In a warning for commercial landlords and tenants (Amacon Alaska Development Partnership v. ARC Digital Canada Corp., 2023 BCCA 34), the BC Court of Appeal has upheld the application of the duty of good faith in the context of an early termination negotiation.
The Court of Appeal came down hard on a party who used an overly technical interpretation of their strict legal rights to seek an unfair advantage. The Court dismissed an appeal from a summary trial decision (2021 BCSC 1612), which was an early application of the duty of good faith in the context of negotiations between a commercial landlord and tenant in BC. The duty is relatively new and the law is still developing. This recent decision confirms and clarifies the application of the principle in the commercial leasing context.
The upshot is that landlords and tenants (and their counsel) need to be wary of clever technical interpretations of a contract that could be construed as dishonest. Courts will consider a party's behaviour, including silence or inaction, and the underlying purpose of the contract, to determine whether a party performed its obligations in good faith.
ARC was a tenant of a commercial premises. Amacon Alaska purchased the premises from the prior landlord and approached the tenant about terminating the lease. The tenant's primary concerns were finding alternative premises and compensation for relocating.
Following negotiations, a lease modification agreement was drafted, which included a new termination date and compensation for the tenant, to be paid in two installments. The first installment was due upon execution of the Agreement; the second installment was conditional on the tenant vacating the premises by the new termination date. The tenant said it would only execute the agreement once it had found new premises, which it did after a short period.
However, the landlord then refused to sign the agreement and failed to pay the first installment, providing no explanation. (At trial, the landlord provided a number of explanations that were ultimately rejected by the Court as untrue.)
Two days after the agreed termination date, the landlord delivered to the tenant an executed agreement, a cheque for the first installment, and a letter stating that the agreement was binding and the tenant was not entitled to the second payment as it failed to vacate the premises by the termination date. Essentially, the landlord had lain in wait for the tenant to be in breach of the draft agreement.
Supreme Court of BC
In the Supreme Court, the court found that the landlord's calculated conduct, though based on "ordinary contract principles" was dishonest, and that it had "knowingly misled ARC" and strategically timed [its] late attempt to "perform" its obligations under the agreement". The court made a number of credibility findings against the landlord's witnesses.
BC Court of Appeal
The Court of Appeal upheld the trial court decision, finding that the judge correctly applied the Supreme Court of Canada's framework that "an organizing principle of good faith ... in part recognizes a duty to perform a contract honestly" and that "parties generally must perform their contractual duties honestly and reasonably and not capriciously or arbitrarily". Critically, the court dismissed the landlord's argument that the new duty had been allowed to overwhelm ordinary contract law principles, stating that the judge properly considered and applied the principle to the contract in question.
Notably, the Court of Appeal also made clear that a summary trial judge may make credibility findings on affidavit evidence, stating that the judge "was entitled to draw a negative credibility inference from the implausibility and vagueness of the affidavit evidence before her".
Bizarrely, the landlord had consented to a summary trial (and had filed its own summary trial application) but on appeal said the judge ought to have refused to hear the summary trial. The Court of Appeal criticized the landlord's approach, making the unusual statement that it took "considerable chutzpah" to make this argument and that it should never have been advanced.
Amacon is a warning to all parties to be wary of clever contractual interpretations that involve potentially dishonest conduct. Similarly, parties must not attempt to prevent the other party from performing their obligation. Courts will consider silence or inaction, as in this case, to determine whether a party has honestly performed their contractual obligations.
Conversely, if you are a landlord or tenant in a situation which feels unjust, you are now in a stronger position, with courts more willing to look outside the letter of a contract to ensure parties are treated fairly.
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.