The Supreme Court of Canada held that good faith contractual performance is a general organizing principle of the common law of contract and that there is a common law duty of good faith contractual performance. This decision is significant for all parties to commercial contracts in Canada and is the first time the Supreme Court has addressed the duty of good faith in contractual performance between parties.

This case arose as a result of Hyrnew’s attempt to capture the niche market of Bhasin, his competitor. First, Hyrnew suggested a merger, which Bhasin rejected. Hrynew then pressured Can-Am to force a merger with Bhasin, all the while denying to Bhasin that any such plans had been made. In the end, Can-Am did not renew its dealership agreement with Bhasin, Bhasin lost of the value in his business and most of Bhasin’s sales agents were solicited by Hrynew. Bhasin sued both parties claiming conspiracy and a failure to act in good faith.

In a unanimous decision the Supreme Court of Canada established a new good faith doctrine and a duty of honesty between contracting parties.

The Supreme Court held that a basic level of honest conduct between commercial parties is necessary to the proper functioning of commerce. A general duty of honesty in contractual performance means simply that parties must not lie or otherwise knowingly mislead each other about matters directly linked to the performance of the contract. Parties must be able to rely on a minimum standard of honesty from their contracting partner in relation to performing the contract as a reassurance that if the contract does not work out, they will have a fair opportunity to protect their interests.

The Court emphasized that a rule of honest performance would promote certainty in commercial dealings. However, good faith as an organizing principle is a “highly context-specific” standard and will be applied differently to each situation. It is not a free-standing rule wherein a breach would be enforceable in and of itself. As a general doctrine, parties are not able to contract out of honest performance, however the Court recognized that parties should be free to relax the standards by which the performance is measured provided they meet the minimum requirements of the duty of good faith.

The Court of Appeal recently reaffirmed when a court will imply terms into commercial contracts.

Energy Fundamentals Group Inc. (“EFG”) provided investment banking services to Veresen pursuant to a letter agreement. The letter agreement was not comprehensive, but it provided for an option for EFG to acquire up to a 20% interest in a limited partnership, the Jordan Cove energy project.

Veresen appealed from the decision of the application judge who ordered Veresen to disclose information to EGC so that it could determine the price of the option and the value of its 20% stake in the project.

The Court of Appeal upheld the application judge’s decision of the existence of an implied term that EFG would be entitled to certain confidential pricing and dismissed the appeal.

The Court found that whether a contractual term can be implied is a question of mixed fact and law. Citing MJB Enterprises Ltd. v. Defence Construction (1951) Ltd., the Court held that a contractual term may be implied “on the basis of the presumed intentions of the parties where necessary to give business efficacy to the contract or where it meets the officious bystander test.”

The business efficacy test considers how the law can give effect to a transaction that both parties must have intended at the time the contract was formed. This is to be measured based on the what the reasonable person with knowledge of the relevant background would have viewed the transaction. Courts should consider what circumstances would frustrate the apparent business purpose of the parties.

The officious bystander test is based on the intentions of the actual parties at the time the contract was formed. A term can be implied in circumstances where both parties would have obviously agreed that it be included as part of the agreement.

The Court of Appeal held that with respect to both the business efficacy test and the officious bystander test, it is important to consider the intention of the actual parties, rather than determining the intentions of reasonable parties. However, the court held that reasonableness is an inescapable part of determining whether to imply a contractual term. The Court held that the analysis must be based on the actual relationship between the parties and the specific contractual context, rather than an abstract analysis of what in general, a reasonable person might have agreed. Therefore the reasonableness of an implied term in a specific context should be assessed.

This decision is consistent with the recent trend to afford greater deference to trial judges regarding their interpretation of contracts. The implication of terms is becoming increasingly prevalent in contract law in order to achieve justice between the parties. Notably, the court recognized that the implication of a contractual term does not require a finding that a party actually thought about a term or expressly agreed to it. Often terms are implied to fill gaps to which the parties did not turn their minds. However, terms will not be implied that are unreasonable or contradict the express language of the contract.

Up until this decision, conflicting caselaw existed about when a trier of fact should consider the independence and impartiality of an expert. Some courts ruled that it should be considered at the threshold admissibility stage, while others held that it should only be considered in the weight given to the evidence stage. In April, 2015, the Supreme Court of Canada clarified that when determining the admissibility of expert evidence, the independence and impartiality of an expert witness should be addressed at the threshold admissibility stage, thereby providing guidance to the legal framework for expert opinion evidence established by the Supreme Court in R. v. Mohan [1994] 2 S.C.R. 9.

This action was one of professional negligence brought by a group of shareholders against their former auditors. The shareholders had hired a new accounting firm (Grant Thornton) who identified problems with the work of the former auditors. The shareholders retained an expert, who also worked at Grant Thornton, although in a different office. The defendant challenged the independence of the plaintiffs’ expert on the basis that her firm would be vulnerable to litigation if her evidence was not accepted by the court and so she lacked independence.

