Lower Court Applies the Supreme Court’s New Guidance on Honest Contractual Performance

Published on: March 2021 | What's Trending

Macro photo of tooth wheel mechanism with ETHICS, RESPECT, HONESTY and INTEGRITY words imprinted on metal surface

The Court of Queen’s Bench of Alberta has released the first lower court decision considering the Supreme Court of Canada’s recent changes to the duty of honest contractual performance in C.M. Callow Inc. v. Zollinger, 2020 SCC 45 (“Callow”). Please see our article and newsletter on Callow for more information.

In Brandt Tractor Ltd. v BOMAG (Canada) Inc., 2021 ABQB 71, the court confirmed the principle set out in Callow that the duty of honest performance is not a positive obligation of disclosure. Parties to a contract are not obligated to immediately disclose a decision not to renew a contract, but they are not permitted to cross the line into deception by leading the counterparty to believe that the contract will be renewed.

The plaintiff, Brandt Tractor Ltd. (“Brandt”), was a distributor of equipment manufactured by the defendant, BOMAG (Canada) Inc. (“BOMAG”). The parties signed an agreement in 2000 which provided that Brandt could not act as the distributor of any direct competitor of BOMAG (the “Agreement”). The Agreement permitted either party to refuse to renew it without cause.

On August 23, 2019, BOMAG learned that Brandt was acquiring another distributor which exclusively represented BOMAG’s competitor, Wirtgen. BOMAG notified Brandt that they would not be renewing the Agreement on September 13, 2019 and that the Agreement would expire on December 31, 2019.

SMS Equipment Inc. (“SMS”) issued a press release on October 1, 2019 announcing that they would become the new exclusive dealer for BOMAG’s products in Canada. On October 25, 2019, Brandt announced that they would become the Canadian distributor of Wirtgen.

Brandt applied for an interlocutory injunction to stop the agreement between BOMAG and SMS, or alternatively to reinstate the Agreement between BOMAG and Brandt.

Justice Romaine noted that BOMAG entered into an agreement to replace Brandt after giving notice but before the termination of the Agreement, but Brandt had breached the Agreement prior to the termination date by becoming a distributor of BOMAG’s competitor.

The injunction was refused for a number of reasons. Most notably, it was held that Brandt had not established that the Agreement was improperly terminated. The Callow decision was released after the injunction application was decided, but before a formal decision was entered. Brandt brought the decision to the court’s attention and raised a bad faith argument by asserting that BOMAG had breached the duty of honest performance by failing to promptly notify Brandt of their intention not to renew.

The court rejected Brandt’s “weak assertion of bad faith” and noted that, in Callow, the terminating party acted in bad faith when they withheld notice of its decision to terminate the contract for months and led their counterparty to believe the contract was likely to be renewed. However, in this case, BOMAG provided notice shortly after learning of Brandt’s intended acquisition, and its conduct did not lead Brandt to believe that the contract would be renewed. The line was never crossed from “withholding confidential information about a party’s future business plans” into “an intention to deceive”.

Brandt was therefore unable to stretch the Supreme Court’s guidance on honest contractual performance set out in Callow to establish bad faith on the part of BOMAG.

This decision serves as a good starting point in what will likely be the first of many attempted applications of the Callow doctrine. Parties should take note of the court’s confirmation that, while honest contractual performance is important, a line must be crossed in order to constitute “bad faith”.

Author: Daniel Waldman, Lawyer

The author would like to thank Allan Tung, Articling Student, for his assistance with this article.