Friends Who Argue

“Good Faith” Trilogy

September 01, 2021 Various Season 2 Episode 1
Friends Who Argue
“Good Faith” Trilogy
Show Notes Transcript

Welcome to Season 2 of Friends Who Argue!

In our first episode of Season 2, litigators Cynthia Spry, Elisha Jamieson and Winston Gee discuss the Supreme Court of Canada's decisions in the "good faith" trilogy of recent decisions: David Matthews v. Ocean Nutrition Canada Limited (NS), 2020 SCC 26 ("Matthews"), C.M. Callow Inc. v. Zollinger, 2020 SCC 45 ("Callow"), and Wastech Services v. Greater Vancouver Sewerage and Drainage District, 2021 SCC 7 ("Wastech"). These cases build upon and clarify the doctrine of good faith contractual performance derived from the Court's landmark judgment in Bhasin v. Hyrnew, 2014 SCC 71.

Cynthia Spry is a litigator and partner at Babin Bessner Spry LLP, where she practices in the areas of class actions, shareholder disputes (including claims for oppression remedies), fraud, contractual disputes, insolvency issues, securities, resource litigation, defamation and executive employment law.

Elisha C. Jamieson-Davies is a partner at Hicks Morley. She represents both public and private sector clients in a variety of industries, and in many types of litigation including employment disputes, long-term disability claims, commercial disputes, restrictive covenant enforcement, class actions, and judicial reviews/appeals.

Winston Gee is an associate at Torys LLP. Winston’s practice focuses on litigation and dispute resolution in a variety of areas, with an emphasis on public and regulatory law, class actions, Indigenous matters, contractual disputes, insurance law, and the energy and infrastructure sectors.  

Speaker 1:

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Speaker 3:

Welcome to this edition of the advocate. Society's friends who argue podcast. Thanks so much for joining us today. As we discussed the recent trilogy of decisions from the Supreme court of Canada on the duty of good faith and contracts. I'm Cynthia SP fry , a partner at Babin BR fry , L P in Toronto, where I practice all manner of business disputes, including contractual disputes, competition, securities, and class actions. I'm the chair of the commercial practice group at the advocate society and a member of its 10 plus standing committee of the board of directors, as well as at standing committee on advocacy and practice. Joining me today are a Alicia Jameson and Winston G Alicia is a partner at Hicks Bley in Toronto and the chair of its litigation practice group. Alicia is also a member of the firm's women's affinity group, student committee, and associate mentoring program. Alicia has expertise in many types of litigation, including employment disputes, restrictive covenant enforcement, class actions, judicial reviews, and appeals, defamation, and historic sexual assault cases. Winston G is an associate in a lit region group at tore. His practice focuses on appeals, contractual disputes and public law. He represented the Canadian chamber of commerce as intervener in two of the decisions will be discussing today. Waste tech and Callow Winston is an active member of the black future lawyers program, where he provides support and engagement opportunities to black undergraduates who aspire to become lawyers. Winston also serves on the boards of directors of two organizations, the first generation network, which is an organization that aims to reduce barriers faced by law students who are the first in their family to complete post secondary educat patient and blueprint a D E , which is a consulting firm that helps policy makers generate and use evidence to solve social and economic problems. Hello to you both. And thank you so much for joining me today. Thanks for having us. Thanks Cynthia. On our podcast today, I'd like to start with a brief overview of the laws . It stood based on the Supreme court decision in Baine and rhino prior to the recent trilogy, and then ask you Alicia about the Supreme court's decision in Matthews, and then ask you Winston about the Supreme court's decisions in Callow and waste tech . So let's start with the takeaways from Baine , which was the state of the law prior to the recent trilogy in Baine the court held the , that there is a general organizing principle of good faith and a duty of honest performance that applies to all contractual relationships in Canada. In that case, the court also held the parties must perform contracts, honestly, and reasonably and not capriciously or arbitrarily parties must have appropriate regard for legitimate interests of their contractual partners, but it's not a fiduciary duty. There's no duty of loyalty, no duty to put the interests of the other party before your own. The freedom , uh, is to produ pursue individual self-interests and that should be respected. No Palm tree justice. The court also held that the studio of good faith in contracts could be applied and expanded to new situations in the future, which brings us to the decisions that we are talking about today. Let's first talk about the decision in Matthews. Alicia, tell us about the underlying facts of the decision <affirmative>

