ONTARIO – ONCA – A contracting party is not required to correct a misapprehension to which it has not contributed, and this is not a breach of the duty of good faith.
Subway Franchise Restaurants of Canada Ltd. v.
BMO Life Assurance Company
2021 ONCA 349 May 26, 2021
Ontario Court of Appeal, (Juriansz, Huscroft and Jamal JJ.A.)
Subway appealed the dismissal of its application for relief from forfeiture by Justice E.M. Morgan. Subway was a tenant in a commercial lease with BMO. Subway failed to renew the lease within the time frame under the lease.
The lease provided that the renewal option had to be exercised at least 9 months and not more than 12 months prior to the expiration of the term. The lease did not set out the expiration date as the lease provided it would begin following fixturing and terminate 10 years later. In October 2008, BMO acquired the lease and became the Landlord.
As a result of the acquisition, estoppel certificates were issued to the parties that defined the lease termination date. Subway incorrectly diarized the lease expiry date. Subway wrote letters to BMO asking for confirmation that the lease expired on the incorrect date and that the right of renewal had to be exercised on an incorrect date. BMO did not respond to the letters. Subway attempted to renew the lease on May 19, 2017, which was outside the notice period based on the correct termination date.
Subway argued that BMO had failed to perform its contractual terms in good faith by remaining silent when Subway asked for confirmation about the termination date of the lease. The application judge rejected this argument.
Referring to CM Callow Inc .v. Zollinger ,2018 ONCA 896 (ONCA):para.17, the application judge rejected the Appellant’s argument that BMO had failed to perform the contractual terms in good faith by remaining silent when the Appellant asked for confirmation of the termination date and window for renewal dates:para.10 .The application judge held that Subway had the estoppel certificate which set out the correct lease expiry and renewal dates and that Subway did not make diligent efforts to comply with the terms of the lease. In addition, the judge held that BMO did not intentionally obscure any facts from Subway:para.11.
As a result, the application judge held that the duty of good faith was not breached, and that BMO had no duty to Subway to ensure that Subway fulfilled its contractual obligations correctly.
After the application judge’s decision, the SCC released its decision in CM Callow Inc. v. Zollinger,2020 SCC 45 SCC.
Juriansz J.A. noted that in Callow the trial judge found deception on the part of the defendant that was directly linked to the contract and that the breach of the duty of good faith was based upon the defendant’s deception.
In Callow, Kasirer J. of the SCC at para.104,discussed the duty to correct a misapprehension, that arises when a party makes a false representation. Kasirer J. further held that in the absence of false representations from the defendant, the failure to disclose a material fact would not be a breach of the duty of good faith:para.77. In Callow, Brown J. of the SCC, held at para.133 that “a contracting party is not required to correct a misapprehension to which it has not contributed.”
The appeal was dismissed as there was no finding that BMO lied, knowingly misled the appellant, created a false impression, or actively contributed to Subway’s misapprehension. ONCA held that the application judge correctly applied the legal principles to the facts.
A trilogy of Supreme Court of Canada cases over the last few years has placed new emphasis on the manner in which commercial contracts are performed. In the three cases referred to below, which are now essential quivers in every litigator’s arsenal, the Supreme Court recognized and explained that there is an organizing principle of good faith in contract and that contracts must be honestly performed.
In Bhasin v. Hyrnew 2014 SCC 71, Cromwell, J., writing for court, recognized an organizing principle of good faith in contract law requiring contracting parties to have the appropriate regard for the interests of the other contracting party. Cromwell J., in Bhasin explained that the new duty of honest performance is a simple requirement not to lie or mislead the other party about one’s contractual performance:para.73. The principle of good faith is to be applied consistently with the common law principles of freedom to contract or to pursue self-interest: para.70.
In CM Callow Inc. v. Zollinger, 2020 SCC 45, the SCC expanded upon the doctrine of honesty in contractual performance. In this case, Baycrest knowingly misled Callow, about its intention to terminate the contract. Callow relied upon Baycrest’s misrepresentation and believed that the contract would be renewed. Baycrest’s misleading conduct was directly linked to performance of the contract: para.51.
There is a debate about whether the exercise of the right to terminate a contract is an absolute right, insulated from judicial oversight or an exercise of contractual discretion. The SCC in Bhasin and Callow did not resolve the debate.
In Callow the SCC held that while the duty of honest performance is not to be equated with a positive obligation of disclosure, in circumstances where a contracting party lies to or knowingly misleads another, a lack of a positive obligation of disclosure does not preclude an obligation to correct a false impression created through that party’s own actions: para.38.The determination of whether a party “ knowingly misled the other”’ is fact specific and can include lies, half lies, omissions and silence: para. 91.
The duty of honest performance and the duty to exercise discretionary powers in good faith, although distinct, are also connected as part of the organising principle of the good faith doctrine. If the contractual right is exercised dishonestly, damages for breach of the duty of good faith flow. The duty does not require parties to subordinate their own interests to the other, but they must “refrain from lying or knowingly misleading the other.” para.86 .
In Callow, the SCC assessed Callow’s damages as the consequential loss of opportunity as a result of the opposing party’s wrongful manner of terminating the contract, which the SCC held was a breach of the duty of good faith.
More recently, in Wastech Services Ltd.v. Greater Vancouver Sewerage and Drainage District, 2021 SCC 7 , the SCC reviewed and clarified the duty to exercise contractual discretion in good faith.
In the Wastech case, the contract between the parties gave Metro “absolute discretion”, in allocating the amount of waste to go to a facility that was farther away. Metro exercised the discretion and directed that less waste be transported to the facility, resulting in Wastech receiving reduced payments. Wastech disputed Metro’s decision and the parties went to arbitration. Wastech was successful at arbitration and was awarded damages as the arbitrator found that Metro breached the duty of good faith in contractual performance in the exercise of its discretion to allocate waste to different facilities. Metro appealed to the BCSC, and the arbitrator’s award was set aside.
The SCC dismissed Wastech’s appeal. The SCC held that when exercising contractual discretion, it must be done reasonably and in accordance with the purpose the discretion was granted. Meaning the exercise of the discretion by a contracting party cannot be arbitrary or capricious.para.4.
The SCC held that the good faith duty does not require that the respondent subordinate its interests to the appellant, nor does it require that “a benefit be conferred on the appellant that was not contemplated under the contract”: para.6.
The SCC held that the test IS NOT that one has to have appropriate regard for the legitimate contractual interests of the other party and that typically a contracting party is “ required to serve the contractual interests of the other party by duties of good faith”:para.52.
Metro’s decision regarding the allocation of waste was based on structuring waste disposal in an “efficient and cost-efficient manner”. Metro had absolute discretion in the contract to make this allocation decision and the decision aligned with the contract. The SCC found Wastech’s exercise of discretion reasonable and did not amount to bad faith and therefore dismissed the appeal.
Whether a contract has been performed in good faith is now a very frequent judicial consideration in courts across Canada. A CanLII search discloses that, in Ontario alone, there have been almost 200 decisions over the last three years, which refer to good faith in contracts.