Writing for the Court, Justice Cromwell clarified the two-stage test for admissibility of expert evidence as follows:

At the first stage, the evidence must meet four threshold requirements of admissibility as set out in Mohan:

1. Relevance;

2. Necessity in assisting the trier of fact;

3. Absence of an exclusionary rule; and

4. Properly qualified expert.

If the evidence is considered admissible, the second stage of the analysis allows the judge to exclude the evidence based on a cost-benefit analysis of whether it “is sufficiently beneficial to the trial process to warrant its admission despite the potential harm to the trial process that may flow from the admission.”

Concerns about an expert’s independence and impartiality should be addressed at the threshold admissibility stage. This standard is not onerous; is the expert aware of his/her primary duty to the court and able and willing to carry it out? The expert’s testimony or attestation in a report or otherwise will be sufficient to meet this threshold. The onus then shifts to the other party to show there is a realistic concern that the expert is unwilling or unable to comply with his or her duties.

The Supreme Court provided some guidance about what could render evidence inadmissible. For example, more than an appearance of bias or the existence of an employment relationship is necessary for expert evidence to be inadmissible. The Court noted that factors that cause concern to be if the expert has a direct financial interest in the outcome of the litigation or if there is a familial relationship between the expert and a party.

Ultimately, the test is “whether the expert’s opinion would not change regardless of which party retained him or her.” Any peripheral concerns about an expert’s impartiality can be addressed at cost-benefit stage.

In this case, the expert testified that she understood and was able to comply with her duty to the Court, thereby satisfying the threshold qualification. The opposing party was unable to provide a satisfactory basis to exclude her evidence. As such, the Court concluded that the expert’s evidence was admissible.

This decision emphasized the importance of experts knowing their duty to the Court to give fair, objective and non-partisan opinion evidence. If a Court is not satisfied that an expert has discharged this duty, then their evidence becomes inadmissible.

 

In January 2015, the Court of Appeal for Ontario ruled in Moore v. Getahun that lawyers and experts should be allowed to discuss the contents of expert reports while those reports are being prepared. This ruling reversed the decision of the trial judge, who held that it was improper for counsel to discuss draft reports with their experts.

This case was a medical malpractice action, most of which concerned expert evidence. The Court of Appeal’s decision did not change the outcome of the trial.

In 2010, significant changes were made to the Rules of Civil Procedure relating to expert witnesses in response to the recommendations of the Honourable Coulter Osborne in his review of the civil justice system, Civil Justice Reform Project: Summary of Findings & Recommendations. The changes were designed to foster unbiased expert evidence by clarifying the duty of an expert witness and specifying information that must be contained in an expert’s report.

At trial, Justice Wilson was critical of the long-standing practice of counsel reviewing the draft reports prepared by expert witnesses. She suggested that this practice undermines the ethical rules and standards of the legal profession. As a solution, her Honour required that counsel were not permitted to discuss draft reports with experts, and that all discussions between counsel and their expert be documented and subject to disclosure and production.

Justice Wilson’s statements caused considerable concern in the legal community. On appeal a number of parties intervened in support of the position that counsel should be permitted to review draft expert reports.

The Court of Appeal held that Justice Wilson erred in holding that it was unacceptable for counsel to review and discuss draft expert reports. Justice Sharpe, writing for a unanimous court, disagreed with her Honour’s interpretation that the 2010 amendments to the Rules changed the role of expert witnesses. Rather than change the existing duties of expert witnesses, the purpose of the amendments was to clarify those duties. Justice Sharpe noted that the ethical and professional standards of the legal profession already maintain expert objectivity by forbidding counsel from interfering with the independence and objectivity of expert witnesses. Further, the adversarial process acts as a check in cases where counsel improperly influence an expert witness. His Honour added

I agree with the submissions of the appellant and the interveners that it would be bad policy to disturb the well-established practice of counsel meeting with expert witnesses to review draft reports. Just as lawyers and judges need the input of experts, so too do expert witnesses need the assistance of lawyers in framing their reports in a way that is comprehensible and responsive to the pertinent legal issues in a case (para. 6).

The Court of Appeal’s decision provides guidance as follows:

  1. counsel are encouraged to consult with experts to ensure the expert is aware of their duty to the court and to ensure that their report and evidence is accessible, comprehensible and relevant;
  1. counsel are forbidden to interfere with the objectivity and independence of the expert witness; and
  1. it is not necessary for counsel or experts to document all of their communications or changes to draft reports. The review of earlier draft reports and counsel’s communication with the expert at trial will be rare.

 

The Court of Appeal’s decision in Royal Bank of Canada v. Trang demonstrates how the Personal Information Protection and Electronic Documents Act (“PIPEDA”) is affecting the enforcement of judgments and has important implications for debtors and creditors. In a 3-2 decision, the Court strengthened debtor’s privacy rights and held that creditors are required to obtain a court order to bypass the consent requirements of PIPEDA.

