Canada: Problem Customer? Problem Solved!

Takeaway

Banks are entitled to terminate banking relationships on reasonable notice and without providing an explanation. When determining how much notice is "reasonable", courts will consider how long it would take for a similarly-situated organization to obtain comparable banking arrangements, without regard to the customer's particular circumstances.

The Case

International Relief Fund for the Afflicted and Needy (Canada) v. Canadian Imperial Bank of Commerce, 2013 ONSC 4612

Case Summary

In 2001, International Relief Fund for the Afflicted and Needy (Canada) ("IRFAN") became a customer of Canadian Imperial Bank of Commerce ("CIBC"). In April 2011, the Canada Revenue Agency ("CRA") revoked IRFAN's registration as a charity, which IRFAN is disputing before the Federal Court of Appeal. CIBC advised IRFAN in March 2013 that their banking relationship would terminate in 60 days. CIBC did not initially give IRFAN an explanation for the termination but later acknowledged that its decision was influenced by the CRA's decision to revoke IRFAN's charitable status, by the CRA's audit report findings, and by information IRFAN provided to CIBC about its operations. CIBC granted two extensions of the termination, with the result that IRFAN received a total of four months notice that its banking relationship with CIBC would terminate.

While IRFAN agreed that the bank was entitled to terminate their banking relationship upon giving reasonable notice, it sought an injunction to restrain the termination on the basis that the notice it received was not reasonable. IRFAN took the position that the Court should determine the appropriate length of notice by reference to the CRA's actions and the effect those actions had on IRFAN's operations, including the impact on its reputation and finances and the resulting difficulty it would have in obtaining the services of another bank. It also argued that the period of notice should reflect the particular type of services required of an international not-for-profit organization, its need for electronic wiring services, and for services that can accommodate continuous streams of donations into its accounts, as well as the damage to its charitable operations that would result if the bank terminated its services on four months' notice.

The Court held that a bank is entitled to terminate a banking relationship on reasonable notice. It added that no explanation for such termination need be given. In particular, the Court cited with approval a British Columbia decision that concluded that a bank is not required to have a "commercially reasonable justification" for terminating its relationship with a customer.

As to what constitutes reasonable notice, the Court agreed with CIBC's position that a customer's particular circumstances need not be taken into account. The period of notice must be such as "would have been reasonable in ordinary circumstances", and is not affected by the customer's "peculiar identity or reputation". In particular, the Court held that IRFAN's dispute with the CRA, and the other issues related to its not-for-profit status, were not relevant to determining how much notice CIBC should have given its customer. The Court concluded that IRFAN did not satisfy its burden to show that, in ordinary circumstances, and without regard to factors that were personal to it, four months was not a reasonable period to allow it to organize its affairs and find a new bank.

This decision provides unequivocal support for the ability of a bank to terminate its relationship with a customer without cause so long as it gives reasonable notice. The decision also suggests two matters that banks and other service providers should take into account in connection with the prudent management of their customer or client contracts:

  1. It should be recognized that the terms of a contact will generally override the Court's conclusion that banking contracts can be terminated on reasonable notice. Both standard form and negotiated contracts should be reviewed to ensure that they do not contain ambiguous provisions which could impair a party's ability to terminate. As well, consideration should be given to including a term that expressly permits a party to terminate a banking or other contract on providing a specified period of notice, thereby eliminating the potential for disputes and costly litigation to determine the amount of notice that would be "reasonable" in a particular situation. 
  2. Where a contract does not specify how much notice of termination is required, businesses should develop standards as to the notice period that would be "reasonable" in the context of their particular industry and circumstances. The IRFAN decision noted that other cases have considered how much notice is required to terminate various types of business relationships, such as distributorship agreements and brokerage agreements. It would be desirable to consider this question before a crisis requires an urgent decision.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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