Canada: Loans To Employees And The Duty Of Good Faith

Last Updated: July 7 2014
Article by A. Irvin Schein

The recent Superior Court decision in Canaccord Genuity Corporation v. Sammy is a useful reminder of the law relating what may happen when an employee obtains a loan from his employer, and then the employee is fired.

In this case, the plaintiff Canaccord, an investment dealer, entered into an agency agreement with the defendant Sammy, an investment advisor, in 2011.

The agreement also provided that Canaccord would make a sizeable loan to Sammy. The loan was forgivable under certain circumstances but the agreement provided that if the agency relationship was terminated by either party and for any reason, the loan would be repayable immediately with interest.

After the agreement was executed, Sammy became an investment advisor for Canaccord and brought over his book of business.

Within about a year, Canaccord made the decision to terminate the relationship and did so on 90 days' notice. Canaccord had concerns about certain aspects of Sammy's conduct.  For his part, not surprisingly, Sammy denied any wrongdoing.

With the termination, the plaintiff demanded repayment of its loan.

Sammy refused to pay, taking the position that the agency agreement had been terminated in bad faith. Sammy insisted that the allegations against him were unproven fabrications, designed as an excuse to end the relationship and appropriate his book of business.  He insisted that because of the abrupt termination, he was unable to transfer his book of business to any other dealer and as a result he lost substantial income.  He took the position that Canaccord had acted wrongfully and accordingly, he was discharged from any obligation to repay the loan.  In the alternative, he insisted that the damages which he had sustained as a result of Canaccord's conduct could be set off against the amount otherwise owing under the loan.

Canaccord moved for summary judgment.

The essence of Sammy's defence to the summary judgment motion, and the basis of his counterclaim, was that the manner of his termination was a breach of an implied duty of good faith.

The Court disagreed and granted summary judgment. The Court pointed out that in this case, the loan was repayable even if Canaccord did breach any duty of good faith, simply as a matter of contract interpretation.  The issue of whether or not Canaccord's good faith or bad faith was not relevant to the issue of whether or not the loan was repayable.

The Court observed that under the current law, Canadian courts have not recognized a stand alone duty of good faith independent from the terms expressed in a contract. To the extent that there is a duty of good faith, it has not gone so far as to create new rights and obligations for which the parties have not bargained, nor will it change the express terms of a contract.  Rather, the duty of good faith exists to ensure that parties do not act in a way that defeats the objectives of their agreement.

Accordingly, while Sammy might be able to allege bad faith with respect to the termination of the agency agreement, that is not a factor in Sammy's obligation to repay the loan.

In cases of this nature, it is always within the discretion of the Court to grant judgment but then stay execution of the judgment pending the resolution of a counterclaim. In other words, the judgment will go into the books, as it were, but the successful plaintiff will not be able to actually collect on the judgment until the defendant's counterclaim has been disposed of.

In this case, the motions judge declined to exercise his discretion that way. He ruled that the money was payable immediately.  Presumably, this was a reflection of the Court's skepticism as to the defendant's counterclaim.

This case is a useful reminder of the difficulty that will be faced by anyone attempting to avoid his or her obligations, expressed in a contract clearly and plainly, by putting forward arguments that are not directly related to the obligation. If Sammy had truly been concerned about what would happen to his book of business upon termination, and the fact that such a termination would cause him a significant amount of difficulty repaying the loan that had been made to him, he should have protected himself in the wording of the contract.

Originally published at irvinschein.com.

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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