



COURT OF APPEAL FOR ONTARIO

CITATION: Willowbrook Nurseries Inc. v. Royal Bank of Canada, 2017 ONCA 974

DATE: 20171212

DOCKET: C62651

Pardu, Trotter and Paciocco JJ.A.

BETWEEN

Willowbrook Nurseries Inc.

Plaintiff (Appellant)

and

Royal Bank of Canada

Defendant (Respondent)

Paul J. Pape, for the appellant

Milton A. Davis and Rob Macdonald, for the respondent

Heard: November 17, 2017

On appeal from the judgment of Justice Robert D. Reilly
    of the Superior Court of Justice, dated August 11, 2016, with reasons for
    judgment reported at 2016 ONSC 4954 and reasons for costs reported at 2016 ONSC
    6630.

Breach of contract  General organizing principle of
    good faith  Duty to provide reasonable notice of change to prevailing course
    of lending conduct  Whether bank exercised discretion in good faith  Duty to
    exercise contractual discretion in objectively reasonable manner.

Pardu J.A.:

[1]

Willowbrook Nurseries Inc. (Willowbrook) needed
    to borrow more money from its banker, Royal Bank of Canada (RBC). It needed
    more working capital because its business was growing and because it suffered a
    few business hiccups in the preceding year. RBC did not agree to immediately
    lend more money to Willowbrook and placed its accounts in Special Loans and
    Advisory Services (Special Loans).

[2]

RBCs refusal to immediately lend more money
    meant that Willowbrook could not pay its suppliers on time and had to lay off
    employees. RBC demanded more financial information from Willowbrook and
    proposed to increase banking fees and interest charges. It wanted up to date
    appraisals of the real property securing Willowbrooks debt.  It proposed to engage
    an accounting consultant to review Willowbrooks financial position, at
    Willowbrooks expense. RBC asked for cash flow projections and indicated that
    an appropriate temporary overdraft accommodation limit will be established
    upon our review and acceptance of your cash flow projections.

[3]

Willowbrook brought an action against RBC for
    breach of its obligation to perform the lending agreement in good faith. Willowbrook
    argued at trial that RBCs refusal to lend new money and its decision to subject
    Willowbrook to Special Loans treatment amounted to a change in the prevailing
    course of lending conduct and required reasonable notice. It argued at trial
    that the Special Loans treatment amounted to a
de facto
demand for payment without notice. Willowbrooks action was
    dismissed and it appeals to this court.

[4]

I would dismiss the appeal for the reasons that
    follow.

Factual background

[5]

RBC began lending to Willowbrook through a line
    of credit, demand loan, various mortgages, and a corporate credit card in
    January 2005. Since the plant nursery business is seasonal, Willowbrook always
    needed an infusion of working capital in the winter in order to produce plants
    that would be sold in the spring and summer. To satisfy Willowbrooks seasonal financing
    needs, RBC would agree to a temporary accommodation request (TAR) that
    allowed Willowbrook to temporarily exceed its $2.75 million line of credit each
    winter. The overdraft amount was set by the parties mutual agreement each fall
    or winter and would typically be paid down in the following spring or early
    summer.

[6]

However, through the spring and summer of 2008,
    Willowbrook did not fully repay the $1.25 million worth of TAR that RBC
    extended in the winter of 2007, despite three extensions of time to do so
    (2007 TAR). By December 2008, $1.029 million of the 2007 TAR was still outstanding.

[7]

Nonetheless, Willowbrook submitted an additional
    $1.2 million TAR following the completion of its fiscal 2008 financial
    statements on October 14, 2008 (2008 TAR) along with a debt restructuring and
    separate $500,000 term loan request. Approval of these requests would have
    meant that RBC would be lending, in total, $500,000 more than ever before to
    Willowbrook.

[8]

Willowbrook was approaching the limits of its
    agreed upon credit, had no immediate prospect of significant revenue, and faced
    the expenses of planting for a new season.

[9]

The local RBC account manager supported
    Willowbrooks requests and submitted them, along with Willowbrooks recently
    completed 2008 financial statements, to RBCs risk management group on November
    21, 2008. On November 26, 2008, a RBC risk manager refused Willowbrooks 2008 TAR,
    restructuring request, and term loan request. Instead, the risk manager
    transferred Willowbrooks account into Special Loans on December 5, 2008
    following a meeting with Willowbrook. The local account manager was replaced.