Speaker 4:

Thanks Cynthia. So David Matthews was a senior chemist employed by ocean nutrition, Canada during his employment, Mr. Matthews participated in the company's long-term incentive plan. Under the plan, employees could receive a payment upon a realization event, which did notably the sale of the company. Mr. Matthews resigned after a change in the company's management brought about changes to his role, which included a significant reduction of his duties approximately a year after he resigned, the company was indeed sold for 400, 540 8 million. Mr. Matthew sued the company for constructive dismissal, and he alleged that his dismissal constituted a breach of the common law duty of good faith. He said both the constructive dismissal and the breach of du of the duty of good faith, entitled him to a payment of the long term incentive plan , um, uh ,

Speaker 3:

Dollars the , so when the decision reached the Supreme court, what issues remained on appeal?

Speaker 4:

There were two, whether Mr. Matthews was entitled to damages in lieu of the L tip payment . And if so, on what basis contractually or the duty of good faith and number two, whether Mr. Math constructive dismissal reached the company's common law duty of good faith. What did the

Speaker 3:

Court find in respect of the duty of good faith?

Speaker 4:

Interestingly, the decision on his entitlement to the L tip actually did not rest or turn on the duty of good faith. The Supreme court went back to base employment law principles, that where there is a failure to provide , um, working notice to the employee, there has been a wrongful dismissal, and they found that the employee was entitled to the long term incentive plan, not because of the breach of duty of good faith, but because he was wrongfully dismissed and the realizing, which was the sale of the company occurred during his notice. I think out of this case, there were some very interesting takeaways. The court commented on the procedure to use when assessing whether an employee is entitled to something like a long term incentive plan , um, payment, they didn't change the law in Ontario, which had been , uh, the law from Paquette and Tego networks from the court of appeal back in 2016. Um, the court of appeal had set at the time that there was two questions to ask. Number one, was the compensation integral to the employee's compensation. And number two, if it was, was there something that took away that right unambiguously and the Supreme court said, yes, that is the test. They did clarify for lawyers, but question number one about a bonus being integral to someone's compensation really only matters if there's a question about whether the person would've received the money during their reasonable notice period, if, but for the termination, they would get it that first question, isn't something that needs to be focused on. So that was clarified by Supreme court at sense , Paquette on the duty of good faith. The Supreme court made clear that damages for bad faith conduct can't be deployed to essentially get double recovery. So in this case, Mr. Matthews couldn't receive damages and rule of the L tip both based on a common lock breach of the duty of good faith and because of his wrongful dismissal. And as I mentioned before, in this case, the decision to award him damages in blue of the L tip came from basic principles of , uh , employment law, wrongful dismissal, the Supreme court, although it was asked by the plaintiffs and many interveners to find a mutual obligation of loyalty throughout the employment contract declined to do so. The Supreme court noted that it was a serious question that , um, really there was a lot of debate , uh , amongst the , the, the bar and the courts about how far that should go and whether there should be a mutual duty recognized. And the Supreme court said in this case, it wasn't going to do that. I think that the Supreme court was really signaling that courts are gonna have to be careful expanding this notion, which at this point really has been focused on determination of employment and going further and holding employers to a duty of loyalty to employees throughout the employment relationship from an employer perspective who I , who I represent , um , it would be a significant change and would have potentially a far reaching ramifications. So I think that , um, um , the fact that the Supreme court wasn't willing to do that in this case was, was certainly welcome news , uh , from my perspective.

Speaker 3:

Yeah, I actually thought that part of the decision was pretty interesting because the court really doesn't decide it on the basis of the duty of good faith, but then they do make quite a lot of statements about that particular point. It

Speaker 4:

Is interesting , um, and it certainly has generated a lot of debate and discussion. And I think we are going to see , uh, more on that point and it being woven into claims as we go forward in . True .

