Canada: Contract Law Update - Developments Of Note 2015

Last Updated: November 13 2015
Article by Lisa Peters

 I have been preparing this annual review of contract law cases relevant to commercial practice since 2009. Last year (2014) was an exceptional year because the Supreme Court of Canada ("SCC") issued several blockbuster decisions influencing contract law. My paper last year was published in two instalments, with the second instalment dealing exclusively with the SCC decision in Bhasin v. Hrynew.

I have attached as an appendix a list of topics covered in prior updates. Those updates are all available on Lawson Lundell LLP's website under my profile ( ).

We find ourselves in a world where many contract law principles have been settled or clarified by SCC jurisprudence over the last decade. To refresh your memory, some of the key SCC decisions (and their subject matters as they pertain to contract law) are:

  • Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53: Confirmed that a question of contract interpretation is a question of mixed fact and law and that the surrounding circumstances (or factual matrix) are to be considered in every contract interpretation exercise, not just where there is an ambiguity.
  • Bhasin v. Hrynew ("Bhasin"), 2014 SCC 71: Articulated the new duty of honesty in contractual performance (not to lie or mislead the other party about one's contractual performance) and mapped out an overarching organizing principle of good faith.
  • Payette v. Guay, 2013 SCC 45: Confirmed that restrictive covenants in commercial contracts (particularly where there was no imbalance of bargaining power and the parties had professional advisors) are not as rigorously scrutinized as restrictive covenants in employment contracts.
  • Tercon Contractors Ltd. v. British Columbia (Transportation and Highways) ("Tercon"), 2010 SCC 4: Enunciated a three-part test for assessing whether a party can escape the effect of an exclusion clause (or similar exculpatory clause).
  • Shafron v. KRG Insurance Brokers (Western) Inc., 2009 SCC 6: Clarified that notional severance is not an appropriate mechanism to cure a defective restrictive covenant.
  • Jedfro Investments (U.S.A.) Ltd. v. Jacyk, 2007 SCC 55: Explained that the fact parties have ignored an agreement or treated it as abandoned will not result in the agreement being discharged unless it can be shown that the parties, by their conduct, agreed to a new contract in substitution for the old.
  • Transport North American Express Inc. v. New Solutions Financial Corp., 2004 SCC 7: Propounded a technique of "notional severance" (a method of reading down more liberal than the traditional "blue-pencil approach") for severing illegal provisions in contracts, particularly contract provisions that provide for a criminal interest rate.
  • Hamilton v. Open Window Bakery Ltd., 2004 SCC 9: Clarified how damages for breach of contract are assessed in a scenario where a defendant who wrongfully repudiated a contract had alternative modes of performing. In this scenario, the performance mode adopted (and on which damages are based) is the mode least profitable to the plaintiff and least burdensome to the defendant.
  • Semlhago v. Parmadevan, [1996] 2 S.C.R. 415 and Southcott Estates Inc. v. Toronto Catholic District School Board, 2012 SCC 51: Clarified when specific performance is available as a remedy and the interaction of the duty to mitigate with a claim for specific performance.
  • London Drugs Ltd. v. Kuehne & Nagel International Ltd., [1992] 3 S.C.R. 288 and Fraser River Pile & Dredge Ltd. v. Can-Dive Services Ltd., [1999] 3 S.C.R. 108: Articulated the "third party beneficiary" or principled exception to the doctrine of privity.

From the perspective of commercial certainty, this abundance of SCC guidance is a good thing. From the perspective of this writer, it has made it more difficult to find cases foreshadowing or illustrating significant changes in contract law as it applies to commercial transactions.

But that does not mean there is nothing to talk about. As always, I reviewed decisions handed down since I wrote last year's paper, looking for cases dealing with contract law principles relevant to commercial solicitors and commercial litigators. The cases I chose do not necessarily change the law; some simply serve as a springboard for discussing pre-existing principles or doctrines.

This year, I track how lower courts have applied some of the SCC cases listed above (Bhasin and Tercon in particular).1 I revisit the question of whether there is a duty of good faith negotiation. I discuss this year's SCC case dealing with a commercial contracting issue (interaction between confidentiality clauses and settlement privilege). I introduce some new topics: automatic renewal clauses and continuing breach.2

Bhasin v. Hrynew – The Aftermath

I reviewed the decisions citing Bhasin with two questions in mind:

1. Would there be many (or any) successful claims under the new duty of honesty in contractual performance?

2. Would lower courts use the "organizing principle" of good faith performance to create new doctrines, by finding a duty of good faith in factual circumstances other than those already identified in pre-Bhasin jurisprudence?

The answer to the first question is a qualified yes. The answer to the second question is no. I will discuss the cases leading me to those conclusions below.

It is important to know that certain appellate decisions have raised questions about the impact of Bhasin on the law of implied terms, a subject I will discuss below under a separate heading after commenting on the more general impact of Bhasin over the past year.

The new duty of honesty in contractual performance

While parties pleaded the new duty of honesty in contractual performance in a number of cases, most failed to make out a breach of the duty on the facts – they could not point to any lies or misleading statements made by their counterparty.3

There are a few cases in which a plaintiff was successful. In those cases, however, the result could be explained on a legal theory other than breach of the duty of honesty.

