Court of Appeal for Ontario
Date: 20210830 Docket: C68698
Rouleau, Hoy and van Rensburg JJ.A.
BETWEEN
2161907 Alberta Ltd. Applicant (Appellant)
AND
11180673 Canada Inc. Respondent (Respondent)
Counsel: J. Thomas Curry, Brian Kolenda and Aoife Quinn, for the appellant Jeffrey Hoffman, for the respondent
Heard: June 3, 2021 by video conference
On appeal from the judgment of Justice Cory A. Gilmore of the Superior Court of Justice, dated September 11, 2020, with reasons reported at 2020 ONSC 5409.
Rouleau J.A.:
Overview
[1] 2161907 Alberta Ltd. (“216”) holds the Ontario rights to the “Tokyo Smoke” cannabis brand, which it licenses to various retail operators. 11180673 Canada Inc. (“111”) and its principal, Mr. Robert Heydon, won a cannabis retail operator license in the allocation lottery held by the Alcohol and Gaming Commission of Ontario (“AGCO”) in August 2019.
[2] In November 2019, the parties entered into a series of agreements for the operation of a Tokyo Smoke-branded cannabis store in Toronto. These agreements included a License Agreement for the use of the Tokyo Smoke brand and a Sublease whereby 111 rented the retail premises from 216. 216 offered 111 funding for start-up costs, including rent, and an inducement of approximately $2 million to open under the Tokyo Smoke banner (the “Branding Fee”). The Branding Fee would come due once 111 obtained its Retail Store Authorization from the AGCO.
[3] Two days before the store was supposed to open, a dispute arose as to 216’s obligation to fund the payment of 111’s rent for the month of opening. Faced with 216’s refusal to pay, 111 advised 216 that it would not be opening the store as planned. 216 took the position that this was a threat to cease carrying on business and accordingly constituted a breach of their agreement. 216 terminated its relationship with 111, refusing to pay the Branding Fee.
[4] 216 brought an application seeking a declaration that 111 had breached the various agreements in effect between the parties, that the Branding Fee was not payable to 111, and that 111 must therefore vacate the retail premises. 111 brought a counter-application seeking, among other things, payment of the Branding Fee and a declaration that 216 had wrongfully terminated the License Agreement and breached its duty of good faith in the performance and enforcement of contractual relations. The application judge dismissed 216’s application and granted 111’s application. She declared that 216 had no valid reason to terminate the agreements, that it had acted in bad faith, and ordered 216 to pay the Branding Fee.
Issues
[5] 216 raises three issues on appeal:
a. Did the application judge err in finding that 216’s termination of the License Agreement was invalid? b. Did the application judge err in finding that 216 had breached the duty of good faith? c. Did the application judge err in failing to issue a declaration that the Sublease between the parties was validly terminated on August 5, 2020?
[6] For the reasons that follow, I would set aside the finding of bad faith, but would dismiss the balance of the appeal.
Factual Background
[7] In August 2019, 111 won the right to apply for a Retail Operator Licence and Retail Store Authorization in the AGCO allocation lottery, permitting 111 to open a retail cannabis store.
[8] 216 approached Mr. Heydon with a proposal that he open his retail location under the “Tokyo Smoke” banner for which 216 held the Ontario rights under licence from a subsidiary of Canopy Growth Corporation (“Canopy”).
[9] Between November 1 and November 7, 2019, the parties entered into the three agreements at issue in this case:
a. Under the Sublease, 111 rented the retail premises, as Subtenant, from 216, as Sublandlord, at a monthly rent of $105,409.03. 216 in turn rented the premises from First Capital Holdings (Ontario) Corporation. b. Under the License Agreement, 216 granted 111 the right to use Tokyo Smoke brand marks in the retail storefront and in its marketing materials subject to 216’s rights of supervision. The License Agreement stipulated that 216 would pay 111 an up-front Branding Fee of approximately $2 million upon the fulfillment of certain conditions, including the issuance of a Retail Store Authorization by the AGCO. c. Under the Loan Agreement, 216 agreed to advance roughly $1.5 million in start-up costs to 111. i. Loan A provided for a maximum loan of up to $750,000, plus the aggregate amount of rent due under the Sublease up to the opening of the store. Loan A was intended to finance construction improvements to the premises, decorations, security, point of sale systems, and other equipment. ii. Loan B provided for a maximum loan of up to $750,000 to finance the purchase of inventory, insurance, and human resources.
[10] The parties anticipated that the store would open in early June 2020.
[11] On May 31, 2020 Mr. Heydon wrote to 216 to confirm that he could draw on Loan A to pay June rent. 216’s representative, Mr. Graydon Calvert, advised Mr. Heydon that the draw was limited to the prorated amount of $10,540 for the first three days of June before the store opened. This left 111 with a shortfall of $95,000 in rent for the month.
