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Top 5 Mistakes When Suing on a Commercial Contract

Torkin Manes LegalWatch

In Ontario, suing for breach of a business contract, like a share or asset purchase agreement, imposes a number of challenges.  

Apart from liability, the question of commercial damages often requires Courts to weigh expert evidence and sometimes divine the plaintiff’s loss.

Plaintiffs who bring actions for breach of contract, or what are known as the “economic torts”, must ensure that their actions are pleaded properly and there is adequate evidence to support their case. 

Defendants often benefit from the plaintiff’s failure to understand the limited scope of their causes of action and how to advance them effectively.

Below is a list of some of the more common mistakes made in advancing cases for economic harm arising out of a commercial contract.

1. Failing to Plead Contractual Bad Faith Properly

All commercial contracts in Canada are subject to a duty of good faith. 

The duty includes:

i. an obligation of honest contractual performance, which prohibits parties to a contract from lying or otherwise misleading one another in respect of matters “directly linked to the performance of the contract”. What constitutes a misrepresentation under the contract is broad in scope, including lies, omissions and half-truths: Bhasin v. Hyrnew, 2014 SCC 71 (“Bhasin”) and C.M. Callow Inc. v. Zollinger, 2020 SCC 45 (“Callow”); and

ii. a duty to exercise any discretion under the contract reasonably, in a manner “consistent with the purposes for which [the discretion] is granted in the contract”: Wastech Services Ltd. v. Greater Vancouver Sewerage & Drainage District, 2021 SCC 7 (“Wastech”).

Contractual parties cannot contract out of these duties. They are imposed on every business agreement in Canada, not by implication, but as a matter of law: Wastech, supra at para. 91.

Further, bad faith must be pleaded by the plaintiff as part of its breach of contract claim. There is no standalone cause of action known as “bad faith” in Canada: Alberta v. Elder Advocates of Alberta Society, 2011 SCC 24, at para. 78.

In imposing this duty of good faith, Canadian Courts do not seek to stifle economic enterprise or freedom of contract.

Rather, the Courts prescribe a minimum level of honest and reasonable conduct on the parties to a commercial agreement, based on the understanding that businesses will suffer harm where the parties act in bad faith towards one other.

Failing to consider these duties as part of any action for breach of contract could seriously impair a commercial action. 

2. Failing to Recognize that Economic Torts Are Usually Narrow in Scope

Plaintiffs in commercial lawsuits have the ability to advance claims separate and apart from a breach of contract.

Canadian common law recognizes a range of “economic” torts, which prescribe liability for commercial wrongs that are discrete from contractual causes of action.

The breadth of economic torts in Canada includes inducing breach of contract, unlawful interference with economic relations (unlawful means), conspiracy, intimidation, breach of fiduciary duty (which is really equitable in nature), breach of confidence, misrepresentation, passing-off, and negligence.

While these potential claims provide an avenue of redress for economic harm, Canadian Courts have generally been skeptical about their application to address losses arising outside the confines of the business agreement.

For example, the tort of intentional interference with economic relations, or what is now known as the “unlawful means”, has been significantly narrowed by the Supreme Court of Canada, in a 2014 decision, A.I. Enterprises Ltd. V. Bram Enterprises Ltd., 2014 SCC 12 (“Bram”). 

Liability for unlawful means applies only in circumstances where the defendant committed an actionable wrong against a third party, which intentionally caused the plaintiff economic harm.  

Absent this tripartite relationship between the plaintiff, the defendant, and a third party, the claim for intentional interference will be struck. 

The Court in Bram explained the rationale for narrowing tortious liability for intentional interference, and economic torts generally, as follows:

… the common law has traditionally been reluctant to develop rules about fair competition ... The common law in general, and tort law in particular, have been astute to assure ‘some elbow room [many would say much elbow room] for the aggressive pursuit of self-interest’ …

Curtailed by the policy concern of curbing legitimate competition and enterprise, Canadian Courts have generally taken a cautious approach to imposing tortious liability for economic loss. Plaintiffs who fail to understand the narrow application of economic torts pursue their lawsuits with peril and may incur the costs consequences that follow.

