Houle v. Canadian National Bank, [1990] 3 S.C.R. 122
National Bank of Canada Appellant
v.
Normand Houle, Réjean Houle,
Rolland Houle and Bruno Houle Respondents
indexed as: houle v. canadian national bank
File No.: 20634.
1990: May 3; 1990: November 22.
Present: Lamer C.J.* and Wilson, La Forest, L'Heureux‑Dubé, Sopinka, Gonthier and Cory JJ.
on appeal from the court of appeal for quebec
Civil responsibility -‑ Abuse of contractual rights ‑‑ Criteria ‑‑Type of liability: contractual or delictual ‑‑ Liability to third parties ‑‑ Civil Code of Lower Canada, arts. 1024, 1053.
Civil responsibility ‑‑ Bank ‑‑ Abuse of contractual rights ‑‑ Liability to third party ‑‑ Bank liquidating company's assets only three hours after demanding payment of company's loan ‑‑ Bank aware at the time of shareholders' negotiations to sell their shares of company ‑‑ Shares sold at reduced price following liquidation of company's assets ‑‑ Shareholders suing bank for difference between value of shares before liquidation of company's assets and amount obtained from sale ‑‑ Whether there has been an abuse by the bank of its contractual right to realize on its security ‑‑ Whether shareholders have a right of action against the bank based on company's contract or on art. 1053 C.C.L.C.
Company law ‑‑ Lifting of corporate veil ‑‑ Bank liquidating company's assets only three hours after demanding payment of company's loan ‑‑ Bank aware at the time of shareholders' negotiations to sell their shares of company ‑‑ Shares sold at reduced price following liquidation of company's assets ‑‑ Shareholders suing bank for difference between value of shares before liquidation of company's assets and amount obtained from sale ‑‑ Family business ‑‑ Long‑term financial relationship between bank and shareholders ‑‑ Personal guarantees given by shareholders to secure company's loan ‑‑ Whether shareholders have a right of action against bank for damage caused to company ‑‑ Whether this is an appropriate case to lift the corporate veil.
Damages ‑‑ Additional indemnity ‑‑ Motion for additional indemnity filed in Supreme Court of Canada after prescribed time ‑‑ Whether motion should be granted ‑‑ Civil Code of Lower Canada, art. 1056c ‑‑ Supreme Court Act, R.S.C., 1985, c. S‑26, s. 48 ‑‑ Rules of the Supreme Court of Canada, SOR/83‑74, Rule 29.
Appellant bank had done business with the respondents' family and their company for over 50 years. In order to modernize and to expand, the company approached the bank for financing and by October 1973 had a rotating line of credit of $700,000 and a letter of credit of $100,000. As security, the bank held letters of surety supplied by the respondents ‑‑ the sole shareholders of the company ‑‑, by their mother, and security under s. 88 of the Bank Act. The bank also obtained a trust deed on all the movable and immovable assets of the company. In December 1973, the respondents commenced negotiations with an interested company to sell their shares in their company for $ 1,000,000. The bank was aware of these negotiations. The next month, the company asked the bank to increase its rotating line of credit to $900,000. The bank instructed an accounting firm to study the financial situation of the company and, following the report, decided to call in the loan and realize on the guarantees. The accounting firm's representative went to the company and attempted to obtain an additional investment from the respondents, promising that the bank would increase the company's line of credit. The representative also informed the respondents that the loan had been called in and that a notice to that effect would soon be served on them. With no agreement reached after an hour, the notice was served. The bank immediately took possession of the company's assets and liquidated them in less than three hours. A few weeks later, the respondents sold their shares of the company to the company with whom they had been negotiating for $300,000. The respondents then took action against the bank in the Superior Court for $700,000, claiming that their loss was solely due to the bank's abusive conduct in the sudden possession and liquidation of the company's assets. The Court found that the bank was at fault for not having given the company enough time to meet its demand for payment and also held that this was an appropriate case to lift the corporate veil. Even though it was the company which had contracted with the bank, the company was only an intermediary between the bank and the respondents. The court maintained the action and awarded the respondents damages in the amount of $250,000 ‑‑ the difference between the real value of the shares at the time of the repossession of the company's assets and the price obtained by the respondents for their shares. The Court of Appeal affirmed the judgment and the bank was granted leave to appeal to this Court. The respondents later filed a motion requesting the additional indemnity provided for by art. 1056c C.C.L.C. The motion was filed without opposition but beyond the time limit provided for in Rule 29 of the Rules of the Supreme Court of Canada.
Held: The appeal should be dismissed.
(1) Abuse of Contractual Rights
The doctrine of abuse of contractual rights is part of Quebec civil law. The doctrine serves the important social as well as economic function of controlling the exercise of contractual rights and is consistent with today's trend towards a just and fair approach to rights and obligations. Bad faith or malice in the exercise of a contractual right is no longer the only criterion for assessing whether such a right has been abused. The standard of the prudent and reasonable individual can also form the basis for liability resulting from an abuse of contractual rights. An abuse of rights may occur when the contractual right is not exercised in a reasonable manner, i.e. in accordance with the rules of equity and fair play. The abuse of a contractual right gives rise to contractual liability. This liability is based on art. 1024 C.C.L.C. and the underlying principle of good faith in the execution of contracts. Since the abuse of a contractual right gives rise to contractual liability, it follows that only the parties to the contract may claim for the breach of that contractual obligation (art. 1023 C.C.L.C.). The fact that two parties have contracted, however, does not shield them from their extra‑contractual responsibilities to those outside the contractual sphere. In order to find delictual liability between a contracting party and a third party, there must exist, independently of the contract, a legal obligation deriving from art. 1053 C.C.L.C.
In this case, it is not contested that the bank had the contractual rights to recall the loan on demand and to realize on its security without notice. The bank exercised its right to recall the loan after a reasoned decision, based on objective economic factors, and there is no evidence that there were any extraneous considerations to that decision. While the recalling of the loan was not in itself an abuse of the bank's contractual rights, the quick liquidation of the company's assets did amount to an abuse of rights. A creditor should not realize its securities or take possession of assets before giving the debtor, depending on the circumstances of each case, a reasonable time to meet its obligations. By liquidating the assets only three hours after demanding payment of the loan, the bank effectively prevented any chance of the company's meeting its obligations. The bank acted in a sudden, impulsive, and detrimental manner, particularly considering that there was never any warning that the bank was concerned about its loan and there was only a low risk of losing money or security, at least in the short term. The respondents, however, as shareholders, were not parties to the contract between the bank and the company and, as such, had no right of action against the bank based on that contract for the abuse by the bank of a contractual right. Nor do they have a right of action based on a contract between themselves and the bank. The respondents did sign letters of surety to guarantee the loans, but they were never called upon to honour such guarantees when the bank called in its loan and liquidated the company's assets. Finally, there is no particular factor in this case which would justify the lifting of the corporate veil. Notwithstanding the "family" nature of the business, the family members chose a corporate structure rather than doing business in their own name. The sureties provided by the respondents are common in financial relations involving small corporations. By choosing the benefits of a corporate structure, the respondents must be prepared to accept the necessary consequences: a shareholder has no action against the person who causes damage to the company.
As third parties, the respondents have a claim against the bank based on delictual responsibility. The bank's impulsive repossession and liquidation of the company's assets, while fully aware of the respondents' imminent sale of their shares, was a fault entailing its liability for the ensuing direct and immediate damage caused to the shareholders. The bank had a duty to act in a prudent and diligent manner, as any individual, in order to avoid prejudice to the respondent shareholders. There is nothing in the record to indicate that the bank could not have granted a reasonable time before taking possession of the assets and liquidating them. Although the obligation to repay the loan and the right to recall it formed part of the contract between the bank and the company, no obligation of diligence towards the shareholders arose from the contract itself. Such an obligation arose from art. 1053 C.C.L.C. in light of the facts of this case. In addition to and independently of any damage the company itself may have incurred, the respondents had a direct, personal, financial interest at stake. It was the potential sale value of their shares that was damaged, a value that the respondents were on the point of enjoying personally. It was the bank's precipitous action in liquidating the company's assets that directly caused the respondents' loss. A more reasonable time period might have given the respondents the opportunity to sell their shares at the fair market value. The bank, therefore, breached its legal obligation towards the respondents under art. 1053 C.C.L.C. and must be found liable for the damage suffered by them, in the amount determined by the trial judge.
(2) Article 1056c C.C.L.C.
Respondents' failure to give the required notice is not fatal to their request for the additional indemnity provided for in art. 1056c C.C.L.C., since s. 48 of the Supreme Court Act allows for amendments whenever necessary for the purposes of the appeal. This section also indicates that such a motion may be granted even if there was error or neglect on the part of the applicant. Accordingly, s. 48 of the Act, read in conjunction with Rule 29 of the Rules of the Supreme Court of Canada, entitles this Court to grant respondents' motion, particularly since the issue was fully canvassed both in the factums and in oral argument and since no prejudice has been demonstrated. Further, while the granting of the additional indemnity is discretionary, it should be awarded where, as in this case, there is no valid reason to deny it.
Cases Cited
Referred to: Salomon v. A. Salomon and Co., [1897] A.C. 22; Boisjoli v. Goebel, [1982] C.S. 1; Colmar, May 2, 1855, D.P. 1856.2.9 (Doerr v. Keller); Brodeur v. Choinière, [1945] C.S. 334; Air‑Rimouski Ltée v. Gagnon, [1952] C.S. 149; Blais v. Giroux, [1958] C.S. 569; Laperrière v. Lemieux, [1958] R.L. 228; Quaker Oats Co. of Canada v. Côté, [1949] Que. K.B. 389; St‑Laurent v. Lapointe, [1950] Que. K.B. 229; Fiorito v. Contingency Insurance Co., [1971] C.S. 1; Noivo Automobile Inc. v. Mazda Motors Canada Ltd., [1974] C.S. 385; Latreille Automobile Ltée v. Volvo (Canada) Ltd., [1978] C.S. 191; Godbout v. Provi‑Soir Inc., [1986] R.L. 212; Equipements Select Inc. v. Banque Nationale du Canada, [1987] R.R.A. 99n; White v. Banque Nationale du Canada, [1986] R.R.A. 207n; Miville v. Québec (Ville de), J.E. 82‑609; Langlois v. Farr Inc., [1988] R.J.Q. 2682; Des Cheneaux v. Miron Inc. (1987), 20 Q.A.C. 157; Caisse populaire de Baie St‑Paul v. Simard, J.E. 85‑943; Stewart v. Standard Broadcasting Corp., J.E. 90‑75; Modernfold (Bas St‑Laurent) Ltée v. New Castle Products (Canada) Ltd., [1973] C.S. 220; National Bank of Canada v. Soucisse, [1981] 2 S.C.R. 339; Bank of Montreal v. Kuet Leong Ng, [1989] 2 S.C.R. 429; Marcotte v. Assomption Cie mutuelle d'assurance‑vie, [1981] C.S. 1102; Macaulay v. Imperial Life Assurance Co. of Canada, J.E. 84‑423; Drouin v. Électrolux Canada Ltée Division de les Produits C.F.C. Ltée, [1988] R.J.Q. 950; Germain v. Sergaz Inc., J.E. 81‑334; Caisse populaire St‑Simon de Drummond v. Lalumière, J.E. 82‑1105; Carignan v. Infasco Division Ivaco Inc., J.E. 89‑286; Air Canada v. McDonnell Douglas Corp., [1989] 1 S.C.R. 1554; Wabasso Ltd. v. National Drying Machinery Co., [1981] 1 S.C.R. 578; Ross v. Dunstall (1921), 62 S.C.R. 393; Alliance Assurance Co. v. Dominion Electric Protection Co., [1970] S.C.R. 168; Bernard v. Cloutier, [1982] C.A. 289; Pole Lite Ltée v. Banque Provinciale du Canada, [1984] C.A. 170; Banque Royale du Canada v. Nettoyeur Terrebonne (1985) Inc., J.E. 88‑61; Charland v. Banque Canadienne Impériale de Commerce, J.E. 86‑142; Ronald Elwyn Lister Ltd. v. Dunlop Canada Ltd., [1982] 1 S.C.R. 726; Massey v. Sladen (1868), L.R. 4 Ex. 13; Toms v. Wilson (1862), 4 B. & S. 442, 122 E.R. 524; Mister Broadloom Corp. (1968) Ltd. v. Bank of Montreal. (1979), 25 O.R. (2d) 198 (H.C.), rev'd (1983), 44 O.R. (2d) 368 (C.A.); Vicply Inc. v. Royal Bank of Canada, [1989] R.R.A. 11; Burland v. Earle, [1902] A.C. 83; Silverman v. Heaps, [1967] C.S. 536; Kosmopoulos v. Constitution Insurance Co., [1987] 1 S.C.R. 2; Travelers Insurance Co. of Canada v. Corriveau, [1982] 2 S.C.R. 866; Trottier v. British American Oil Ltd., [1977] C.A. 576; Godin v. Trempe, J.E. 85‑822.
Statutes and Regulations Cited
Civil Code of Lower Canada, arts. 1023, 1024, 1040a [ad. 1964, c. 67, s. 1], 1053, 1056c [ad. 1956‑57, c. 16, s. 1; am. 1971, c. 85, s. 10], 1065, 1070, 1075, 1141, 1152.
Civil Code of Quebec [am. 1987, c. 18, s. 1], arts. 6, 7 [not yet in force].
Rules of the Supreme Court of Canada, SOR/83‑74, Rule 29(1).
Supreme Court Act, R.S.C., 1985, c. S‑26, s. 48.
Authors Cited
Angus, David. "Abuse of Rights in Contractual Matters in the Province of Quebec" (1962), 8 McGill L.J. 150.
Appleton, Ch. "Les exercices pratiques dans l'enseignement du droit romain et plan d'un cours sur l'abus des droits" (1924), 78 Revue internationale de l'enseignement 142.
Baudouin, Jean‑Louis. "Contrat ‑‑ Application de la théorie de l'abus de droit en matières contractuelles" (1971), 31 R. du B. 335.
Baudouin, Jean‑Louis. La responsabilité civile délictuelle, 3e éd. Cowansville, Qué.: Éditions Yvon Blais Inc., 1990.
Baudouin, Jean‑Louis. Les obligations, 3e éd. Cowansville, Qué.: Éditions Yvon Blais Inc., 1989.
Baudouin, Louis. Le droit civil de la Province de Québec. Montréal: Wilson & Lafleur Ltée, 1953.
Caron, Maximilien. Précis de droit des effets de commerce, 7e éd. rév. par Albert Bohémier. Montréal: Beauchemin, 1978.
Charmont, J. "L'abus du droit" (1902), 1 Rev. trim. dr. civ. 113.
