Court of Appeal for Ontario

Citation: 2017 ONCA 974

Date: December 12, 2017

Docket: C62651

Judges: Pardu, Trotter and Paciocco JJ.A.

Parties

Between

Willowbrook Nurseries Inc. Plaintiff (Appellant)

and

Royal Bank of Canada Defendant (Respondent)

Counsel

For the Appellant: Paul J. Pape

For the Respondent: Milton A. Davis and Rob Macdonald

Hearing and Appeal

Heard: November 17, 2017

On appeal from: The judgment of Justice Robert D. Reilly of the Superior Court of Justice, dated August 11, 2016, with reasons for judgment reported at 2016 ONSC 4954 and reasons for costs reported at 2016 ONSC 6630.

Issues

Breach of contract – General organizing principle of good faith – Duty to provide reasonable notice of change to prevailing course of lending conduct – Whether bank exercised discretion in good faith – Duty to exercise contractual discretion in objectively reasonable manner.

Decision

Pardu J.A.:

[1] Introduction

[1] Willowbrook Nurseries Inc. ("Willowbrook") needed to borrow more money from its banker, Royal Bank of Canada ("RBC"). It needed more working capital because its business was growing and because it suffered a few business hiccups in the preceding year. RBC did not agree to immediately lend more money to Willowbrook and placed its accounts in Special Loans and Advisory Services ("Special Loans").

[2] RBC's refusal to immediately lend more money meant that Willowbrook could not pay its suppliers on time and had to lay off employees. RBC demanded more financial information from Willowbrook and proposed to increase banking fees and interest charges. It wanted up to date appraisals of the real property securing Willowbrook's debt. It proposed to engage an accounting consultant to review Willowbrook's financial position, at Willowbrook's expense. RBC asked for cash flow projections and indicated that "an appropriate temporary overdraft accommodation limit will be established upon our review and acceptance of your cash flow projections."

[3] Willowbrook brought an action against RBC for breach of its obligation to perform the lending agreement in good faith. Willowbrook argued at trial that RBC's refusal to lend new money and its decision to subject Willowbrook to Special Loans treatment amounted to a change in the prevailing course of lending conduct and required reasonable notice. It argued at trial that the Special Loans treatment amounted to a de facto demand for payment without notice. Willowbrook's action was dismissed and it appeals to this court.

[4] I would dismiss the appeal for the reasons that follow.

Factual Background

[5] RBC began lending to Willowbrook through a line of credit, demand loan, various mortgages, and a corporate credit card in January 2005. Since the plant nursery business is seasonal, Willowbrook always needed an infusion of working capital in the winter in order to produce plants that would be sold in the spring and summer. To satisfy Willowbrook's seasonal financing needs, RBC would agree to a temporary accommodation request ("TAR") that allowed Willowbrook to temporarily exceed its $2.75 million line of credit each winter. The overdraft amount was set by the parties' mutual agreement each fall or winter and would typically be paid down in the following spring or early summer.

[6] However, through the spring and summer of 2008, Willowbrook did not fully repay the $1.25 million worth of TAR that RBC extended in the winter of 2007, despite three extensions of time to do so ("2007 TAR"). By December 2008, $1.029 million of the 2007 TAR was still outstanding.

[7] Nonetheless, Willowbrook submitted an additional $1.2 million TAR following the completion of its fiscal 2008 financial statements on October 14, 2008 ("2008 TAR") along with a debt restructuring and separate $500,000 term loan request. Approval of these requests would have meant that RBC would be lending, in total, $500,000 more than ever before to Willowbrook.

[8] Willowbrook was approaching the limits of its agreed upon credit, had no immediate prospect of significant revenue, and faced the expenses of planting for a new season.

[9] The local RBC account manager supported Willowbrook's requests and submitted them, along with Willowbrook's recently completed 2008 financial statements, to RBC's risk management group on November 21, 2008. On November 26, 2008, a RBC risk manager refused Willowbrook's 2008 TAR, restructuring request, and term loan request. Instead, the risk manager transferred Willowbrook's account into Special Loans on December 5, 2008 following a meeting with Willowbrook. The local account manager was replaced.

[10] RBC outlined its concerns and requirements by letter dated December 8, 2008. It expressed concern about Willowbrook's working capital, liquidity, and increased inventory levels. RBC noted the outstanding 2007 TAR and Willowbrook's forecast that it would need $500,000 more to carry it through to April of the following year.

[11] RBC said it would continue to provide interim financing to allow Willowbrook to revise its business plan and to address the bank's concerns. It demanded detailed financial information and up to date appraisals of real property securing Willowbrook's debt. Overdrafts in excess of agreed upon limits would not be permitted. Bank fees and interest charges were forecast to increase. The new RBC account manager had to approve payment of all cheques.