3. Failing to Understand What Evidence is Admissible in the Interpretation of the Contract

When interpreting the language of a business contract, Courts consider evidence at the time of contract formation (known as the factual matrix) to determine the parties’ intentions. 

This can include evidence of the parties’ negotiations and correspondence at the time of the contract’s execution. 

Evidence of how the parties conducted themselves when the agreement was formed must, however, never be allowed to overwhelm the language of the agreement itself: Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53 at para. 57. 

How the parties conducted themselves after the contract is entered into is, however, rarely admissible. 

Absent a genuine ambiguity in the language of the agreement itself, the Court will not allow evidence of the parties’ post-contract behaviour to skew its interpretation of the agreement: Shewchuk v. Blackmount Capital Inc., 2016 ONCA 912 (“Shewchuk”).

One of the reasons for this approach is simple: following the execution of a commercial contract, parties could align their behaviour to favour their preferred interpretation of the agreement. 

In particular, Ontario Courts are skeptical of employing the parties’ post-contractual conduct to determine the meaning of the agreement’s words. In Shewchuck, supra, the Ontario Court of Appeal expressed its reasoning as follows:

… over-reliance on subsequent conduct may reward self-serving conduct whereby a party deliberately conducts itself in a way that would lend support to its preferred interpretation of the contract …

4. Failing to Consider the Commercially Reasonable Result

While black-letter law governs how judges approach the text and interpretation of commercial contracts, judges understand that businesses operate in the real world.

When interpreting contracts, Courts must consider what is the most commercially reasonable result. Commercial reasonableness is determined from the perspective of both contracting parties: Harvey Kalles Realty Inc. v. BSaR (Eglinton) LP, 2021 ONCA 426 at para. 6 (“Harvey Kalles”), citing Resolute FP Canada Inc. v. Ontario (AG), 2019 SCC 60 at para. 148.

Courts will therefore avoid a commercially absurd interpretation of an agreement: Harvey Kalles, supra at para. 6.

When advancing a particular interpretation of a contract, then, parties must always determine what position makes the best sense from a business perspective. Canadian Courts will not bless contractual interpretations that run contrary to prudent business practices.

5. Courts will Not Presume Businesses Losses by the Plaintiff

It may seem obvious, but a plaintiff suing on a commercial agreement has a positive obligation to prove their economic loss if they can show that a defendant is liable for breach of contract.

Where, for example, a defendant is found liable for breach of the duty of good faith, the Courts will not presume that the aggrieved party is “entitled to damages in the absence of an evidentiary foundation of a lost [economic] opportunity”: Bhatnagar v. Cresco Labs, 2023 ONCA 401 at para. 55.

In the case of an action in tort (as opposed to contract), the burden remains on the plaintiff in its claim for pure economic loss to prove there is a sufficient “proximity” between itself and the defendant, giving rise to a duty of care on the part of the defendant. Otherwise, a defendant could be held liable for economic harm that it could not have reasonably foreseen: 2460906 Ontario Inc. v. 1521476 Ontario Inc., 2021 ONCA 682 at paras. 7-8.

Accordingly, plaintiffs who sue on a commercial agreement must be prepared to have tangible evidence of their loss. Asking the Court to engage in speculative or presumptive analyses of damages will unlikely lead to a successful claim.

The Pitfalls of Suing on a Commercial Agreement

While far from comprehensive, the above errors represent some of the main perils in suing or defending an action based on a commercial agreement.

Parties wading into the waters of proving liability or economic damages under a contract should bear in mind that Courts will not engage in conjecture to impose fault or compensate a party for its loss.

Breaches of contract, and the economic torts that frequently accompany such claims, must be supported on a solid foundation of concrete evidence. Anything short of that standard will result in a lawsuit’s dismissal.

Marco P. Falco is a Partner in the Litigation and Alternative Dispute Resolution Group at Torkin Manes LLP. If you have questions about your own commercial contract, you may contact Marco at mfalco@torkin.com. Note that a conflict search will need to be conducted before your matter can be discussed.