Cornu, Gérard. Droit civil (Introduction: Les personnes ‑‑ Les biens), 4e éd. Paris: Éditions Montchrestien, 1990.
Corpus Juris Civilis, 11e éd. Par C. M. Galisset. Paris: A. Cotelle, 1881.
Crépeau, Paul‑André. "Le contenu obligationnel d'un contrat" (1965), 43 Can. Bar. Rev. 1.
Crépeau, Paul‑André. L'intensité de l'obligation juridique ou des obligations de diligence, de résultat et de garantie. Cowansville, Qué.: Éditions Yvon Blais Inc., 1989.
Crépeau, Paul‑André. Théorie générale de l'obligation juridique: éléments d'une introduction. Montréal: Quebec Research Centre of Private & Comparative Law, 1987.
Domat, Jean. Oeuvres de J. Domat, t. 4, 1re éd. in‑octavo par M. Carré. Paris: Kleffer, 1823.
Ghestin, Jacques et Gilles Goubeaux. Traité de droit civil, t. 1, Introduction générale, 3e éd. Paris: L.G.D.J., 1990.
Jobin, Pierre‑Gabriel. "L'abus de droit contractuel depuis 1980". Dans Congrès annuel du Barreau du Québec (1990). Montréal: Service de la formation permanente‑‑Barreau du Québec, 1990, 127.
Josserand, Louis. "À propos de la relativité des droits" (1929), 49 Rev. cri. lég. et jur. 227.
Josserand, Louis. De l'abus des droits. Paris: Rousseau, 1905.
Josserand, Louis. De l'esprit des droits et de leur relativité, 2e éd. Paris: Dalloz, 1939.
L'Heureux, Nicole. Le droit bancaire, Sherbrooke: Éditions Revue de droit Université de Sherbrooke, 1988.
Lalou, Henri. Traité pratique de la responsabilité civile, 6e éd. Par Pierre Azard. Paris: Dalloz, 1962.
Martel, Paul. "L'arrêt Banque Nationale du Canada c. Houle: Lumières nouvelles sur l'abus de droit et le "voile corporatif"" (1987), 33 McGill L.J. 213.
Marty, Gabriel et Pierre Raynaud. Droit civil: Les obligations, t. I, 2e éd. Paris: Sirey, 1988.
Massuë, Hubert de la. "Responsabilité contractuelle et responsabilité délictuelle sous la notion de l'abus du droit" (1948), 46 Rev. trim. dr. civ. 29.
Mayrand, Albert. "Abuse of Rights in France and Quebec" (1974), 34 La. L. Rev. 993.
Mayrand, Albert. Dictionnaire des maximes et locutions latines utilisées en droit, 2e éd. Cowansville, Qué.: Éditions Yvon Blais Inc., 1985.
Mazeaud, Henri et Léon, et André Tunc. Traité théorique et pratique de la responsabilité civile délictuelle et contractuelle, t. I, 6e éd. Paris: Éditions Montchrestien, 1965.
Mignault, Pierre Basile. "The Modern Evolution of Civil Responsibility" (1927), 5 Can. Bar Rev. 1.
Nadeau, André et Richard Nadeau. Traité pratique de la responsabilité civile délictuelle. Montréal: Wilson & Lafleur Ltée, 1971.
Payette, Louis. "Prise de possession: demande de paiement et délai raisonnable". In Meredith Memorial Lectures 1981, New Developments in Commercial Lending. Faculty of Law, McGill University, Don Mills, Ont.: Richard De Boo, 1982.
Planiol, Marcel et Georges Ripert. Traité élémentaire de droit civil, t. 2, 10e éd. Paris: L.G.D.J, 1926.
Planiol, Marcel et Georges Ripert. Traité pratique de droit civil français, t. VI, 2e éd. Paris: L.G.D.J., 1952.
Quebec. Civil Code Revision Office. Report on the Québec Civil Code: Commentaries, vol. II, t. 1. Quebec: Éditeur officiel, 1978.
Quebec. Civil Code Revision Office. Report on the Québec Civil Code: Draft Civil Code, vol. I. Quebec: Éditeur officiel, 1978.
Ripert, Georges. "Abus ou relativité des droits" (1929), 49 Rev. crit. lég. et jur. 33.
Ripert, Georges. La règle morale dans les obligations civiles, 4e éd. Paris: L.G.D.J., 1949.
Scassa, Teresa. "The Bank as Creditor" (1988), 3:3 National Creditor/Debtor Rev. 41.
Tancelin, Maurice. Des obligations, contrat et responsabilité, 4e éd. Montréal: Wilson & Lafleur Ltée, 1988.
Tourneau, Philippe le. La reponsabilité civile, 3e éd. Paris: Dalloz, 1982.
Vennat, Chantal. "Commentaire d'arrêt: Banque Nationale du Canada c. Houle" (1988), 22 R.J.T. 387.
Vezian, Jack. La responsabilité du banquier en droit privé français, 3e éd. Paris: Litec, 1983.
Viney, Geneviève. Traité de droit civil, t. IV, Les obligations: la responsabilité ‑‑ conditions. Paris: L.G.D.J., 1982.
APPEAL from a judgment of the Quebec Court of Appeal, [1987] R.J.Q. 1518, 9 Q.A.C. 9, affirming a judgment of the Superior Court[1]. Appeal dismissed.
Serge Guérette and Roger Reinhardt, for the appellant.
Jean‑Yves Fortin, Richard Nadeau and Lise Beaudoin, for the respondents.
The judgment of the Court was delivered by
//L'Heureux-Dubé J.//
L'HEUREUX-DUBÉ J.--The doctrine of abuse of contractual rights has provoked controversy and confusion from its beginnings in Roman law to the present. This case provides the opportunity to deal with this doctrine that has vexed jurists, doctrinal writers, and jurisprudence for centuries, both in French and Quebec civil law.
Facts
The facts of this case are simple, yet a detailed analysis may be necessary given that any decision as to whether contractual rights have been abused must, in the end, rest on the particular facts of each case. For the moment, however, I will recite the facts essential to the understanding of what follows.
For fifty-eight years, the appellant bank had done business with Hervé Houle Limited, a company specializing in pork slaughter and the bringing to market of pork carcasses. The sole shareholders of this company were the four Houle brothers, who are the respondents before this Court. In order to modernize the factory and to allow a new orientation towards the sale of pork in pieces, the company approached the bank for financing in January of 1972.
By October 1973, the company had a rotating line of credit of
$700 000 and a letter of credit of $100 000 to guarantee the purchase of new products at the Ontario Hog Producers Marketing Board. As well, the company owed $90 000 as the balance on some temporary financing that the bank had arranged for the modernization of the company's slaughterhouse. As security for these debts, the appellant bank held the following guarantees:
1. Security under s. 88 (now s. 178) of the Bank Act, R.S.C. 1970, c. B-1;
2. The transfer of the balance of a $90 000 loan between the company and Roy Nat Ltd.; and
3. Letters of surety for $1 000 000 supplied by all the shareholders of the company (the respondents), as well as letters of surety provided by the respondents' mother and by Les Porcheries Houle Ltée, a company whose sole shareholders were the respondents.
In October 1973, the appellant bank, wanting to increase its securities, demanded a $1 000 000 trust deed on all the moveable and immoveable assets of the company. This trust deed was signed on January 29, 1974.
In December 1973, negotiations commenced between the respondents and an interested corporation, Weddel Ltd., for the purpose of the proposed sale of the respondents' shares in the company to Weddel. The respondents hoped to obtain $1 000 000 for their shares. The appellant bank was aware that these negotiations were taking place.
At the end of January 1974, the company asked the bank to increase its rotating line of credit to $900 000. This request was referred to the head office of the bank. An accounting firm was then given a mandate, by the head office, to prepare a report on the financial situation of the company. A representative of the accounting firm came to the company's office to obtain the necessary information. However, on February 19, 1974, only 20 days after the signature of the trust deed, the bank, based on the verbal report of the accounting firm's representative, took the following action: the credit committee at the bank's head office met and decided to recall the loan and realize on the guarantees. Immediately, the branch manager of the bank where the company did business was apprised of the situation and a letter of demand was drafted. It was the first time that the St-Hyacinthe branch had been informed of either the decision of the head office or that there had even been a credit investigation by an accounting firm.
One hour before the putting in default, the accounting firm's representative went to the company and attempted to obtain a further $100 000 investment from the respondent shareholders, promising that the bank would increase the line of credit by $220 000 if this was done. However, the representative also told the respondents that the loan had been recalled and that a notice to that effect would soon be served on them. It was the first time that the respondents and the company became aware that the bank intended to realize its securities. With no agreement reached after an hour, the notice was served. The bank there and then took possession of the company's assets, and liquidated them soon after. The time span from the first notification of the imminent recall of the loan to the liquidation of the assets was three hours.
It is evident that, after the liquidation of the company's assets, the respondents, sole shareholders in the company, were no longer in a strong negotiating position for the sale of their shares in the company to Weddel Ltd. The sale did, however, take place on March 14, 1974, in response to a written offer made by Weddel Ltd. one week after the liquidation of the company's assets. The price obtained by the respondents was $300 000, far less than the respondents' estimated value of their shares at the outset of the negotiations and before the liquidation of the company's assets ($1 000 000).
The respondent shareholders took action against the appellant bank in Quebec Superior Court for $700 000, being the difference between what they alleged was the real value of their shares in the company and the amount they obtained from the sale to Weddel Ltd. They claimed that this loss was solely due to the bank's abusive conduct in the sudden possession and liquidation of the company's assets.
Judgments
Superior Court (Deslongchamps J.)
The trial judge held that the appellant bank was at fault for not having given the company enough time to meet its demand for payment. As he concludes:
[TRANSLATION] Considering . . . the unexpected and sudden nature of the demand for payment, and considering that no time was allowed to respond either to the demand for payment or to [the bank's] investment requirements . . . THE COURT has to come to the conclusion that [the bank] acted wrongfully.
He further held that the appellant's good faith, necessary when executing contractual obligations, seemed doubtful given the facts of the case, and particularly [TRANSLATION] "considering the [appellant's] knowledge of the negotiations for the purchase of the "company's" shares"".
With respect to the right of action of the shareholders, the trial judge concluded that the corporation Hervé Houle Limited was only an intermediary between the appellant and the respondents, even though it was the company which had contracted with the appellant bank. He found the shareholders to be [TRANSLATION] "the people with whom it was really doing business". Although acknowledging the principle of the independent personality of companies established in Salomon v. A. Salomon and Co., [1897] A.C. 22 (H.L.), he noted that the courts have not hesitated to "lift the corporate veil" to prevent injustice. Therefore, the trial judge maintained the action of the respondent shareholders and granted them damages in the amount of $250 000, being the difference between the real value of the shares at the time in his estimation ($550 000) and the price ($300 000) obtained by the respondents for their shares.
Court of Appeal, [1987] R.J.Q. 1518 (Malouf and Nichols JJ.A., and Chevalier J. (ad hoc))
The Court of Appeal also concluded that this was an appropriate case to lift the corporate veil. There existed, in its view, [TRANSLATION] "sufficient positive indications to recognize, in equity, the existence of a legal relationship between the parties" (p. 1523). In the circumstances, given the personal sureties of the respondents as well as the request for additional investment made to the shareholders directly, the Court held that the appellant's business relations were with the shareholders as well as with the company.
The liability of the bank for the abuse of its contractual rights towards the company was found to lie in art. 1053 C.C.L.C., and the court underlined the fact that, as all members of society, a bank must act in a prudent and reasonable manner when dealing with a client. On the issue of reasonable delay, it held that [TRANSLATION] "the creditor must give his debtor a reasonable time before demanding payment and proceeding to realize on his security" (p. 1524), and that, on the facts of this case, the bank did not give its debtor a reasonable delay to allow it to either liquidate some assets to meet the debt, or to obtain other financing for the business.
With respect to the criteria for establishing an abuse of rights, Malouf J.A., after a thorough analysis of the Quebec jurisprudence, expressed the view that the criteria are not restricted to bad faith (at p. 1529):
[TRANSLATION] After considering the scholarly commentary and precedents . . ., I have come to the conclusion that the time is now right to rule that this theory [abuse of contractual rights], which is now part of Quebec law, should no longer be limited in contractual matters only to cases where the creditor reacts maliciously or mischievously or is in bad faith.
Consequently, the appeal was dismissed.
Issues and Arguments
Three issues are raised by this appeal. Firstly, what are the criteria for the abuse of contractual rights? Secondly, what is the foundation of liability for the abuse of contractual rights? Thirdly, assuming that there is an abuse of contractual rights, what are the rights of third parties? If there are any, on what basis are these third party rights grounded?
The appellant and the respondents take opposite views on each of these issues.
The appellant's arguments can be summarized in the four following propositions:
The criteria for the abuse of contractual rights should not be enlarged. In contractual matters, the only situation in which one can abuse contractual rights is where rights are exercised with the intent to harm the other party to the contract.
A contract defines how the parties may act, and thus, the notion of "reasonableness" in exercising rights cannot be imported into contractual relationships. This would involve the court's substitution of its own judgment for that of the parties and would be, in essence, an alteration of the contract, which goes against the principle of autonomy of the will.
Any abuse of a contractual right can only lead to contractual liability. If the doctrine of abuse of contractual rights is to be widened to include the unreasonable use of a contractual right, then the abuse can only be the failure to execute an implicit obligation, which can only engage responsibility between the contracting parties. Consequently, the respondent shareholders, who were not parties to the contract, had no right of action, according to the principle of relativity of contracts of art. 1023 C.C.L.C.
Finally, the corporate veil should not be lifted in favour of the respondent shareholders. The respondents, having opted for the benefits of the corporate form, must be bound by its disadvantages.
The respondents advance the following arguments:
Neither bad faith, nor an intent to harm, is a necessary element of the doctrine of abuse of contractual rights. An abuse of a contractual right occurred in the present case because the appellant bank did not conduct itself with a minimum amount of cooperation and loyalty towards the respondents' company.
There is a right of action between the respondent shareholders and the appellant bank, grounded in art. 1053 C.C.L.C., independent of any contractual relationship with the appellant. This delictual recourse is based on the appellant's alleged contractual fault in the execution of its rights under the contract.
The right of action is independent of the issue of the lifting of the corporate veil. It is a direct right of action of the respondents, as third parties, against the appellant for the breach of a general legal obligation of diligence towards the respondents.
The respondents have established fault, damage, and causality, and thus, as third parties, can exercise a quasi-delictual recourse based on the appellant's contractual fault.
In order to dispose of these issues, an overview of the evolution of the abuse of rights theory as it has developed in civil law is warranted at the outset.
