Royal Bank of Canada v Universal Energy Resources Inc et al, 2021 MBCA 105

Citation: Royal Bank of Canada v Universal Energy Resources Inc et al, 2021 MBCA 105 Date: 20211217 Docket: AI21-30-09580 IN THE COURT OF APPEAL OF MANITOBA Coram: Madam Justice Holly C. Beard Mr. Justice Christopher J. Mainella Madam Justice Jennifer A. Pfuetzner BETWEEN : ROYAL BANK OF CANADA ) R. W. Schwartz ) for the Appellants (Plaintiff) Respondent ) ) J. M. J. Dow and - and - ) K. A. Anniko ) for the Respondent UNIVERSAL ENERGY RESOURCES INC. ) and 7453958 MANITOBA INC. and ) Appeal heard: NEIL EUGENE CRAWFORD ) October 1, 2021 ) (Defendants) Appellants ) Judgment delivered: ) December 17, 2021 pfuetzner JA [ 1 ] The defendants appeal an order granting

summary judgment to the plaintiff (RBC) on its claim for repayment of money that it loaned to the defendant Universal Energy Resources Inc. (UER). [ 2 ] UER initially argued that the motion judge erred in determining, by way of

summary judgment, both whether it was in default on the loans and whether RBC had acted in bad faith in demanding repayment. [ 3 ] At the appeal hearing, UER conceded the first issue and focussed on the second, being whether it was appropriate to determine its claim of bad faith by way of

summary judgment. More particularly, UER claims that RBC’s dealings with it, including its action in demanding immediate repayment of its indebtedness, constituted a breach of RBC’s duty of good faith in contractual relations. It states that this is a developing area of the law and, as such, this issue could only be fairly determined after a full trial. For this reason, its position is that this matter should not have been disposed of by way of

summary judgment. UER also argues that the motion judge erred in dismissing its counterclaim against RBC for damages for breach of its duty of good faith. Finally, UER argues that the motion judge erred in granting costs to RBC on a solicitor and client basis. [ 4 ] For the reasons that follow, I would dismiss the appeal. Background [ 5 ] In the spring of 2018, RBC entered into a loan agreement with UER which authorized a number of loan and credit facilities to UER totalling $653,000.

All of the loan and credit facilities were repayable at any time on demand with the exception of a term loan which had a term of one year. The term loan was payable on maturity, or earlier upon demand by RBC, which demand could only be made following an “[e]vent of [d]efault”, as defined in the loan agreement. [ 6 ] Both the defendant 7453958 Manitoba Inc. (745) and the defendant Neil Eugene Crawford (Crawford) guaranteed the loans. As security for the loans, UER agreed to provide RBC with first-priority general security over all of its property, as did 745.

The defendants were represented by counsel throughout the negotiation of the loan agreement. [ 7 ] The purpose of the term loan was to pay out UER’s prior lender, the Business Development Bank of Canada (BDC), and discharge its security. 745 also had a loan from BDC secured by a mortgage over its real property. Originally, RBC was also to provide financing to pay out the BDC mortgage loan to 745. However, with RBC’s approval, the defendants did not draw down on that financing and the BDC mortgage loan to 745 remained in place. As a result, and as later discovered by RBC, BDC did not discharge its

first-priority security over the personal property of UER. [ 8 ] In the spring of 2019, RBC reviewed the financial positions of UER and 745 after receiving their 2018 financial statements. RBC noted a decline in UER’s financial position. Moreover, RBC identified three defined events of default in respect of the term loan. First, UER did not provide RBC with first-priority security over its personal property. Second, UER breached a financial covenant.

Third, based on its 2018 financial statements, there was a material adverse change in UER’s financial condition. [ 9 ] RBC took steps to assist UER to have BDC release its security interest so that UER could comply with its obligation to give RBC first-priority security. However, this was unsuccessful as RBC had difficulty both in obtaining UER’s cooperation to obtain the release and in making contact with BDC to resolve the issue. [ 10 ] Ultimately, RBC issued a notice of default to UER and demanded repayment of its indebtedness in full. When UER failed to make the repayment, RBC filed a statement of claim.

The defendants filed a statement of defence and counterclaim asserting that RBC wrongfully demanded repayment of the loans and thereby breached its duty to act in good faith. They sought damages for RBC’s alleged breach of contract. [ 11 ] RBC moved for

summary judgment of its claim and for

summary judgment dismissing the defendants’ counterclaim. In his endorsement, the motion judge instructed himself on the test for granting

summary judgment and on the “duty of honest performance” imposed on parties to contracts, as described in Bhasin v Hrynew , 2014 SCC 71 at para 73 .