[10]

RBC outlined its concerns and requirements by letter
    dated December 8, 2008. It expressed concern about Willowbrooks working
    capital, liquidity, and increased inventory levels. RBC noted the outstanding 2007
    TAR and Willowbrooks forecast that it would need $500,000 more to carry it
    through to April of the following year.

[11]

RBC said it would continue to provide interim
    financing to allow Willowbrook to revise its business plan and to address the
    banks concerns. It demanded detailed financial information and up to date
    appraisals of real property securing Willowbrooks debt. Overdrafts in excess
    of agreed upon limits would not be permitted. Bank fees and interest charges
    were forecast to increase. The new RBC account manager had to approve payment
    of all cheques.

[12]

Willowbrook scrambled to provide the requested
    information, while dealing at the same time with the terminal illness of one of
    the principals. On January 12, 2009, Willowbrooks accountant wrote to RBC,
    stating we feel our client should not remain in special loans under your
    proposed terms. We do not feel that our clients financial situation warrants
    this. If our client cannot be returned to normal credit or if the proposed
    terms cannot be amended, then on behalf of our client, we respectfully request
    a reasonable time period to seek alternative financing. The accountant asked RBC
    for 30 days to seek other financing.

[13]

RBC was not prepared to remove Willowbrook from
    Special Loans but agreed to Willowbrooks request for time to find alternative
    financing and provided 60 days to do so. Ultimately, all of Willowbrooks debt
    to RBC was discharged upon refinancing by another bank in April 2009.

[14]

Willowbrook was a profitable business throughout
    the time it banked with RBC. It never defaulted on any of its loans.

Trial judges
    findings

[15]

Willowbrook sued RBC and alleged that RBC exercised
    its contractual discretion in bad faith. Willowbrook argued at trial that RBC was
    obliged to advance additional credit because it had done so in the past. Willowbrook
    also argued that placing its accounts in Special Loans amounted to a
de
    facto
demand for repayment without notice.

[16]

The trial judge rejected Willowbrooks argument
    that RBC acted in bad faith. He found that RBC gave Willowbrook reasonable time
    to make other financial arrangements. After citing
Bhasin v. Hrynew
, 2014 SCC 71, [2014] 3 S.C.R. 494
,
he noted at para. 51 of his reasons:

One might
    question the financial wisdom of RBCs decision to limit the extension of
    financial relief to Willowbrook, but I cannot conclude that in doing so RBC
    acted in bad faith. RBC was simply exercising honestly its contractual
    entitlement. This exercise was not capricious or arbitrary.

[17]

At para. 57 of his reasons, the trial judge
    concluded that RBC acted in good faith throughout, consistent with its
    contractual rights and obligations.

Issues on
    appeal

[18]

On appeal, Willowbrook submits first that the trial
    judge erred in finding that RBC did not act in bad faith on December 5, 2008
    when it restricted Willowbrooks access to credit and transferred its accounts to
    Special Loans, both without reasonable notice.

[19]

Secondly, Willowbrook argues that RBC had a duty
    to exercise its discretionary powers in an objectively reasonable manner. RBC
    was not in danger of losing its money and should not, therefore, have subjected
    Willowbrook to Special Loans treatment. Willowbrook submits the trial judge
    erred by focusing only on whether RBC acted subjectively in good faith, and not
    whether RBCs actions were objectively reasonable.

[20]

Neither party challenges the trial judges
    findings of fact.

[21]

Willowbrook relies on
Thermo King
    Corp. v. Provincial Bank of Canada
(1981),
34 O.R. (2d) 369 (C.A.), [1981] O.J. No. 3136 and submits that RBC had
    a duty to give reasonable notice of a change to the prevailing course of lending
    conduct between the parties. Willowbrook submits that there was a prevailing
    course of lending conduct with RBC; temporary overdrafts had been granted in
    the past to fund its winter working capital needs. Willowbrook alleges that
    RBCs decision to reject the 2008 TAR and place its accounts under Special
    Loans management constituted changes to the prevailing course of lending
    conduct. Willowbrook argues that RBC was required to provide reasonable notice
    before implementing either change.

[22]

Willowbrook further contends that RBCs decision
    to place its accounts under Special Loans management was objectively unreasonable.
    It submits that RBCs subjective belief that it was acting in good faith does
    not shield RBC from liability for making objectively unreasonable discretionary
    decisions.