Speaker 3:

Great. Well, we'll have to wait and see how that all shakes out. Um, thanks so much for that , um , discussion . Let's move to talking about the next decision in the trilogy that of , uh , Callow . So Winston, give us a little bit of background about this .

Speaker 5:

So Callow is an interesting case. It's about , uh, the extent to which a party , uh , knowingly misled the other in the performance of a contract. So that aspect of the duty of honest performance , um, so in Callow , there was this condo corporation , uh, that decided to terminate a property maintenance contract early , uh, and that was allowed by a 10 day notice provision in the contract, but where the issue of misleading arose is that , uh, the condo corporation, or rather a group of condo corporations didn't disclose that they were intending to in terminate the contract and instead gave notice of terminations several months afterwards. And in the meantime, a condo board member made statements to the plaintiff suggesting that renewal of the contract was likely. Um, and to add to that the condo corporations also silently accepted freebie services from the plaintiff, knowing that these were provided by him as incentives to renew the con contract. Um , so in essence, what Mr. Callo , who was a sole proprietor was alleging is that the condo corporations strung him along , uh , misled him into thinking of the contract would be renewed in order to make sure that he would complete his current maintenance contract in a satisfactory manner before the, the next phase of his services contract, which I believe was in winter would take place. So the condo board benefited from having a reliable employee who would complete their work to satisfactory standard. Um, and in the meantime, Mr. Callow , uh, had no idea , uh, the court found that the condo boards were actually intending to terminate the contract

Speaker 3:

Earlier. What was the primary issue on the appeal to the Supreme court? Then

Speaker 5:

It was really about the scope of the duty of honest performance and specifically, you know, in Baine the duty is phrased as you must not lie or otherwise knowingly mislead the contractual counterparty about matters directly linked to performance of the contract. So call was about the second part of that. What does it mean to otherwise knowingly mislead someone and the interesting issue in this case and what was really the focus of argument on appeal is that the condo corporations , uh, there was a sense in which it's not like they did anything active to mislead Mr. Callo , but they were silent because they didn't disclose the fact that they had intended to , uh, terminate the contract. Um, and there was a large debate on appeal, was the extent to which , uh, this type of nondisclosure can constitute a breach of the duty of honest performance, because, you know, we know from general principles of contract law, there's no, except in certain good faith circumstances like Alicia was talking about , um, in certain contexts, there's no unilateral duty to disclose information relevant to contractual perform or termination. Um, so in this case, a question was to what extent can the condo board's silence in this case , uh, actually constitute a breach of the duty of honor performance. Um, and the court found in this case that, and in general that the duty of honest performance is not limited to just outright law, but it can include half truths omissions and even silence in certain circumstances. And in this case, there was a debate about the distinction between what was phrased active nondisclosure and passive nondisclosure. So active nondisclosure being the idea that while there may be no general duty to lows, when you combine nondisclosure with certain positive acts or statements. So in this case, you know, the condo corporations made prior statements to Mr. Callow suggesting that renewal was likely and then decided that they weren't gonna renew it and then were silent about their decision all with the effect of misleading, Mr. Callow , uh, that was termed active nondisclosure and the court held that that can constitute knowingly misleading, a contractual counterparty. And it's intuitive. I , in my view in the sense that , uh, you know, the duties about dishonesty, right? And so dishonesty can take many forms. It can be an outright lies . The , as the court is previously previously said, but it conclude all those other things where the effect is to knowingly mislead someone else. So dishonesty is dishonesty is dishonesty, right?

Speaker 3:

Yeah. I think that's a really good point. And that was kind of my reaction to the decision as well. And I think, you know, it's consistent with other areas of the law, because if you're dealing with, for instance, a misrepresentation, a claim for a fraudulent misrepresentation in a contractual situation, those same kinds of things will constitute misrepresentation, silence, or omission can constitute a misrepresentation. So it seemed , just seemed consistent to me. Um, so going forward , um, what are your view use about the significance of this decision?

