Introduction
In a breakdown of a contractual relationship, the “duty of good faith” is often touted by parties who feel that they have been treated unfairly. However, a recent decision by the Court of King’s Bench has clarified that the duty of good faith is not a trump card that can be used to defeat clearly pronounced rights, even when the opposing party has used its contractual discretion to serve its own best interests.
Background facts
Business Development of Canada (“BDC”) provided two business loans to Logco Wireline Services (Logco). As security for those loans, BDC took a General Security Agreement against Logco’s assets, and personal guarantees from four Directors of Logco, including the Defendant, Cummins (the “Guarantees”). Approximately one year after the loans were advanced, Logco defaulted and BDC elected to pursue repayment of the loans through the Guarantees.
The Guarantees were unconditional and expressly gave BDC unfettered discretion to choose to demand payment on the guarantees. Clause 4(g) of Cummins’ Guarantees provided that “BDC is not bound to seek recourse against the Borrower before requiring payment from the Guarantor and BDC may enforce its various remedies under this guarantee and the Loan Security or any part of it at any time, in any manner, and in any order that BDC may choose.”
BDC brought a claim to collect on the Guarantees and was successful on an application for summary judgment. Cummins appealed.
The issue before the Court was whether the following questions were triable issues, incapable of resolution on summary judgment:
- Did BDC owe Cummins a duty to exercise its discretion in good faith?; and
- Did BDC violate that duty?
Cummins argued that the 2021 Supreme Court of Canada case of Wastech Services Ltd. v Greater Vancouver Sewerage and Drainage District, 2021 SCC 7 (“Wastech”) changed the law regarding the exercise of contractual discretion and that when applying for summary judgement, the uncertainties on the facts, record, and the law make summary judgement inappropriate.
The decision
In Wastech, the Supreme Court held that the duty to exercise contractual discretion is breached only where the discretion is exercised unreasonably, in a manner unconnected to the purposes underlying the discretion. This purpose would be evident from the text of the discretionary clause or through reading the clause in the context of the contract as a whole.
Cummins argued that in applying this principle, there would be a reasonable expectation that BDC would realize its security as against the assets of Logco before proceeding against the Directors on their respective Guarantees.
However, the Court concluded that there was no evidence that BDC’s exercise of discretion occurred in a manner unconnected to the purposes underlying the discretion, nor did BDC behave in an unreasonable or arbitrary manner. The parties’ own bargain did not require BDC to realize on other security before looking to enforce the Guarantees. As such, BDC was entitled to act in its own best interest and pursue the Guarantees as it saw fit.
Accordingly, the Court agreed with the Applications Judge that “it is pure speculation in the face of the unfettered discretion set out in the guarantee that there was a breach of duty to exercise that discretion in good faith.” BDC did not owe a fiduciary duty to protect Cummins’ interests. The Court did not permit Cummins’ attempt to use the duty of good faith to obtain a benefit for which he did not bargain.
In the end, the Court upheld the Applications Judge’s decision that there was no evidence to support Cummins’ position. The Court affirmed that there was no genuine issue for trial and that the granting of summary judgment was appropriate.
Practical implications
This decision confirms that the duty of good faith does not override contractual provisions that grant parties the discretion to act in their own best interest. Provided a party acts reasonably, and in accordance with the purpose underlying the contract, they may exercise the discretion to their benefit.
Practically speaking, where discretionary powers are conferred, contracting parties may want to think carefully about expressly setting out the limits of that power and the purpose or reasons for which it is conferred, as well as discussing and determining what may constitute an unreasonable or bad faith exercise of discretion.
Miller Thomson LLP is here to help with all of your business and litigation needs. If you have questions about this decision or any other matter, please contact a member of our Commercial Litigation team.
