ONTARIO – Breach of Contract – Breach of the duty of good faith is a separate and distinct contractual breach giving rise to a claim for damages and must be pleaded. Repudiation of a contract will only be ordered in exceptional circumstances and where there has been a substantial breach of contract.

Will v. Geo. A. Kelson Company Limited
2023 ONSC 29 (CanLII), (January 3, 2023)
ONSC (Ramsay J.)

This decision is about the interpretation of a Share Purchase Plan (“SPP”) between the Applicant (“former employee”) and the Respondent(“employer”). As part of his employment, the Applicant purchased shares in the Respondent pursuant to the SPP and a Share Ownership Agreement (collectively, the “Agreement”)

The Agreement gave the Respondent the option to purchase the shares back from the employee when retiring. (para. 7) The Applicant notified the Respondent that he wished to sell his shares in January 2017. The Respondent agreed to purchase the Applicant’s shares for $963,900.00. The Respondent elected to pay the purchase price plus interest in installments. By 2021, the Respondent had partially paid the purchase price. At the time the case was heard, four installment payments were outstanding.

The dispute was about the method of amortizing and calculating the interest payments after the first installment payment was made. Between 2017 and 2021, experts for both sides calculated that between $82,000 and $86000 in interest was owed.

The Agreement stated that the Respondent was obliged to pay interest “as to not less than 10% of such aggregate purchase price on the closing date of the transaction, with the balance, plus interest (at the prime rate quoted from time to time by the Corporation’s principal bankers), payable thereafter in annual instalments of not less than 10% of such aggregate purchase price”. (para. 39)

Eventually, the Respondent failed to pay the correct amount of interest and to cooperatively communicate with the Applicant, which conduct the Applicant alleged was a breach of good faith. The Applicant argued the Agreement was a contract of adhesion that required the former employer to administer it over time, pay the annual amount owed, determine the interest on a yearly basis, issue tax receipts, and administer the declining balance in good faith.

The main issues were:

1. Did the Respondent’s conduct breach its duty of good faith?
2. Did the Respondent repudiate the Agreement?

Breach of duty of good faith

The Applicant argued that “parties are obliged to perform their contractual duties honestly and reasonably and not capriciously or arbitrarily” as set out in the Supreme Court of Canada decisions of Bhasin v. Hrynew, 2014 SCC 71 (“Bhasin”) and C.M. Callow Inc v. Zollinger, 2020 SCC 45 (“C.M. Callow”) (para. 23)

Ramsay J. held that the Applicant’s pleading did not plead a breach of the duty of good faith, which is a separate and distinct contractual breach giving rise to a claim for damages. (para. 24) The Court then held that there was no evidence that the Respondent had breached its duty of good faith. (para. 25)

Ramsay J. also referred tothe SCC’s decision as to termination of an employment relationship in Matthews v. Ocean Nutrition Canada Ltd., 2020 SCC 26, where the SCC acknowledged that an employer’s conduct was contrary to the expected standard of good faith andcan “transcend the request for damages and may be meaningful for an employee in a way that the mere finding that reasonable notice was provided cannot. One aspect of this relates to dignity in the workplace and the non-financial value associated with fair treatment upon dismissal.” (para. 25)

Ramsay J. was satisfied that in this case, the Applicant resigned and was not terminated and therefore found that Mathews did not apply.

Repudiation

The Applicant argued that the Respondent’s refusal to pay interest was a repudiation of the Agreement and a signal that the Respondent did not intend to be bound by the Agreement

Ramsay J. referred to “Guarantee Co. of North America v. Gordon Capital, 1999 CanLII 664 (SCC), [1999] 3 S.C.R. 423, at para. 40 [Gordon Capital], where the Supreme Court of Canada held that “repudiation of a contract occurs where one party, by words or conduct, shows an intention not to be bound by the contract.” (para. 31)

If there is repudiation of a contract, the innocent party can elect to treat the contract as being in force and sue for damages or treat the contract at an end and discharge the parties from any further obligations. (para. 32)

Ramsay J. did not hold that the Respondent had repudiated the Agreement because there was no breach that deprived the Applicant of substantially the whole benefit of the contract as set out in Hunter Engineering Co. v. Syncrude Canada Ltd., 1989 CanLII 129 (SCC). (para. 34)

Ramsay J. reviewed the five factors used by the courts to determine if a breach is substantial as set out in Place Concorde East Limited Partnership v. Shelter Corporation of Canada (2006), 2006 16346 (ON CA), namely:

1. the ratio of the party’s obligation not performed to the obligation as a whole;
2.  the seriousness of the breach to the innocent party;
3. the likelihood of repetition of the breach;
4. the seriousness of the consequences of the breach; and
5. the relationship of the part of the obligation performed to the whole obligation. (para. 36)

Ramsay J. held that the interest component of the Agreement was a minor component of the Agreement and that the dispute about how interest was to be calculated and timing of an interest payment were less substantial than non-payment of an installment payment. The Court thus held there was no fundamental breach of contract. (para. 38)

Further, there was no evidence that the Respondent did not intend to perform the contract since it admitted that it had breached the agreement by incorrectly calculating the interest owed and had given an undertaking to abide by the Applicant’s interpretation of the interest owing.

The Respondent was ordered to pay the outstanding interest as it had calculated it, and to pay interest on the outstanding principal pursuant to the Applicant’s interpretation.