[12] The next day, June 1, Mr. Heydon sought the additional $95,000 in rent for June. Mr. Justin Farbstein, the president of 216, responded that Mr. Heydon was “at the max of the facility” and that he was “not able to grant more.” As it turned out, Mr. Farbstein was mistaken. He would later admit on cross-examination that Loan A should have covered the amounts sought by Mr. Heydon.
[13] Faced with 216’s refusal to fund the balance of the June rent, Mr. Heydon responded: “Please inform Canopy that we will NOT be opening. I will lay off the staff tomorrow.” Mr. Farbstein called Mr. Heydon that same evening to “calm him down”, indicating that he could likely arrange to have the rent payment deferred and that, in any event, the Branding Fee would soon be paid. It was more than sufficient to cover rent for June.
[14] On the morning of June 2, the AGCO gave 111 final approval to open for business. 111 forwarded the approval notice to 216 as proof that the final condition for the payment of the Branding Fee had been satisfied. Mr. Farbstein again confirmed, on behalf of 216, that the Branding Fee would be paid later in the week in accordance with the License Agreement now that all conditions for the payment of the Branding Fee had been met.
[15] In the late morning of June 2, Mr. Farbstein reviewed the License Agreement and concluded that Mr. Heydon’s statements the previous day that 111 would not be opening the store constituted a “threat to cease to carry on business” contrary to the License Agreement. Mr. Farbstein indicated in cross-examination that he sought instructions from 216’s parent company and communicated with both external and internal counsel. Then, at around noon on June 2, Mr. Farbstein instructed external counsel to begin drafting a notice terminating the License Agreement. 216 pulled its staff from the retail premises and, at 4:26 p.m., sent 111 a “Notice of Defaults” indicating that the License Agreement had been terminated.
[16] Mr. Heydon did not follow through on his threat. 111 responded to 216’s Notice of Defaults through counsel and carried on with the planned opening. The store opened to the public on June 3, 2020.
[17] 216 did not pay the Branding Fee. On July 2, 2020, it commenced this application seeking, among other things, a declaration that the License Agreement was validly terminated.
[18] 111 did not make its June and July rent payments. On August 5, 2020, 216 gave notice of termination of the Sublease, citing the missed rent payments. 216 subsequently amended its notice of application to seek a further declaration that the Sublease was validly terminated on August 5 as a result of unpaid rent.
Decision Below
[19] The application judge found that Mr. Heydon’s communication to the effect that he would not be opening the store and would be laying off staff was not an event of default under the License Agreement. It was “an emotional response to being given incorrect information at a critical time”. As a result, she concluded that 216’s termination of the License Agreement was invalid. The application judge went on to find, based on Mr. Farbstein’s admission in cross-examination that on the morning of June 2, 2020, 216 was looking for a way to end the relationship with 111, that 216 had “pounced” on the statement made by Mr. Heydon as a way to terminate the relationship and avoid paying the Branding Fee, and therefore that 216’s termination of the agreements was not done in good faith.
[20] The application judge also found that the Branding Fee was due and owing, subject to certain deductions, including set-off for 111’s unpaid rent between June and September 2020. The issue of damages was left to be determined at trial or by agreement between the parties.
Did the Application Judge Err in Finding That 216’s Termination of the License Agreement Was Invalid?
[21] 216 submits that it validly terminated the License Agreement in response to a genuine threat to cease carrying on business by Mr. Heydon. 216 relies on the following paragraph of the License Agreement:
- The Licensor has the right, without liability, cost or penalty, to terminate this agreement with immediate effect on written notice to the Licensee if one or more of the following occurs.
(c) the Licensee ceases or threatens to cease to carry on business, or takes or threatens to take any action to liquidate its assets, or stops making payments in the usual course of business; [Emphasis added.]
[22] 216 argues that the application judge erred in finding that Mr. Heydon’s “statement” that he intended to cease operations did not constitute grounds for termination under the License Agreement because it was an “emotional response”. 216 submits that there were in fact several statements made to different representatives of 216 and Canopy. 216 further submits that it was an error of law for the application judge to have expected 216 to discern Mr. Heydon’s subjective intention for the statements, and for the application judge to have relied on Mr. Heydon’s subjective intention to determine whether those statements were indeed threats to cease to carry on business.