[12] Willowbrook scrambled to provide the requested information, while dealing at the same time with the terminal illness of one of the principals. On January 12, 2009, Willowbrook's accountant wrote to RBC, stating "we feel our client should not remain in special loans under your proposed terms. We do not feel that our client's financial situation warrants this. If our client cannot be returned to normal credit or if the proposed terms cannot be amended, then on behalf of our client, we respectfully request a reasonable time period to seek alternative financing." The accountant asked RBC for 30 days to seek other financing.

[13] RBC was not prepared to remove Willowbrook from Special Loans but agreed to Willowbrook's request for time to find alternative financing and provided 60 days to do so. Ultimately, all of Willowbrook's debt to RBC was discharged upon refinancing by another bank in April 2009.

[14] Willowbrook was a profitable business throughout the time it banked with RBC. It never defaulted on any of its loans.

Trial Judge's Findings

[15] Willowbrook sued RBC and alleged that RBC exercised its contractual discretion in bad faith. Willowbrook argued at trial that RBC was obliged to advance additional credit because it had done so in the past. Willowbrook also argued that placing its accounts in Special Loans amounted to a de facto demand for repayment without notice.

[16] The trial judge rejected Willowbrook's argument that RBC acted in bad faith. He found that RBC gave Willowbrook reasonable time to make other financial arrangements. After citing Bhasin v. Hrynew, 2014 SCC 71, [2014] 3 S.C.R. 494, he noted at para. 51 of his reasons:

One might question the financial wisdom of RBC's decision to limit the extension of financial relief to Willowbrook, but I cannot conclude that in doing so RBC acted in bad faith. RBC was simply exercising honestly its contractual entitlement. This exercise was not capricious or arbitrary.

[17] At para. 57 of his reasons, the trial judge concluded that RBC "acted in good faith throughout, consistent with its contractual rights and obligations".

Issues on Appeal

[18] On appeal, Willowbrook submits first that the trial judge erred in finding that RBC did not act in bad faith on December 5, 2008 when it restricted Willowbrook's access to credit and transferred its accounts to Special Loans, both without reasonable notice.

[19] Secondly, Willowbrook argues that RBC had a duty to exercise its discretionary powers in an objectively reasonable manner. RBC was not in danger of losing its money and should not, therefore, have subjected Willowbrook to Special Loans treatment. Willowbrook submits the trial judge erred by focusing only on whether RBC acted subjectively in good faith, and not whether RBC's actions were objectively reasonable.

[20] Neither party challenges the trial judge's findings of fact.

[21] Willowbrook relies on Thermo King Corp. v. Provincial Bank of Canada (1981), 34 O.R. (2d) 369 (C.A.) and submits that RBC had a duty to give reasonable notice of a change to the prevailing course of lending conduct between the parties. Willowbrook submits that there was a prevailing course of lending conduct with RBC; temporary overdrafts had been granted in the past to fund its winter working capital needs. Willowbrook alleges that RBC's decision to reject the 2008 TAR and place its accounts under Special Loans management constituted changes to the prevailing course of lending conduct. Willowbrook argues that RBC was required to provide reasonable notice before implementing either change.

[22] Willowbrook further contends that RBC's decision to place its accounts under Special Loans management was objectively unreasonable. It submits that RBC's subjective belief that it was acting in good faith does not shield RBC from liability for making objectively unreasonable discretionary decisions.

[23] RBC agrees that a bank has a duty to provide reasonable notice to a customer if the bank intends to change a prevailing course of lending conduct with respect to overdraft accounts. RBC submits, however, that it never changed the prevailing course of lending conduct in this case. RBC argues it had allowed Willowbrook access to temporary overdraft credit facilities within agreed upon limits on the understanding they would be repaid annually. RBC submits the 2008 TAR constituted a request for additional credit as Willowbrook did not first repay the 2007 TAR. RBC submits that it responded reasonably to Willowbrook's failure to repay the 2007 TAR and Willowbrook's request for additional credit. Willowbrook, not RBC, proposed a change in their banking relationship.

[24] With respect to its discretion to place Willowbrook's accounts into Special Loans, RBC submits that its decision was well founded in the context of this case. RBC asserts that, according to Bhasin, contracting parties are entitled to protect their own economic interests and that doing so, even where harm may be inflicted on the other party, is not a breach of the general principle of good faith. Moreover, RBC submits that the exercise of discretion in this case was a type of "subjective" discretionary decision-making intended to protect its own commercial best interests as recognized by this court in Greenberg v. Meffert (1985), 50 O.R. (2d) 755 (C.A.).

