Lexus pulls dealership over botched construction deadlines

By the time the store was to haven opened, the plaintiff hadn't even broken ground

UPDATED: 8/2/16 2:42 pm ET - corrected

Editor's note: A previous version of this story misspelled Sylvester Chuang's name. The spelling has been corrected.

A prospective dealer who didn't get his Lexus franchise after missing deadlines for a proposed new store in downtown Toronto must pay $1.2 million to Toyota Canada Inc., the Ontario Court of Appeal ruled July 21.

The unanimous decision upheld a lower court award against Sylvester Chuang and his affiliated companies.

Although the court found it was unreasonable for Toyota to terminate Chuang's letter of commitment in 2005, a provision in the letter shields the automaker from liability, the court held.

Toyota terminated Chuang "because he failed to meet certain deadlines set out in the agreement," the court said.

Chuang hadn't begun construction by the December 2004 deadline that the original letter of commitment set for the store to open. He also missed extended deadlines to complete the project and to obtain a final financing commitment, the court said.

OPENS AUDI STORE INSTEAD

Chuang later opened an Audi dealership at the site. His dealer group, Auto World Imports Network, has stores in Ontario and British Columbia.

The suit sought damages stemming from the allegedly wrongful termination, but a trial judge ruled against Chuang and awarded Toyota $1.2 million to cover its costs of defending the case. The automaker had requested $1.6 million.

The Court of Appeal also sided with Toyota, saying that provision applied although the automaker "acted unreason- ably in terminating the agreement."

In an opinion written by Justice David Doherty, the court said, "Chuang had failed to even commence construction by the time he had agreed he would have the dealership open for business. No doubt, much of the delay was beyond his control.

"However, from Toyota's perspective, Chuang's failure to perform as promised required significant alterations to the agreement," the court continued. "In the circumstances, it was not surprising that Toyota would drive a hard bargain that included rights of termination and the allocation to Chuang of the financial risks flowing from termination."

Chiang's lawyer, John Adair of Toronto, called the ruling "very problematic for dealers, and perspective dealers in particular. The dealer or prospective dealer takes all the risk."

In this case, he said, Chuang committed himself to invest more than $16 million, while the Toyota-Lexus commitment was only $200,000-$400,000.

Toyota Canada attorney Timothy Pinos of Toronto said the ruling underscores the importance to manufacturers and distributors of letters of commitment.

"The expectation is that if a dealer-prospect does what he promises, he does get

the dealership," Pinos said. Despite their importance, "letters of commitment are often not as tightly drafted as they ought to be," although they are binding and enforceable, he said.

You can reach Eric Freedman at freedma5@msu.edu

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