with an option-to-purchase clause because transfer of title is not automatic; at the end of the lease, the lessee has an option, but not an obligation, to buy the vehicle. However, the BC Sale of Goods on Condition Act expanded the narrow common law definition to include contracts "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". Hence lessors under lease-option agreements were "saved" from vicarious liability by s. 86(3) of the Act.

The Sales of Goods on Condition Act was repealed in 1990 and replaced by BC’s Personal Property Security Act. The new Act has no definition of conditional sale contracts. This raised the question whether a "contract of conditional sale" in section 86(3) of the Motor Vehicle Act was now governed by the narrow common law definition, excluding option-to-purchase contracts and exposing vehicle leasing companies to vicarious liability for the drivers' negligence.

That question was initially answered by the BC Court of Appeal in 1996 in the case of Schoenbach v. Truong. The Court of Appeal noted the repeal of the Sale of Goods on Condition Act but said this did not alter the legislative intention to treat all conditional sales contracts (i.e. those with option-to- purchase terms and those without) the same for the purposes of vicarious liability under the Motor Vehicle Act. Option-to-purchase agreements were therefore still conditional sale contracts within the meaning of section 86(3) and leasing companies using option-to-purchase agreements were still exempt from vicarious liability. This ruling was bolstered by a second Court of Appeal decision, Alexander v. Bertram, in the year 2000. In that case, one of the judges stated there was no reason to doubt that the reference to "conditional sale" in the Motor Vehicle Act continued to be the definition previously provided by the Sale of Goods on Condition Act.

On May 3rd, 2006, in the case of Yeung v. Au, the Court of Appeal reversed itself. The Plaintiff suffered serious brain damage when riding in a vehicle driven by Henry Au. Henry’s father, Anthony Au, had leased the vehicle from Transportaction Lease Systems Inc. The lease agreement contained an option to purchase the vehicle. The Plaintiff sued both Anthony and Transportaction as "owners" alleging vicarious liability for Henry's negligent driving. The trial judge awarded $5,800,000 in damages against Henry and Anthony but dismissed the claim against Transportaction based on the Court of Appeal decision in the Schoenbach case and several lower court rulings that had followed.

The Court of Appeal in the Yeung case ruled the Schoenbach decision should no longer be followed. Citing principles of statutory interpretation, the Court of Appeal said that when a statute is repealed - in this case the Sale of Goods on Condition Act - it is considered as if it had never existed. That meant the common law definition of "conditional sale" applied to section 86(3) of the Motor Vehicle Act. As noted above, the common law definition does not cover option-to-purchase agreements and so vehicle leasing companies using option- to-purchase agreements no longer enjoy the protection of section 86(3). Such lessors are vicariously liable for the harm caused by the drivers who acquired possession of the vehicle with their express or implied consent. Transportaction was therefore vicariously liable for the plaintiff's damages, a significant outcome because the limits of Henry/Anthony's insurance was four million dollars less than the award.

In the past, a lessor (or the finance company to whom the lease was assigned) might occasionally find itself named as an "owner"-defendant in a personal injury lawsuit arising from a motor vehicle accident caused by the lessee's negligence. Based on the earlier case law, such a lessor could usually convince the Plaintiff that it had no vicarious liability under section 86 of the Motor Vehicle Act and could extract itself from the litigation. This is no longer the case. Such lessors now have vicarious liability. The result is that the "small print" in auto leases is going to come under greater scrutiny. These leases already contain provisions respecting insurance and indemnities in favour of the lessor. Such clauses, along with restrictions regarding the use of the vehicle by others, will now come to the fore and will give rise to interesting coverage and liability issues in the future.

The full text of the Court of Appeal's judgment in Yeung v. Au can be found here:
http://www.courts.gov.bc.ca/jdb-
txt/ca/06/02/2006bcca0217.htm

If you have any questions about the decision or any other insurance matter, please contact Glen Boswall (tel: 604.643.3125 email: rgb@cwilson.com), Jon Hodes (tel: 604.643.3168 e-mail: jlh@cwilson.com) or any other member of the Clark Wilson LLP Insurance Practice Group.