Analysis

Standard of Review

[25] The trial judge's decision about whether RBC acted in bad faith is a question of mixed fact and law. It is owed deference absent an extricable error of law: Housen v. Nikolaisen, 2002 SCC 33, [2002] S.C.R. 235, at paras. 10 and 36.

Did RBC Act in Bad Faith by Refusing to Lend New Money Without Notice?

[26] This court held that a bank has a duty to give a customer reasonable notice of a change in the prevailing course of conduct with respect to overdraft lending in Thermo King, at para. 36. This reasonable notice duty is distinct from a bank's more commonly litigated but separate duty to give reasonable notice before calling for repayment of a demand loan. This case concerns the former, not the latter.

[27] As discussed in Thermo King, a bank's duty to give reasonable notice of a change to a prevailing course of overdraft lending conduct existed at common law well before the Supreme Court's Bhasin decision. However, Cromwell J.'s discussion in Bhasin regarding the good faith principle is nonetheless instructive as to the content and limits of the duty to provide reasonable notice in this case.

[28] I will first review the underlying facts and ratio of Thermo King. In Thermo King, the bank allowed the customer to run an overdraft for three years, from 1973 to May 1976. The overdraft was required because the business performed poorly and suffered cash flow problems. The maximum amount of overdraft granted during that time was $30,086. Moreover, the customer owed the bank approximately $380,000 in other indebtedness.

[29] On June 25, 1976, the customer's account was overdrawn by $11,236. That day, the customer deposited $102,211 in cheques and asked the bank to issue a $100,000 cheque in U.S. funds. The deposit, therefore, removed the account from overdraft and resulted in a positive $89,949 account balance. The subsequent withdrawal request, however, would have put the account back into a $13,447 overdraft.

[30] On June 29, 1976, without notice, the bank seized the funds in the customer's current account as partial discharge of the customer's other outstanding debts. The bank refused to issue the $100,000 cheque that the customer needed to pay a supplier. Despite contractual language giving the bank the right to seize the funds for repayment of outstanding debts at any time, this court held that in light of the prevailing course of lending conduct, the bank did not have the right to "lower the boom" on the customer without advance notice. The bank was required to give reasonable notice of its decision to stop allowing overdrafts. Notably, the $13,447 of overdraft that would have resulted was less than the overdraft amounts the bank had previously extended to the customer.

[31] There is no question that a prevailing course of lending conduct existed between the parties in this case. The conduct consisted of Willowbrook making a TAR each winter and paying it down the following year before presenting another TAR.

[32] Here, however, it was Willowbrook that sought to change the prevailing course of lending conduct. It had not repaid the 2007 TAR, contrary to previous practice, and wanted an additional 2008 TAR. Willowbrook had exhausted its existing credit and it wanted more. RBC was not obliged to accede to Willowbrook's requests, especially since Willowbrook's requests would have resulted in RBC lending $500,000 more than it had ever lent to Willowbrook before: Barclay Construction Corp. v. Bank of Montreal (1989), 41 B.C.L.R. (2d) 239 at para. 12; and XPG v. Royal Bank of Canada, 2017 ONSC 2598, at paras. 321-25.

[33] Willowbrook essentially submits that reasonable notice meant that RBC had to continue to agree to advance new money during the alleged reasonable notice period. I do not agree. Here, RBC had little time to assess the request for more money after receiving the recent year-end financial statements. Willowbrook had run out of money by exhausting its credit limit at a time when it would have little revenue and substantial expenses.

[34] Bhasin does not require a lender in these circumstances to lend new money. In Bhasin, Cromwell J. stated at paras. 73, 80, and 86 that the new duty of honest contractual performance in that case: (i) did not require a party to forego advantages flowing from the contract; (ii) did not create commercial uncertainty in the law of contract; (iii) was clear and easy to apply; and (iv) did not impose a general duty on a contracting party to subordinate his or her interest to that of the other party. Moreover, at para. 70, Cromwell J. expressly wrote:

The principle of good faith must be applied in a manner that is consistent with the fundamental commitments of the common law of contract which generally places great weight on the freedom of contracting parties to pursue their individual self-interest. In commerce, a party may sometimes cause loss to another – even intentionally – in the legitimate pursuit of economic self-interest … Doing so is not necessarily contrary to good faith and in some cases has actually been encouraged by the courts on the basis of economic efficiency …

[Emphasis added. Citations omitted.]

[35] Accordingly, I would dismiss this ground of appeal.

Did RBC Act in Bad Faith by Moving Willowbrook's Accounts into Special Loans?

[36] The parties agreed, and the record shows, that RBC's power to move an account into Special Loans was a discretionary power provided for by the lending contract. Willowbrook concedes that RBC did not violate any express term of the lending contracts in doing so.