[23] According to 216, the application judge had to determine what a reasonable person, circumstanced as the actual parties were, would have had in mind when Mr. Heydon’s statements were made. See Goodyear Canada Inc. v. Burnhamthorpe Square Inc. (1998), 41 O.R. (3d) 321 (C.A.), at para. 88. 216 cites three communications:
a) Mr. Heydon’s June 1 email to 216 stating: “Please inform Canopy we will NOT be opening. I will lay off the staff tomorrow”; b) Mr. Heydon’s June 1 email to a representative of Canopy with the subject line “Still no rent on the table…” stating “I also have to pay payroll this week. So if we cannot sort by tomorrow, I will be forced to lay off the staff”; c) Mr. Heydon’s oral communications with 216’s on-site staff, whom he advised that the store would not be opening due to issues regarding rent with 216.
[24] 216 argues that, viewed objectively, these three communications from Mr. Heydon to 216, Canopy and 216’s on-site representatives clearly constituted a threat to cease to carry on business entitling 216 to terminate the agreement.
[25] I disagree.
[26] The interpretation of commercial agreements involves questions of mixed fact and law. A trial judge’s interpretation and application of contractual terms is owed deference on appeal: Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, [2014] 2 S.C.R. 633.
[27] In this case, the application judge was called upon to determine whether the statements made by Mr. Heydon on June 1 constituted a “threat to cease to carry on business” for the purposes of paragraph 26(c) of the License Agreement. As the Supreme Court stated in Sattva, at para. 47, “[t]he overriding concern is to determine the intent of the parties and the scope of their understanding” by reading the contract as a whole and giving the words used their ordinary and grammatical meaning consistent with the surrounding circumstances known to the parties at the time of formation of the contract.
[28] Unfortunately, the application judge did not expressly grapple with the scope or purpose of paragraph 26(c), nor did she explore the parties’ intentions in including it in their agreement. On appeal, neither party sought to explain the rationale for paragraph 26(c). Without this crucial framing, it is difficult to determine whether Mr. Heydon’s statements were, as a matter of contractual interpretation, threats for the purposes of paragraph 26(c). In other words, while, on their face, Mr. Heydon’s statements were a threat not to open, were these threats that would trigger default under the License Agreement?
[29] In my view, there are at least two possible interpretations of paragraph 26(c), one of which the application judge implicitly adopted and the other she implicitly rejected.
[30] Under the first interpretation, paragraph 26(c) seeks to prevent the licensee from making what are, on their face, threats to cease carrying on business or threats to take any action to liquidate its assets. In other words, the clause is directed at preventing the licensee from making these kinds of statements whether or not the licensee intends to carry out the threatened action or the licensor expects that the threat will be carried out. The logic behind such an interpretation would be that the License Agreement was set to last for a 10-year initial term. Threats and brinkmanship exhibited by the licensee would be corrosive to such a long-term relationship, especially if such threats were used as a negotiating or pressure tactic. Moreover, as Mr. Farbstein repeatedly stressed in his evidence, 216 was concerned about preserving its relationship with Canopy, the master licensor of the Tokyo Smoke brand. Threats of closure by a branded store, whether acted upon or not, might be viewed as injuring the brand.
[31] The second interpretation would require the threat to be objectively credible in order to trigger default under the agreement. This second interpretation recognizes that the language of paragraph 26(c) contemplates more than threats to cease to carry on business: it is also an event of default under paragraph 26(c) for 111 to take action or threaten to take action to liquidate its assets, or to stop making payments in the usual course of business. Taken as a whole, paragraph 26(c) can be viewed as seeking to preserve the licensor’s rights in the event of a looming insolvency. Indeed, paragraph 26(d), addresses formal insolvency proceedings, and paragraph 26(e) makes it an event of default for 111 to “cease to operate the Business at the Store for a period of more than thirty (30) consecutive days”. It is reasonable that 216 would seek to preserve its right to terminate the License Agreement in such circumstances, both to pre-empt the uncertainty associated with insolvency and to avoid its brand materials becoming associated with a defunct or inoperative storefront in a fashionable neighbourhood. Viewed through this lens, paragraph 26(c) is directed toward credible threats to cease to carry on business which would require 216 to take action to preserve its intellectual property rights. From the application judge’s reasons, it is apparent that she interpreted paragraph 26(c) in this way. Such an interpretation is reasonable in the circumstances and I see no basis to interfere.
[32] The application judge correctly noted that 111’s communications during the evening of June 1 had to be viewed in context. Mr. Heydon had just been told that 216 would not be advancing the money needed to pay the June rent. He believed that this was a breach of 216’s obligation pursuant to the agreements between the parties. It turned out that he was in fact correct in that regard and 216 ought to have financed the payment of the June rent.
[33] On June 1, 2020, as a consequence of 216’s mistake, Mr. Heydon was faced with an unexpected shortfall of $95,000. There was therefore uncertainty as to whether 111 could be ready to open on June 3.
