On the Hook Despite Breach of Contract

29 août 2016 | Timothy J. McGurrin | Kitchener-Waterloo

( Disponible en anglais seulement )


Last quarter, my colleague Rohit Kumar wrote in this column about the landmark decision made by the Supreme Court of Canada in Bhasin v. Hrynew. In Bhasin, our highest court proclaimed that a principle of good faith underpins contractual performance and imposes a duty on parties to perform their contractual duties honestly.

More recently, this June, the Supreme Court refused leave to appeal the decision of the Ontario Court of Appeal in Shah v. Bank of Montreal. In doing so, it confirmed that the duty of good faith proclaimed in Bhasin does not expand the doctrine of unconscionability beyond its current focus on the bargaining power of the parties and the terms of the contract when formed, to considerations involving performance over the life of the contract.

In early 2011, Mr. Shah had provided a personal guarantee to support part of a small business loan being made to a company operating a donut franchise. Later that year, he resigned as a director of the company, and ceased having any active role. A couple of years later, Mr. Shah asked the bank for the company’s business account information. The bank refused, as Mr. Shah had been removed as a signing officer of the company. However, when the company defaulted on its loan in 2014, the bank still sought to enforce the personal guarantee and collect from Mr. Shah.

The Court of Appeal held that the bank had breached its contractual obligation to Mr. Shah in refusing to provide him disclosure, but that Mr. Shah had not proven that he suffered damages as a result of the bank’s refusal. The Court declined an argument that, based on Bhasin, it should extend the doctrine of unconsionability beyond the terms of the guarantee, and examine whether it was unconscionable for the bank to enforce the guarantee in light of its failure to properly answer Mr. Shah’s request. The decision does note that there was no evidence that Mr. Shah had sought information directly from the company in the intervening years and that Mr. Shah had not proven that he suffered damages because of the bank’s failure to disclose, which he might have been entitled to set-off against the money owed under the guarantee.

As we commented last quarter, while Canadian courts having been applying Bhasin conservatively, significant questions remain, and individuals and business need to be aware that contractual obligations and performance can present complex issues.