Abuse of Rights
I. Historical Background
Although this historical analysis deals with abuse of both contractual and extra-contractual rights, I want to stress immediately that the present case is concerned only with the abuse of contractual rights inasmuch as such abuse causes damages to third parties, that is persons who are not parties to the alleged contract. (For a clear example of abuse of purely extra-contractual rights, see Boisjoli v. Goebel, [1982] C.S. 1, where an abuse of property rights was alleged because the construction of a sundeck threatened a neighbour's rose garden.) However, given that the abuse of contractual rights is a particular aspect of the general theory of abuse of rights, it is helpful to examine this theory in a broader perspective.
Roman law is often cited as the basis for the proposition that there can be no "abuse" of a "right", since it would not be a right (i.e. absolute entitlement) if it were subject to review for abuse. The Corpus Juris Civilis 11th ed. 1881) sets out several propositions that would lead to such a conclusion. Gaius asserts that no one is considered to commit a fraud who does what he has a right to do -- Nullus videtur dolo facere, qui suo jure utitur (Digest, 50.17.55); while Paulus is of the view that no one commits a wrong against another unless he does something which he has no right to do -- Nemo damnum facit, nisi qui id fecit, quod facere jus non habet (Digest, 50.17.151). However, a closer analysis does demonstrate that the concept of abuse of rights was, to a certain extent, accepted in Roman law. Planiol and Ripert, in their Traité pratique de droit civil français (2nd ed. 1952), t. VI, so find, at No. 573, pp. 798-99:
[TRANSLATION] While there are in the Digest formulas which, taken out of context, are such as to suggest that Roman jurists considered that a person could not be liable for damage caused to another while exercising a right, other texts show that these jurists refused to accept the use of a right so as to cause harm to another.
The well-known maxim Neque malitiis indulgendum est (Digest, 6.1.38) seems to confirm it: malice would never be permitted, even if a right were being exercised. In fact, interestingly, Gaius states that if a debtor is ready to pay and the creditor attacks the sureties instead, for the purpose of injuring his debtor, then the creditor, even though he has a right to claim from the sureties, will be liable on account of such injury (Digest, 47.10.19) As Mazeaud and Tunc, in their Traité théorique et pratique de la responsabilité civile délictuelle et contractuelle (6th ed. 1965), t. I, assert, at No. 555, p. 646:
[TRANSLATION] However, if these formulas [which appear to state that there can be no abuse of rights] are placed in their context, if one refers to Roman law as a whole, it can be seen that the idea of an abuse of right was recognized.
(See also Planiol and Ripert, op. cit., at No. 573, notes 1 and 2, p. 799; and Ch. Appleton, "Les exercices pratiques dans l'enseignement du droit romain et plan d'un cours sur l'abus des droits" (1924), 78 Revue internationale de l'enseignement 142, at p. 156.) This theory, like others derived from Roman law, made its way into French law early on.
A) Acceptance of the Abuse of Rights Doctrine
1. France
Ancient French law accepted the concept of abuse of rights (Mazeaud and Tunc, op. cit., at No. 556, p. 646). Voltaire, paraphrasing the Latin maxim Summum jus summa injuria, is quoted as saying (Josserand, De l'esprit des droits et de leur relativité (2nd ed. 1939), at p. 5):
[TRANSLATION] A right taken too far becomes an injustice.
Mazeaud and Tunc, op. cit., describe the situation in early French law as follows, at No. 556, p. 646:
[TRANSLATION] With the rebirth of Roman law, these ideas passed into our old law. The Parlements did not hesitate to punish any malicious abuse: thus on February 1, 1577 the Parlement of Aix condemned a wool carder who was singing simply in order to annoy his neighbour, a lawyer.
Domat would allow an action for abuse of rights [TRANSLATION] "as a result of injustice and chicanery by poor litigants" (Oeuvres de J. Domat (1823), vol. 4, by M. Carré, at pp. 131-32), and would also allow it with regard to property rights if exercised with an intent to harm (p. 134).
The French Civil Code did not contain any specific provision relating to the abuse of rights. However, courts soon began to apply the theory. Mazeaud and Tunc, op. cit., at No. 557, p. 647, discuss the famous decision of the Court of Colmar, May 2, 1855, D.P. 1856.2.9 (Doerr v. Keller), condemning a property owner to damages for building a false chimney with the sole purpose of [TRANSLATION] "removing almost all the daylight left in his neighbour's window". Marty and Raynaud, Droit civil: Les obligations (2nd ed. 1988), t. I, at No. 477, p. 538, comment:
[TRANSLATION] This line of authority has developed widely not only for the right of ownership but also with respect to many other rights, such as the right to bring an action or to defend an action at law and to use execution proceedings.
The evolution and application of the abuse of rights doctrine grew quickly from the beginning of the 20th century. It then became an accepted recourse in French law. The extent of that acceptance was perhaps best summarized by J. Charmont, "L'abus du droit" (1902), 1 Rev. trim. dr. civ. 113, at p. 118:
[TRANSLATION] What we cannot help being struck by in considering this question of abuse of rights is the increasing importance it tends to have in lawyers' concerns -- and the fact that it has had this position for only a short time. Ten or fifteen years ago it was barely mentioned: since then, cases of its use have multiplied; in strikes, labour unions, dismissal in contracts of employment, the right of criticism in newspapers. . . .
That application of the doctrine by the courts translated eventually into legislation as regards dilatory proceedings, the unreasonable refusal by a landlord to rent his premises, and an express limitation on a husband's right to oppose the exercise of a separate profession by his wife since it had to be justified by the family's best interests (Mazeaud and Tunc, op. cit., at No. 558, pp. 648-49).
Consequently, by the early part of the 20th century, the doctrine of abuse of rights had acquired its "letters patent of nobility" in French law. This trend appears even stronger today. One need only note the words of the
eminent French jurist, Gérard Cornu, in Droit civil (Introduction: Les personnes -- Les biens) (4th ed. 1990), where he states, at No. 147, p. 57:
[TRANSLATION] The theory of abuse of rights, of Praetorian and doctrinal origin and expressly set out in legislation in various specific areas (such as a wrongful breach by an employer of a contract of employment), is now an integral part of French positive law.
Given the established role of the abuse of rights doctrine in France, it is now appropriate to examine its evolution in Quebec.
2. Quebec
Mayrand (formerly of the Quebec Court of Appeal), one of Quebec's leading jurists, perhaps best summarized the evolution of the abuse of rights doctrine in Quebec when he noted, in "Abuse of Rights in France and Quebec" (1974), 34 La. L. Rev. 993, at p. 994:
The evolution and the spread of the theory of abuse of right has followed a similar pattern in France and in the Province of Quebec.
David Angus, in "Abuse of Rights in Contractual Matters in the Province of Quebec" (1962), 8 McGill L.J. 150, also discusses the acceptance of the abuse of rights theory at p. 152:
From time to time after 1895, various French jurists came to Quebec and spoke ardently in favor of the abuse of rights theory. As a result, Quebec writers began to discuss the theory, and indications that the absolutist tradition might break down appeared in several judgements. . . . This trend towards greater equity in the law led finally, in 1944, to express acceptance by our courts of abuse of rights in extra-contractual matters.
The first application of the doctrine (as referred to by Angus) seems to have been in regard to property law, with the decision of Brodeur v. Choinière, [1945] C.S. 334, where a property owner was found to have abused his right of ownership by building a [TRANSLATION] "fence 47 feet long and about 8 1/2 feet high", described by Duranleau J. at p. 335 as:
[TRANSLATION]. . . of rough wood, and of a frightful appearance, the only effect of which was to deprive the plaintiff on this side of air, sun and light and depreciate his site . . .
The decision of Air-Rimouski Ltée v. Gagnon, [1952] C.S. 149, also applied the doctrine to property law. It was held that a former director of an airport had abused his right of ownership when he placed poles on his property with the intention to disrupt operations at the neighbouring airport. (See also Blais v. Giroux, [1958] C.S. 569, and Laperrière v. Lemieux, [1958] R.L. 228 (Sup. Ct.).)
The established nature of the doctrine in present Quebec law is demonstrated by its incorporation in An Act to add the reformed law of persons, successions and property to the Civil Code of Québec, S.Q. 1987, ch. 18, assented to April 15, 1987, not in effect except for ss. 1338 to 1411, for specific purposes (S.Q. 1989, ch. 54, s. 200). Article 7 of Book One, Title One, proposes:
7. No right may be exercised with the intent of injuring another or, without a serious and legitimate interest, in a way that is to his prejudice.
This article stems from the recommendations of the Civil Code Revision Office where the suggested text, in the Report on the Québec Civil Code: Draft Civil Code (1978), vol. I, reads (at p. 4):
9 No person may exercise a right with the intent of injuring another, or in any way that may cause damage out of proportion to the benefit he may derive.
The comments of the Office under that proposed article, in the Report on the Québec Civil Code: Commentaries (1978), vol. II, tome 1, refer to the acceptance of the doctrine in our law (at p. 24):
9
This article expressly confirms the theory of violation of rights laid down in the maxim sic utere tuo ut alienum non laedas, which is now recognized both in doctrine and in jurisprudence. It is found in several recent Codes. [References omitted.]
The theory of abuse of rights also gained doctrinal and jurisprudential acceptance in administrative law (see Mayrand, op. cit., at pp. 329-30). As well, Professor Jean-Louis Baudouin (now of the Quebec Court of Appeal), in La responsabilité civile délictuelle (3rd ed. 1990), adds, at Nos. 150 to 155, pp. 85-89, that the right to take judicial proceedings can be subject to abuse.
Given this brief analysis of the abuse of rights doctrine in a general context, I will now examine its historical development with particular regard to contractual rights.
B) Abuse of Contractual Rights
1. France
Early on, doctrinal writers analyzed the doctrine of abuse of contractual rights. Josserand, op. cit., at pp. 124-213, devotes an entire chapter of his treatise to contracts, discussing in particular [TRANSLATION] "abuse committed in the dealings between contracting parties" at pp. 143-44.
French legislation also started to introduce the notion of abuse of rights, most particularly in the contractual context. Mazeaud and Tunc, op. cit., at No. 558, p. 648, mention the modifications introduced to the French Code du travail by the Act of July 19, 1928. After stating that [TRANSLATION] "unilateral rescission of the contract may give rise to damages", the Code stipulates that:
[TRANSLATION] The damages which may be awarded for failure to give notice of dismissal are not to be confused with those which may result from the wrongful unilateral rescission of the contract to determine whether there has been abuse, the court may investigate the circumstances of the breach. The judgment will in any case have to expressly mention the ground alleged by the party who broke the contract.
The same authors discuss the abuse of contractual rights in French case law at No. 583, p. 662:
[TRANSLATION] The question [acceptance of the abuse of rights doctrine] is not even discussed where the exercise of certain rights is involved, in particular those deriving from a contract.
The courts have used the abuse of rights theory to control the exercise of contractual rights.
They then analyze the French jurisprudence at Nos. 584 to 587, pp. 662-70, dealing with such diverse contractual relationships as contracts of service for indeterminate length, mandate, sale, lease, partnership, unions and associations, and contracts regarding film production and editing.
Similarly, Marty and Raynaud, op. cit., recognize the application of the abuse of rights doctrine to contractual relationships in current French law at No. 479, p. 544:
[TRANSLATION] Relationships arising out of contracts and customary contractual rights also entail important applications of the concept of abuse of rights. [Emphasis in original.]
(See also Jacques Ghestin and Gilles Goubeaux, in Traité de droit civil, vol. I, Introduction générale (3rd ed. 1990), at Nos. 727 to 730, pp. 709-12.)
It appears from this overview that the doctrine of abuse of contractual rights is alive and undisputed in France. The position in Quebec now remains to be examined.
2. Quebec
Doctrinal writers in Quebec have often called for the application of the abuse of rights doctrine to contractual relationships. As stated by Professor Paul-André Crépeau, in "Le contenu obligationnel d'un contrat" (1965), 43 Can. Bar Rev. 1, at p. 26:
[TRANSLATION] Essentially it must be recognized that, whatever its origin, a right can never be absolute. Every right has a particular purpose: it is conferred to meet social imperatives or economic needs, not to assuage instincts of vengeance or spitefulness. The exercise of contractual rights has to be seen from this perspective. A legal order, which is a pale reflection of the moral order, unavoidably must accommodate egoism; in no case should it tolerate malice.
Angus, op. cit., shares the same opinion, at p. 157:
If one looks at the true spirit of our civil law, it is clear that contractual rights cannot be totally absolute. Contracting parties do not foresee all eventualities expressly and so their formal accord is limited to the essential.
Despite its acceptance in France and in Quebec doctrine, courts in Quebec were reluctant to recognize and apply this theory. In fact, early Quebec jurisprudence was even hostile to the idea that contractual rights could be abused. In Quaker Oats Co. of Canada v. Côté, [1949] Que. K.B. 389, both Galipeault and Marchand JJ.A. held that the doctrine of abuse of rights had very limited application in Quebec law. Citing Mignault, Galipeault J.A. states, at p. 396:
[TRANSLATION] As has been argued, it is only where there has been a wrongful use of real rights that our courts have found that a source of civil liability exists; they have never gone further than that.
A similar approach was taken in St-Laurent v. Lapointe, [1950] Que. K.B. 229, where, in analyzing the possible abuse by an employer in exercising his right to terminate unilaterally a contract of service, St-Jacques J.A. held, at pp. 233-34:
[TRANSLATION] Here we are dealing with a formal stipulation that either of the two parties may terminate the contract of employment, which was not made for a specific period. This stipulation is lawful; there is nothing in it contrary to public order or good morals and it is binding on both parties. If thus follows that, in dismissing its employees, defendant simply gave effect to the agreement as made, and the dismissal which plaintiffs regard as harsh cannot be a basis for the action for damages allowed by the Superior Court.
Nonetheless, and this the appellant does not contest, the theory of abuse of contractual rights slowly made inroads into Quebec jurisprudence. The case of Fiorito v. Contingency Insurance Co., [1971] C.S. 1, marked the turning point. Monet J. (now of the Quebec Court of Appeal) undertook a thorough analysis of the doctrine and jurisprudence and rejected the defendant's motion to dismiss the action. The motion was based on the argument that the plaintiff had no right of action as a result of the alleged abuse by the defendant of his contractual rights. At page 4, he says:
[TRANSLATION] While I have the greatest respect for the contrary view, I cannot accept the general proposition that the scope of the theory of abuse of rights does not include the law of contract in Quebec law.
