One of the longest standing principles at law is that if there is a breach of contract a party can sue for damages such that they should be placed in the same position as if the contract had been completed.

Lease agreements commonly include termination clauses where upon default by the lessee all remaining payments automatically become due, discounted to take into account the time value of money. Properly drafted acceleration clauses can be considered a genuine pre-estimate of damages as the lessor is in the same position they would have been in had the contract been completed. If the lessor were to collect full payments (i.e., not discounted) the lessor would be in a better position than he or she would have been had the default not occurred. A recent Ontario Court of Appeal case takes this principle one step further. In Hav-A-Kar Leasing Ltd. v. Vekselshtein 2012 ONCA 826 (“Hav-A-Kar”), the Court awarded the lessor all remaining lease payments in full without discounting. What is interesting is that the Court relied on Keneric Tractor Sales Ltd. v. Langille, [1987] 2 S.C.R. 440, as precedent for the enforcement of payment acceleration clauses, however this case acknowledges the need to discount future payments to properly reflect the time value of money. This was not discussed or followed by the Court.

In Hav-A-Kar, the lease agreement was for a motor vehicle and provided for payment of all amounts unpaid upon default by the lessee. The lessee defaulted and the lessor sued for damages, including enforcement of the accelerated payment clause. The trial judge rejected the lessee’s argument that the payment clause was a penalty, as opposed to a liquidated damages clause. The lessee appealed the decision on the basis that the trial judge erred in enforcing the accelerated payment clause. The appeal was dismissed. The Court of Appeal, in making its determination, relied on the well established principle that damages for breach of contract should put the plaintiff in the same position as if the contract had been performed. It was found that the accelerated payment clause was not excessive, it simply put the lessor in the position it would have been if the lessee performed its obligations under the lease agreement. The Court decision was focused on whether acceleration was an appropriate remedy and to a much lesser extent (or not at all) on how this acceleration should have been calculated.

As noted above, the problem with the Court of Appeal decision is that it ignores the benefit to the lessor of receiving future lease payments today. The math was simply wrong. While not stated, the Court may have taken into account that the full value of the remaining payments and the discounted value of those payments, given that it is a small ticket lease in a low interest rate environment, may be quite small. If this were the case it would be helpful if the Court indicated as such. What is concerning is that this case may be relied upon in a different fact situation where the differential between the two amounts are large which is why we bring this decision to your attention.