Jul 27, 2021
How to Prove Breach of Good Faith in a Commercial Contract
By Marco P. Falco
In 2020, the Supreme Court of Canada reaffirmed that parties to a contract have a duty not to “lie or otherwise knowingly mislead each other about matters directly linked to the performance of the contract”: CM Callow Inc. v. Zollinger, 2020 SCC 45.
Known as the duty of good faith and honest contractual performance, the doctrine applies to all Canadian contracts, regardless of the parties’ intentions.
But in order for a plaintiff to successfully sue their co-contracting party for breach of honest contractual performance, do they have to show that the defendant lied or misled to their own personal advantage? Moreover, can 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, addresses both these issues head on.
An Innocent Misrepresentation?
Canlanka involved an agreement between the appellant mortgage broker and the respondent who had purchased second mortgages from the appellant as an investment. Under the contract, the appellant was hired 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 administering 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.
The appellant made what the trial judge characterized as two intentional misrepresentations to the respondent in the performance of the agreement.
First, 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 information to the respondent.
Second, the appellant told the respondent that another party intended to buy out a second mortgage – this information was not correct and the buyout did not in fact take place.
As a result of these misrepresentations, 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 therefore commenced an action against the appellant for its losses.
At trial, 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.
On appeal to the Alberta Court of Appeal, the Court affirmed.
Proof of the Defendant’s Personal Gain Not Required
On appeal, the appellant argued that the trial judge erred in finding that the appellant 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 of Appeal characterized the appellant’s intentions 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 SCC 71 and the Callow decision, supra, the Court observed that the duty of honest contractual performance did not require proof of the defendant’s personal gain under the contract.
What mattered was that the trial judge held that the appellant’s conduct was intentional:
The misrepresentations made here amounted to more than protecting the appellant’s advantages arising from the administration agreement or failing to disclose so as to subordinate the appellant’s interests to those of the respondent. 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.
Parties Cannot Contract Out of the Duty of Good Faith
The Alberta Court of Appeal further rejected the argument that the appellant was immune from liability for breach of the duty of good faith under the exclusion clause.
The trial judge had held that the exclusion clause did not apply as it was limited to negligent conduct; that is, the appellant’s misrepresentations were deliberate and therefore not protected by the liability clause.
The Court of Appeal went a step further.
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…
A Broad and Robust Doctrine
Callanka affirms that the duty of good faith and honest contractual performance is a robust doctrine. It is not as narrow as once was assumed when it was established by the Supreme Court of Canada in Bhasin.
Callanka confirms 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.
Callanka also re-establishes 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 turns of phrase in an agreement that try to exclude the doctrine’s application will be rejected by the Court. Like other contractual doctrines, the parties are bound by a basic level of honesty and good faith in the performance of their agreement. Nothing the parties say or draft in their contract will change that.