It is at this juncture that this recourse became more widely used. A number of cases which followed allowed actions based on the abuse of contractual rights, as appears from decisions such as Noivo Automobile Inc. v. Mazda Motors Canada Ltd., [1974] C.S. 385 (see p. 387), and Latreille Automobile Ltée v. Volvo (Canada) Ltd., [1978] C.S. 191 (see p. 192). In the past decade, the acceptance of the doctrine has become complete, leading to my statement in Godbout v. Provi-Soir Inc., [1986] R.L. 212 (C.A.), at p. 228:
[TRANSLATION] I think it can be assumed that the theory of abuse of rights in contractual matters has now been admitted into our law. . . .
This was also the conclusion reached by Malouf J.A. in the present case.
The doctrine of abuse of contractual rights is consistent with the fundamental principles of Quebec civil law, where good faith and reasonableness permeate the theories of rights and obligations, contractual (art. 1024 C.C.L.C.) as well as extra-contractual. It is also consistent with the general philosophy that the debtor is to be favoured in contractual relationships (for example, see arts. 1070, 1141, and 1152 C.C.L.C.).
But more fundamentally, the doctrine of abuse of contractual rights today serves the important social as well as economic function of a necessary control over the exercise of contractual rights. While the doctrine may represent a departure from the absolutist approach of previous decades, consecrated in the well-known maxim "la volonté des parties fait loi" (the intent of the parties is the governing factor), it inserts itself into today's trend towards a just and fair approach to rights and obligations (by way of example of this trend: consumer protection legislation, family law as regards the disposition of family assets upon divorce and death, the notion of "lesion between persons of full age" in the proposed reforms to the Quebec Civil Code, etc.). Such uncertainty which the doctrine of abuse of rights may bring to contractual relationships, besides being worth that price, may be counterbalanced by the presumption of good faith which remains basic in contractual relationships. Courts have so far demonstrated, in applying the doctrine, that they will only sanction marked departure from the general norm of behaviour acceptable in our society. As Professor Pierre-Gabriel Jobin has noted, in a recent conference given before the Quebec Bar Association, "L'abus de droit contractuel depuis 1980", in Congrès annuel du Barreau du Québec (1990), 127, at p. 132:
[TRANSLATION] In many respects, abuse of rights is to contractual relationships what fault under art. 1053 C.C.[L.C.] is to extra‑contractual relationships.
If this doctrine were not already part of Quebec civil law, there should be no hesitation to adopt it.
Despite this acceptance, there are still two major areas of controversy with respect to the abuse of a contractual right. While they are at the heart of the present case, they also form the cornerstone of the confusion which exists to this day in French and Quebec doctrine and jurisprudence. The first area of dispute concerns the criteria for the abuse of a contractual right: is it exclusively based on bad faith or malice, or can it also be based on an unreasonable use of a contractual right? The second controversy surrounds the nature of the liability: is an abuse of a contractual right grounded on contract or on delict? I will address these two issues in turn.
II. The Criteria for Abuse of Contractual Rights
There are three leading theories discussing the standard to be applied when determining whether there has been an abuse of a contractual right. All have both doctrinal and jurisprudential support. I propose to analyze the theoretical underpinnings of each of these theses as advanced by their respective advocates and to assess the support each has attained in Quebec jurisprudence.
Before entering into this discussion, however, it may be helpful to briefly comment on the distinction between "discretionary" and "controlled" rights.
A) Controlled and Discretionary Rights
"Discretionary" rights do not easily lend themselves to abuse. As Cornu, op. cit., states, at No. 148, p. 58:
[TRANSLATION] In our contemporary positive law, the exercise of rights is thus subject to review by the courts in cases of abuse. In principle, this review extends to subjective rights as a whole. With some exceptions, subjective rights are not discretionary but reviewable.
Baudouin, op. cit., agrees, at No. 125, p. 72:
[TRANSLATION] . . . there can also be no question of abuse of rights in the case, increasingly rare these days, of the exercise of a purely discretionary right.
However, since "discretionary" rights are extremely rare, I would hesitate to even provide an example of a right which is at the absolute discretion of its holder and cannot be subject to abuse. This being said, the present case does not raise this distinction, as contractual rights are "controlled" from the outset, by the parties themselves. They cannot be exercised at the "discretion" of the holder, since the contract defines the obligations of the parties. Thus, the following discussion will apply only to controlled rights.
I would also note that the following theories apply equally to the abuse of contractual and extra-contractual rights. They deal with the general issue of what type of use constitutes an abuse of rights. However, given that this case is concerned solely with the abuse of contractual rights in respect of third parties suffering injury, my analysis will focus on their application to the abuse of contractual rights.
B) Doctrine
1. The "Individualist" Theory
Based on the historical position, as earlier discussed, this theory holds, at its most stringent, that there can be no such concept as "abuse of rights". Its leading proponents are Planiol and Ripert, who, in their Traité élémentaire de droit civil (10th ed. 1926), t. 2, assert, at No. 871, p. 298:
[TRANSLATION] [The] formula "abusive use of rights" is playing with words: if I use my right, my act is legitimate, and when it is not legitimate, I am exceeding my right and acting wrongfully. . . . [A]right ceases where an abuse begins, and there cannot be an "abusive use" of any right for the irrefutable reason that one and the same act cannot be both in accordance with the right and contrary to it. [Emphasis in original.]
(See also Ripert, La règle morale dans les obligations civiles (4th ed. 1949), at Nos. 90 et seq., pp. 159 et seq.; and Ripert, "Abus ou relativité des droits" (1929), 49 Rev. crit. lég. et jur. 33.) In Quebec, the notion that individuals have the unfettered exercise of any right seems to have been suggested by Mignault in "The Modern Evolution of Civil Responsibility" (1927), 5 Can. Bar Rev. 1. At page 12, he comments:
Courts would embark on a very perilous and questionable course should they enter into an inquiry as to motives, when the act which has caused injury is permitted by law.
The strictness of this theory has been tempered somewhat by allowing recourse based on an abuse of rights when there is evidence of malice or lack of good faith (Planiol and Ripert, Traité pratique de droit civil français, op. cit., at No. 574, pp. 800-801). Nonetheless, even with a bad faith exception, this theory is absolute in nature, allowing only for the very rare instances where absence of good faith or malice can be proven.
Dealing with the abuse of a contractual right, Mayrand, op. cit., suggests that this theory negates the autonomy of the will of the parties and the freedom to contract, at p. 331:
[TRANSLATION] Does the theory of abuse of rights apply to contracts? At first sight, the principle of freedom of contract and free will is at variance with application of the abuse of rights theory to contracts.
This individualist theory is attributed, by Josserand, op. cit., at p. 6, to the ideology surrounding:
[TRANSLATION] . . . the "human rights" in the famous Declaration of 1789, "natural, inalienable and sacred rights", "natural and indefeasible rights", "inviolable" rights to which public authority is subject, not excepting the legislature and the constituent assembly itself. [Emphasis in original.]
Although there is no doubt that bad faith and the malicious exercise of a contractual right can give rise to liability based on abuse of rights, the question is whether other criteria can also ground such liability. As noted by Marty and Raynaud, op. cit., at No. 478, p. 540, the limitation of the doctrine of abuse of rights to only malice or bad faith is [TRANSLATION] "narrow and individualistic" (see also Ghestin and Goubeaux, op. cit., at No. 716, p. 696). For that reason perhaps, other criteria have been proposed.
2. The "Social Function" Theory
Josserand is the principal supporter of this theory. He advances the proposition that the criteria for the abuse of rights should be based on a social view of the law. Whenever a right is used, it must be examined against the social function which the right is meant to serve. If the right is used contrary to this social function, then there has been an abuse of the right, regardless of the intent of the user of the right, and no matter whether the user acted reasonably or not. The goal of this theory is set out by Josserand in his treatise, op. cit., at p. 11, where he postulates:
[TRANSLATION]. . . the goal and purpose of the theory of abuse of rights . . . is to ensure that the spirit of the rights prevails, and so to guarantee justice not only in statutory instruments and abstract formulas, this being relatively easy, but, what is a more substantial ideal, in their very application and even in daily life. [Emphasis in original.]
This theory has been further developed by the same author in De l'abus des droits (1905); and "À propos de la relativité des droits" (1929), 49 Rev. crit. lég. et jur. 277.
Despite the lofty goals of Josserand's theory, it is met with several criticisms. According to some critics, it ignores the distinction between the judiciary and the legislature. It is for the judge to apply the laws created by the legislative branch, and for the latter to determine which acts are "anti-social", whether in private or criminal law. In Quebec, the legislature has already enacted such provisions as art. 1040a C.C.L.C., which requires a mandatory 60-day notice before a creditor can exercise a possessory recourse. Thus, the legislature has deemed that the execution of a possessory recourse by a creditor without reasonable notice is "anti-social".
Baudouin, op. cit., discusses the division of powers in relation to Josserand's theory at No. 137, pp. 77-78:
[TRANSLATION] First, in view of the traditional division of legislative, executive and judicial powers, they [the Quebec courts] feel that it is not their duty to take the legislature's place and characterize as anti‑social, where there is absence of fault in the classic sense, behaviour relating to the exercise of a right. On the other hand, increasingly in recent times the legislature has intervened directly to limit the absolutism and egocentrism of the exercise of individual rights, by creating specific provisions the breach of which is a breach of a legal duty, and at the same time characterizing as wrongful behaviour which, in the absence of such a provision, would perhaps have fallen under the doctrine of abuse of rights.
Ripert notes in "Abus ou relativité des droits", op. cit., at p. 44, that this position also creates a great deal of uncertainty in its application, given its emphasis on the social function of a contractual right:
[TRANSLATION] All the same, a vague sociological formula is not enough for the legal mind.
Mazeaud and Tunc, op. cit., at No. 573, p. 658, question how each judge may be personally influenced as to the social function of a right by the different philosophers, economists, and political writers of a particular era, and accordingly propose a different approach.
3. The "Reasonable Exercise of Rights" Theory
This theory holds that an abuse of rights occurs when the right is not exercised in a reasonable manner or in a manner consistent with the conduct of a prudent and diligent individual. This makes it unnecessary either to determine whether the user of the right acts in good faith or to examine the social function of the right in question. Ghestin and Goubeaux, op. cit., at No. 711, p. 692, summarize the position of the main proponents of that theory, the Mazeaud brothers (Mazeaud and Tunc, op. cit., at Nos. 564 et seq., pp. 651 et seq.) as follows:
[TRANSLATION] Anyone who, claiming to exercise the prerogatives conferred on him by law, does not act as would do a normally prudent and reasonable individual commits a wrongful act that will be characterized as abuse. This wrongful act may be intentional or otherwise. What matters is the comparison, in abstract terms, with the ideal behaviour of a person exercising his right in a normal manner.
This approach rejoins that of Marty and Raynaud, op. cit., at No. 478, p. 542; Lalou, Traité pratique de la responsabilité civile (6th ed. 1962), at Nos. 867 et seq., pp. 509 et seq.; Philippe le Tourneau, La responsabilité civile (3rd ed. 1982), at No. 1944, p. 624.
The concept of a "bon père de famille" or the reasonable and prudent person is well known to Quebec civil law. Derived from the pater familias notion in Roman law, this standard, most often applied towards delictual liability, requires that an individual act in a manner which is [TRANSLATION] "ordinarily prudent and diligent" (see Baudouin, op. cit., at No. 120, p. 71). Thus, it is not surprising that the standard of "reasonableness" has made inroads into the doctrine of abuse of rights.
In Quebec, the theory of the "reasonable" exercise of rights seems to have gained acceptance as a standard for the abuse of extra-contractual rights. (See Baudouin, op. cit., at No. 137, pp. 77-78, as well as the authorities he cites at note 101.) It is only recently however that such criteria of "reasonableness" has been applied to the abuse of contractual rights. Professor Jobin, op. cit., notes, at p. 128:
[TRANSLATION] Malice is far from being the only criterion of abuse of rights in contractual matters. Since 1980, the courts have indicated a willingness to admit new criteria, which has had the effect of extending the theory of abuse of rights considerably.
I will now turn to the application of these different theories by the courts.
C) Jurisprudence
I do not find it necessary here to delve into French jurisprudence, given the foregoing analysis. Leading French writers are divided on the question and so are the courts. (See Ghestin and Goubeaux, op. cit., at Nos. 715 and 716, pp. 696-97, for "malice" cases, and Mazeaud and Tunc, op. cit., at Nos. 584 to 587-3, pp. 662-70, for cases where malice was not the sole criteria.)
Although there is jurisprudential support in Quebec for malice or bad faith as the exclusive standard on which to ground an abuse of a contractual right, there is also support for a less stringent test. While the case law may appear to be contradictory, a careful examination shows that both malice or bad faith and reasonableness can be found to give rise to legal recourse based on an abuse of a contractual right.
Several cases were cited by the appellant in support of the malice/bad faith argument, such as Equipements Select Inc. v. Banque Nationale du Canada, Sup. Ct. Québec, No. 200-05-003613-820, November 18, 1986 (summarized in [1987] R.R.A. 99), where the trial judge, when dealing with a bank's seizure of its debtor's assets, states, at p. 12:
[TRANSLATION]. . . in contract law abuse of rights is a basis for damages only if it is proven that the person causing the damage intended to injure another.
However, when concluding that there was no bad faith on the part of the bank, the court found that the bank disposed of the assets [TRANSLATION] "properly" and that there was [TRANSLATION] "no fault on the part of the defendants [the bank and others]" (Equipements Select, supra, at pp. 13-14). Thus, there was no need to conclude that proof of bad faith was necessary given that the analysis focussed on whether the bank acted reasonably in exercising its contractual rights.
In White v. Banque Nationale du Canada, Sup. Ct. Québec, No. 200-05-003970-832, March 5, 1986 (summarized in [1986] R.R.A. 207), although the trial judge held that the evidence of an intent to harm was necessary in order to find an abuse of contractual rights, he specifically noted, at p. 20, that:
[TRANSLATION] In reality, the White company had three months to get its financial affairs in order and worked actively toward that end with the agents of defendant [the bank] but without success.
(See also Chantal Vennat, "Commentaire d'arrêt: Banque Nationale du Canada c. Houle" (1988), 22 R.J.T. 387, at p. 410.)
In Miville v. Québec (Ville de), Prov. Ct. Québec, No. 200-02-001769-811, May 6, 1982 (summarized in J.E. 82-609), at p. 6, the court's requirement of proof of bad faith is followed by an assessment of the "reasonableness" of the defendant city's actions:
[TRANSLATION] That [the actions of the defendant] is not in our opinion an abuse of rights because no evidence was presented of any bad faith on the part of the defendant. The latter enforced its health regulation, and if the plaintiff did not want to spend $4,000 to comply with the regulations, it had no option but to give up the premises by giving thirty days' notice as well.
