By: Anthony Pugh
Editor: Ben Hanuka
Wastech Services Ltd. v. Greater Vancouver Sewerage and Drainage District, 2021 SCC 7
(Supreme Court of Canada)
The majority of the Supreme Court of Canada held that the duty of good faith included an obligation to exercise discretion under a contract.
The plaintiff, Wastech, had a contract with the Defendant, the Greater Vancouver Sewerage and Drainage District, for waste disposal. Under the contract, Wastech was to remove and transport waste to two landfills and one waste-to-energy plant. Wastech received a higher rate for removal to one landfill – the Cache Creek Landfill – than the other two facilities.
The contract also set a target operating ratio, 0.89, which essentially amounted to a 11 percent operating profit to Wastech. If the actual operating ratio was more than 0.89, Vancouver Sewerage was required to compensate Wastech 50% of the difference.
Vancouver Sewerage was also required to provide a forecast of the how the waste was to be allocated between the various facilities. Vancouver Sewerage had discretion to change the minimum amount of waste that Wastech could transport to the Cache Creek Landfill. All parties were aware that the redirection of waste from Cache Creek Landfill to the other facilities might prevent Wastech from achieving the target operation ratio; however, the parties chose to ignore this risk and not include an adjustment.
In the 2011 operating year, Wastech only generated a 4% operating profit after adjustments, resulting from Vancouver Sewerage’s reallocation of waste from the Cache Creek Landfill to the other facilities.
Wastech commenced an arbitration against Vancouver Sewerage. The arbitrator held in favour of Wastech, finding that Vancouver Sewerage breached its duty of good faith by making it impossible for Wastech to achieve the target operating ratio.
The Supreme Court of British Columbia set aside the arbitrator’s decision and the Court of Appeal for British Columbia upheld the decision of the Supreme Court of British Columbia.
In the Supreme Court of Canada, the majority recognized that one part of the general duty of good faith was to exercise contractual discretion in good faith. This means whether the discretion is exercised for the purpose that it was created.
The court is required to only ensure that a party has not exercised its discretion in a manner that it unconnected from that discretion’s contractual purpose.
Whether a party has been completely deprived of the benefit of the contract does not determine the issue of duty of good faith.
The Supreme Court held that Vancouver Sewerage did not breach its good faith obligations. The parties’ intention, under the recitals of the contract, included to maximize efficiency, minimize costs, and maximize capacity at the Cache Creek Landfill. By allocating more waste to the other two facilities, Vancouver Sewerage was guided by the objective to dispose of waste in a cost effective and efficient manner and to preserve capacity at the Cache Creek Landfill.
Wastech had no guarantee that it would meet the target operating ratio during any given year. Further, both sides were aware of the risk that redirection of waste from the Cache Creek Landfill to the other two facilities may prevent Wastech from reaching the target operating revenue. The parties chose not to deal with this risk in the contract – rather, they included various adjustment mechanisms.
Ultimately, Vancouver Sewerage’s waste allocation was within the permittable range of discretion and was consistent with the purpose of that discretion.
There was an additional issue about the standard of review of an arbitrator’s decision, which has been unclear since the Supreme Court of Canada’s decision in Canada (Minister of Citizenship and Immigration) v. Vavilov. However, the Supreme Court declined to resolve this issue.
Cineplex v. Cineworld, 2021 ONSC 8016
(Ontario Superior Court of Justice, Commercial List)
The Ontario Superior Court of Justice (Commercial List) awarded over $1.2 billion in damages to Cineplex (based in Toronto) for the breach of Cineworld (based in the UK) of their Arrangement Agreement, under which Cineworld and a related BC numbered company had agreed to buy all of Cineplex’s shares at $34 per share.
In December 2019, Cineplex (which we will call “C-Plex” to avoid confusion) and Cineworld (which we will call “C-World” for the same reason) entered into the Arrangement Agreement. Shortly after that, the COVID pandemic hit, resulting in the shutdown of movie theatres, which seriously disrupted C-Plex’s business.
The Arrangement Agreement contained the following key provisions:
- C-Plex agreed that it’s bank debt under a company credit agreement could not exceed $725 million;
- C-Plex agreed to conduct its business in the ordinary course, in accordance with laws, and to use commercially reasonable efforts to maintain and preserve its business organization, assets, properties, employees, goodwill and business relationships (the “Operating Covenant”);
- As a condition of closing, no “Company Material Adverse Effect” must have occurred. Changes attributable to an outbreak of illness were expressly not captured by this section.
After the pandemic hit, C-World’s shareholders started putting pressure on it to exit the arrangement agreement. C-World expected C-Plex to default on its obligations by exceeding the $725 debt limit and saw it as their chance to terminate the agreement. However, C-Plex never exceeded it.
C-World then sent a notice of default to C-Plex, alleging various violations of the Operating Covenant. C-Plex denied any breach of the Arrangement Agreement. Its position was that the risk of the pandemic was assigned to C-World under the material adverse effect clause, which expressly excluded a pandemic.
Based on existing caselaw, the court held that the purpose of interim covenants is to ensure that the business that the purchaser bargained for is essentially the same at closing as the one that existed at the time the parties signed the purchase agreement. In addition, interim covenants mitigate the risk of the seller acting solely in its own interest during the interim period.
