Bhasin and the Duty of Good Faith in Contract Renewal

Ontario Superior Court rules on “sole discretion” termination rights

When the Supreme Court of Canada addressed good faith and honest performance in Canadian contract law, it was unclear how the case would be applied. Data & Scientific Inc. v. Oracle Corp 1 (DS v. Oracle) suggests that courts may be reluctant to narrow the application of Bhasin v. Hrynew 2 (Bhasin) without an investigation into the factual circumstances. In Bhasin, the Supreme Court recognized a general organizing principle of good faith in contractual performance. That organizing principle means that parties must generally perform their contractual duties honestly and reasonably, and not capriciously or arbitrarily (further analysis on Bhasin is available here).

In DS v. Oracle, the Superior Court refused to strike a claim for damages as a result of a termination of a contract which gave one party "sole discretion" to reject an application for contract renewal without any explicit requirement as to the timing of the rejection notice. The Court left open the possibility that the principle of good faith set out in Bhasin could require reasonable notice of termination or non-renewal of commercial contracts. Whether reasonable notice was required in this case will not be clear until after trial or summary judgment motion.

What You Need To Know

  • Bhasin does not stand for the broad proposition that a party is free to exercise a "sole discretion" renewal right without regard to whether such exercise is reasonable.
  • Even absent dishonesty, the duty to exercise discretionary powers reasonably may apply to contract renewal situations.
  • The application of the principle of good faith in contractual performance is highly contextual.
  • Parties forming agreements should be mindful of how their exercise of discretionary powers under a contract may look to a court in the event of a dispute. Including explicit terms relevant to a party’s reasonable expectations, such as stipulating appropriate notice periods and defining the limits of parties’ exercise of discretionary powers, may help achieve contractual aims.  

Background

Data & Scientific Inc. (DS) was an Oracle Partner Network company for 20 years. The Oracle Partner Network contract between the parties was subject to renewal annually, when DS was entitled to submit an application for renewal and Oracle Corp. (Oracle) was entitled to accept or reject that application at its sole discretion. There was no explicit timing requirement for Oracle to provide notice of acceptance or rejection.

DS brought a claim against Oracle for failure to give reasonable notice of non-renewal. It alleged that Oracle was obliged to exercise its discretion not to renew reasonably, and failed to do so when it rejected DS’s application. DS alleged that as part of its reasonable exercise of discretion not to renew, Oracle was obligated to give a reasonable period of notice when it chose not to renew the contract. DS claimed that these obligations stemmed from the organizing principle of good faith set out in Bhasin.

Oracle brought a motion seeking to strike the claim for failure to disclose a reasonable cause of action on the basis that Bhasin foreclosed on the possibility that decisions regarding contractual renewal needed to be made reasonably.

Court Decision

The Superior Court held that a claim that a discretionary contractual power must be exercised reasonably is not necessarily doomed to fail. As a result, it dismissed Oracle’s motion.

While both parties agreed that discretionary contractual powers must be exercised reasonably, Oracle argued that, in accordance with the Bhasin decision, applying that doctrine to contract renewal in the absence of dishonesty would be a "significant expansion" of the principle of good faith. The Court disagreed with this position, holding that the Supreme Court in Bhasin made no comments on a situation where a discretionary power to renew a contract was exercised unreasonably (e.g., without a reasonable period notice) but not dishonestly. It is therefore not plain and obvious that the action brought by DS would fail.

The Court also notes that the list of situations which attract good faith obligations is not closed and good faith can be invoked in contexts other than those discussed in Bhasin. The Court was therefore not prepared to rule that a claim of good faith which had not been considered before should be dismissed as disclosing no cause of action.

Analysis

It is notable that this was a motion brought in the very beginning of the legal process, before discovery took place or any evidence was presented to the Court. The Court made its decision assuming all the facts in the pleadings were true. It left the determination of whether Oracle was, in fact, subject to a duty to act reasonably when exercising its discretion to accept DS’s application for renewal or, if Oracle was subject to such a duty, whether Oracle met that duty, to be determined at a later stage in the proceeding.

It remains the law that the principle of good faith can be invoked in many different contexts and requires a context-specific analysis of what is reasonable. In the absence of evidence, courts are unlikely to decide that a given situation is or is not, as a matter of law, subject to the principle of good faith.

The decision does not expand the good faith principles set out in Bhasin, but it shows that courts will not be quick to dismiss claims that a party’s conduct violates duties under the organizing principle of good faith without considering the evidence. The Court in this case refused to read Bhasin narrowly and suggested that it may be possible to apply the principle of good faith in situations beyond those discussed in Bhasin. Whether a court actually applies the principle of good faith to "sole discretion" termination rights remains to be seen.

If, at trial, there is found to be a duty to exercise discretion reasonably with respect to notices of termination or non-renewal, the analysis of whether Oracle was, in fact, reasonable in its actions will likely rest on factors that were at play in Bhasin:

  • the duration of the parties' relationship;
  • the extent to which one of the parties was reliant on the other for a large proportion of its income; and
  • the conduct of the parties leading up the exercise of discretion.

Until the questions raised in DS v. Oracle are answered by the courts, parties will likely choose to be mindful of how their exercise of discretionary powers under a contract would look to a court. In negotiating agreements, parties may choose to include explicit terms that are relevant to a party’s reasonable expectations. Stipulating appropriate notice periods and defining the limits of parties’ exercise of discretionary powers may help parties achieve their contractual aims.  

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1 2015 ONSC 4178.

2 2014 SCC 71.

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