Speaker 5:

So it's very significant in short , um, because it , it, it changes the way I think individuals and businesses need to think about how they communicate about contracts. Um, so there are circumstances like in Callow , where if you have a party that's under a misapprehension about contractual performance , um, such as termination of a contract, or whether you're gonna exercise an option to buy, sell something , uh , you may be under a duty to correct that misapprehension. Um, if you cause that misapprehension and you are aware, the other party has that MIS apprehension , um, it does change existing law insofar as it expands the circumstances in which you may have to disclose information. Um , and I think from a practical standpoint, what needs to be top of mind is making sure that you don't communicate in a way that's going to give rise to those MIS apprehensions in the first place. So there's a sense in which this will, this may have a bit of a chilling effect on how business P people communicate about contracts. Um, because if you set the wrong expectations, you create that misapprehension , um, that creates fodder for the other side to say, well, I thought you were going to do this. Um, you told me X , uh, and you didn't do that. Um, I believe that you knowingly did that to extract benefits from me, and therefore I'm gonna Sue you for breach of the duty of honest performance. Um, there are obviously some important standards or parts of the legal test that have to be met. It's not just enough that the other party under a misapprehension, you going back to the, how they it's phrased in the scene , you have to knowingly mislead the other party. So you have to have caused that misapprehension, and you must be aware that the other party's under that misapprehension. And then at that point, you know , failure to correct it , um , can constitute a breach of the duty Avanish performance. But if those, if those elements aren't present, then the , the duty would not be breached. Um , the , the practical difficulty with this of course, is that , um, in a , in a litigation context , um, evidence could arise later in the discovery process about certain internal communications that were had, where, you know, maybe you're a company and you made an internal decision to terminate a contract, and you didn't tell the other side. And so you may have litigants , uh, bring lawsuits, alleging a breach of the duty of good faiths , um, with the intention of getting evidence like this through discovery process. And it's interesting in Callow , and from a really practical standpoint, there were emails in Callow that were quite , um, explicit it. Um, and there was, there was one example of one where the, a member of the condo board effectively said , um, and I have a quote here. It said, by the way, I was talking to him last week as well. And he is under the impression that we're keeping him for winter. Again, I didn't say a word to him and communications like that can obviously be disclosed in the discovery process. Um, so it may be preferable not to have those communications , um, and not reduce them to writing, and certainly not , uh, communicate them to the other contractual party until you've made a decision.

Speaker 3:

Yeah, I think that's a really important point. Um, and something that, you know , um, we often tell clients at the risk of getting legal advice as part of the podcast. Um, if you don't wanna see your statement on the front page of the global mail, don't put it in writing <laugh> and it's, I think that it , you know, it sticks with clients, but it's surprising how often that's something that they don't consider in their day to day .

Speaker 5:

Well, and also just in a , in another aspect too, another thing that they focused the court focused on in Callow is , uh , these meeting minutes from, from the board where they said that they , the board said that Mr. Callow had been diligent in addressing concerns. So they used that as evidence to say, well, the condo were satisfied with Mr. Cow's work. And there was no reason not to renew the contract. And he believed likewise, there was no reason not to renew the contract. So to the communication point , um, not just email communications, but even things like that. So you may want to just make sure that, that those types of communications they're , they're at a sufficient high level of generalities that you don't get into some of these issues.

Speaker 3:

Yeah. And it's a , I mean, it is a difficult position, I think, as you pointed out for contractual counterparties to be in, because , um, I'm sure it happens fairly regularly that there's a decision made to terminate a service provider or a contractual counter party, but the decision isn't communicated for some period of time. So now, as a result of this decision, are they at risk in those situations?

Speaker 4:

Yeah. And I think on that, I think it , um, to , to Winston's point before, I mean, the , the chilling effect, you're gonna have a lot of people on, on eggshells walking on eggshells, wondering what did they think I I'm saying right now, have I gone too far? Do I need to correct myself? And it could be depending on how long they they're gonna wait to give notice it could be a pretty awkward situation for a while trying to figure out whether you cross that line or not.