After having reviewed the evidence, the motion judge found that, “[e]ven if all of the complaints made by Crawford [were] taken at face value, they [did] not cumulatively amount to the kind of bad faith, which would preclude RBC from making demand for payment.” [ 12 ] Key to his decision is his finding that “[t]he failure to move RBC into a first-priority position was a clear event of default entitling RBC to demand payment.” In addition, he found that “there [was] ample evidence to show that RBC met its obligation to act in good faith and in honest performance of its contractual obligations.” [ 13 ] Ultimately, the motion judge was satisfied that the matter could be resolved fairly by way of

summary judgment and that a trial was not necessary. Accordingly, he granted RBC’s motion. Issues [ 14 ] The defendants argue that the motion judge erred in finding, on the facts and the law, that a fair disposition of this matter could be achieved by way of the

summary judgment process. For the same reasons, the defendants submit that their counterclaim should not have been dismissed on a

summary basis. Finally, while not raised in their notice of appeal, the defendants assert that the motion judge erred in granting costs on a solicitor and client basis and in the amount awarded. Analysis [ 15 ] The standard by which this Court is to review the motion judge’s decision to grant

summary judgment is well-known. Barring a material error as to the law or the facts, or a decision that is so wrong as to amount to an injustice, an appellate court will not intervene (see Dakota Ojibway Child and Family Services et al v MBH , 2019 MBCA 91 at para 37 ). [ 16 ] After the motion judge delivered his decision in this matter, the Supreme Court of Canada issued its reasons in Wastech Services Ltd v Greater Vancouver Sewerage and Drainage District , 2021 SCC 7 .

In Wastech , the Court addressed “the source [and] content of the specific duty to exercise discretion in good faith” (at para 1)—matters that were not at issue in Bhasin , a previous decision on the duty of good faith in contractual relations. [ 17 ] Of particular importance to the present case are the following statements in Wastech (at paras 69, 88): . . . [T]o determine whether a party failed in its duty to exercise discretionary power in good faith, one must ask the following question: was the exercise of contractual discretion unconnected to the purpose for which the contract granted discretion?

If so, the party has not exercised the contractual power in good faith. In sum, then, the duty to exercise discretion in good faith will be breached where the exercise of discretion is unreasonable, in the sense that it is unconnected to the purposes for which the discretion was granted. This will notably be the case where the exercise of discretion is capricious or arbitrary in light of those purposes because that exercise has fallen outside the range of behaviour contemplated by the parties.

The fact that the exercise substantially nullifies or eviscerates the fundamental contractual benefit may be relevant but is not a necessary pre-requisite to establishing a breach. [ 18 ] The defendants concede that RBC’s “conduct falls short of a strict interpret ation of dishonesty,” as was the case in Bhasin .

However, the essence of their argument is that “ the requirement of good faith in contractual relations is a developing area of the law that merits a full inquiry [by] a trial judge .” They take issue with the statement in Wastech that the only requirement for the good faith exercise of a contractual discretionary power is that it is connected to the purpose of the power. The defendants submit that the present case should not be decided on a

summary basis as further refinements might be made to the test in Wastech . [ 19 ] In my view, there is no basis to intervene with the motion judge’s decision. I am not persuaded that the motion judge made any material error in fact or law, nor is the decision so wrong as to amount to an injustice. [ 20 ] I say this despite the fact that the motion judge did not have the benefit of Wastech when he exercised his discretion to grant

summary judgment. Indeed, it is apparent that the result would have been the same had the motion judge applied the more specific test in Wastech .

[ 21 ] The motion judge found that RBC was entitled to exercise its discretion to demand payment of the loans due to the failure of UER to move RBC into a first-priority security position. There is no basis to argue that RBC’s exercise of its discretion to demand repayment of the loans for this reason is unconnected to the purposes for which the discretion was granted.

At the hearing, the defendants conceded—properly so—that, under the current state of the law, RBC was entitled to do what it did. [ 22 ] Wastech represents a very recent statement of the law that is clearly applicable to the facts in the present case.

To suggest that there is a “genuine issue requiring a trial” ( MB, Court of Queen’s Bench Rules , MR 553/88 at r 20.03(1) ) because the Supreme Court of Canada might be inclined to revisit the law i n this area is both speculative and contrary to the principle of stare decisis (see Canada (Attorney General) v Bedford , 2013 SCC 72 at paras 43-44 ). [ 23 ] As for the defendants’ objection to the motion judge’s award of solicitor and client costs, they concede that the loan agreement provides for solicitor and client costs.

However, they maintain that the quantum awarded was, even on this measure, excessive. [ 24 ] The motion judge gave a reasoned decision for the costs award and assessed the quantum at less than what was claimed by RBC. A costs award can be set aside on appellate review if it is based on “an error in principle or . . . is plainly wrong” ( Hamilton v Open Window Bakery Ltd , 2004 SCC 9 at para 27 ) . However, neither basis is met here.

As a result, I would not interfere with the motion judge’s discretionary costs award. [ 25 ] Before concluding, I would make a comment on certain language in the endorsement that is, in my view, unfortunate. The defendants are described as raising complaints that “are nothing more than a smoke screen to justify a failure to pay a debt that is properly owing” and making “every effort to stonewall” RBC.

In my respectful view, these comments are an unwarranted criticism of borrowers who were servicing their debt obligations, had not missed payments but who disputed the propriety of the bank calling its loans in the circumstances. Conclusion [ 26 ] For all of these reasons, I would dismiss the appeal with costs on a solicitor and client basis in light of the provisions of the loan agreement. JA I agree: JA I agree: JA