[37] While the existence of a "Special Loans" department might be a convenient label for internal bank purposes, Special Loans treatment is not a monolithic legal term of art carrying in itself a requirement for reasonable notice. The precise conduct of a bank and its position taken has to be assessed. For example, it could not be argued here that RBC's decision to change the account manager or to demand up-to-date financial information and appraisals in light of the request for additional credit and the failure to repay the 2007 TAR amounted to bad faith or was unreasonable.

[38] Willowbrook's real complaint is that RBC would not extend additional credit during the alleged reasonable notice period. The principle of good faith performance of contractual obligations does not extend so far as to require RBC to subjugate its own financial interests by extending additional credit that it does not want to advance. There is no basis to hold that any other particular aspect of the Special Loans treatment was unreasonable or undertaken in bad faith, or that RBC had to give notice before reacting as they did to Willowbrook's changed circumstances and request for additional credit.

Did RBC Exercise Its Contractual Discretionary Power in an Objectively Unreasonable Manner and Therefore Act in Bad Faith?

[39] Willowbrook submits that RBC had a duty to exercise its contractual discretion reasonably. Willowbrook contends that RBC's decision to move Willowbrook's accounts into Special Loans was objectively unreasonable and therefore amounted to bad faith. Willowbrook accepts the trial judge's finding that RBC's employees did not subjectively act in bad faith.

[40] Willowbrook relies on Greenberg v. Meffert (1985), 50 O.R. (2d) 755 (C.A.). In that case, a contract provided that payment of a commission to a salesperson was solely within the employer's discretion. This court observed at para. 18:

[T]he company's discretion in this matter is not unbridled, firstly, because the nature of this contract and the subject-matter of the discretion are such that the company's decision should be construed as being controlled by objective standards and secondly, because the exercise of the discretion, whether measured by subjective or objective standards, is subject to a requirement of honesty and good faith.

[41] The Greenberg decision makes perfect sense. The parties could not reasonably have intended that the employer could arbitrarily deny commission. It was implicit that the discretion would have to be exercised reasonably.

[42] Willowbrook submits that RBC's decision to place its accounts into Special Loans is similarly reviewable on an objective standard. It submits that the instant case is comparable to the facts of Marshall v. Bernard Place Corp (2002), 58 O.R. (3d) 97 (C.A.). I disagree. Marshall dealt with the scope of a residential home purchaser's discretionary power to decline to waive a property inspection condition in a purchase and sale agreement. In that case, the inspection report noted that most deficiencies could be remedied at a minor cost, gave a rating of seven of nine, and described the property as a well-built house. On those facts, this court held at para. 21 that "absent express contractual language to the contrary, an inspection report which identifies deficiencies in the construction or integrity of a house provides an objective basis on which to assess the potential exercise of discretion under a discretionary property inspection condition."

[43] The factual context in Marshall is very different from RBC's business decision to move Willowbrook's accounts into Special Loans. The instant case does not concern a bank's contractual discretion to realize upon its security, or to require repayment of a loan where it might well be appropriate to examine the reasonableness of those decisions. Rather, RBC made a choice to refuse to lend Willowbrook more money beyond limits to which each had previously agreed. When Willowbrook suggested that the parties end their banking relationship, RBC gave Willowbrook more time than they asked for to make those arrangements.

[44] It is inapt to subject a bank's decision whether to lend substantial new credit to an existing customer who is at the end of their credit limit to an objective reasonableness analysis. The choice whether to lend new money is at heart, a subjective business decision to be made by a bank. These decisions may be based on factors unrelated to a particular customer and should not be assessed by a court, after the fact, for objective fiscal prudence. (See Fifth Third Bank v. MPI Packaging Inc. et al., 2013 ONCA 5 at para. 12-16) Nor was this a case where a bank acted dishonestly by promising additional financial support while secretly planning a receivership.

[45] In any event, the trial judge identified some reasons why RBC might have decided to exercise its discretion to move Willowbrook's accounts into Special Loans. He ultimately found that RBC's decision was neither arbitrary nor capricious and was not in bad faith. There was no palpable or overriding error in these factual findings and I see no basis to interfere with the trial judge's conclusions.

Did the Trial Judge Err in His Assessment of Damages?

[46] It is accordingly not necessary to deal with the assessment of damages.

Disposition

[47] I would dismiss the appeal. If counsel are unable to resolve the issue of costs, RBC may make brief written submissions about costs due no later than 30 days after the release of this decision. Willowbrook shall respond within 15 days after receipt of RBC's costs submissions.

"G. Pardu J.A."

"I agree G.T. Trotter J.A."

"I agree David M. Paciocco J.A."

Released: December 12, 2017