[34] The application judge had before her the email chain between Canopy and Mr. Heydon and between 216 (represented by Mr. Calvert and Mr. Farbstein) and Mr. Heydon from June 1. These emails show that Mr. Heydon was reacting to the fact that he had been denied the June rent advance:
Canopy - 4:00 pm: Can we confirm that we will be opening the doors as per your regular store hours? Heydon - 4:26 pm: No, we are not. Just need to sort out rent. Calvert - 6:48 pm: Can you clarify your comments? As discussed in last nights email we fund the prorated portion of June rent ($10k) in Loan A. Is there something outside of this that would prevent you from opening? Heydon - 7:38 pm: The other 95k… Farbstein - 7:41 pm: Rob – you are at the max of the facility. I am not able to grant more. Heydon - 7:48 pm: Ok, thank you. Please inform Canopy we will NOT be opening. I will lay off the staff tomorrow.
[35] In a separate email to Canopy at 8:16 p.m. with the subject line “Still no rent on the table…” Mr. Heydon wrote: “I also have to pay payroll this week. So if we cannot sort by tomorrow I will be forced to lay off the staff”.
[36] Significantly, during the evening of June 1, with these exchanges ongoing, Mr. Farbstein called Mr. Heydon “to calm him down” and reassure him that “everything was going to be ok.” He reiterated that 216 would pay 111 the Branding Fee as agreed. In other words, Mr. Farbstein responded to the threat in a manner suggesting that he could address Mr. Heydon’s concerns and that a closure could and would be avoided. In fact, by the time the Notice of Defaults was sent, it would have been apparent that Mr. Heydon was moving forward with the planned opening.
[37] Given the context, I see nothing unreasonable in the application judge’s conclusion that Mr. Heydon’s communication did not constitute a threat entitling 216 to terminate the License Agreement. An objective observer would understand that Mr. Heydon was facing a problem: how was he to cover the June rent and open on June 3 given the last-minute wrongful withholding of needed funds? Indeed, despite Mr. Heydon’s threat not to open and to lay off staff, his frustration provided an objective manifestation of his strong desire to open as planned, not an intent to shutter the store.
[38] Contrary to 216’s submission, the application judge’s finding that Mr. Heydon’s behaviour was “an emotional response to being given incorrect information at a critical time” was not simply based on Mr. Heydon’s subjective frustration. It was based on the application judge’s objective assessment of the parties’ exchanges in light of the language of the agreement and the factual context.
[39] In my view, on this record, the application judge’s finding that Mr. Heydon’s emotional frustration, viewed in context, did not meet the requirements of the parties’ termination clause was clearly reasonable. For the threats to be treated as an event of default under the License Agreement, a degree of objective credibility – or objective intent – or a real risk that Mr. Heydon’s threats would be carried out was required. As a finding of mixed fact and law, the application judge’s conclusion is owed deference on appeal and I see no basis to interfere.
Did the Application Judge Err in Finding That 216 Had Breached Its Duty of Good Faith?
[40] 216 acknowledges that the License Agreement contained an express contractual duty of good faith that bound both parties. However, 216 argues that the application judge erred in law in finding that 216 had breached that duty or the common law duty of good faith in contractual performance. In 216’s submission, the application judge equated what she held was an invalid termination of the License Agreement with bad faith because 216 was looking for a way to get out of the relationship. 216 takes the position that a party does not act in bad faith merely because its error concerning its contractual termination rights achieved an additional objective, fulfilling its desire to end the relationship.
[41] 111 for its part argues that 216 acted in bad faith by misleading 111 about the funds available to it under Loan A and by leading 111 to believe that the Branding Fee would be paid and the rent deferred. Shortly after giving these assurances, 216 terminated the License Agreement. In its factum, 111 submits that this conduct “revealed 216’s true intention, namely, to seek to end its relationship with 111 and seize 111’s business without paying the Branding Fee and without compensating 111”. 111 submits that all of these findings were open to the application judge on this record and constitute a breach of 216’s duty of honest performance.
The Law
[42] The Supreme Court in Bhasin v. Hrynew, 2014 SCC 71, [2014] 3 S.C.R. 494, explained that good faith contractual performance is a general organizing principle of the common law of contract. The court also recognized a more specific “manifestation” of the organizing principle in the duty to act honestly in the performance of contractual obligations: at para. 33. In this case, there is no issue as to the existence of a duty of good faith since the parties expressly stipulated such a duty in the License Agreement. The issue is therefore to determine the content of that duty in the circumstances and whether it was breached.
[43] Good faith requires “simply that parties generally must perform their contractual duties honestly and reasonably and not capriciously or arbitrarily”: Bhasin, at para. 63. The duty requires that “in carrying out his or her own performance of the contract, a contracting party should have appropriate regard to the legitimate contractual interests of the contracting partner”: Bhasin, at para. 65. It does not require that contracting parties serve each other’s interests. However, they may not seek to undermine those interests in bad faith.
