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Canada’s Highest Courts Deliver a Series of Landmark Decisions on Contract Law

By Daniel Waldman, Pallett Valo LLP

While under lockdown last year and conducting hearings electronically, the highest courts in Canada delivered several precedent-setting decisions that have changed the way we view written contracts under the law. Though these decisions have been praised as positive developments, they have also been met with controversy. There is some concern that they may compromise the sanctity of written agreements.

Unconscionability and Contractual Enforcement

Last June, the Supreme Court of Canada handed down a longawaited decision. It held that a term in a standard form contract cannot be enforced if it unfairly deprives the weaker party of its right to pursue a dispute remedy against the stronger party. In Uber Technologies Inc. v Heller, a driver for Uber Eats had to accept a standard form employment contract when he signed on with the company. It stated that any employment disputes were to be resolved through mediation and arbitration in the Netherlands. The driver commenced a class action lawsuit against Uber in 2017, alleging that the company had violated employment standards legislation. Uber moved to stay the action as the dispute raised had to be dealt with by arbitration in the Netherlands, as per the employment agreement.

The plaintiff argued that this clause was not enforceable because it was unconscionable. His position was that the clause unfairly deprived him of a realistic means of pursuing any dispute against his employer.

Uber’s motion reached the Supreme Court, where the majority held the arbitration clause was unconscionable and therefore unenforceable. The doctrine of unconscionability is particularly applicable to standard form contracts, which often create an imbalance of bargaining power, giving a stronger party an unfair advantage. In this case, the plaintiff was clearly the weaker party and the clause imposed a grave financial and logistical burden on him to exercise his right to resolve a dispute against his employer.

Prior to this decision, unconscionability was often raised by parties who did not want to live up to their end of an agreement. Courts seldom accepted that argument. The Uber decision has been hailed as an important victory. But there have been concerns about its potential implications, as litigants might follow its lead to try and invalidate terms in standard contracts.

Subsequent judicial treatment of the Uber decision has allayed these concerns. A recent decision of the Ontario Superior Court of Justice has confirmed that courts will not be quick to allow unconscionability arguments to invalidate standard contractual clauses just because a weaker party claims they are unfair. It will be interesting to see the effect of Uber in years to come.

Invalidating Contracts Based on Misrepresentations

The Ontario Court of Appeal took things a step further with a recent ruling that held that a party can rescind a contract entirely if they were lured into it based on oral misrepresentations.

In Issa v Wilson, a first-time homebuyer entered into an agreement to purchase a home after being told by the homeowner and the real estate agent that the size of the property was about 2,000 square feet. The buyer was given the chance to carry out his own due diligence. During a visit to the property, he was again informed that the home was about 2,000 square feet. Based on this, he executed the agreement of purchase and sale and paid a deposit. The agreement did not mention the size of the property.

The buyer pulled out of the transaction before it closed, after he obtained an appraisal confirming that the property was about 1,450 square feet. He then successfully sued the real estate agent and vendor, obtained a judgment that the agreement was invalid, and his deposit was returned.

The judgment was upheld by the Ontario Court of Appeal. It ruled that if a party makes a false statement that is material and induces another party into entering a contract, then the agreement may be rescinded based on misrepresentation. The representations regarding the size of the property were deemed to be material to the buyer’s decision to purchase.

The Issa decision has caused quite a stir, particularly among the real estate community, which has taken issue with the ruling that a buyer is permitted to back out of an agreement at a late stage of the transaction based on a prior representation. There is concern that Issa may create a slippery slope, with parties attempting to get out of valid written contracts based on alleged misrepresentations.

The Expanded Duty of Honesty in Contractual Performance

In C.M. Callow Inc. v Zollinger, the Supreme Court expanded on the duty of honesty that parties owe to each other in contractual performance. The plaintiff had a snow-clearing contract with a group of condominium corporations. The defendants decided to terminate the contract in early 2013 but led the plaintiff to believe that it would be renewed.

The matter made it to the Supreme Court, where it was ruled that the defendants owed the plaintiff a duty to perform the contract honestly and in good faith. The court noted that, while the duty of honest performance is not equivalent to a duty of disclosure, parties still may not “knowingly mislead” one another.

It was held that the defendants breached this duty by actively deceiving the plaintiff into believing that the contract would be renewed.

Many have praised Callow as an important (and overdue) expansion of the duty of honest performance in contract law, while others are concerned that it has taken this duty too far, which may compromise the certainty contained in commercial transactions.

These decisions, while controversial, all represent positive developments in contract law, as they challenge the notion that contractual obligations are limited to written documents. As the high courts have demonstrated, the enforceability and performance of contracts can come down to the parties’ rights and behaviour and are not necessarily confined to the document itself.

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Daniel Waldman

GGI member firm
Pallett Valo LLP
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Mississauga (ON), Canada
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Pallett Valo LLP is one of Ontario’s Top 10 Regional Law Firms. The firm practices in the areas of business law, commercial litigation, commercial real estate, construction, insolvency and corporate restructuring, employment and labour, and wills, estates, and trusts.

Daniel Waldman is a member of the commercial litigation practice and a member of the Remedies Group. Daniel has a commercial litigation practice with an emphasis on real property litigation, including commercial leasing, commercial real estate, construction law, and debt collection.

Published: GGI Insider, No. 112, March 2021 l Photo: helgidinson - stock.adobe.com


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