Bank of Montreal v Javed, 2016 ONCA 49 – Ontario Court of Appeal Found That The Test for Unconscionability Was Not Modified by Bhasin v Hrynew General Principle of Good Faith
In Bank of Montreal v Javed, the appellant, Ileshumar Shah (“Shah”), was the director and vice-president of a corporation that operated a donut shop. Together with the co-defendant, Amer Javed, Shah provided the Bank of Montreal (“BMO”) a joint and several personal guarantee (the “Guarantee”) to secure a small business loan for the corporation. Shah subsequently resigned as director of the corporation and ceased having an active role in it, although he remained vice-president. After resigning as director, Shah contacted BMO seeking access to the corporation’s business account information, including the balance of the loan. BMO refused on the basis that the corporation had withdrawn its authorization and Shah was no longer an authorized signing officer for the corporation’s account. The corporation eventually defaulted on the loan and BMO sought to enforce the Guarantee. The motion judge granted summary judgment. Shah appealed, arguing that BMO’s conduct after executing the Guarantee rendered the Guarantee unconscionable.
Unconscionability is traditionally assessed at the time the contract is entered into. Shah purported to show that BMO abused its bargaining power or preyed upon Shah or that the bargain was improvident. Shah argued that although unconscionability was not present at the outset of the contract, BMO’s refusal to provide him with the requested information regarding the business account details and balance of the loan was unconscionable. As such, Shah’s argument sought to extend the test for unconscionability beyond an assessment of the equities existing at the inception of the agreement to an assessment a party’s performance of its obligations under the agreement.
Shah relied on Bhasin v Hrynew (“Bhasin”), in which the Supreme Court of Canada (the “SCC”) recognized an organizing principle of good faith underlying the law of contract. The SCC held that, pursuant to this principle, a duty of honesty exists in contractual performance, meaning that parties must not lie or otherwise knowingly mislead each other. The SCC explained that this organizing principle may be relied upon to incrementally develop the law of contract where it is lacking. Bhasin was seen by commentators as ground-breaking when it was rendered, but has since has been classified by the courts as “a very measured case which makes little incremental change to the common law” and does not warrant “a wholesale revision of contract law to invite subjective assessments of the business practices and morals of parties before the court outside of or beyond the existing law”.
The Court of Appeal rejected the argument that Bhasin extended the test for unconscionability, commenting that Bhasin recognized a duty of honest performance, not a duty of disclosure. There was no evidence that BMO conducted itself dishonestly in not disclosing the business account information or the loan balance to Shan. Although BMO had breached its disclosure obligations to Shah under the contract by refusing to respond to his enquiries, BMO’s misconduct was not serious enough to warrant discharging the guarantee. The breach was such as should be remedied by damages; however, Shah failed to adduce evidence to substantiate his losses. Therefore, he was not entitled to any set-off or reduction in the amount owing under the guarantee.
There was some concern that Bhasin would inject uncertainty into the law of contract. However, subsequent cases have taken a restricted approach with respect to the effect of the general principle of good faith. For example, in Moulton Contracting Ltd. v British Columbia, 2015 BCCA 89, the British Columbia Court of Appeal rejected the argument that Bhasin modified the law surrounding implied terms. Bank of Montreal v Javed helps to preserve certainty in the law of contract by restricting the application of the good faith principle and confirming the test for unconscionability.
