Five Key Appellate Decisions of 2021

As we did last year, we have highlighted five appellate decisions from 2021 that we believe will have a lasting impact on commercial disputes.

Good Faith in Exercising Contractual Discretion

At the outset of 2021, the Supreme Court of Canada further developed the law on the duty of good faith, and outlined when the exercise of contractual discretion can cross the line and give rise to a claim for breach of good faith.

In Wastech Services Ltd. v. Greater Vancouver Sewerage and Drainage District, 2021 SCC 7, the Supreme Court of Canada recognized that the duty to exercise contractual discretion in good faith is well-established in the common law. However, the Court clarified that this duty requires parties to exercise their discretion in a manner that is consistent with the purpose for which the parties granted such discretion in the first place.

The Court cautioned that, in determining whether there has been a breach of good faith, the question is not whether the discretion was exercised in a commercially reasonable manner, but rather if it was exercised in a manner unconnected to the purpose underlying the discretion.

Accordingly, what is reasonable is determined by interpreting the contract as a whole and assessing the parties’ intentions in conferring discretion in their contractual arrangement. Courts will intervene only where discretion is exercised in ways unconnected to the purposes for which the parties agreed to confer that discretion.

Releases

In March, the Supreme Court of Canada addressed the proper approach to interpreting the scope of a release.

In Corner Brook (City) v. Bailey, 2021 SCC 29, the Court rejected that different interpretative rules should apply to releases, holding that the general principles of contractual interpretation apply equally to releases. The scope of a release will depend on the wording and the surrounding circumstances giving rise to the release. Any judicial tendency to interpret releases narrowly is not a function of any special rule, but rather a function of releases themselves.

Specifically, the Court held that courts should no longer refer to the century old rule that the general words in a release are limited always to those things which were specifically in the contemplation of the parties at the time of the release. Instead, courts are to read a contract as a whole, giving the words used their ordinary and grammatical meaning consistent with the surrounding circumstances known to the parties at the time of the formation of the contract.

The Court specifically rejected, as a rule of interpretation, that explicit language is always required for a release to be held to surrender rights and claims that the releasing party was unaware of. While the Court observed that it was a sensible approach for parties to consider wording that makes it clear whether the release will cover unknown claims and whether the claims must be related to a particular area or subject matter, a release can be found to cover unknown claims without needing to particularize with precision the exact claims that fall within its scope. In this case, even though the parties had not explicitly turned their minds to the possibility of a third party claim, it was their mutual intent to cover all types of claims relating to the accident. As such, the release covered the third party claim.

Triggering the Start of Limitation Periods

Two appeal decisions released over the summer of 2021 offer clarity on when limitation periods begin to run. Notably, these decisions indicate that a limitation period may start earlier than one might think.

First, the Supreme Court of Canada in Grant Thornton LLP v. New Brunswick, 2021 SCC 31 addressed when a claim is “discoverable” for the purpose of starting a limitation period. It held that the standard to be applied is whether the plaintiff has (actual or constructive) knowledge of the material facts upon which a plausible inference of the defendant’s liability can be drawn. The Court held that a plausible inference of liability requires more than mere suspicion or speculation, but does not give rise to knowledge of facts that confer a legally enforceable right. A plausible inference is one which gives rise to a “permissible fact inference.”

It follows that in a claim alleging negligence, for example, the Court has clarified that a plaintiff does not need knowledge that the defendant owed it a duty of care, or that the defendant’s act or omission breached the applicable standard of care. All that would be required to start the limitation’s clock is knowledge of the material facts from which a plausible inference can be made that the defendant acted negligently.

Second, the Ontario Court of Appeal addressed whether an assessment of the appropriateness of litigation, which is required to start a limitation period under Ontario’s limitations statute, includes an assessment as to the amount of damages recoverable in litigation. One of the factors to determine when a claim is “discovered” under Ontario’s limitations statute is when the person with the claim first knew “that, having regard to the nature of the injury, loss or damage, a proceeding would be an appropriate means to seek to remedy it.”

