A Relief For Lenders: Duty Of Good Faith Performance Of Contractual Obligations Does Not Require Lenders To Advance Additional Funds To Borrowers

Since the Supreme Court's landmark decision in Bhasin v Hrynew1 confirmed the existence of a general duty to perform contracts in good faith, the Canadian legal and business communities have looked to understand the scope of this duty and its application to various types of contracts. In Willowbrook Nurseries2 , the Ontario Court of Appeal set out certain guidelines regarding the duty of good faith performance of contracts in the commercial lending context.

Willowbrook Nurseries involved a dispute between Royal Bank of Canada [RBC] and Willowbrook Nurseries Inc. [Willowbrook] over RBC's duties under its contractual arrangements with Willowbrook. Beginning in 2005, RBC advanced funds to Willowbrook, a plant nursery business, under a line of credit, demand loan, various mortgages and a corporate credit card. Given the seasonal nature of Willowbrook's business and its need for extra working capital during planting season, RBC advanced amounts in excess of the line of credit limit to Willowbrook every winter. These amounts were always repaid by Willowbrook the following spring or summer.3 In 2008, Willowbrook failed to repay the $1.29 million in additional funds advanced by RBC in 2007. Nevertheless, it submitted a further request for $1.7 million of additional funds in October 2008.4 RBC turned down the credit request and transferred Willowbrook's accounts to its special loans department. The lender's unwillingness to lend these additional funds resulted in Willowbrook being unable to pay its suppliers on time and having to lay off some employees.

Willowbrook brought a claim, which alleged that RBC performed its contract in bad faith by (i) by refusing to advance additional funds to Willowbrook in 2008, in line with its previous practice; and (ii) transferring Willowbrook's accounts to its special loans department.5

The Ontario Court of Appeal confirmed the trial court's decision, stating that the duty of good faith performance of contracts did not require RBC to advance new money to Willowbrook. The Court affirmed earlier case law that had held that a bank has a duty to give a customer notice of a change in the prevailing course of conduct with respect to overdraft lending. However, the Court determined that the prevailing course of conduct in this situation consisted of RBC advancing additional funds to Willowbrook each winter and Willowbrook repaying those funds the following year, prior to receiving a subsequent request.6 In 2008...