Perhaps the restrictive approach, which, in these cases at least, does not seem to correspond with findings of fact, can be attributed to the early Quebec jurisprudence, where courts were very reluctant to allow recourse grounded on the abuse of contractual rights. Nonetheless, a thorough analysis of the facts of those cases indicates that reasonableness was a determinative factor of "bad faith" or "malice". (For other cases which favour malice as the exclusive criteria, see the jurisprudence cited by Jobin, op. cit., at note 3, p. 128.)
Quebec courts have however begun explicitly to move away from the malice/bad faith criteria as the sole basis to ground liability arising out of an abuse of contractual rights. By way of example, in Langlois v. Farr Inc., [1988] R.J.Q. 2682, a unanimous bench ruled that proof of malice was not essential. Gendreau J.A., following the Court of Appeal's decision in the present case, at p. 2689, remarks:
[TRANSLATION] It therefore seems to me that it is this rule [that proof of bad faith is not necessary] which now prevails and must be applied to the case at bar.
In that case, there was no evidence of bad faith on the part of the employer in his decision to exercise his contractual right to dismiss his employee without notice, and the judgment is based on the "reasonableness" of the employer's actions. This reasoning was also followed in Des Cheneaux v. Morin Inc. (1987), 20 Q.A.C. 157, albeit implicitly, since the unanimous Bench did not examine the issue of the employer's bad faith when concluding that there was an abuse of the employer's contractual right to dismiss without notice (see p. 159). One should also note an implicit acceptance of the "reasonableness" test in Caisse populaire de Baie St-Paul v. Simard, Sup. Ct. Saguenay, No. 240-05-000043-845, September 9, 1985 (summarized in J.E. 85-943), where the court again examined the actions of a bank concerning its failure to give notice before realizing on its securities, without questioning the "moral" issue of bad faith. (See also Stewart v. Standard Broadcasting Corp., J.E. 90-75 (Sup. Ct.), and Jobin, op. cit., at note 8, p. 129.)
A few cases have concluded that the use of a contract for purposes other than those envisaged by the contracting parties constitutes an abuse of contractual rights. Such was the situation in Modernfold (Bas St-Laurent) Ltée v. New Castle Products (Canada) Ltd., [1973] C.S. 220, in which the court found an abuse of contractual rights when the manufacturer ended his exclusive distribution contract with his agent for the sole purpose of earning the profits for himself. (See also the cases referred to by Jobin, op. cit., at note 15, p. 131.)
In accordance with the evolution of the Quebec doctrine and jurisprudence on this issue, the time has come to assert that malice or the absence of good faith should no longer be the exclusive criteria to assess whether a contractual right has been abused. A review of both the theoretical underpinnings of recent trends in civil liability and the current state of Quebec doctrine and jurisprudence leads to the inevitable conclusion that there can no longer be a debate in Quebec law that the less stringent standard of "the reasonable exercise" of a right, the conduct of the prudent and reasonable individual, as opposed to the more stringent test of malice and the absence of good faith, can ground liability resulting from an abuse of contractual rights.
This applicable standard of "reasonableness" is compatible with sources of liability in civil law such as art. 1053 C.C.L.C. Moreover, every contract contains an implicit obligation on the parties to the contract to exercise their rights in accordance with the rules of equity and fair play (art. 1024 C.C.L.C.). Consequently, any act that breaches this implicit obligation would be a source of liability.
The question is then: what regime of liability does the abuse of contractual rights give rise to: contractual or delictual? This issue must now be more fully examined.
III. Foundation of Liability for Abuse of Contractual Rights
Before delving into the controversies in both doctrine and jurisprudence concerning the basis of liability when a contractual right is abused, I believe that it is appropriate to make a few general comments about contractual and delictual liability.
A) General Comments
1. The Relativity of Contracts
The principle of the relativity of contracts which often finds expression in the famous maxim Res inter alios acta, aliis neque nocere, neque prodesse potest (see Mayrand, Dictionnaire des maximes et locutions latines utilisées en droit (2nd ed. 1985), at p. 246) has been codified in art. 1023 C.C.L.C.:
1023. Contracts have effect only between the contracting parties; they cannot affect third persons, except in the cases provided in the articles of the fifth section of this chapter [stipulations for the benefit of third parties].
Professor Maurice Tancelin, in Des obligations, contrat et responsabilité (4th ed. 1988), at No. 279, p. 164, comments on this provision:
[TRANSLATION] The contract has the effects indicated by art. 1022 C.C.[L.C.] only between the contracting parties, in accordance with art. 1023 C.C.[L.C.], which adds that it has no effect on third parties. This second assertion is immediately corrected by reference to arts. 1028 and 1031 C.C.[L.C.], which set out the rules concerning stipulations for a third party.
Similarly, Jean-Louis Baudouin, in Les obligations (3rd ed. 1989), at No. 380, p. 252:
[TRANSLATION] [A] person who has not performed this act of contractual intent can neither claim to be the creditor of an obligation which has not been undertaken toward him nor be required to perform an obligation arising out of a contract to which he was not a party.
It follows logically that if the abuse of a contractual right is to give rise to contractual liability, then only the parties to the contract may claim for the breach of that contractual obligation. Third parties are excluded from any such claim.
2. The Implicit Contractual Obligation of Good Faith
Contractual obligations are not limited to those expressly mentioned in a contract, as enunciated in art. 1024 C.C.L.C.:
1024. The obligation of a contract extends not only to what is expressed in it, but also to all the consequences which, by equity, usage or law, are incident to the contract, according to its nature.
The extent of those implicit obligations has been assessed in both doctrine and jurisprudence. Good faith has been regarded as one such implicit, necessary obligation in all contractual relationships.
Even in Roman law, an implicit obligation to execute contracts in good faith was found to exist. Gaius notes that Item in his contractibus alter alteri obligatur de eo quod alterum alteri ex bono et {ae}quo pr{ae}stare oportet (Digest, 44.7.2, {ss}. 3). Any doubt as to the acceptance of this doctrine in Quebec civil law was erased by the decision of Beetz J. in National Bank of Canada v. Soucisse, [1981] 2 S.C.R. 339, where, citing Domat, he states, at pp. 356-57:
[TRANSLATION] "There is no species of agreement in which it is not implied that one party owes good faith to the other party, with all the consequences which equity may demand, in the manner of stating the agreement as well as in the performance of what is agreed upon and all that follows therefrom". This is in keeping with art. 1024 of the Civil Code. . . . [Emphasis added.]
Recently, Gonthier J. applied this principle in Bank of Montreal v. Kuet Leong Ng, [1989] 2 S.C.R. 429, and, at p. 436, noted the existence of:
. . . [the] policy of the civil law for the protection of honesty and good faith in the execution of contracts.
In Godbout, supra, at pp. 228-29, I was equally of the view that there were implicit contractual obligations.
Professor Crépeau, op. cit., at p. 26, had previously expressed a similar view:
[TRANSLATION] We therefore believe, based on art. 1024 of the Civil Code and the old law, that any contract must include an implied duty that the parties will abide by the requirements of good faith in carrying out its provisions.
And with particular reference to banking contracts, Professor Nicole L'Heureux, in Le droit bancaire (1988), adds, at para. 1.21, pp. 60-61:
[TRANSLATION] It is recognized in civil law that a banking contract, like any other contract, must be concluded and performed in good faith and that art. 1024 C.C.[L.C.] is inherent in a banking contract.
The content of this good faith obligation was discussed by Jean-Louis Baudouin, in his commentary on Fiorito, "Contrat -- Application de la théorie de l'abus de droit en matières contractuelles" (1971), 31 R. du B. 335, at p. 335:
[TRANSLATION] A contracting party must perform his obligation or exercise the rights conferred on him by the agreement in a manner consistent with justice, equity and fair play, and not simply so as to injure the other party.
As well, Professor Jobin, op. cit., adds at p. 135:
[TRANSLATION] The courts quite properly wish to avoid one party using a right conferred on him by the contract maliciously against the other party, negligently or for a purpose completely unrelated to that which the legislature or the parties had in mind in creating that right.
The Act to add the reformed law of persons, successions and property to the Civil Code of Québec, art. 6 proposes to codify the principle of good faith:
6. Every person shall exercise his civil rights in good faith. Good faith is always presumed.
This article flows from the suggested text of the Civil Code Revision Office, in its Report on the Québec Civil Code: Draft Civil Code, op. cit., at p. 4, where art. 8 reads as follows:
8 Every person must exercise his rights and perform his duties in accordance with the requirements of good faith.
The comments of the Office in the Report on the Québec Civil Code: Commentaries, op. cit., at p. 24, are also noteworthy:
8
This article is new, but is based on long standing tradition.
Article 1134 of the French Civil Code (corresponding to Article 1022 C.C.[L.C.]) has a similar provision on contractual matters: "Elles (les conventions légalement formées) doivent être exécutées de bonne foi."
The report of the 1866 codifiers gives no explanation why they did not follow the French model in this respect. [References omitted.]
Therefore, at a general level, it seems indisputable that an implicit obligation of good faith exists in every contract in Quebec civil law. This obligation is derived from a long civil law tradition formulated in art. 1024 C.C.L.C.; it mandates that rights be exercised in a spirit of fair play.
B) Analysis
Given these general comments, I will now turn to the main question: what is the basis of liability for the abuse of a contractual right? Is it the contractual ground of art. 1024 and 1065 C.C.L.C. or the quasi-delictual ground of art. 1053 C.C.L.C.? There again, one finds a doctrinal controversy in civil law, which I will briefly address at the outset.
1. Doctrine
Mazeaud and Tunc, op. cit., at No. 592, p. 682, appear to be of the view that an abuse of a contractual right is grounded in delictual liability:
[TRANSLATION] Abuse of a right is a fault committed in exercising that right. This fault may consist of an intention to injure, in which case it is delictual; but it may also result simply from carelessness or negligence, in which case it is quasi-delictual.
They note at No. 559, p. 649:
[TRANSLATION] What then is the nature of the liability resulting from the exercise of a contractual right? Is it delictual liability or contractual liability?
The courts generally apply here the rules of delictual liability. . . .
A quick review of the situations in which the problem of abuse has arisen in contractual terms indicates that these precedents should be upheld.
Professor Geneviève Viney, in Traité de droit civil, vol. IV, Les obligations: la responsabilité -- conditions (1982), at No. 195, p. 228, assesses the French jurisprudence in this way:
[TRANSLATION] The courts have also taken the same position in another case where the link between the act alleged against the defendant and the contract is even closer: this is the case of abuse of a right derived from a contract or even of simple fault in exercising such a right. The Chambre social of the Court of Cassation has had occasion to state that "abuse of right, whether committed within or without the limits of a contract, in all cases imposes delictual or quasi‑delictual liability on its perpetrator".
It would appear from these extracts that both French doctrine and jurisprudence adopt delictual liability as a foundation for abuse of contractual rights. There however seems to have been a recent reassessment, at least on the part of doctrine.
Professor Viney, op. cit., after noting the preference of French courts for delictual liability, criticizes the delictual approach, at No. 195, pp. 228-29:
[TRANSLATION] This solution [is] in actual fact rather strange for abuse of rights arising out the contract itself . . . .
. . .
However, while the courts quite frequently recognize this type of liability [delictual], they rarely have occasion to make this characterization as quite often there are special provisions in the applicable regime which are justified by the protection of the victim's professional interests.
Professor Tunc's remark in Mazeaud and Tunc, op. cit., at note 559 (2 ter), pp. 649-50, is in the same vein:
[TRANSLATION] Abuse of rights . . . seems to give rise to contractual fault when it occurs in the performance, interpretation or rescission of a contract.
It is interesting to note that Mazeaud's earlier approach was questioned even at the time it was first proposed. Hubert de la Massuë, in his article "Responsabilité contractuelle et responsabilité délictuelle sous la notion de l'abus du droit" (1948), 46 Rev. trim. dr. civ. 29, expresses the view that abuse of contractual rights gives rise to contractual liability. He writes, at p. 33:
[TRANSLATION] A source of delictual liability can only arise outside, where the contractual roots cannot reach.
From this brief overview, the current trend of French doctrine appears to be moving towards contractual liability as the sole ground for liability in cases of abuse of contractual rights.
Quebec doctrine follows a similar evolution starting, as in France, from a delictual position held by Nadeau and Nadeau, Traité pratique de la responsabilité civile délictuelle (1971), at No. 211, p. 229:
[TRANSLATION] In Quebec, when we speak of abuse of rights, we mean simply that in a given case the holder of a right has exercised it unlawfully, to the detriment of others, or was guided by an intent to harm, or exercised his right in conditions which cannot justify the damage caused. The criterion applied is invariably that of fault within the meaning of art. 1053 C.C.[L.C.].
(See also Louis Baudouin, Le droit civil de la Province de Québec (1953), at p. 1283.)
In early Quebec doctrine, the delictual basis proposed by these authors may not even have been conceived to apply to the abuse of contractual rights since only in the last twenty years, and most particularly in the last decade, have the courts allowed the recourse. This evolution provided an environment in which doctrinal writers could directly apply themselves to analyzing the basis for the abuse of contractual rights.
Professor Crépeau, op. cit., speaking of a contractual liability basis, observes, at p. 24:
[TRANSLATION] It [art. 1024 C.C.L.C.] could be given a more useful and productive role in developing a theory of abuse of contractual rights, just as art. 1053 of the Civil Code is now used as a basis for the theory of abuse of rights extra‑contractually.
As well, Mayrand, "L'abus des droits en France et au Québec", op. cit., states at p. 336:
[TRANSLATION] If we consider that the obligation to perform a contract in good faith is a condition implicitly agreed upon between the parties, abuse of a contractual right is itself a breach of the contract.
In his commentary on Fiorito, "Contrat -- Application de la théorie de l'abus de droit en matières contractuelles", Baudouin, op. cit., remarks, at p. 335:
[TRANSLATION] Further, in our view the legislative basis for this principle [the abuse of contractual rights] can be found in the rule stated in art. 1054 C.C.[L.C.] and the legal basis in the rule that every contract must be performed in good faith.
This conclusion is shared by Professor Jobin, op. cit., at p. 133:
[TRANSLATION] In Quebec law, in our opinion, the justification for intervention by the courts through contractual liability to check abuse of right in contracts is the higher and more general standard of good faith in contracts.
And at p. 135 he comments:
[TRANSLATION] This principle [of good faith in the exercise of contractual rights] clearly belongs to the area of contract, not the general rules governing conduct between persons.
In summary, the current trend in both French and Quebec leading doctrinal writings is towards grounding liability in the contract when there is an abuse of a contractual right.
The same holds true for Quebec jurisprudence, although not without some controversy. The majority of cases, in effect, appears to find contractual liability for abuse of contractual rights.
