The Ontario Court Of Appeal Declines To Extend The Doctrine Of Unconscionability Into The Performance Of Contracts

In the 14 months since the Supreme Court of Canada rendered its landmark decision in Bhasin v. Hrynew, 2014 SCC 71 1 the general organizing principle of good faith in contract law has been applied in a very restrained manner by courts across Canada. The recent decision of the Ontario Court of Appeal in Bank of Montreal v. Javed, 2016 ONCA 49 is a further example of this trend.

The Good Faith Principle

In Bhasin, the Supreme Court of Canada recognized a general organizing principle of good faith that underlies the law of contracts.2 The good faith principle is already reflected in many of the existing doctrines of contract law, including unconscionability.3 The principle may be used to develop the law of contract "where the existing law is found to be wanting and where the development may occur incrementally in a way that is consistent with the structure of the common law of contract and gives due weight to the importance of private ordering and certainty in commercial affairs."4

The Supreme Court in Bhasin used the good faith principle to recognize a new duty of honest performance "which requires the parties to be honest with each other in relation to the performance of their contractual obligations."5 For further discussion of Bhasin, see our previous post here.

The Facts in Bank of Montreal

In Bank of Montreal, the defendant, Mr. Shah, was a director of a corporation that operated a donut shop (the "Corporation"). Mr. Shah provided a guarantee to the Bank of Montreal ("BMO") to secure a small business loan for the Corporation. He subsequently resigned as a director and ceased to have an active role in the operation of the restaurant, but continued to be bound by the guarantee. In 2013, he requested information about the Corporation's business accounts from BMO. BMO denied this request as the Corporation had withdrawn its authorization to provide this information to Mr. Shah. The Corporation subsequently defaulted on its loan and BMO sought to enforce the guarantee.

Mr. Shah argued, among other things, that the series of events following the signing of the guarantee had rendered the guarantee unconscionable.

The Doctrine of Unconscionability

Unconscionability is a doctrine that permits a party to void a contract that is manifestly unfair. In order to demonstrate unconscionability, a contracting party must show that the other party 1) enjoyed unequal bargaining power, and 2) a substantially unfair bargain resulted.6 Traditionally, the...