Gaudet v. Dugas, 2015 NBQB 59, involved a contract under which Mr. and Mrs. Gaudet purchased a commercial fishing business from Mr. and Mrs. Dugas, including federal fishing licences. The most valuable licence was a snow crab licence. In what follows, I will refer to this licence simply as the "licence".

At the time the sale closed, Mr. Gaudet did not qualify to hold title to the licence. It was agreed that Mr. Dugas would hold it in trust pending an eventual transfer. Three years later, on the pretext that the Department of Fisheries and Oceans was going to revoke the licence and that it would not be possible to transfer it, Mr. Dugas unilaterally terminated the trust agreement, re-appropriated the licence and resumed fishing himself. The Gaudets sued. Mr. Dugas offered to pay them $2.1 million within 30 days to settle the matter and a consent order was executed, which included that term. Mr. Dugas then proceeded to declare bankruptcy, which allowed him to keep the licence, and the original purchase price under the contract with the Gaudets, while paying them cents on the dollar through the trustee in bankruptcy. The Gaudets then brought an action seeking to set the consent order aside (along with other relief).

The basis asserted for setting aside the consent order was Mr. Dugas's bad faith. Mr. Justice Ouellette held that Mr. Dugas failed to meet the requirement to act honestly in the performance of a contract, citing Bhasin. He found that Mr. Dugas never intended to perform the contract and to pay the settlement amount of $2.1 million; rather, his goal was to recover the licence in order to profit from the considerable increase in its market value.

The trial judge found that by terminating the trust agreement under which he held the licence and failing to transfer the licence, Mr. Dugas breached his fiduciary duty. Since Mr. Dugas was clothed as a fiduciary in relation to the licences, his lack of candour about his plan for going bankrupt was arguably a breach of fiduciary duty as well and the case might have been decided on that basis alone.

The Court declared the consent order to be void ab initio. Mr. Justice Ouellette ordered specific performance of the trust agreement (conveyance of the licence to the Gaudets) and awarded damages for breach of fiduciary duty by way of an accounting of the profits earned by Mr. Dugas fishing with the licence.

Combined Air Mechanical Services v. Computer Room Services Corp., 2015 ONSC 610, involved the bid tendering process in a construction context. Combined Air was an approved tenderer on a design/build project of HVAC systems for the computer systems of Hydro One. Combined Air agreed to work with the defendant ("CRSC") to develop a single tender, with CRSC as prime contractor/tenderer naming Combined Air as its mechanical subcontractor. Combined Air then withdrew as a primary tenderer. Combined Air's price for the mechanical work was included in CRSC's bid, which also referred to the expertise of the project and service manager of Combined Air. CRSC's bid was accepted but it subcontracted mechanical services for the project to another company. Combined Air sued CRSC.

Combined Air relied on the principles set out in R. v. Ron Engineering & Construction (Eastern) Ltd., [1981] 1 S.C.R. 111, to found an argument that there was a "Contract A" between the plaintiff and defendant. Justice Brown applied those principles and found that there was a contract that arose when CRSC included Combined Air's bid (price) as part of CRSC's tender to Hydro One. Implicitly, she appears to have been of the view that CRSC was obligated to use Combined Air as its subcontractor when it won the tender. Accordingly, it may not have been strictly necessary to consider the duty of honesty in contractual performance from Bhasin. Nonetheless, it was breach of that duty that Justice Brown focussed on. She held that CRSC breached its duty of honesty by including information about Combined Air in the bid (such as its project manager's profile) to impress Hydro One, and when CRSC used Combined Air's pricing knowing that it had no intention of using Combined Air as the mechanical sub-contractor (CRSC intended to keep Combined Air in reserve to do the work if it failed to find another mechanical sub-contractor at a lower price).

She awarded Combined Air its lost profit in the amount of $505,420.00.

I will discuss a third case, which dealt with good faith performance in the context of pre-contractual negotiations, under the heading "Is There a Duty of Good Faith Negotiation?" below.

The organizing principle from Bhasin

Post-Bhasin, while counsel often have chosen to allege a more generic contractual duty of good faith in a range of factual circumstances, drawing on the SCC's articulation of an overarching organizing principle, the decisions over the last year show the courts (in particular the Ontario Superior Court) reining in overly enthusiastic attempts to make Bhasin stand for more than it does.

In Data & Scientific Inc. v. Oracle Corp., 2015 ONSC 4178, an express clause in a standard form agreement stated that its renewal was at the defendant's ("Oracle's") sole discretion upon the network user applying for renewal on line. The plaintiff had been a member of the Oracle Partner Network for 20 years, but when it applied for a renewal of its contract in 2014, Oracle declined to renew. The plaintiff sued, claiming damages for an alleged failure to give reasonable notice of non-renewal. It argued that Oracle was obliged to exercise its discretionary renewal power reasonably. Oracle brought a summary judgment application.

In this case it was the defendant who sought to rely on Bhasin. Oracle submitted that Bhasin decided the general principle that the obligation to exercise discretionary contractual powers reasonably does not ever apply in contract renewal situation.