This case arose as a result of the Royal Bank of Canada’s (“RBC”) attempts to obtain a mortgage discharge statement in order to enforce a judgment it obtained against the Trangs. RBC registered a writ of seizure and sale to enforce the judgment and directed the Sheriff to seize and sell the Trang’s property. The Sheriff refused to sell the property unless the Bank of Nova Scotia (“Scotiabank”), who held a first mortgage on the property, provided a mortgage discharge statement. Scotiabank refused to provide the statement on the basis that PIPEDA restricted it from disclosure as it contained sensitive personal information that required the Trangs’ explicit consent to disclose to a third party. The Court of Appeal agreed that the mortgage discharge statement was protected by PIPEDA.

Justice Laskin, writing for the majority, held that there are two possible options for creditors in RBC’s situation where the debtor refuses to consent to production of a mortgage discharge statement:

1. A creditor can include a term in its loan agreements so that the debtor consents to disclosing the discharge statement to the creditor in advance; or

2. A creditor can seek production through a motion under Rule 60.18(6)(a) of the Rules of Civil Procedure. This Rule is the judgment debtor exam rule which requires a third party to attend an examination and bring the discharge statement examination.

Justice Hoy, writing for the dissent, expressed concern that not all creditors have the same resources as RBC to protect their interests through court proceedings, and this may create access to justice issues. They were of the view that strict compliance with rule 60.18(6)(a) was unnecessary since RBC had already brought two motions to obtain the discharge statement from Scotiabank. The dissent further stated that a rule 60.18(6)(a) motion was unnecessary in the circumstances because the mortgage discharge statement contained “less sensitive” information for the purposes of s. 4.3.6 of Schedule 1 to PIPEDA, and that the Trangs had implicitly consented to disclose this information.

The law, however, is that a mortgage statement is protected under PIPEDA unless a court order or the debtor’s express consent in obtained. The Court of Appeal effectively upheld its previous decision in Citi Cards Canada Inc. v. Plaisance, wherein it refused to order production of a bank customer’s mortgage statement to Citi Cards Canada Inc. so that it could enforce its judgment on a credit card debt.

Creditors may wish to consider the inclusion of an express term in its loan agreements so as to avoid the time and expense of a motion under Rule 60.18(6)(a) for production a mortgage discharge statement, or other relevant document.

In Pate v. Galway-Cavendish, a divided panel of the Ontario Court of Appeal took 240 paragraphs to reduce a punitive damage award from $550,000 to $450,000.  This was in circumstances where the defendant’s conduct was found to be “egregious, prolonged, and of great adverse impact.”  Why bother?  A likely answer is that the court is concerned about possible duplication of damages, including an important reminder of the fact that compensatory damages may themselves have the effect of achieving some or all of the “punishment” required in a given fact situation.

In Arseneault (Succession de) c. École Sacré-Coeur de Montréal, the Quebec Court of Appeal awarded a dismissed employee $5,000 in damages on account of the defendant employer’s refusal to give her a letter of reference, following dismissal.  The court seems to have implied a term in the contract of employment by way of a double negative: that is, that a refusal to provide a letter of reference must not be contrary to good faith requirements, particularly because a curriculum vitae is an integral component of a person’s reputation.  Query: whether this principle will be picked up in Ontario courts.

Some six years ago, I expressed relief that Pearson v. Inco had been finally certified as a class proceeding (see below).

I recorded my thoughts that environmental class actions were the subject of judicial flinching because of general reluctance to let plaintiffs threaten the existence of an entire industry, no matter what the merits of their claim. Pearson v. Inco (now renamed Smith v. Inco) has now crashed and burned as our court of appeal has overturned a $36 million trial judgment. See the court’s reasons. I have to imagine that our courts keep a close eye not only on the case in front of them but all other cases that might be inspired by substantial damage awards.

I have long advised clients that contracts of employment have essentially two speeds: on and off.

Our courts do not want to judicialize the workplace, and they are determined not to have their attention shifted away from circumstances of dismissal.

This is most apparent in  Piresferreira v. Ayotte. There, the Ontario Court of Appeal overturned a half million dollar damage award granted by a highly respected trial judge, Justice Catherine Aitken, for an employer’s alleged negligent infliction of mental suffering during the course of employment. The court held that the parties had a relationship of proximity and that the damages suffered were reasonably foreseeable. However, for policy reasons, the court would not impose a general duty on employers to “shield an employee during the entire course of his or her employment from acts in the workplace that might cause mental suffering.” The court held therefore that the tort of negligent infliction of mental suffering is not available in the employment context.

This leaves the possibility of intentional infliction of mental suffering, but the court narrowed the applicability of this intentional tort to the “sort of glaring and notorious false communication that has been the basis of the classic application of the tort,” referring to century-old cases where defendants falsely communicated to plaintiffs deliberate lies calculated specifically to cause distress.

Implicit in the court’s decision is that if your boss is making you crazy, you should talk to your lawyer about suing for constructive dismissal, as that is likely your only reasonable remedy.

Olivieri v. Sherman, released July 3, 2007 by the Ontario Court of Appeal, gives a succinct answer to a dispute that comes up far more often than it should. Contractual intention must be decided solely on the basis of what a party says and does. Actual intention is irrelevant. The point is made clear in this case, on simple facts.