No Requirement to Subordinate Self-Interest: CWB Maximum Financial Inc. + Fram Elgin Mills 90 Inc.
March 2022 - 2 min read
In 2020 and 2021, C.M. Callow Inc. v. Zollinger, 2020 SCC 45 and Wastech Services Ltd. v. Greater Vancouver Sewerage and Drainage District, 2021 SCC 7, two significant Supreme Court of Canada cases, clarified and confirmed the duty of good faith and honest contract performance. These cases have since been followed several times in Alberta and Canada to confirm, clarify, or extend the duty of good faith and honest performance. Understanding the evolution of the law following Callow and Wastech is essential for all individuals and entities with contractual duties and rights.
This article aims to provide an update on how appellate courts have applied the concepts of good faith and honest contractual performance, following Callow and Wastech.
In CWB, the Court applied the duty of honest performance and good faith in the insolvency context. In CWB, the defendants owned a pharmacy and continued to operate it under a court-appointed interim receiver. The principal of the corporate defendant was actively trying to sell the pharmacy. The pharmacy alleged that the plaintiffs (CWB) had, through misrepresentation or omission, breached their duty of good faith. The pharmacy alleged that:
- CWB lulled them into a false sense of security and prevented them from taking steps that could have avoided the need for a receivership application.
- CWB advised them that the first set of demands was just a formality not to be acted on, which was false.
- A forbearance agreement was "sprung on them," and they had no opportunity to negotiate its terms.
Although it was ultimately found that there was no breach of the duty of good faith, the Court noted that the relationship between lender and debtor is contractual, and the duty applies.
The conduct of the party alleged to have breached the duty of good faith should be assessed in light of the intent and policy objectives of the Bankruptcy and Insolvency Act. The remedy of receivership sought from the Court is a contractual component, and its initiation is subject to the lender's discretion, although the legal test is statutory. Therefore, the parties must act according to the duty of good faith and honest performance. Interested parties should not bring or conduct proceedings for an oblique motive or improper purpose.
In CWB, the duty of good faith required the parties not to lie to or mislead the other concerning the status of the loan or the state of the lender-borrower relationship. It did not impose a duty of loyalty or disclosure, or require the subordination of one's interests to the other.
The fact that the duty does not require parties to subordinate or forgo their interests was confirmed by the Ontario Court of Appeal in Fram. In Fram, the Court stated that "courts should be very reluctant to interfere in the dealings of hard-headed business people pursuing their competitive goals. This pursuit is not forbidden in a market economy: it is expected".