Aug 16, 2021

How a plaintiff proves breach of good faith in a commercial contract

By Marco P. Falco
The Lawyer’s Daily View original

In 2020, the Supreme Court of Canada in CM Callow Inc. v. Zollinger, 2020 sec 45 reinvigorated the duty of honest contractual performance, i.e. the obligation that parties to an agreement must not "lie or otherwise knowingly mislead each other about matters directly linked to the performance of the contract." 

But in order for a plaintiff to successfully sue a defendant for breach of honest contractual performance, do they have to show that the defendant lied or misled to their own personal advantage? Moreover, will an exclusion of liability clause render the defendant immune from an action for breach of good faith? 

A recent decision of the Alberta Court of Appeal, Canlanka Ventures Ltd. v. Capital Direct Lending Corp., 2021 ABCA 115, provides answers to both of these questions. 

Misrepresentations and good faith 

Canlanka involved a contract between the appellant mortgage broker and the respondent who had purchased second mortgages from the appellant as an investment. The appellant was retained to administer the respondent's mortgages. 

The contract included an exclusion of liability clause which purported to limit the appellant's liability for any errors or omissions in the administration of the mortgages: 

Due to the nature of the mortgage business and the surrounding environment of notices and information from a variety of sources, the [appellant] will strive to attend to all aspects of the [respondent's] mortgage interests, but cannot therefore be held liable for any oversight, errors or omissions related to the mortgage interests included under this agreement. 

According to the trial judge, the appellant made two intentional misrepresentations to the respondent in the performance of the agreement: 

  • The appellant told the respondent that one of its mortgages had been placed into foreclosure. When the appellant learned that foreclosure was in relation to another mortgage, owned by a third party, the appellant did nothing to correct this representation; and
  • The appellant told the respondent that another party intended to buy out a second mortgage - this information was incorrect. The buyout did not take place.

As a result of these representations, the respondent was unable to make an informed decision about whether to foreclose on one of its mortgages, to obtain its own appraisals and to offer to buy out another mortgagee. The respondent commenced an action for its losses. 

The trial judge dismissed three of the respondent's four claims, but awarded judgment in favour of the respondent for damages of $25,000 in relation to one of the mortgages. 

The trial judge held that the appellant's misrepresentations were intentional, deliberate and amounted to a breach of the duty of honest contractual performance and good faith. 

The Alberta Court of Appeal affirmed this decision.

No need to prove defendant's personal gain 

On appeal, the appellant argued that the trial judge erred in finding that it had breached its duty of good faith under the contract because, although the representations it made to the respondent were intentional, they were not made for personal gain. 

The appellant argued that it had previously concluded that no action should be taken on the mortgages because of the respondent's limited equity in the secured property and because of the high costs of foreclosure. The court characterized the appellant's conduct toward the respondent as "paternalistic." 

The court, however, held that a breach of the duty of good faith nonetheless occurred, despite the fact that the appellant was not motivated by personal gain in making its misrepresentations.

Citing Bhasin v. Hrynew, 2014 sec 71 and the Callow decision, supra, the court noted that the duty of honest contractual performance did not require proof of the defendant's personal gain under the contract: 

... The trial judge found, and the appellant does not argue otherwise, that the misrepresentations were intentional. They actively misled the respondent, regarding the proceedings in relation to the ... mortgage, and therefore amounted to a breach of the duty of honesty in contractual performance. Nothing in Bhasin makes a finding of a breach of the duty of honesty in contractual performance turn on the fact [that] the underlying misrepresentation was made for personal gain. The misrepresentations in this case were active, intentional and went well beyond innocent non-disclosure. 

No contracting out of duty of good faith 

The Alberta Court of Appeal further rejected the appellant's position that it was immune from liability for breach of the duty of good faith under the exclusion clause. The exclusion clause did not apply as it was limited to negligent conduct. Here, the appellant's misrepresentations were deliberate and therefore the conduct was not covered by the clause. 

The Court of Appeal went further, however. It noted that, as a general contract doctrine, the duty of honest contractual performance cannot be excluded by the parties. The doctrine applies, regardless of the parties' intentions: 

We note that at para 75 of Bhasin, the Supreme Court declared that the duty of honesty in contractual performance is a doctrine that the parties are not free to exclude. It was therefore not, in any event, open for the trial judge to interpret the exclusion clause in a way that would excuse the breach of the appellant's duty of honesty toward the respondent. 

Breach of good faith not narrow doctrine it once was 

Canlanka affirms that the duty of good faith and honest contractual performance is a robust doctrine. It is not as narrow as once was assumed. Both its scope and application have arguably been broadened in the post-Callow jurisprudence. 

Canlanka establishes that the defendant's liability under the doctrine does not turn on whether the defendant stood to gain by its misrepresentations. A benefit to the defendant is irrelevant to whether the duty of good faith has been breached. What matters instead is whether there was a misrepresentation to the plaintiff - be it in the form of an active deception or even an omission. 

Canlanka also affirms that parties are not free to contract out of the duty of honest contractual performance. The doctrine applies to all Canadian contracts as a matter of common law. Clever contractual turns of phrase that try to exclude the doctrine's application will be rejected. Like other contractual doctrines, the parties are bound by a basic level of honesty and good faith in the performance of their agreement. This is a matter of common law, not express contractual rights.