2. Jurisprudence
While it may seem that French courts favour characterizing as delictual the liability arising from the abuse of contractual rights (for a detailed review of French jurisprudence, see Viney, op. cit., at notes 83 to 87, No. 195, p. 228), Quebec courts have moved away from this notion, rather following, it seems to me, the latest French and Quebec doctrine. A review of recent case law will demonstrate this.
In Marcotte v. Assomption Cie mutuelle d'assurance-vie, [1981] C.S. 1102, Biron J., after a thorough review of the doctrine of the abuse of contractual rights, concludes, at p. 1108:
[TRANSLATION] After reviewing these decisions and opinions expressed on the point, this Court subscribes to the view that art. 1024 of the Civil Code allows the theory of abuse of rights to be applied in the law of contract.
In Macaulay v. Imperial Life Assurance Co. of Canada, Sup. Ct. Montréal, No. 500-05-015231-804, April 19, 1984 (summarized in J.E. 84-423), Gonthier J. (now of this Court) analyzes the two potential sources of liability to arrive at the conclusion, at p. 6, that:
The better view as set forth by Mr. Justice Biron in the Marcotte case appears to be that this [abuse of contractual rights] rests upon art. 1024 of the Civil Code and the underlying principle of good faith in the execution of contracts.
In 1988, the Quebec Court of Appeal examined the same issue in Drouin v. Électrolux Canada Ltée Division de les Produits C.F.C. Ltée, [1988] R.J.Q. 950. Chouinard J.A. speaking for the court, writes, at pp. 952-53:
[TRANSLATION] Based on the concepts of good faith and equity which underlie all contracts, this theory [that there is an obligation to give a reasonable notice period even if the contract does not provide for one] involves abuse of rights, in view of the provisions of art. 1024 of the Civil Code which state that the obligations of a contract are not necessarily all expressed in the contract but extend also to the consequences which in certain cases may be incident to it.
See also Germain v. Sergaz Inc., J.E. 81-334 (Sup. Ct.); Caisse populaire St-Simon de Drummond v. Lalumière, J.E. 82-1105 (Sup. Ct.); and the jurisprudence cited by Jobin, op. cit., at note 24, p. 132. (Contra: Carignan v. Infasco Division Ivaco Inc., J.E. 89-286 (Sup. Ct.); and the jurisprudence cited by Jobin, op. cit., at note 22, p. 132.)
This trend towards contractual liability as the foundation for the abuse of contractual rights, in my view, conforms with art. 1023 and 1024 C.C.L.C. and I entirely subscribe to Professor Crépeau's assertion, in Théorie générale de l'obligation juridique: éléments d'une introduction (1987), at pp. 48-49:
[TRANSLATION] If the conditions exist for the contractual provisions to apply in the circumstances, the fault is contractual.
. . .
The principle of freedom of contract, the implied intention of the legislature, logic and the coherence of the system of civil liability require respect for the characterization of the regime which the parties have expressly or by implication chosen to govern their mutual relations.
To summarize, then, it appears indisputable that the doctrine of abuse of contractual rights is now part of Quebec law. The standard with which to measure such abuse has expanded from the stringent test of malice or bad faith, and now includes reasonableness, as expressed by reference to the conduct of a prudent and diligent individual. This test could encompass a number of situations, including the use of a contract for purposes other than the ones contemplated by the parties. Consequently, the proper approach can be formulated as follows: were such rights exercised in the spirit of fair play? With regard to the foundation for the doctrine, as both Quebec doctrine and jurisprudence hold, the rules of contractual liability do govern the abuse of contractual rights since implicitly, in every contract, according to the civil law, parties undertake to act in the prudent and diligent manner of a reasonable individual and within the confines of fair play when exercising their contractual rights. If this implicit obligation is breached, then contractual liability is engaged with regard to the other contracting party.
It would however be wrong to think that the mere existence of a contract between the parties excludes the possibility of a delictual liability between them. It is at this point that the coexistence of contractual and delictual liability will be briefly discussed.
C) The Coexistence of Contractual and Delictual Liability
That the two sources of liability can coexist is not in question. However, some comments about the extent to which they can coexist are appropriate both for contracting parties and with respect to third parties.
Gonthier J. recently reaffirmed the principle of coexistence between contracting parties in Air Canada v. McDonnell Douglas Corp., [1989] 1 S.C.R. 1554, where he states, at pp. 1566-67:
The fact that McDonnell Douglas is party to a contract . . . does not make their failure to warn Air Canada of that danger any less of a fault which, independent of the genesis of the danger, grounds an action in quasi-delict.
In order to find delictual liability between the contracting parties themselves however, there must exist, independently of the contract, a legal obligation deriving from art. 1053 C.C.L.C., which would apply generally, not only to the contracting parties. In Air Canada, the action was not based on the contract but on art. 1053 C.C.L.C., alleging the extra-contractual fault of the failure to warn the purchaser of a hidden danger in the goods sold.
Similarly, in Wabasso Ltd. v. National Drying Machinery Co., [1981] 1 S.C.R. 578, it was decided that the facts gave rise to extra-contractual liability between contracting parties, based on the manufacturer's failure to warn the purchaser of the dangers of the machine. (The question of the choice between or the "cumul" or joinder of recourses, which was at issue in Wabasso, is not at issue here.) As in Air Canada, the action was not based on the contractual obligations undertaken by the parties, but rather on the delictual liability of the manufacturer.
Viewed in this factual context, these cases support the proposition that even between contracting parties, extra-contractual liability can exist, so long as the fault alleged is independent of the contract and would have existed even in the absence of a contract.
In both of these cases, it must be noted, the Court was dealing solely with preliminary exceptions to dismiss actions where the facts alleged are taken as true.
Contractual and delictual liability can also coexist when third parties are affected. The fact that two parties have contracted does not shield them from their extra-contractual liability towards those outside the contractual sphere. The classic case in support of this position is Ross v. Dunstall (1921), 62 S.C.R. 393. Dunstall, who did not purchase the sporting rifle directly from the manufacturer, nonetheless took action based on art. 1053 C.C.L.C. alleging the manufacturer's failure to provide proper instructions for reassembly of the weapon and the failure to warn of the weapon's dangers. Although the same failure to warn may, in this case, have been a breach of a contractual obligation to a contracting party, the manufacturer was held delictually liable to a third party who was not a party to the contract.
In Alliance Assurance Co. v. Dominion Electric Protection Co., [1970] S.C.R. 168, a third party (the appellants) claimed that the respondent was delictually liable for the damages resulting from the respondent's failure to execute a contractual obligation undertaken towards the owner of the building. Pigeon J., for the Court, allowed for such possibility arising outside the contractual sphere, but he specifically noted that this must be an independent extra-contractual liability. At page 173, he stated:
It is true that the existence of contractual relations does in no way exclude the possibility of a delictual or quasi-delictual obligation arising out of the same fact. However, it is necessary for this that all the elements required to give rise to such responsibility should be found.
. . .
At the hearing . . . a great many cases and authors were quoted to demonstrate that a duty a breach of which is a fault may exist without an explicit legal provision proclaiming its existence. Thisis not doubtful but does not mean that we should consider as sucha duty an obligation that does not arise from the law but solely from a contract with a third party.
(See also Bernard v. Cloutier, [1982] C.A. 289, where I allowed for the possibility that a hospital that was contractually liable to its patient could also be found delictually liable to the spouse, although, on the facts of the case, no delictual liability arose; and the jurisprudence cited by Baudouin, Les obligations, op. cit., at note 24, p. 257.)
In summary, although contractual and delictual liability may coexist even in the context of a contract, delictual liability must arise independently of contractual obligations and all the elements required to give rise to such liability must be found. In the context of an abuse of contractual rights, it is the rights arising out of the contract itself which are exercised, and only the contracting parties possess these rights and the correlative obligation to exercise them reasonably. This obligation is derived exclusively from the contract. Consequently, when the fault alleged arises strictly from the abuse of a contractual right, then the liability must have its source in the contract.
Conversely, since a claim for abuse of contractual rights is based solely on contractual grounds, the contracting parties alone have a right of action. From this flows the conclusion that the respondent shareholders in the present case, given that it was the company which contracted with the bank, have no right of action based on the contract, for the abuse by the bank of those contractual rights. Such action is only open to the company, a party to the contract. The company in the present case did not take action against the bank, given that it was sold shortly after the liquidation of the assets and the new purchaser released the bank of potential liability for its actions in the execution of the loan. It is against this background, as well as the principles previously discussed, that liability for the respondent shareholders' claim against the appellant bank must be assessed.
Application to the Facts of the Case
The first step in this analysis is to determine the respective rights of the parties, contractually and extra-contractually.
I. The Rights of the Bank
Advances by the bank to the company were made by way of promissory notes signed by the company. As noted in the appellant's factum at pp. 1-2:
[TRANSLATION] Advances made under the rotating line of credit were made in the normal course of business by notes payable on demand in accordance with the banking practice then in effect. [Emphasis added.]
It is not contested by either party that the bank had the right to recall the loan on demand. By advancing money in the form of "promissory notes", the bank effectively provided itself with a means of recalling the loan on demand. As Louis Payette, in "Prise de possession: demande de paiement et délai raisonnable", in Meredith Memorial Lectures 1981, New Developments in Commercial Lending (1982), 129, notes, at p. 135:
[TRANSLATION] No grace period is given by the Bills of Exchange Act [R.S.C., 1985, c. B‑4] for payment of a bill payable on demand. Refusal to pay immediately gives rise to a remedy. The demand promissory note becomes payable as soon as it is made and the obligor must pay as soon as the first demand is made.
(For a more detailed analysis of the effect of promissory notes, see L'Heureux, op. cit., at pp. 287-96; and Caron, Précis de droit des effets de commerce (7th ed. 1978), at pp. 185-87.)
Other provisions pertinent to this case can be found in the "Convention établissant les pouvoirs de la Banque Canadienne Nationale relativement à toutes les avances faites par elle et aux garanties s'y rapportant", as evidenced in paragraphs 4 and 10 of exhibit D-1:
[TRANSLATION] 4. In the event of failure by the customer to pay in full any advance or debt, the Bank is authorized to realize in whole or in part on the guarantees given by the customer and to sell in whole or in part the property (hereinafter referred to as the "effects" pledged or covered by these guarantees, and all its proceeds, in such manner, at such time and at such place as the Bank, in the exercise of its absolute discretion, shall decide, without notice to the customer or to any person whatsoever, and without any obligation to place any advertisement or sell at public auction. . .
10. The Bank or its representative may at any time, without notice, force entry to the property (real or personal) of the customer and the premises occupied by him in connection with the effects (except for the establishment of a warehouseman or carrier); it may effect entry therein, occupy and use the same without cost and to the exclusion of any other person, including the customer, until it has disposed of the effects. . . . [Emphasis in original.]
Thus, according to the agreement between the parties, in conformity with the applicable legislation, the bank had the right to be paid upon demand, a demand that could have been made at any time, and it also had the right to realize its securities without notice.
II. The Recall of the Loan
In accordance with its rights, the bank did recall its loan and realize its securities. The question is whether it abused its rights in so doing. Such abuse can arise, in my view, when contractual rights are not executed in a reasonable fashion. As Jack Vezian, in La responsabilité du banquier en droit privé français (3rd ed. 1983), writes, at No. 282, p. 201:
[TRANSLATION] Termination which occurs "abruptly" or "brusquely", that is, without prior warning and without giving a period of "reasonable" notice that will allow the debtor to make arrangements, may be abusive.
And Payette, op. cit., notes, at p. 139:
[TRANSLATION] However, it would not be surprising if our courts were to find a means of penalizing a creditor who has suddenly revoked a line of credit without reasons based on the risk to his debt or his security. Perhaps this obligation could be linked to that of performing every agreement in good faith, as the Supreme Court recently did in the field of bank sureties [Soucisse, supra].
The importance of the "suddenness" of a recall of credit must not however be overstated. No matter how many warnings a debtor may be given, the actual moment of the recall of a loan will always be a sudden and dramatic event. Gonthier J. comments on the abrupt termination of contractual relationships in Macaulay, supra, at p. 8:
It [the employer] exercised a right which could be harsh in its consequences on the Defendant [the employee], but to which it was entitled by contract and it did so for reasons which it had assessed in good faith and which were pertinent.
The right to recall a loan as soon as financial difficulties are noticed is perhaps the key security for an institution or individual providing a rotating line of credit. With the possibility of other creditors taking recourses that could preempt the lendor's rights, no creditor should have to be in a less advantageous position than any other.
In the present case, the bank's recall of the loan was taken after a report was completed surrounding the financial circumstances of the company. This report indicated that there were sufficient reasons for the bank to demand payment, and no evidence was adduced to indicate that the bank's conclusions were not reasonable. The bank exercised its right to recall the loan after a reasoned decision, based on objective economic factors. There is no evidence that there were any extraneous considerations to that decision and nothing demonstrates that the demand was made [TRANSLATION] "without reasons based on the risk to his debt or his security". It follows that the respondents have been unable to prove that the bank's decision was taken for reasons which it had not assessed in good faith and which were not pertinent. Therefore, I must conclude that the recalling of the loan was not in itself an abuse of the bank's contractual rights. That, however, is not the end of the matter.
III. The Reasonablenness of the Delay
The recall of a loan can be quite proper and not constitute in and of itself an abuse of rights under the contract, as discussed above. Nonetheless, should the length of the delay between the demand for payment and the realization of the securities or liquidation of assets be found to be unreasonable, an abuse of such contractual right may still occur.
When a bank recalls a loan, the demand for payment serves to put the debtor in default. If this demand is to have any meaning, then there must be a reasonable time given to respond to it. There seems to be unanimity in Quebec doctrine on this subject. Payette, op. cit., states it in these terms, at p. 156:
[TRANSLATION] A request for payment is a request for performance. Logically, it should be followed by a lapse of time during which such performance may occur. If the creditor does not give the debtor time for performance, it will be hard for him to argue that the latter has not complied with his request. He will not really have established failure to make payment. By taking possession of pledged goods or starting to dispose of them as soon as the request for payment is made, he is probably preventing his debtor from paying.
Professor Paul Martel, in his commentary on the Court of Appeal's decision in the present case, "L'arrêt Banque Nationale du Canada c. Houle: Lumières nouvelles sur l'abus de droit et le "voile corporatif"" (1987), 33 McGill L.J. 213, adds, at p. 216:
[TRANSLATION] [I]t is now established in Canadian and Quebec law that a creditor must give his debtor a reasonable time to make payment.
Professor Jobin, op. cit., elaborates, at p. 137:
[TRANSLATION] Notice is not a mere formality; it has a specific function. The purpose of reasonable notice is to give the debtor a real chance to make payment, that is, the minimum time needed to find funds and transfer them to the lender.