The court found that C-World was overly focused on the first part of the operating covenant – the obligation to conduct its business in the ordinary course, and that it ignored the second part – the obligation to maintain and preserve its business.
The government COVID mandates required C-Plex to close its theatres. It responded in a way consistent with its past practice of maintaining liquidity and in a commercially reasonable way. It was commercially reasonable for C-Plex to take into consideration all debt limits.
Under the material adverse effect clause, C-World agreed to complete the transaction even if there was a pandemic. The court reasoned that interpreting the Operating Covenant in the manner that C-World was arguing would render this provision meaningless.
The court also rejected other arguments that C-Plex breached the Arrangement Agreement, as well as an argument that C-Plex had acted in bad faith. It found that C-Plex made reasonable disclosure to C-World. C-World’s argument that it required further details about rent and payment deferrals and rent relief went beyond the scope of the Arrangement Agreement and was inadequate to make out a breach of the duty of honest performance.
About damages, the Court accepted C-Plex’s expert evidence about damages resulting from loss of synergies and awarded C-Plex $1.2366 billion in damages under this head of damages. It also awarded C-Plex $5.5 million for its transaction costs. (The decision is expected to be appealed.)
Grant Thornton LLP v. New Brunswick, 2021 SCC 31
(Supreme Court of Canada)
The Supreme Court of Canada held that the Province of New Brunswick had missed the statutory limitation period under New Brunswick’s Limitation of Actions Act in a claim against an auditor.
The Appellant auditors, Grant Thornton LLP, had provided a report to the province about the Atcon Group of Company’s financial statements. Among other things, this report stated that Atcon’s financial statements was prepared in accordance with Generally Accepted Accounting Principles (“GAAP”). Grant Thornton’s report prompted the province to deliver loan guarantees to the company in the amount of about $50 million. This allowed Atcon to borrow funds from the Bank of Nova Scotia.
Latter, the bank called on the loan guarantees, and applied for a receivership order against Atcon. The province retained another auditor, which found that Atcon had systematically overstated assets and revenues and understated liabilities and losses, and that Grant Thornton did not prepare its audit report in accordance with GAAP.
The province advised the New Brunswick Institute of Chartered Accountants that it was going to make a formal complaint against Grant Thornton and started a claim for negligence a year and a half later.
The Supreme Court held that discoverability starts when there is a plausible inference of liability – in other words, when a plaintiff has actual or constructive knowledge of the material facts on which it can draw a plausible inference of liability by a defendant.
The Province claimed that the limitation period could not have started from the date of the second report, because it did not have access to Grant Thornton’s audit files. The Supreme Court held that that this did not change the fact that the Province had actual or constructive knowledge of the material facts.
It therefore held that the Province discovered its claim when it received the report from the second auditor. At this time, the Province knew or should have known of the following: (i) it had suffered a loss (since the bank had called on the loan guarantee); (ii) it had relied on Grant Thornton; (iii) Atcon’s financial statements were not prepared in accordance with GAAP; (iv) Atcon had overstated its assets and revenues and underreported liabilities, and (v) Grant Thornton represented in error that Atcon’s financial statements were prepared in accordance with GAAP and had missed the various other issues with Atcon’s financial statements.
Corner Brook (City) v. Bailey, 2021 SCC 29
(Supreme Court of Canada)
The Supreme Court of Canada held that there are no special interpretive rules that apply specifically to releases and enforced a release that the plaintiff had signed with the City of Corner Brook in Newfoundland and Labrador.
The plaintiff, Mrs. Bailey, was an individual who struck an employee of the City of Corner Brook with her car. The employee brought a claim against her, and she brought a claim against the city. After negotiations, the parties settled Mrs. Bailey’s claim against the city for the amount of $7,500, payable to her, and entered into a full and final mutual release with the city on broad terms.
But she later sued the city in a Third-Party Claim in a lawsuit that the employee brought against her. The application judge enforced the release and held that Mrs. Bailey had no right to sue the city in the Third-Party Claim because of her release.
The Court of Appeal for Newfoundland and Labrador allowed an appeal by Mrs. Bailey, relying on specific references in the release to Mrs. Bailey’s action and pre-contractual correspondence.
The Supreme Court of Canada overturned the decision of the Court of Appeal for Newfoundland and Labrador, and reinstated the original decision of the application judge against Mrs. Bailey.
At issue was whether a rule in an old House of Lords (UK) decision, London and South Western Railway Co. v. Blackmore, applied (which limited releases to claims that were specially in the contemplation of the parties), or whether that rule had been overtaken by the Supreme Court of Canada’s modern decision in Sattva Capital Corp. v. Creston Moly Corp. The Supreme Court held that Sattva applied, and that the Blackmore Rule and jurisprudence under it should not longer be relied on, as it had been subsumed by Sattva.
The Supreme Court held that a release should be read as a whole, giving the words their ordinary meaning, consistent with the surrounding circumstances known to the parties (like any other contract).
As a result, the court concluded that the release covered Mrs. Bailey’s Third-Party Claim against the city, which therefore could not be pursued.