In Dass v. Kay, 2021 ONCA 565, the plaintiffs appealed the dismissal of their claim for being outside Ontario’s general two-year limitation period from when the claim was “discovered.” The plaintiffs argued that they did not know that the defendants’ actions in 2015 had resulted in any loss worth pursuing until 2018. It was only in January 2018 that the plaintiffs learned from two financial institutions that they had been blacklisted from obtaining loans due to the prior, unauthorized loan application submitted by the defendants. Until then, the plaintiffs merely incurred higher interest rates on a loan due to the defendants’ actions, which did not warrant the cost of litigation.

In dismissing the appeal, the Court of Appeal viewed the plaintiffs’ position as looking to incorrectly expand the class of matters that would delay the start of the limitation period to “any situation where plaintiffs know they have been wronged or suffered damage at the hands of the defendants, but doubt they will be able to marshal the evidence to prove the claim and are unsure whether the scale of the eventual commercial loss will make an action remunerative.”

Ultimately, the Court held that a limitation period cannot be taken to commence only when a plaintiff can determine the quantum of damages available as a remedy, such that it “would be better able to assess whether litigation would be an attractive option.”

Entire Agreement Clauses & Evidence of Surrounding Circumstances

In Ontario First Nations (2008) Limited Partnership v. Ontario Lottery and Gaming Corporation, 2021 ONCA 592, the Ontario Court of Appeal determined that an entire agreement clause does not prevent a court from considering admissible evidence of the surrounding circumstances at the time of contract formation, noting that relevant background and context are often essential to understand contractual language. Specifically, the Court rejected that an entire agreement clause precluded admitting pre-contractual dealings between the parties into evidence. Such evidence was held to be admissible to show the parties’ objective mutual intention and the background facts leading to the Agreement.

Notable Mentions

Although the lower courts in Ontario saw plenty of important commercial decisions in 2021, we have chosen two decisions to highlight in this year’s recap. One reaffirms when a class action can be brought against a defendant in Ontario, and the other addresses a terminated sale of a company and interprets a typical operating covenant included in such agreements as well as the available damages for improperly terminating the acquisition.

First, in Vecchio Longo Consulting Services Inc. v. Aphria Inc., 2021 ONSC 5405, Justice Perell of the Ontario Superior Court of Justice affirmed the requirement in Ontario that there must be at least one representative plaintiff with a cause of action against a named defendant in a proposed class proceeding. His Honour held that the 2014 Supreme Court of Canada decision in Bank of Montreal v. Marcotte (which rejected such a requirement) concerned only the interpretation of the law in Quebec and the particular language in that province’s Civil Code of Procedure.

Second, in December 2021, the Commercial List’s decision in Cineplex v. Cineworld, 2021 ONSC 8016 found Cineworld liable to Cineplex for terminating its agreement to acquire Cineplex. Cineworld argued that it was allowed to terminate the agreement because the plaintiff breached its contractual covenant to conduct its business in the “ordinary course of the normal day-to-day operations of the business” by altering its practices to adapt to the economic challenges of the pandemic.

However, Justice Conway rejected the defendant’s argument and affirmed that the covenant must be interpreted in light of the surrounding circumstances and in harmony with the rest of the contract. Given that the contract’s material adverse effect (“MAE”) clause provided that a party could not refuse to close the sale if a pandemic occurred, the seller could not be in breach of the covenant to operate in the “ordinary course” where it altered its business practices as a result of the pandemic. Otherwise, it would effectively permit the buyer to refuse to close if a pandemic occurred, thus rendering the MAE provision meaningless. Cineplex’s use of cash management tools to manage its liquidity did not render the nature of the business different than it was at the time of signing. Cineplex had used these tools in the past, and they were being used to preserve its business and emerge with its business and relationships intact. Her Honour found Cineplex’s actions did not engage any of the concerns underlying the purpose of ordinary course covenants.

In terms of the calculation of damages, the Court rejected damages based on the loss of consideration that would have been payable had the transaction been completed. The terms of the transaction provided that the purchase price for the shares was to be payable to the shareholders, and not Cineplex, and were not damages to Cineplex. However, the Court did award Cineplex damages of over $1.2 billion for the present value of the synergies that Cineplex would have realized had the transaction closed.

Aird & Berlis 2021 Cases

The past year also included a number of key commercial matters argued by Aird & Berlis lawyers, including the following.

Contact a member of our Litigation and Dispute Resolution Group for further updates and advice on commercial litigation matters.