While, of course, it may be quite legitimate for a creditor to request immediate payment of a loan payable on demand, the principle of reasonable delay demands that such creditor not realize its securities or take possession of assets before giving the debtor, depending on the circumstances of each case, a reasonable delay to meet its obligations. What must be examined are the sanctions taken by a creditor after the demand for payment, and the manner in which those sanctions are exercised. Payette, op. cit., at p. 165, makes the following distinction:
[TRANSLATION] Did the creditor begin to liquidate the assets immediately or did he simply take action to prevent dilapidation or ensure he would have possession of the assets? Were the initial steps taken for conservation or were they also steps to dispose of the property? [Emphasis added.]
The principle of a reasonable delay between the demand for payment and the realization of securities is also well established in Quebec jurisprudence.
The decision in Pole Lite Ltée v. Banque Provinciale du Canada, [1984] C.A. 170, marked an acceptance of the principle of reasonable delay in Quebec jurisprudence. On the facts of the case, no abuse of contractual rights was found. However, the Court of Appeal expressly allowed for the possibility that a quick liquidation could amount to an abuse of rights. At pages 176-77, Beauregard J.A. comments:
[TRANSLATION] This is not a case in which the bank, through unreasonable fear of losing its security, liquidated the latter overnight without giving its customer a chance to find a solution to his problem. [Emphasis added.]
A similar result was reached in Caisse populaire de Baie St-Paul v. Simard, supra, a case where the facts were strikingly similar to those in the present instance, the delay between the demand for payment and the seizure by the Caisse populaire being only two hours. Desmeules J. observes, at p. 9:
[TRANSLATION] It is true that at the time the seizure was made, Mr. Simard had asked Mr. Bolduc for more time and that in fact a period of two hours was granted, but the Court considers that in the circumstances that period was much too short.
The principle of reasonable delay was again applied in Banque Royale du Canada v. Nettoyeur Terrebonne (1985) Inc., J.E. 88-61 (Sup. Ct.), where Colas J. held that a five-day delay between the demand for payment and the realization of the securities was insufficient given that the demand was made during the Christmas holiday period.
Even in cases where allegations of abuse of contractual rights were rejected, the principle of a reasonable delay has still been maintained. For example, in Equipements Select, supra, the bank took several months before it liquidated the assets of the company, where the company was in no position whatsoever to pay back the loan (p. 11). In Charland v. Banque Canadienne Impériale de Commerce, Sup. Ct. Beauharnois, No. 760-05-000190-833, December 10, 1985 (summarized in J.E. 86-142), Flynn J. found no abuse by the bank on the facts of the case, but notes, at p. 27, that the bank delayed its liquidation of the assets, allowed the company to operate during that period, and even examined plans proposed by the company.
Therefore, I fully agree with Malouf J.A.'s conclusion in the present case at the Court of Appeal (at p. 1524):
[TRANSLATION] The courts and scholarly commentators have concluded that a creditor must give his debtor a reasonable time before demanding payment and proceeding to realize on his security. The creditor must give his debtor a reasonable time in which to make payment of the amount owed. He must give him an opportunity to find other financing. The length of time is a question of fact. A court which has to answer this question must take into account all the circumstances surrounding opening of the line of credit, the relationship between the parties, the request for payment and the taking of possession.
As an exercise in comparative law, it is interesting to see that the common law has reached the same conclusions. In Ronald Elwyn Lister Ltd. v. Dunlop Canada Ltd., [1982] 1 S.C.R. 726, Estey J. noted that the principle of a reasonable delay could be traced as far back as the case of Massey v. Sladen (1868), L.R. 4 Ex. 13, and Toms v. Wilson (1862), 4 B. & S. 442, 122 E.R. 524, and he draws the conclusion, at p. 746, that:
. . . the debtor must be given "some notice on which he might reasonably expect to be able to act". The application of this simple proposition will depend upon all the facts and circumstances in each case.
The factors to be taken into account when assessing the reasonableness of a delay are thoroughly analyzed in Mister Broadloom Corp. (1968) Ltd. v. Bank of Montreal (1979), 25 O.R. (2d) 198 (H.C.). Linden J. states, at p. 208:
... various factors must be analyzed: (1) the amount of the loan; (2) the risk to the creditor of losing his money or the security; (3) the length of the relationship between the debtor and the creditor; (4) the character and reputation of the debtor; (5) the potential ability to raise the money required in a short period; (6) the circumstances surrounding the demand for payment; and (7) any other relevant factors.
The Ontario Court of Appeal allowed the appeal (Mister Broadloom Corp. (1968) Ltd. v. Bank of Montreal (1983), 44 O.R. (2d) 368), but implicitly agreed that the above factors correctly stated the law.
Payette, op. cit., at p. 158, even goes as far as to suggest that the factors should be no different in civil law:
[TRANSLATION] These criteria [from Mister Broadloom, supra] do not appear to be connected with any specific legal rule at common law; they are in reality factual circumstances which it is suggested should be considered in determining what is commercially "reasonable". Moreover, several of these circumstances are used by the French courts in deciding on the wrongful nature of a breach of a line of credit, the duration of relations with the debtor, the latter's reputation, risk of loss and conduct of the debtor's affairs.
Even if Quebec courts have yet to develop their own criteria in as systematic a fashion as the common law has done, no set of criteria is exhaustive. At the end of the day, each case must rest on its own facts (see Vicply Inc. v. Royal Bank of Canada, [1989] R.R.A. 11 (Sup. Ct.), at p. 22).
Was then the delay reasonable on the facts of this case? The trial judge found as a fact, and a unanimous Court of Appeal agreed, that a reasonable delay between the demand for payment and the possession and liquidation of assets had not been given in the present case. As Deslongchamps J. notes:
[TRANSLATION] Considering in the case at bar the unexpected and sudden nature of the demand for payment, and considering that no time was allowed to respond either to the demand for payment or to [the bank's] investment requirements, while as regards such possible investment Porcheries Houle Ltée, which had stood surety for the "company", had on hand a debt from the latter of some $178,000, payment of which it retained, THE COURT has to come to the conclusion that defendant acted wrongfully.
And Malouf J.A. adds (at p. 1525):
[TRANSLATION] In this case, appellant had done business with respondents and their company for a period of at least fifty years and the evidence does not show that, before the date on which possession was taken, the bank asked the company for payment of the amount owed. The company and its officers and shareholders had no reason to suspect that the bank intended to call in its loan without prior notice and to seize the company's property.
In the circumstances, the bank was not justified in acting in the way described. The request for payment accompanied by immediate taking of possession was premature.
I find myself in full agreement with the judges below, particularly since a trial judge's findings of fact should not be disturbed unless an error can be clearly demonstrated. No such error has been found here, nor have the conclusions which the trial judge drew from those facts been shown to be erroneous, unreasonable, or not based on the evidence. Quite the contrary, by liquidating the assets only three hours after demanding payment of the loan, the bank effectively prevented any chance of the company's meeting its obligations.
The bank and the company had been doing business for over fifty years. The company had always fulfilled its obligations towards the bank, and had no reason to doubt the bank's faith in them. In addition, no warning was ever given to the company or to the respondents by a bank representative about any concerns that the bank may have had towards the company's financial viability. In fact, not even the manager of the branch where the company negotiated its loan knew of any concerns about the company. Like the company, he was made aware of the situation on February 19, 1974, the very day that the loan was recalled.
Against this background, the company and the respondents were only given one hour to find an additional $100 000 investment when notified of the situation by the accountant's representative. By the time that demand was made, at 11:00 a.m., the letter of demand had already been drafted and the possession of assets was about to take place. By noon, the bank took possession of all the company's assets, and by 2:00 p.m., all the assets had been sold.
The bank acted, in my view, in a sudden, impulsive, and harmful manner, particularly considering that there was never any warning that the bank was concerned about its loan. The effect of the bank's decision was the termination of over fifty years of business in three hours. With a low risk of losing money or security, at least in the short term, one is at a loss to understand why the bank did not at least wait until the negotiations had been completed with Weddel Ltd. before exercising its securities. The record is silent on this. Therefore, I find there was a flagrant abuse of the bank's contractual right to realize its securities after the demand for payment of its loan was not met.
I must note that the contract regarding the rights of the bank to realize its securities stipulates, in paragraph 4, that it can do so without notice. Nonetheless, this seemingly absolute right must be tempered by the principle of reasonable delay, and what constitutes the abuse of contractual rights in this case is the absence of such reasonable delay to allow the company to pay after it was put in default.
Given the above analysis, recourse may have been available to the company against the bank for abuse of its contractual rights arising out of the loan agreements between the two parties. However, the company took no action against the bank; only the respondents, as shareholders, did. Not being parties to the contract between the company and the bank, the question now is whether the respondents, as third parties, do have recourse against the bank, and if so, on what basis.
Liability to Third Parties Where There Has Been an Abuse of a Contractual Right
The parties to the contract are the appellant bank and the company, Hervé Houle Limited. The respondents were shareholders of the company, but were not parties to the contract. While it is true that they signed letters of surety to guarantee the loans, they were never called upon to honour such guarantees when the bank recalled its loan and liquidated the assets of the company. Therefore, it would appear that the respondents cannot anchor their claim on the terms of a contract between themselves and the bank, nor on the contract between the bank and the company. In the courts below, the respondents' claim was allowed on the ground that the lifting of the corporate veil was appropriate in the circumstances of the case. Before us, the respondents rest their claim upon the delictual liability of the bank. I will discuss these grounds in turn.
I. The "Corporate Veil" Argument
Both the trial judge and the Court of Appeal accepted the respondents' position that the "corporate veil" should be lifted, in the circumstances of this case, and the respondents' action was allowed on this basis. In the Superior Court, the judge elaborates on his reasons for so doing:
[TRANSLATION] In the case before the Court, whereas Hervé Houle Ltée was and has always been a family business, whereas the Houle Family had been doing business with defendant as such for over fifty years, whereas defendant required not only from the Houle brothers, the plaintiff‑shareholders, but from the widow of Hervé Houle, who was not a shareholder** in the "company", a letter of surety which amounted in October 1973 to $1,000,000, and whereas, further, defendant also required that Les Porcheries Houle Ltée, another family business whose shares were also held by plaintiffs, sign the said letter of surety, whereas in short all the personal assets of the Houle family, including the assets in the estate of Hervé Houle, were pledged in the business of Hervé Houle Ltée, at the express request of the defendant, THE COURT must conclude that Hervé Houle Ltée was only an intermediary between defendant and the people with whom it was really doing business, namely plaintiffs.
After reviewing the same facts, the Court of Appeal arrives at the same conclusion (at p. 1523):
[TRANSLATION] The special nature of this case indicates that the bank was doing business not just with the company but also with respondents. The latter accordingly had a right of action for damages against the bank.
With respect, I cannot agree that the lifting of the corporate veil is a proper basis to ground the respondents' claim in the circumstances of this case.
Almost a century ago, the case of Salomon v. A. Salomon and Co., supra, established the concept of an independent legal personality of a corporation, and it is often this very fact that attracts individuals to incorporate. The limitation of liability to the interest one possesses as a shareholder, with the resulting exclusion of certain personal liability for the debts of the corporation is a key feature of the corporate format, which carries other advantages, including fiscal ones. However, by choosing the benefits of this business structure, individuals must be prepared to accept the necessary consequences.
One of these consequences is that it is the corporation which suffers damages when there is a wrong to the corporation. As early as 1901, Lord Davey of the Privy Council expressed this principle, in Burland v. Earle, [1902] A.C. 83, at p. 93:
Again, it is clear law that in order to redress a wrong done to the company or to recover moneys or damages alleged to be due to the company, the action should prima facie be brought by the company itself.
Quebec courts have been extremely reluctant to allow shareholders' actions where the damage is suffered by the corporation. In the leading case of Silverman v. Heaps, [1967] C.S. 536, Mayrand J. so states, at p. 539:
The shareholder of a company has no action against the person who causes damage to the company. One cannot limit his responsibility by investing in a company and still consider as a personal damage any damage caused to such company; the shareholder's damage is indirect.
This is a clearly established principle and, I conclude, the correct position concerning shareholders' recourses.
The consequences of any other position would not be logical. There would be no value to the corporate structure if whoever does business with a corporation would, at the same time, become liable not only to the company but also to every shareholder for any damage that may be caused to the company. Wilson J. in Kosmopoulos v. Constitution Insurance Co., [1987] 1 S.C.R. 2, so says, at p. 11:
Having chosen to receive the benefits of incorporation, he [Mr. Kosmopoulos] should not be allowed to escape its burdens. He should not be permitted to "blow hot and cold" at the same time.
Teresa Scassa, in her comment on the decision of the Court of Appeal, "The Bank as Creditor" (1988), 3:3 National Creditor/Debtor Rev. 41, also makes the point that there should be a distinction between a corporation and its shareholders.
There are several Quebec cases directly on point, where shareholders have taken action against a bank, claiming that the bank has abused its contract with the company. In the great majority, if not all, of these cases, the recourse has been denied. (See Charland, supra, at p. 27; Equipements Select, supra, at pp. 15-16; and White, supra, at pp. 7-13; see also Professor Martel's commentary on the Court of Appeal's decision in the present case, op. cit., and the cases to the same effect referred to, particularly his note 23.)
With deference for the opinion of the lower courts, on the facts of this case I cannot find any factor that would justify the lifting of the corporate veil. Notwithstanding the "family" nature of the business, the family members, here the respondents, chose the corporate structure rather than do business in their own name. The sureties provided by the respondents are common in financial relations involving small corporations, as the bank often requires more security than the corporation itself can provide. In addition, the fifty-eight years of collaboration between the respondents and the bank, as well as the personal guarantees given by the respondents as security for the loan, do not alter the fact that the loan agreement was signed only by the company, not by the respondents, and that the latter were not requested to honour such guarantees. Therefore, I find nothing in this case to distinguish it from the other cases cited above and the general principles which have served our law over the past century. Consequently, this is not a case where the corporate veil should be lifted and the respondents' action cannot, in my view, succeed on this ground.
Given my earlier conclusion that an abuse of contractual rights gives rise to contractual liability, and my view that it is not appropriate in this case to lift the corporate veil, the respondents, as shareholders of the company, can have no right of action based on the contract itself. If they are to have any claim, it must therefore be based on delictual liability.
II. Delictual Liability
Before discussing whether the respondents have any right of action based on delictual liability, a few general comments are appropriate.
It is important to note that the respondents are not claiming damages as "ricochet" victims since no delictual liability arises out of the contract between the appellant bank and the company, but only a contractual one. It would offend both logic and law to sustain that, as victims, the respondents suffered here by the "ricochet" of a delictual fault.
