Legal Blog

Stretch

We have opined that the smell of a case often informs the decision. Sometimes judges can find facts that allow them to apply the law and come to the result they prefer. Sometimes, they have to stretch the facts or the law or both. This judicial stretching was, in our view, apparent in Westwood Mall Holdings Limited v. Kapila 2017 ONSC 5478, a decision of the Ontario Superior Court of Justice.

Issue

“You’re not being fair” – a cry of children in the schoolyard. Now, it seems, it is the cry of a purchaser who does not receive a price reduction from a developer when the developer gave that reduction to other purchasers.

The purchaser sued for damages in Small Claims Court. What damages and how they were calculated, we do not know.

The plaintiff, by his own admission, was unhappy with his prospective purchase and had actively complained about the developer. He alleged at trial, without any evidence, that, because of his complaints, the developer did not give him the same break on the price as it did to others. The developer submitted no evidence to counter this allegation, taking the position that its actions regarding other purchasers were irrelevant to its obligations to the plaintiff under his agreement of purchase and sale. Such a novel argument.

Based seemingly on the plaintiff’s unsupported allegations, the deputy judge held that the developer “exercised its discretion capriciously and arbitrarily” in refusing to reduce the purchase price. The reasons did not refer to any discretion in the agreement so it appears that the deputy judge referred to a discretion that any contracting party has to enforce the terms of its bargain. The deputy judge created – out of nothing – a discretion that is not a real discretion, in contradistinction to a situation where, for example, an employer has a discretion in an employment contract to award a bonus.

The deputy judge implied a duty that the discretion must be exercised in a manner that is not capricious or arbitrary. We agree that, at law, a contractually created discretion must be exercised reasonably, but this was not a contractually created discretion.

The deputy judge concluded that “this conduct, coupled [with] the failure to provide any explanation or rationale, would be regarded as commercially unacceptable by reasonable and honest people.” This conclusion makes no more sense to us than her creation of the discretion.

The deputy judge needed a case on which to hang her creations and latched onto Bhasin v. Hrynew 2014 SCC 71. Relying on Bhasin, she opined that the developer had a duty to act honestly in the performance of the agreement. So far, so good. But then, she leaped a gaping chasm, stating that the developer’s insistence on being paid the stated price in the agreement, when it had reduced the price for other purchasers, was a failure to act honestly in the performance of the agreement (which, we suggest, is nonsense) and a breach of a duty of fair dealing – except that, as we will discuss, there is no duty of fair dealing.

Appeal

The developer justifiably appealed the decision to a Superior Court judge. The reasons for decision set out the findings of the deputy judge and deal with some technical matters. The decision on the merits was dealt with as follows: “With respect to the Deputy Judge’s reference to the Supreme Court of Canada decision in Bhasin v. Hrynew, 2014 SCC 71 (S.C.C.), I find no error in either her interpretation or application of the law to the facts of the case.” That was it folks. No discussion about the law of contract; no recognition of the right of a contracting party to expect and insist upon compliance with contractual terms; and no analysis of Bhasin.

Bhasin

What did Bhasin say and, more importantly, what did it not say? The Court stated:

“(1) There is a general organizing principle of good faith that underlies many facets of contract law.

(2) In general, the particular implications of the broad principle for particular cases are determined by resorting to the body of doctrine that has developed which gives effect to aspects of that principle in particular types of situations and relationships.

(3) It is appropriate to recognize a new common law duty that applies to all contracts as a manifestation of the general organizing principle of good faith: a duty of honest performance, which requires the parties to be honest with each other in relation to the performance of their contractual obligations.”

To be clear, the Supreme Court did not create a free standing duty of good faith, the breach of which results in liability. It recognised an underlying notion of good faith, which had been previously applied to a number of situations (e.g. tender, franchise, etc.). The court then created a new duty, the duty not to lie in the performance of a contract. No more, no less.

“Commercial parties reasonably expect a basic level of honesty and good faith in contractual dealings. While they remain at arm’s length and are not subject to the duties of a fiduciary, a basic level of honest conduct is necessary to the proper functioning of commerce.”

“The organizing principle of good faith exemplifies the notion that, in carrying out his or her own performance of the contract, a contracting party should have appropriate regard to the legitimate contractual interests of the contracting partner. While “appropriate regard” for the other party’s interests will vary depending on the context of the contractual relationship, it does not require acting to serve those interests in all cases. It merely requires that a party not seek to undermine those interests in bad faith. This general principle has strong conceptual differences from the much higher obligations of a fiduciary. Unlike fiduciary duties, good faith performance does not engage duties of loyalty to the other contracting party or a duty to put the interests of the other contracting party first.”

“This organizing principle of good faith manifests itself through the existing doctrines about the types of situations and relationships in which the law requires, in certain respects, honest, candid, forthright or reasonable contractual performance. Generally, claims of good faith will not succeed if they do not fall within these existing doctrines. But we should also recognize that this list is not closed. The application of the organizing principle of good faith to particular situations should be developed where the existing law is found to be wanting and where the development may occur incrementally in a way that is consistent with the structure of the common law of contract and gives due weight to the importance of private ordering and certainty in commercial affairs.”

“The principle of good faith must be applied in a manner that is consistent with the fundamental commitments of the common law of contract which generally places great weight on the freedom of contracting parties to pursue their individual self-interest. In commerce, a party may sometimes cause loss to another — even intentionally — in the legitimate pursuit of economic self-interest. The development of the principle of good faith must be clear not to veer into a form of ad hoc judicial moralism or “palm tree” justice. In particular, the organizing principle of good faith should not be used as a pretext for scrutinizing the motives of contracting parties.

The court held the defendant in that case liable because it was dishonest in its dealings with the plaintiff, who had expected the defendant to deal with him honestly and would have conducted himself differently had the defendant been forthcoming.

Questions

Did the deputy judge understand that the Supreme Court did not create a free standing duty of good faith, just a free standing duty not to lie in performing a contract? Did the appeal judge? Did either understand that their decision should not merely be a “pretext for scrutinizing the motives of (the developer)?” Were the judges expanding the existing categories of good faith to a new one? If so, what is it? Certainly, neither explained what it is. The Supreme Court did not want palm tree justice, but that, to us, is exactly what the developer received.

 

Image courtesy of cohdra.

Written by Jonathan Speigel, the founding partner of Speigel Nichols Fox LLP, leads the litigation and construction practices.