[44] In Bhasin, the court identified four distinct legal doctrines operating as manifestations of the general organizing principle: 1) the duty of cooperation between the parties to achieve the objects of the contract; 2) the duty to exercise contractual discretion in good faith; 3) the duty not to evade contractual obligations in bad faith; and 4) the duty of honest performance. These doctrines generally reflect the situations and relationships in which the law requires contracts to be performed honestly, and reasonably, and not capriciously or arbitrarily. Accordingly, the list of recognized duties is not closed: Bhasin, at para. 66.
[45] The application judge did not specify which of these doctrines was at play in this case, nor did she have the benefit of the Supreme Court’s decisions in C.M. Callow Inc. v. Zollinger, 2020 SCC 45, 452 D.L.R. (4th) 44, or Wastech Services Ltd. v. Greater Vancouver Sewerage and Drainage District, 2021 SCC 7, 454 D.L.R. (4th) 1, both of which were released after her decision. In its notice of counter-application and its factum, 111 focusses on the duty of honest performance. 111 alleges that 216 knowingly misled 111 about the amounts available to it under the Loan Agreement, that the Branding Fee would be paid and that rent would be deferred. After knowingly misleading 111 in this way, it simply terminated the agreement. 111 further alleges that 216 terminated the agreement to avoid payment of the Branding Fee. All of this conduct, in 111’s submission, amounts to a breach of the duty of honest performance.
Analysis
[46] The application judge set out her finding of bad faith in five paragraphs at the end of her reasons. She concluded as follows:
While I do not find that 216 lied to 111, it pounced on a single statement made by Mr. Heydon as a basis to trigger default, thereby achieving its goal of ending the relationship with Mr. Heydon and attempting to discharge its obligation to pay the Branding Fee.
[47] While the application judge’s conclusion clearly rested on her finding that 216 “pounced” on Mr. Heydon’s threat, 111 argues that the record discloses, and it is implicit from her reasons, that other sources of bad faith informed the application judge’s analysis.
[48] In what follows, I address four potential sources or instantiations of bad faith: first, that 216 knowingly misled 111; second, that 216 “pounced” on a default that it did not believe had occurred; third, that 216 sought to evade payment of the Branding Fee in bad faith; and fourth, that 216 seized upon a breach of its own making as in Mason v. Freedman, [1958] S.C.R. 483.
(1) 216 did not knowingly mislead 111
[49] I turn first to the question of whether 216 knowingly misled 111 at any point. In my view, the application judge’s finding that 216 did not lie to 111 and that Mr. Farbstein did not act dishonestly is critical in this respect. As I will explain, it is apparent from the application judge’s finding on this point that, when Mr. Farbstein informed 111 about the amounts available to it under the Loan Agreement and that he intended to pay the Branding Fee and seek to have the June rent deferred, he was not, as 111 alleges, knowingly misleading Mr. Heydon.
[50] I accept that it is possible to mislead in many ways: lies, half-truths, omissions, and even silence. In this case, it is acknowledged that at various points, 216 misled or misinformed 111, or changed its position. The critical issue, however, is whether Mr. Farbstein or 216 knowingly misled 111: Bhasin at para. 73. In this respect, it is significant that the application judge found that Mr. Farbstein did not lie to 111 at any point. Further, nothing in the application judge’s reasons suggest that she rejected any element of Mr. Farbstein’s testimony or made an adverse credibility finding against him. Mr. Farbstein’s evidence on at least three key points indicates that he never intended to mislead 111 or Mr. Heydon.
[51] First, Mr. Farbstein admitted on cross-examination that he was mistaken when he told Mr. Heydon that 216 was not required to fund the June rent. He did not lie or knowingly withhold information. Thus, while 111 received false information, there is no basis for saying that 216 knowingly misled 111.
[52] Second, Mr. Farbstein gave evidence that when he called Mr. Heydon during the evening of June 1 to “calm him down”, he did not say that 111 was in default because he did not believe 111 was in default at that time. He told Mr. Heydon that 216 would pay the Branding Fee later in the week and that it would work with the landlord to defer rent until 111 was able to pay, as appears from the following excerpt from Mr. Farbstein’s cross-examination:
Q: Say, at the time you made this statement that you would pay the Branding Fee later that week and you would go speak to the landlord about deferring rent, those statements were true at the time you made them, right? A: Correct. Those are true. Q: And you didn’t tell him in that phone call that his agreements with 216 were at risk of being terminated, did you? A: I didn’t tell him because at that point, I had – it wasn’t in my head at risk of being – I hadn’t thought about terminating at that point. I was thinking to try and just – so I do tell him that.