The respondents rather submit that, on the facts of this case, the appellant bank, incurred a legal obligation towards the respondents when exercising its contractual rights. It is claimed that this obligation is separate from the contractual obligations owed. As I have previously discussed, it is undisputed that a contracting party may also incur delictual liability towards a third party who is outside the contractual sphere. By breaching this legal obligation, the respondents urge, the appellant bank became directly liable to them, under art. 1053 C.C.L.C.
The respondents also allege that the mere breach of a contractual obligation by the bank against the company can constitute a "fault" under art. 1053 C.C.L.C. For that proposition, the respondents take support in Baudouin's assertions, Les obligations, op. cit., at No. 395, p. 257:
[TRANSLATION] From time to time, even a third party may rely on the non‑performance of a contract concluded between two other people and claim damages suffered by him as a result of that non‑performance.
However, Baudouin's analysis must be taken a bit further than face value. He does not assert that the mere inexecution of a contractual obligation necessarily grounds delictual liability but that it can be one of the juridical facts which establish a delictual fault. There must still be a legal obligation, apart from the contract, between the contracting party and the third party claiming delictual liability, as is particularly noted by Pigeon J. in Dominion Electric, supra, at p. 173. This is also made clear by the following passage from Mazeaud and Tunc, op. cit., at No. 144-3, p. 179:
[TRANSLATION] Third parties may rely on the existence and non‑performance of a contract to which they were not parties, so long as they do not seek thereby to extend to their advantage an obligation which was undertaken only towards the other contracting parties. Relying on the fact that a person has concluded a contract, and even that he has not performed, is simply to rely on a fact which exists as such with regard to everyone. Claiming to be a creditor of an obligation undertaken between the parties is to invade the circle of the contract, to rely on the contract as a legal act, a creator of obligations, which is impossible. [Emphasis added.]
Therefore, in cases where this argument has been accepted (see Baudouin, Les obligations, op. cit., at note 24, p. 257) while there may have been a contractual relationship, a legal obligation must have been found to exist between one of the contracting parties and the injured third party that could ground liability under art. 1053 C.C.L.C.
The respondents' argument that a contractual fault, by itself, will ground delictual liability must fail. Basically, it is an attempt by a third party to claim the benefit of an obligation that was only undertaken towards the party to the contract, here to act reasonably upon demand for payment. If the respondents are to succeed, they will have to show, on the facts of this case, that the appellant bank had a distinct legal obligation to act reasonably towards them independently of its contractual obligation towards the company.
Finally, I would note that, in all but the most exceptional circumstances, the recall of a loan or the delay given for payment after the recall of the loan, even when abusive, would not result in delictual liability towards shareholders of a company. Only contractual liability towards the company would arise. Although an abusive demand for payment may have harsh effects on shareholders, in order to anchor liability towards them under art. 1053 C.C.L.C., there must exist a legal obligation that transcends the contractual ones.
In this case, as in any other case of delictual or quasi-delictual liability based on art. 1053 C.C.L.C., liability can only be established if the claimant proves fault, damage, and causality:
1053. Every person capable of discerning right from wrong is responsible for the damage caused by his fault to another, whether by positive act, imprudence, neglect or want of skill.
A) Fault
Fault is a very well-known concept in Quebec civil law, which Baudouin, in La responsabilité civile délictuelle, op. cit., explains at No. 120, p. 71, as follows:
[TRANSLATION] It [fault] can generally be described as the breach of a legal duty not to cause unlawful harm to another, by conduct contrary to what would have been done by an ordinarily prudent and diligent man placed in the same circumstances as those in which the perpetrator of the damage was placed at the time he committed the act alleged against him or failed to do what he was supposed to have done. [Emphasis in original.]
Article 1053 C.C.L.C. imposes an obligation of diligence, described by Professor Crépeau in L'intensité de l'obligation juridique ou Des obligations de diligence, de résultat et de garantie (1989), at No. 11, p. 7, as follows:
[TRANSLATION] . . . where the debtor is required to demonstrate caution and skill in arriving at the result desired by the parties.
In order to decide whether such an obligation of diligence does exist here between the bank and the shareholders, it is essential to examine the facts of this case as they relate to this issue. Although some of these facts have been discussed in the context of the abuse of contractual rights, they are no less pertinent to the issue of the fault of the appellant bank.
The respondents' family and the family business had a financial relationship with the bank encompassing more than fifty years. Not only were the respondents asked to be guarantors for the loans to the company, but the respondents' mother was also asked to act as surety. Furthermore, the other family business owned by the respondents, Les Porcheries Houle Ltée, also signed the letter of surety. In addition, the trial judge noted that when the accountant's representative attempted to obtain an additional $100 000 investment one hour before the possession of the assets:
[TRANSLATION] . . . his first duty was thus to obtain an additional investment from the "company's" shareholders . . . [Emphasis added.]
While this may indicate that the bank's relationship was not only with the "company" itself, but with the shareholders personally, these facts alone would not be sufficient to create a legal obligation on the part of the bank towards the respondent shareholders, independent from its contractual obligations to the company. When banks enter into financial relationships with small, family-owned companies, the above facts are usually present. Generally speaking, contractual obligations do not entail a general legal obligation to act reasonably towards third parties, but only contractual obligations towards the parties to the contract. However, in this case, there is more. As the trial judge notes:
[TRANSLATION] These negotiations with Weddel Ltd. [and respondent shareholders] were known to defendant [appellant bank] in late December 1973. . . .
Malouf J.A. agrees (at p. 1519):
[TRANSLATION] The bank knew of these negotiations.
In these circumstances, a general legal obligation arises that a person not prejudice, by his or her actions, the parties to a sale, when such sale, to his or her knowledge, is imminent. Should the sale fail to materialize or the price decrease due to a course of conduct which constitutes a fault, then liability may be engaged under art. 1053 C.C.L.C.
Here, given the bank's knowledge of the imminent sale, it had a duty to act in a prudent and diligent manner, as any individual, in order to avoid prejudice to the shareholders. There is nothing in the record to indicate that the bank could not have granted a reasonable delay before taking possession of the assets and liquidating them. Although the obligation to repay the loan and the right to recall the loan formed part of the contract between the bank and the company, no obligation of diligence towards the shareholders arose from the contract itself. Such obligation arose from the law (art. 1053 C.C.L.C.) in the light of the facts of this case.
Given that the respondents were in the process of negotiating the sale of their family-owned company, given the close contacts of the bank with the respondents, and given the knowledge that negotiations were taking place, the bank had the obligation to provide a reasonable delay before demanding payment or taking possession and liquidating the assets. It would be obvious to anyone in these circumstances that the consequences of acting precipitously would bring a drastic reduction in the value of the shares of the company, and that a more reasonable delay might have given the respondents the opportunity to sell their shares at the fair market value. If an extra-contractual creditor of the company had seized the assets and sold them, all within the span of three hours, in the same circumstances as those present in this case, he could have incurred liability as well under art. 1053 C.C.L.C. Consequently, the appellant bank's impulsive and detrimental repossession and sale of the company's assets after such a short and unreasonable delay, while fully aware of the respondents' imminent sale of their shares, was a fault entailing its liability for the ensuing direct and immediate damage caused to the shareholders.
B) Damage
In order for the prejudice to be compensated, it must be direct and certain (art. 1075 C.C.L.C.). The above facts were dealt with by the trial judge and the Court of Appeal. Both concluded that the respondents suffered a loss of $250 000, representing the difference between the value of the shares before and after the acts of the appellant bank. This value is no longer contested and constitutes actual damage. Thus, the damage is certain.
It may be questioned whether the damage is direct. The argument would be that the company suffered the damage, and only indirectly would the shareholders be prejudiced, on account of the value of their shares being affected.
In most circumstances, this argument would prevail. Even if fault can be found, the damage is done to the company, and it is for the company to claim compensation for the damage. However, in this case, there was more than just damage to the company, since, to the knowledge of the bank, the respondents were in the process of negotiating the sale of their shares. The respondents had a direct, personal, financial interest at stake and the bank knew this. Furthermore, the respondents sold their shares, very soon after the liquidation of the company's assets, to the same company with whom they were previously negotiating. In these circumstances, it was the potential sale value of their shares that was damaged, a value that the respondents were at the point of enjoying personally. The acts of the bank resulted in the respondents' losing something that was inches away from their grasp. As Vennat comments, op. cit., at p. 396:
[TRANSLATION] The special feature of Houle is the fact that, as the Court of Appeal mentions, the bank knew of the negotiations for the sale of the shares, but above all the fact that the sale actually took place only a few days after the seizure, to the same persons with whom the shareholders were negotiating. It was easy to determine the amount of the damages and to see that the real victims of the loss were the shareholders. Accordingly, this sale was as it were a line of demarcation between the company and the shareholders. Without an accumulation of all these facts and without the sale, it would have been surprising if the action had been allowed. [Emphasis added.]
A similar view is entertained by Martel, op. cit., at pp. 221 and 222. On the facts of this case, the harm flowing from the imminent sale of the respondents' shares in the company resulted in direct damage to the shareholders, besides or beyond and independently of any damage the company itself may have incurred as a result of its contractual relationship with the bank.
C) Causation
Causation is the third component of delictual liability (art. 1053 C.C.L.C.). As Baudouin explains, in La responsabilité civile délictuelle, op. cit. at No. 334, p. 185:
[TRANSLATION] When fault has been committed and the victim complains of loss, he must also show a direct connection existing between the two. He must prove that the damage is the consequence of the wrongful act.
Having determined the fault of the appellant bank and the direct and certain damage suffered by the respondents, I have no difficulty in concluding that there was a direct relationship between the fault and the damage and that the actions of the bank directly caused the respondents' loss. It was inevitable under the circumstances that precipitous action, in liquidating the assets of the company, would cause damage to the respondents. The liquidation of assets of a company can do nothing but decrease the bargaining power of any individual who is in the process of negotiating the sale of shares in that company, and this was exactly the result in this case. Consequently, a causal link exists between the fault of the appellant bank and the damage to the respondent shareholders.
The facts of this case give rise to a legal obligation on the appellant to act reasonably towards the respondents in order to avoid prejudice. Banks are no different than any other member of society who must abide by the rules of good faith implicit in a contractual relationship and avoid any actions which might be in breach of a legal obligation of diligence regardless of any contractual relationship, as is the case here. Having determined that all of the elements of delictual liability are present in this case, independently from any contractual liability which may have existed between the parties to the contract, I conclude that the appellant has breached its legal obligation towards the respondents under art. 1053 C.C.L.C. and must be found liable for the damages suffered by them, in the amount determined by the trial judge and confirmed on appeal. Accordingly, the appellant bank's appeal cannot succeed.
There remains to discuss a subsidiary point raised by the respondents.
Article 1056c C.C.L.C.
The respondents made a motion requesting that this Court expressly grant them the additional indemnity provided for by the second paragraph of art. 1056c C.C.L.C., which reads:
1056c. The amount awarded by judgment for damages resulting from an offence or a quasi-offence shall bear interest at the legal rate as from the date when the action at law was instituted.
There may be added to the amount so awarded an indemnity computed by applying to the amount, from such date, a percentage equal to the excess of the interest rate fixed according to section 28 of the Act respecting the Ministère du Revenu (R.S.Q., chapter M-31) over the legal interest rate.
The respondents did not specifically claim this additional indemnity in either the Superior Court or the Court of Appeal. This Court granted leave to appeal on May 2, 1988, [1988] 1 S.C.R. v***, but only in late 1989 did the respondents file a motion, without opposition, beyond the deadline mandated by Rule 29(1) of the Rules of the Supreme Court of Canada, SOR/83-74, a fact they do not deny.
As indicated by Rule 29(1) itself, the omission to give the required notice is not fatal to the respondents' request for the additional indemnity, since s. 48(1) of the Supreme Court Act, R.S.C., 1985, c. S-26, allows for amendments whenever necessary for the purposes of the appeal. Moreover, s. 48(2) of the Supreme Court Act indicates that such motion may be granted even if there was error or neglect on the part of the applicant. Section 48 of the Supreme Court Act, read in conjunction with Rule 29, in my view, entitles this Court to grant respondents' motion, particularly since the issue was fully canvassed both in the briefs and in oral argument and no prejudice has been demonstrated. The question is then: are the respondents entitled to the additional indemnity provided for in art. 1056c C.C.L.C. under the circumstances of this case? In my view, they are so entitled.
The nature of the indemnity covered by the second paragraph of art. 1056c C.C.L.C. was discussed by our Court in the leading case of Travelers Insurance Co. of Canada v. Corriveau, [1982] 2 S.C.R. 866. Affirming the decision of the Quebec Court of Appeal, Chouinard J., speaking for the majority of the Court, stated at p. 875:
As interest under the first paragraph of art. 1056c is in reality damages due to delay, what is the nature of the indemnity which may be awarded under the second paragraph? With respect, in my opinion it is the same.
It has been consistently held by the Quebec Court of Appeal that while the granting of such indemnity is discretionary, the indemnity should be allowed unless there are specific reasons why it should not. (See Trottier v. British American Oil Ltd., [1977] C.A. 576, at p. 580; Godin v. Trempe, C.A. Montréal, No. 500-09-000894-790, August 14, 1985 (summarized in J.E. 85-822), at p. 9.) As Montgomery J.A. rightly puts it in Godin, at p. 9:
Article 1056c was, however, enacted to provide some measure of relief for a plaintiff who suffered from the discrepancy. . . between the legal interest rate of 5% and that which a borrower would have to pay in commercial circles. I agree that a trial judge has the right to withhold it, but he should, in my opinion, have some valid legal reason for doing so.
The trial judge and the Court of Appeal having not directly exercised their discretion on this issue, it is open to this Court to do so since the issue was fully debated before it.
This being a case of delictual liability, art. 1056c C.C.L.C. applies and I can find no reason here for denying the request for the additional indemnity. Counsel for the appellant conceded that no prejudice was incurred by the failure to claim the additional indemnity at the outset. Furthermore, despite the time it took for the final resolution of this case, the delay cannot be attributed to either party but rather stems from circumstances outside their control. No valid reason having been advanced for denying the additional indemnity, the discretion should be exercised in favour of the respondents. Consequently, I would grant the motion and award to the respondents the additional indemnity under art. 1056c C.C.L.C.
Conclusion
For these reasons, I would affirm the judgment of the Court of Appeal and dismiss the appeal with costs throughout. However, I would modify the judgment of the Quebec Superior Court so that it read:
Orders defendant to pay plaintiffs the sum of $250,000, with interest from the date of service and costs, AND THE ADDITIONAL INDEMNITY PROVIDED FOR UNDER ART. 1056c Civil Code of Lower Canada.
Appeal dismissed with costs.
Solicitors for the appellant: Martineau Walker, Montréal.
Solicitors for the respondents: Bélanger, Sauvé, Montréal.