Speaker 5:

Definitely . Yeah .

Speaker 3:

Okay . So let's move to about the last decision in the trilogy waste tech . So Winston maybe give us some of the background facts of that decision.

Speaker 5:

So waste tech dealt with a specific aspect of the organizing principle of good faith. That is the duty to exercise a contractual discretion in good faith. Um, and just by way of background. So the, this was about this case was about a long term waste disposal contract , um, that waste tech had a waste disposal company with the greater Vancouver steward district, which I'll call Metro Vancouver. For sure . I believe it's a part of the , the, you know, municipality amalgamation. Um, and under that contract, the parties agreed on what was called the target operating ratio, which is really essentially a profit margin of 11% for waste tech , um, with a limited cost or profit sharing mechanism. If the ratio deviated from that standard and Metro Vancouver had absolute discretion under the contract, that was the that's the phrase it's used to allocate between their waste between different landfills and an incinerator and how it allocated that waste would affect waste techs , operating ratio. So Vancouver in short, decided to , uh , allocate waste away from certain landfills towards other landfills. And as a result, waste techs operating ratio went down to 4%. Um, so waste tech obviously displeased commenced an arbitration under the contract arguing first that there was an implied term that thing Cooper wouldn't deprive waste tech of the possibility of achieving the 11% profit margin. And secondly, that Vancouver breached its duty of good faith by exercising its discretion to shift waste away from certain landfills and towards others and refusing to compensate waste tech . And I think an interesting aspect of, of this case in which I think gave rise to one of the key issues on appeal is that the arbitrator dismissed the implied terms argument, the arbitrator applied the officious bystander test and said, this is not a case where, you know, a , an impartial bystander would've seen that the negotiations and said, well, of course they meant to include a term protecting waste tech from the reduction in profit margin, because in fact, the parties during the course of negotiations had turned their mind to including such a clause and decided not to do so. Um, so in that, in that context, you obviously couldn't have an implied term. Um, but what the arbitrator then did is said that waste tech or sorry, Vancouver reached the duty of good faith contractual discretion by failing to have appropriate regard for waste text's legitimate contractual expectation. And that language is from a certain paragraph of the scene, which has given rise and had given rise to a lot of uncertainty about the scope of the duty of good faith and how it interacts with the organizing principle. So, so that was really a main issue on appeal is, is the extent to which the idea of having , uh , failing to have appropriate regard for another party's contractual interest can give rise to a breach of the duty of good faith.

Speaker 3:

And so what has on appeal?

Speaker 5:

So on appeal, the Supreme court found that Vancouver did not violate its duty to exercise good faith, contractual discretion. Um, the court confirmed that there's no free standing duty to have appropriate regard for the interests of another contracting party, but there is a general duty as a matter of law to exercise contractual discretion in good faith. There's no contracting out of that. Um, and the court modified existing case law to an extent , um, because there was a debate about whether, and in what circumstances good faith contractual discretion was required as a matter of law, the court clarified that , um, there was also questions about the standard that would be used to determine whether there was a breach of the duty . So some prior case law , uh , some appellate jurisprudence said that in order to breach that duty, you have to eviscerate or substantially nullify the bargain for benefit under the contract. Um, there was there's other lines of cases that, that have said that you only breached the duty if you've acted arbitrarily or capriciously. Um, the Supreme court went , took a different route and the court held that to exercise contractual discretion in good faith means you have to exercise it reasonably, which they gave a very specific meaning as meaning in a manner consistent with the purpose for which the contractual discretion was granted in the contract. So that again is, is a bit different than some other cases. Some other cases took the view that you kind of take an objective view, stand back and, and determine whether something was exercised reasonably. Um, but in this case, the court held that it's about contractual interpretation. You look at the purpose of the contract to determine the scope of the discretionary power. And when the exercise of discretion stands outside, that that compass set by the contractual purpose as they phrased it, that will be a violation of the duty of good faith. Um, and I think there is some comfort to folks who want a more judicially restrained approach to assessing exercises of discretion because , um, justice, KA youre who wrote the , the majority judgment , um, confirmed that the measure of fairness is what is reasonable, according to the bargain set by the parties, not what a court's is fair . And, you know, then the , the court went into a discussion about how do you determine the scope of the , of the contractual purpose . And that's where it gets a little , a little at times .