[53] Third, Mr. Farbstein admitted that his email of June 2 at 9:24 a.m., in which he reiterated that the Branding Fee would be paid and a rent deferral sought, was honest and reflected his true intention at the time, despite the fact that 216 was considering ways to terminate the relationship. He stated:
Q: Did you say at that point in time, 9:24 a.m. on June 2nd, you didn’t think he was in default or you wouldn’t have written that, right? A: That’s what I said. A: At that point at 9:24, I did not think he was in default because at that point, I had not re-reviewed the License Agreements. So I thought at that point he wasn’t in default and that I owed him the Branding Fee at that point in time, 9:24, when I sent that email. You’re correct. Q: Was [216] looking for a way to get out of the relationship with 111? A: On the morning of June 2nd, it was looking for a way to end the relationship with 111, correct.
[54] Taken together, the uncontradicted evidence is that 216 did not, at any point, knowingly mislead 111 about its intention with respect to the Branding Fee or the deferral of rent. In fact, because the application judge made a finding that Mr. Farbstein did not lie to 111, it is apparent that the assurance given to Mr. Heydon reflected Mr. Farbstein’s honest belief at the time they were made. He had not reviewed the agreements or spoken with counsel. Mr. Farbstein explained that he did not form a concrete intention to terminate the agreement until after 9:24 a.m. on June 2, at which point he had reviewed the License Agreement and determined that Mr. Heydon’s threat gave 216 cause to terminate and that the Branding Fee was no longer due. He then contacted internal and external counsel to “validate” his thoughts on the termination before instructing external counsel to draft a notice.
[55] 216 did not, as 111 suggests, actively mislead 111. It simply changed positions in light of new information. The application judge made no finding that the change in position was taken dishonestly or unreasonably nor is there any suggestion that it was taken capriciously or arbitrarily.
(2) “Pouncing” by 216 did not constitute bad faith
[56] The application judge’s conclusion that 216 acted in bad faith is more plausibly anchored to her finding that 216 “pounced on a single statement made by Mr. Heydon as a basis to trigger default, thereby achieving its goal of ending the relationship … and attempting to discharge its obligation to pay the Branding Fee”. In my view, however, 216’s act of pouncing did not constitute bad faith in this case.
[57] Setting aside the factual question of whether Mr. Heydon made a “single statement” or several statements, the more fundamental difficulty I have with this as a basis for finding that there was a breach of the duty of honest performance and bad faith on the part of the appellant is that the application judge made no finding of dishonesty and such a finding cannot be inferred from her reasons. A party is not prevented from exercising a right of termination simply because it wishes to bring its relationship with the other party to an end. Nor should a party be prevented from ending a relationship because it will deprive the defaulting party of a payment that it would have received had the relationship continued. Where a party is anxious to end a relationship, and a valid reason to do so presents itself, that party is not, in the absence of some other relevant fact, prevented from “pouncing” on it.
[58] While 216’s basis for terminating the License Agreement ultimately proved invalid, as discussed above, its position on termination was not unreasonable, malicious, or so inconsiderate of 111’s legitimate contractual interests as to constitute bad faith. It was neither manufactured nor concocted. Mr. Farbstein believed Mr. Heydon’s threat constituted a breach.
[59] I also see no basis for concluding that 216’s change in position was capricious or arbitrary. Mr. Farbstein reviewed the License Agreement and spoke with counsel before taking the position that Mr. Heydon’s threat constituted an event of default.
[60] Mr. Farbstein’s conduct following Mr. Heydon’s threatening statements is consistent with Mr. Farbstein having viewed Mr. Heydon’s communication as a genuine and credible threat, even if he did not immediately recognize that such a threat could constitute an event of default under the License Agreement. Mr. Farbstein called Mr. Heydon because “at ten months trying to get the store opened and I was threatened two nights before the store was opened that it wasn’t going to be open, and so, my reaction was to try to calm him down” … “If I wasn’t concerned, I wouldn’t call him. I was concerned.” He then promised and ultimately did speak with the landlord about a possible rent deferral, and reported on the situation to 216’s parent company at least twice between 8:30 p.m. on June 1 and 10:00 a.m. on June 2. Mr. Farbstein’s actions suggest that he saw Mr. Heydon’s communications as more than empty threats or posturing.
