ONTARIO – A judge’s finding that a party “pounced on a single statement as a basis to trigger default, thereby achieving its goal of ending the relationship” is not a breach of the organizing principle of good faith performance of contract and was set aside on appeal.

2161907 Alberta Ltd. v. 11180673 Canada Inc.
2021 ONCA 590 (CanLII), https://canlii.ca/t/jj04f
Ontario Court of Appeal, August 30, 2021
(P. Rouleau, A. Hoy, and K. van Rensburg JJ.A.)

In this appeal, the Rouleau JA, writing for the Court, considered an appeal of a contract dispute concerning a license agreement for the Tokyo Smoke cannabis brand, which was owned by the Appellant (“216”). The application judge, Gilmore J., dismissed 216’s application alleging that the Respondent (“111”) had breached the agreement and granted the counter-application.

Gilmore J. held that 216 breached the duty of good faith performance. The ONCA dismissed the appeal but set aside the application judge’s declaration that 216 acted in bad faith.

Since the SCC’s decision in Bhasin v. Hrynew, 2014 SCC 71, Canadian courts have recognized a general organizing principle of good faith contractual performance, which are manifested by four legal doctrines:

1. the duty of cooperation between the parties to achieve the objects of the contract;
2. the duty to exercise contractual discretion in good faith;
3. the duty not to evade contractual obligations in bad faith; and
4. the duty of honest performance.

These doctrines generally reflect the situations and relationships in which the law requires contracts to be performed honestly, and reasonably, and not capriciously or arbitrarily. Accordingly, the list of recognized duties is not closed: Bhasin, at para. 66.

In the present case, the ONCA noted that Gilmore J. held that 216 acted in bad faith, not because its representatives lied to 111’s representatives but because “it pounced on a single statement made by Mr. Heydon as a basis to trigger default, thereby achieving its goal of ending the relationship…”: para. 46.

In paras. 49-64, Rouleau JA conducts a deep dive into the factual basis on which the application judge found bad faith and concludes that 216’s act of pouncing did not constitute bad faith in this case: para. 56. The conclusion is based on an analysis of the relationship between the parties and the advancement of their respective interests.

Editor’s Note:

In setting aside Gilmore J’. s finding that 216 breached the duty of good faith performance, Rouleau JA noted that the application judge did not have the benefit of the SCC’s two recent decisions on the topic of the principle of good faith performance of contracts, as both were released later:

• M. Callow Inc. v. Zollinger, 2020 SCC 45; and
• Wastech Services Ltd. v. Greater Vancouver Sewerage and Drainage District, 2021 SCC 7

An important element of a judge’s analysis that a party has not performed a contract in good faith is to identify which of the four legal doctrines referred to above, as set out by the SCC in Bhasin, is engaged. Whereas in the present case, the application judge did not identify which doctrine applies, there is a greater prospect that the finding of bad faith will not be upheld on appeal.

In the present case, 216’s success in setting aside the finding of bad faith on appeal was a dubious victory as the ONCA upheld the application judge’s finding on all other issues and dismissed the appeal with costs to the opposing party.