Commercially Reasonable

Resolute FP Canada Inc. v. Ontario (Attorney General), 2019 SCC 60 (CanLII)

[79] As we will explain below, contractual interpretation also requires courts to consider the principle of commercial reasonableness and efficacy. Contracts ought therefore to be interpreted “in accordance with sound commercial principles and good business sense” (Scanlon v. Castlepoint Development Corp. (1992), 1992 CanLII 7745 (ON CA), 11 O.R. (3d) 744, at p. 770). As Lord Diplock explained in Antaios Compania Naviera S.A. v. Salen Rederierna A.B., [1985] 1 A.C. 191 (H.L.), at p. 201, “if detailed semantic and syntactical analysis of a word in a commercial contract is going to lead to a conclusion that flouts business commonsense, it must be made to yield to business commonsense”. The principle that requires contracts to be read in a commercially reasonable and efficient manner is therefore an important interpretive aid in construing contractual terms.

[80] Ultimately, contractual interpretation involves the application of various tools — including consideration of the factual matrix and the principle of commercial reasonableness — in order to properly understand the meaning of the words used by the parties to express their agreement.

Bhasin v. Hrynew, 2014 SCC 71 (CanLII), [2014] 3 SCR 494

[61] The fact that commercial parties expect honesty on the part of their contracting partners can also be seen from the fact that it was the American Bar Association’s Section of Corporation, Banking and Business Law that urged the adoption of “honesty in fact” in the original drafting of the Uniform Commercial Code (“U.C.C.ˮ): E. A. Farnsworth, “Good Faith Performance and Commercial Reasonableness Under the Uniform Commercial Codeˮ (1963), 30 U. Chicago L. Rev. 666, at p. 673. Moreover, empirical research suggests that commercial parties do in fact expect that their contracting parties will conduct themselves in good faith: see, e.g., S. Macaulay, “Non-contractual Relations in Business: A Preliminary Study” (1963), 28 Am. Soc. Rev. 55, at p. 58; H. Beale and T. Dugdale, “Contracts Between Businessmen: Planning and the Use of Contractual Remedies” (1975), 2 Brit. J. Law & Soc. 45, at pp. 47-48; S. Macaulay, “An Empirical View of Contract”, [1985] Wis. L. Rev. 465; V. Goldwasser and T. Ciro, “Standards of Behaviour in Commercial Contracting” (2002), 30 A.B.L.R. 369, at pp. 372-77. It is, to say the least, counterintuitive to think that reasonable commercial parties would accept a contract which contained a provision to the effect that they were not obliged to act honestly in performing their contractual obligations.

[62] I conclude from this review that enunciating a general organizing principle of good faith and recognizing a duty to perform contracts honestly will help bring certainty and coherence to this area of the law in a way that is consistent with reasonable commercial expectations.

[73] In my view, we should. I would hold that there is a general duty of honesty in contractual performance. This means simply that parties must not lie or otherwise knowingly mislead each other about matters directly linked to the performance of the contract. This does not impose a duty of loyalty or of disclosure or require a party to forego advantages flowing from the contract; it is a simple requirement not to lie or mislead the other party about one’s contractual performance. Recognizing a duty of honest performance flowing directly from the common law organizing principle of good faith is a modest, incremental step. The requirement to act honestly is one of the most widely recognized aspects of the organizing principle of good faith: see Swan and Adamski, at § 8.135; O’Byrne, “Good Faith in Contractual Performance: Recent Developments”, at p. 78; Belobaba; Greenberg v. Meffert (1985), 1985 CanLII 1975 (ON CA), 50 O.R. (2d) 755 (C.A.), at p. 764; Gateway Realty, at para. 38, per Kelly J.; Shelanu Inc. v. Print Three Franchising Corp. (2003), 2003 CanLII 52151 (ON CA), 64 O.R. (3d) 533 (C.A.), at para. 69. For example, the duty of honesty was a key component of the good faith requirements which have been recognized in relation to termination of employment contracts: Wallace, at para. 98; Honda Canada, at para. 58.

Kiki Kapalua Inc. v. 1203840 Ontario Limited, 2014 ONSC 6298 (CanLII)

[13] In March 2007, the landlord began requesting the tenant pay her rent by certified cheque and offered to work with the tenant on a payment plan to make up the growing arrears. As of December 2007, the tenant owed over $20,000 in arrears. The tenant remained in arrears yet the landlord took no steps to evict the tenant. Rather the landlord continued to offer the tenant ways to make up the arrears by way of a payment plan. The landlord worked with the tenant and took no action on the arrears from October 2006 until December 2009. The tenant remained in arrears often not responding to the landlord’s written offers of support and assistance.

[35] The landlord submits that the language of the agreements between the parties is such that the landlord’s contractual right to measure the premises and alter the contractual consideration crystallizes when the parties dispute the approximate measurement as set out in the agreements. I disagree. The language does not contemplate a re-measurement upon dispute. Rather, it reads that the measurement therein is an approximate number and that the landlord may confirm the number with the use of a qualified architect or surveyor. The measurement impacts the payment by the tenant of both base and additional rent; implicit in the right granted is its timely exercise. It is not commercially reasonable to conclude that the untimeliness in this case was the intention of the parties in 2003 when they agreed to defer actual measurement of the premises to the landlord. Considering the circumstances up to and including March 2013, the landlord’s retroactive recalculation was not a reasonable exercise of a contractual right. Rather it a was reactive uppercut to the tenant’s reasonable, yet unprecedented, efforts to review the TMI supporting documentation.

[36] For 9 years of a 10-year lease the calculations of the tenant’s base rent and proportionate share of TMI was governed by the only square footage of the premises specifically stated in the agreement to lease and the lease at 3,485 and the square footage of the building at 19,737. The agreements defer the exact measurement to the landlord’s architect or surveyor. A variation to the measurement as estimated has a resultant variation to the tenant’s consideration as contracted as it impacts the tenant’s obligation to pay both base rent and additional rent. As a variation impacts an essential term(s) of the commercial agreement, in my view, implicit in the granting of the right to the landlord is the obligation of the landlord to exercise its right within a reasonable time after the commencement of the lease; 9 years into a 10-year lease is not reasonable.