[61] While Mr. Farbstein may well have understood by sometime on June 2 that, despite his threat, Mr. Heydon would in fact open the store on June 3, 216 had an interest in ending such threats, especially those sent directly to Canopy, 216’s master licensor. As I have noted, it is possible to read paragraph 26(c) of the License Agreement as permitting termination when a party makes what, on its face, is a significant threat, even if such threat is later withdrawn or may be considered unlikely to be carried out. Such an interpretation acknowledges 216’s legitimate contractual interest in preserving its own relationship with Canopy and enjoying a commercial relationship with 111 free of brinkmanship. As Mr. Farbstein deposed: “That type of [threatening] behaviour by 216’s sublicensees may cause Canopy to lose confidence in 216, and undermine its business relationship”.
[62] The evidence is that the relationship between 216 and 111 was “difficult” because Mr. Heydon bristled at any intervention by 216. The threat was, from 216’s perspective, serious. As the application judge observed:
a) 216 saw 111’s threat as a “shakedown” for additional funds; b) 216 was concerned that Mr. Heydon’s behaviour reflected negatively on his capacity to act honestly; and c) the fact that Mr. Heydon’s threat was sent directly to Canopy worried 216 that this could cause Canopy to lose confidence in it.
[63] Mr. Farbstein confirmed in his evidence that, by June 2, 216 had serious reservations about being in business with 111 for the next 10 years. As he admitted on cross-examination, Mr. Farbstein returned to the License Agreement early on June 2 with a view to determining whether the threat constituted a breach that justified terminating the relationship with 111: “I, you know, took some time and re-looked at the License Agreement and believed that the email that happened the night before may be cause for termination of License Agreement because I perceived that as a threat”. The breach he ultimately invoked was based on 216’s understanding that the threat was the type of threat contemplated by paragraph 26(c). That interpretation was wrong but, absent a finding that it was a position manufactured to achieve 216’s objective of ending the relationship, an unreasonable position, or a position taken capriciously or arbitrarily, it constitutes an error and no more. This was a fluid situation at a crucial point in the commercial relationship with both parties evaluating and re-evaluating their legal rights in real time.
[64] In my view, the finding that 216 had a desire to end its relationship with 111 and chose to “pounce” on what, incorrectly, it saw as providing the opportunity to do so was not sufficient to justify a finding of bad faith. I would therefore set aside the application judge’s finding of bad faith.
(3) The Branding Fee
[65] 111 argues that 216’s true intention in terminating the agreements was to seize 111’s business without paying the Branding Fee. Although the application judge’s reasons do not set out an express finding on this point, 111 submits that such a finding is implied in her conclusion that 216 pounced on 111’s statement “to trigger default, thereby achieving its goal of ending the relationship with Mr. Heydon and attempting to discharge its obligation to pay the Branding Fee”.
[66] I disagree. I acknowledge that, in Bhasin, the Supreme Court explained that a party has a duty not to evade its contractual obligations in bad faith. As a result, a party that manufactures an artificial reason to terminate a contract in order to avoid future payment obligations would likely be found to have acted in bad faith. However, as explained above, 216 believed the termination was justified. The fact that termination releases a party from making a significant payment does not amount to bad faith, even where a court later finds that the termination was invalid.
[67] The issue of the Branding Fee was put directly to Mr. Farbstein in cross-examination:
Q. All right. Did 216 start to regret the fact that it obligated itself to pay a Branding Fee, a $2 million Branding Fee, to Mr. Heydon once the market opened up in 2020? A. It did not. Q. Was it looking for a way to avoid the payment of that fee? A. Nope.
[68] The application judge did not reject this evidence. Without an adverse credibility finding against Mr. Farbstein or some other reason to reject his testimony, there is no basis for 111’s suggestion that the termination of the License Agreement was an excuse manufactured by 216 to avoid payment of the Branding Fee. If 216’s goal of ending the relationship with Mr. Heydon was achieved legitimately by the exercise of an express termination right, it would, as far as Mr. Farbstein understood at the time, result in the discharge of 216’s obligation to pay the Branding Fee. This alone does not support a finding of bad faith.
(4) Does the doctrine in Mason v. Freedman apply?
[69] While it was not explicitly argued in this way, 111 effectively takes the position that 216 should not be permitted to evade its contractual obligation to pay the Branding Fee by invoking a breach of its own making. It was Mr. Farbstein’s erroneous interpretation of the Loan Agreement that caused Mr. Heydon’s “emotional response”, which 216 then claimed was a “threat” in violation of the License Agreement. 216’s attempt to seize upon the consequences of its own mistake is arguably another way that 216 sought to evade its contractual obligations in bad faith, contrary to the duty described above.
[70] Again, I disagree. In Bhasin, the Supreme Court illustrated the duty not to evade contractual obligations in bad faith with reference to the case of Mason v. Freedman. In Mason, a vendor of real property attempted to repudiate an agreement of sale on the basis that he was “unable or unwilling” to remove a defect on title because his wife would not provide a bar of dower. The evidence, however, revealed that the vendor had made no effort to remove the defect on title in a deliberate attempt to sabotage the sale and escape his bargain.