Justice Belobaba, in a passage picked up in subsequent cases, rejected this proposition but also summarized what Bhasin did and didn't do:

[10]...In Bhasin, an obviously important development in the continuing modernization of Canadian contract law, the Court in essence, did two things: one, it recognized that the 'situational' and 'relational' examples or pockets of a judicially recognized good faith doctrine were aspects of a broader organizing principle of good faith – "that parties generally must perform their contractual duties honestly and reasonably and not capriciously or arbitrarily;" and two, the Court decided on the facts before it that it was time to recognize a new duty - "a general duty of honesty in contractual performance."

[11] The Court made clear that this new duty of honesty in contractual performance flowed "directly from" and was an "aspect" (albeit "one of the most widely recognized aspects") of the general organizing principle of good faith. In other words, the pre-existing situational and relational aspects or pockets of implied good faith (such as the obligation to exercise discretionary contractual powers reasonably) were not eliminated but were simply realigned under a broad organizing principle of good faith. And the newly established duty of honesty in contractual performance was applied on the facts in Bhasin to confirm that the defendant Can-Am breached this duty by misleading the plaintiff and acting dishonestly in numerous ways leading up to and including the non-renewal of their agreement. [...]

[15] I am therefore not persuaded that Bhasin stands for the broadly worded proposition that is being advanced by the defendants. The Supreme Court has not (yet) decided that the long-standing requirement that discretionary contractual power must be exercised reasonably can never apply in contract renewal situations where, as here, the contractual agreement bestows a "sole discretion" non-renewal power and requires no notice of any kind.

[16] I also note that in its reasons for judgment, the Court reminds the reader that the list of situations and relationships that can attract good faith obligations "is not closed" and that "the application of the organizing principle of good faith to particular situations should be developed where the existing law is found to be wanting ..." The Court notes that good faith can be invoked in "widely varying contexts" and this calls for "a highly context-specific understanding of what honesty and reasonableness in performance require so as to give appropriate consideration to the legitimate interests of both contracting parties." For example, continues the Court, "the general organizing principle of good faith would likely have different implications in the context of a long-term contract of mutual co-operation that it would in a more transactional exchange." In my view, these comments apply to the facts herein.

In Empire Communities Ltd. v. Ontario, 2015 ONSC 4355, Justice Myers quotes from Justice Belobaba's reasons in Data & Scientific Inc. v. Oracle Corp and set out his views of what Bhasin did and did not do.

What it did:

  • "...rationalized, renamed, and provided an overall framework for understanding several pre-existing aspects of duties of good faith that have been recognized by the law."
  • Added a new duty not to lie to one's contractual counterparty.

What it did not:

  • Eliminate the pre-existing law of latent defects or the contractual interpretation principles set out in Sattva Capital Corp. v. Creston Moly Corp.
  • Create a freestanding, ill-defined, and potential arbitrary duty of good faith against which to measure all aspects of contractual performance.

Another Ontario Justice (Justice Dunphy) stated that,4 "Bhasin is no authority for unbridled creativity in the creation from whole cloth of obligations in a contractual context which the parties have not provided for or have addressed in a fashion which one party regrets in hindsight."

And in Reserve Properties Limited v. 2174689 Ontario Inc., 2015 ONSC 3469, Myers J., after holding that there is no duty to remind a party of its contractual obligations (especially sophisticated parties), noted that "Bhasin is a very measured case which makes little incremental change to the common law."5

There were also decisions in which courts confirmed circumstances in which a specific good faith duty of performance had already been recognized and which were mentioned by the SCC when discussing the organizing principle in Bhasin. For example, in Styles v. Alberta Investment Management Corp, 2015 ABQB 621, the Court confirmed the common law duty of reasonable exercise of discretionary contractual powers under the rubric of the general organizing principle

Bottom line: The new duty of honesty in contractual performance has provided an alternative cause of action in cases that might previously have only proceeded under the banner of breach of fiduciary duty or misrepresentation. However, to succeed on such a plea, the plaintiff must be able to prove that the defendant lied to or actively misled them in terms of their contract performance. The organizing principle discussed in Bhasin has not, to this point, served as a springboard for new duties of good faith.

To continue reading this article, please click here.


1 A chart tracking the topics covered in my annual papers since 2009 is attached.

2 I would like to thank Nabila Pirani, articled student, for her help in reviewing this year's cases and Meg Gaily for her assistance in editing.

3 See, for example, Chuang v. Toyota Canada Inc., 2015 ONSC 885, Burquitlam Care Society v. Fraser Health Authority, 2015 BCSC 1343; Badger Daylighting Kindersley Ltd. v. Badger Daylighting Inc., 2015 ABQB 55; Tender Choice Foods Inc. v. Planet Energy (Ontario) Corp., 2015 ONSC 817.

4 Addison Chevrolet Buick GMC Limited v. General Motors of Canada Limited, 2015 ONSC 3404 at para. 116, leave to appeal refused, 2015 CarswellOnt 16573 (Div. Ct.).

5 At para. 22.

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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