The Courts Can Rescue Your Contract … But Try to Avoid the Need for This (If You Can)

There has been a growing trend in contract litigation lately – the courts are more willing to step in and help an unfortunate party.

Example #1:  In the Supreme Court of Canada’s decision in Bhasin at the end of 2014, the Court held that there was a duty of good faith performance of contracts.  In that case, which can be found here, the plaintiff had a contract with the defendant which was automatically renewable unless notice of termination was given at least 6 months before the expiry of the existing term.  The defendant was found to have pressured the plaintiff to merge with a competitor and the trial court (and then the Supreme Court) found that when the plaintiff did not give in to the pressure and the defendant gave notice of termination (in accordance with the contract terms), that the defendant was not acting in good faith.  In doing so, the Supreme Court held that there was an implied term in all contracts that the parties would exercise their contractual rights in good faith.  [For more on this case, you can go to it or you can see my blog post from November 2014 on the case.]

Example #2: In May of last year, the Ontario Court of Appeal had a claim on a “guarantee” in Global Food Traders.  The “guarantee” was found in the following wording at the end of one paragraph:

“The Purchase Price shall be payable in 50 equal monthly installments of $10,000 commencing April 30, 2012 by post-dated cheques. If Mr. Massalin’s obligations are called upon pursuant to this Section he shall within three days provide the Seller with immediately available funds to cover any bounced or NSF cheques.”

The word “guarantee” does not appear anywhere in this wording and, accordingly, Mr. Massalin argued that this wasn’t an actual guarantee and he shouldn’t be found liable.  The Court of Appeal in its decision, which can be found here, did not have significant concern about the lack of the word “guarantee” and essentially found that it was clear that this was a guarantee obligation and that if there was any other possible understanding of this wording, Mr. Massalin had failed to provide what that possible understanding might be.

Example #3:  I had a trial last week in which my client said that there was a contract in which the defendants had agreed to share expenses 2/3 for them and 1/3 for him and this included payments on various leases that totaled approximately $100,000.  This was the arrangement, although only my client was named on the lease.  A few months into the leases, the other two companies refused to pay on the leases (one of them even shutting down business) and took the position that their names were not on the leases, so they had no obligation to pay.  Unfortunately for my client, there was nothing clearly setting out in writing that there was the agreement to pay.  Instead, I had to show (through both my client’s evidence and through cross-examination of the main officer/director of the defendant companies) that there were enough other documents indicating that there must have been such an agreement to pay (or else why would these documents say what they said).  Thankfully, the court agreed that there was, in fact, a verbal contract and gave judgment in favour of my client.

Whichever example you consider, the result is that the Court had to come to the rescue of one of the contracting parties.  This is not necessarily a new phenomenon.  What appears to be new, however, is the fact that the courts are more inclined to rescue unfortunate parties from their predicaments.  So what does this mean?  Firstly, it means that the days of strict reliance and interpretation of contracts is probably going (if not already having gone) the way of the Dodo bird.  I used to be able to say to clients that if the contract says X, then the result is X.  Now I have to say, if the contract says X, then the starting point is that the result will be X – but have you done or said anything that might cause a court to consider that the result should be something other than X?  Secondly, even if the courts have the power to come to the rescue and are willing to do so, that still shouldn’t be a cause for celebration.  Yes, my client had the court confirm that there was a valid verbal contract.  That is wonderful.  How much would it have cost my client to have the verbal contract put into writing?  Whatever the answer is, you can be absolutely guaranteed that the amount is nothing compared to the cost he spent on legal fees to have the issue litigated in court to get to the same result.  Similarly, if Global Food Traders had simply added a few words (including the word “guarantee”) to its agreement, they could have saved litigation through two levels of court.  And in all other cases, adding specific wording to address not only the anticipated “good” results of an agreement, but also taking a few moments to add wording to address any “what if something goes wrong” results of an agreement can save the need for a court to have to determine whether the other side performed its side of the deal in good faith or otherwise.

So, the courts can rescue your contract if something has gone wrong but, as always, an ounce of prevention is worth more than a pound of cure and it would be better to try and avoid having the court rescue your situation if that is possible.

Something to think about.

CALC

 

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