[71] In this case, the evidence is that Mr. Farbstein simply misinterpreted the Loan Agreement when he made the statements that triggered Mr. Heydon’s emotional response, which Mr. Farbstein in turn perceived as an event of default. Unlike Mason, there was no deliberate attempt to create the conditions giving rise to 216’s right of termination. While Mr. Heydon’s reaction was, in the sequence of events, a default of 216’s own making, it is not analogous to the vendor’s actions in Mason. In my view, it would not be appropriate to characterize 216’s error as bad faith simply because that error set in motion the events that would culminate with 216’s invalid termination of the License Agreement. This is quite simply a case of breach of contract.
Conclusion on Good Faith
[72] Put simply, in terminating the License Agreement, 216 did not seek to undermine 111’s interests in bad faith. While 216’s notice of termination was, by definition, an attempt to put an end to the agreement, the termination right in question formed part of the parties’ bargain and reflected, among other things, the licensor’s legitimate interest in protecting its brand in circumstances that the parties expressly stipulated would give rise to a right of termination. The fact that Mr. Farbstein erroneously believed those circumstances were present does not amount to bad faith.
[73] As I have explained, the application judge’s findings do not, in law, make out the necessary requirements for bad faith. That finding must be set aside.
Did the Application Judge Err in Failing to Declare That the Sublease Was Terminated in August 2020?
[74] 216 argues that the application judge was obliged to declare that the Sublease was validly terminated on August 5, 2020 and that, consequently, the License Agreement was frustrated and at an end.
[75] As noted, 111 failed to pay June and July rent after the purported termination of the License Agreement on June 2. 216 gave 111 notice that it intended to terminate the Sublease for failure to pay, and it gave 111 an opportunity to cure the breach. 111 was unable to cure the breach and 216 terminated the Sublease for failure to pay June and July rent and sought a declaration that the Sublease was at an end. 216 argues that the application judge simply failed to address these issues.
[76] 216 maintains that once the Sublease was terminated the License Agreement was frustrated. The License Agreement permitted 111 to use the Tokyo Smoke brand only at the “Store”, defined as “the Licensee’s retail cannabis store to be located at Unit A01131A, 21 Bloor Street, Toronto, Ontario.” 216 suggests that this is a “classic case of contractual frustration” because the August 5 termination of the Sublease makes it both legally and physically impossible to operate the “Store” in accordance with the License Agreement.
[77] For its part, 111 argues that June and July rent would have been paid if 216 had not wrongfully terminated the License Agreement and withheld payment of the Branding Fee. The purpose of the agreements between the parties was to ensure that 111 was funded in the early stages of the opening of the store. If 216 had paid the Branding Fee as agreed, 111 would have had no difficulty in paying June and July rent.
[78] 111 objects to 216 raising the question of frustration on appeal since it was not argued before the application judge. Nevertheless, 111 argues that there was no frustration of the License Agreement because there was no supervening event that made the License Agreement incapable of being performed. It was 216’s wrongful termination of the License Agreement in June that brought the parties’ relationship to an end.
[79] In any event, 111 notes that the parties entered into a consent order in connection with the judgment below. In the judgment, the outstanding rent obligations between June and September 2020, totalling $344,336.18, were set off against the unpaid Branding Fee. The consent order granted 216 possession of the premises as of September 2020. Accordingly, an order that the Sublease was terminated in August was not warranted.
Analysis
[80] The application judge’s reasons only address the termination of the Sublease in general terms. However, her resolution of the issue is apparent in her judgment and in the consent order. The application judge awarded 216 its rent payments under the Sublease for the period June 1 to September 8, and the consent order granted 216 possession of the retail premises as of September 8. From a practical perspective, the Sublease is at an end and all of the outstanding issues under the Sublease are resolved.
[81] The impact that terminating the Sublease may have had on the License Agreement and on the damages that flowed from 216’s wrongful termination of the License Agreement in June 2020, were not addressed in the court below. Nor is that issue dealt with in the settled judgment. In my view, therefore, the issue as to whether the License Agreement was brought to an end in August by virtue of the doctrine of frustration ought not to be addressed for the first time on appeal. It is best left to the trial or other resolution of the outstanding damages issues pursuant to the application judge’s decision.
Conclusion
[82] In conclusion, therefore, I would set aside the finding of bad faith, but would otherwise dismiss the appeal. As I consider that 111 was largely successful on appeal, I would award it costs on a partial indemnity basis in the all-inclusive amount of $27,000.
Released: August 30, 2021 “P.R.” “Paul Rouleau J.A.” “I agree Alexandra Hoy J.A.” “I agree K. van Rensburg J.A.”
