Houle v. Banque Canadienne Nationale, [1990] 3 S.C.R. 122 [Background reading]

Houle v. Banque Canadienne Nationale, [1990] 3 S.C.R. 122 [Background reading]

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  “I want to stress at the outset that this 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.”
  
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  Abuse of right in Quebec first gained acceptance in property law and also gained doctrinal and jurisprudential support in Admin law. “The doctrine of abuse of contractual rights is alive and undisputed in France.”
  
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  Despite acceptance in Quebec doctrine, early Quebec jurisprudence was hostile to the idea that k’al rights could be abused, but it has slowly made inroads into QC jurisprudence. Turning point was Fiorito [1971], at which juncture the recourse became more widely used.
  
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  “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 or rights and obligations, contractual as well as extra-contractual. It is also consistent with the general philosophy that the debtor is to be favored in contractual relationships.”
  
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  It is a necessary control over the exercise of contractual rights
  
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  Explicit recognition of the erosion of the absolutist “intent of the parties is supreme” idea: “it inserts itself into today’s trend towards a just and fair approach to rights and obligations (I,e, consumer protection legislation, etc.
  
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  “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 departures from the general norm of behavior acceptable in ours society.”
  
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  The abuse of right is to contractual relationships what fault is to extra-contractual relationships. (yes, but is fault necessarily a marked departure? I don’t think so…)
  
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  An question as to whether good faith is here to stay is now answered by L’H-D: “If this doctrine were not already part of Quebec Law, there should be no hesitation to adopt it.” (CB 83).
  
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  The appropriate standard for abuse of right the “reasonable exercise of right” theory which holds that an abuse of right 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 accords with the concept of the “bon père de famille” that is well known to Quebec Law.
  
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  There can no longer be a debate in Quebec law that the less stringent standard of the reasonable exercise of the right, the conduct of the reasonable and prudent individual, as opposed to the more stringent standard of malice and the absence of good faith, can ground liability resulting from an abuse of contractual rights.
  
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  In terms or liability if the abuse of right is to give rise to a contractual liability, the only the parties to the contract may claim for the breach of that contractual obligation. Third parties are excluded from any such claim.
  
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  At a general level, it is indisputable that an implicit obligation of good faith exists is every contract in Quebec civil law. The proper approach is to ask : were rights exercised in a spirit of fair play? If this implicit obligation is breached, contractual liability is engaged with regards to the other contracting party.
  
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  However, the existence of a contract between the parties does not shield to parties from their x-k liability towards each other, or to third parties. IN order to find x-k liability between the parties themselves, there must exist a legal obligation deriving from 1053 (1457) which exists independently of the K and would apply generally. For example, failure to warn of dangers of goods can give rise to x-k liability so long as the fault alleged is independent of the contract and would have existed even in the absence of a contract. The same holds for third parties: there must be a legal obligation between the party to the K and the third party that exists independently of the contract in order to find x-k liability.
  
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  In this case, the abuse of the contractual right could not give rise to liability to the shareholders. Instead, it comes from the general legal obligation not to prejudice the parties to a sale, when you have knowledge that the sale is imminent. Thus, the bank had a duty to act in a prudent and diligent manner so as to avoid prejudicing the shareholders in the sale they knew was imminent. No obligation of diligence towards the shareholders arose form the contract itself. The obligation to the shareholders was independent of the contractual undertaking between the bank and the company.
  

*** Interestingly, at the time L’H-D wrote Houle (1990) the code was in the process of being revised. In support if the idea that the principle of good faith has come to override autonomy of the will she noted several examples such as the Consumer Protection Act, etc. and also mentions the a provision dealing with “lesion between persons of full age” in the proposed reforms to the Civil Code: the CCQ only deals with persons of full age under protective supervision: maybe the reformers wanted to give a wider scope to lesion, but it didn’t make it into the final draft – so, at the time she was writing, maybe she was anticipating changes that are much wider than what actually happened.

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  In Houle (1990) it takes the duty of good faith one step further. As opposed to Soucise, in the present case, the bank had a right under the contract that it could call a loan without notice. The court says that we will not let you exercise this right. This is going a step further than Soucise. A Company has been negotiating its sale and the bank decided to recall its loan and to liquidate its assets in a matter of hours. As a result the corporation suffered great losses and shareholders sued. The importance of Houle —the doctrine of abuse of rights is part of the civil law in Quebec.
  
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  What is the standard of this good faith? It is important not to equate it to bad faith. Bad faith entails malice. Good faith can entail malice but it need not entail malice (objective concept of good faith). Good faith means that you have to act reasonable. The standard in Houle is one of reasonableness and not malice. L’heureux-Dube J. it is implied in every contract and it carries the obligation to act prudently. Instead of adding an obligation, it modifies the rights in the k.