Speaker 3:

And so view what's the significance of ,

Speaker 5:

Well, it has a lot of implications, I think for , um, the drafting of contracts. So it justice, cuz you're identified two situations, one where the text of the discretionary clause is clear in that it , it makes clear the , the contractual purpose of the discretion leaving less room for judges to define divine the , the purpose after the fact. And then a second circumstance where there's unclear text where the discretionary power is entirely general. And in this case it was just phrased as absolute discretion. A so in that case, the clause and , and the words of the contract may have no real information about what the intended purpose is. Um , and instead you have to read the contract as a whole, and it's full context with an eye to the broader purposes of the transaction ordeal. Um , and that gave , uh , a lot of heart to the dissenting judges , um, justice Rowe , justice, brown, and justice Cote , um, that you're now inviting courts to step back beyond the actual written bargain of the parties to assess some broad purpose. Um, and they would've had it that you, if you give unfettered discretion under a contract, that's, that's what you give that's the bargain. Um, you can't go beyond that and divine some broader purpose to restrict the clear text of the contract. Um, so, you know , I think what this means in practice is , um, the less clear you are about the scope of a discretionary power. The more room there is for judges to come in and , uh, decide what the purpose is based on arguments put forth by parties and litigation. Um, so you can consider including in the recitals to the contract , uh, and in the actual operative clause, the discretionary clause, what the intended purposes . So, you know, when the contractual discretion should be used , um, for what ends and in this case, it's a real, I think helpful practice point is that the court did actually pay close attention to the recitals, the court, and actually was quite restricted. I would say how it actually applied it's it's this purpose of test because it looked at the discretionary clause. It said, absolute discretion gives us no insight , uh , looked at the recitals and said that, look, the recitals say that point of this is to allow the parties to maximize efficiency and minimize costs . That was one of the phrases used in the recital, I believe, and then looked at the contract as a whole. And the contract actually included a clause that addressed risk allocation. So that cost during mechanism, I talked about before that AC that showed the court held that that waste tech was required to share in the consequences of failing to meet the target margin. And then as a result of that, the court found that, okay, Vancouver, the purpose of giving Vancouver absolute discretion was clearly to give it flexibility, to allow it, to minimize the cost of the operation, where it's all fit . Um, and so to the extent that you, you can include similar things in, in your contracts, or just be more precise about what the purpose is that can go a long way. Um, the other practice point I I'd mentioned is just that just cuz you're offered what he called a guide , um, which is that discretions that are more readily susceptible to objective measurement. So things like, you know, operative, fitness , uh, structural completion , uh , things like that. Those would come with a narrow narrower range of reasonable outcomes. Um, kind of did import a bit to that administrative law phraseology , um, compared to subjective assessments that involve taste sensibility, personal compatibility or the judgment of a party, which will , uh, attract a , a broader range of, of reasonable outcomes because they obviously relate to subjective taste.

Speaker 3:

Great. Well that's so helped . Thank you very much . And I think you raise a really interesting point about the recitals. Um, I think there was a fair amount of surprise in the business community that the recitals really , uh , determined anything so suddenly people are paying a lot more attention to those. Um, so I think that's all the time that we have today. Thanks so much to both with , of you for joining me to discuss the Supreme court's trilogy of decisions on good faith and thanks so much as well to our listeners for joining us today.

Speaker 5:

Thanks for having us. Appreciate it. Thank you.

Speaker 6:

Thank you to Cynthia spry , Alicia , Jameson and Winston G for a thoughtful discussion. Thanks to our production leads. I Brennaman and Natalia Rodriguez, Laura GU Matthew Huis and Johns to Danielle Bevo , Dentons our technical sponsor for her editing assistance and to the advocate society team for their support. This is we high signing off

Speaker 1:

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