[23]

RBC agrees that a bank has a duty to provide
    reasonable notice to a customer if the bank intends to change a prevailing
    course of lending conduct with respect to overdraft accounts. RBC submits,
    however, that it never changed the prevailing course of lending conduct in this
    case. RBC argues it had allowed Willowbrook access to temporary overdraft
    credit facilities within agreed upon limits on the understanding they would be
    repaid annually. RBC submits the 2008 TAR constituted a request for additional
    credit as Willowbrook did not first repay the 2007 TAR. RBC submits that it responded
    reasonably to Willowbrooks failure to repay the 2007 TAR and Willowbrooks
    request for additional credit. Willowbrook, not RBC, proposed a change in their
    banking relationship.

[24]

With respect to its discretion to place
    Willowbrooks accounts into Special Loans, RBC submits that its decision was
    well founded in the context of this case. RBC asserts that, according to
Bhasin
, contracting parties are entitled to protect their own economic interests
    and that doing so, even where harm may be inflicted on the other party, is not
    a breach of the general principle of good faith. Moreover, RBC submits that the
    exercise of discretion in this case was a type of subjective discretionary
    decision-making intended to protect its own commercial best interests as
    recognized by this court in
Greenberg v. Meffert
(1985), 50 O.R. (2d) 755 (C.A.), [1985] O.J. No. 2539.

Analysis

Standard
    of review

[25]

The trial judges decision about whether RBC acted
    in bad faith is a question of mixed fact and law. It is owed deference absent an
    extricable error of law:
Housen v. Nikolaisen
,
    2002 SCC 33, [2002] S.C.R. 235, at paras. 10 and 36.

Did RBC act in bad
    faith by refusing to lend new money without notice?

[26]

This court held that a bank has a duty to give a
    customer reasonable notice of a change in the prevailing course of conduct with
    respect to overdraft lending in
Thermo King
,
    at para. 36. This reasonable notice duty is distinct from a banks more
    commonly litigated but separate duty to give reasonable notice before calling
    for repayment of a demand loan. This case concerns the former, not the latter.

[27]

As discussed in
Thermo King
, a banks duty to give reasonable notice of a change to a
    prevailing course of overdraft lending conduct existed at common law well
    before the Supreme Courts
Bhasin

decision. However,
    Cromwell J.s discussion in
Bhasin

regarding
    the good faith principle is nonetheless instructive as to the content and
    limits of the duty to provide reasonable notice in this case.

[28]

I will first review the underlying facts and
ratio
of
Thermo King
. In
Thermo
    King
, the bank allowed the customer to run an overdraft
    for three years, from 1973 to May 1976. The overdraft was required because the
    business performed poorly and suffered cash flow problems. The maximum amount
    of overdraft granted during that time was $30,086. Moreover, the customer owed
    the bank approximately $380,000 in other indebtedness.

[29]

On June 25, 1976, the customers account was
    overdrawn by $11,236. That day, the customer deposited $102,211 in cheques and
    asked the bank to issue a $100,000 cheque in U.S. funds. The deposit,
    therefore, removed the account from overdraft and resulted in a positive
    $89,949 account balance. The subsequent withdrawal request, however, would have
    put the account back into a $13,447 overdraft.

[30]

On June 29, 1976, without notice, the bank
    seized the funds in the customers current account as partial discharge of the
    customers other outstanding debts. The bank refused to issue the $100,000
    cheque that the customer needed to pay a supplier. Despite contractual language
    giving the bank the right to seize the funds for repayment of outstanding debts
    at any time, this court held that in light of the prevailing course of lending conduct,
    the bank did not have the right to lower the boom on the customer without
    advance notice. The bank was required to give reasonable notice of its decision
    to stop allowing overdrafts. Notably, the $13,447 of overdraft that would have
    resulted was less than the overdraft amounts the bank had previously extended to
    the customer.

[31]

There is no question that a prevailing course of
    lending conduct existed between the parties in this case. The conduct consisted
    of Willowbrook  making a TAR each winter and paying it down the following year
    before presenting  another TAR.

[32]

Here, however, it was Willowbrook that sought to
    change the prevailing course of lending conduct. It had not repaid the 2007 TAR,
    contrary to previous practice, and wanted an additional 2008 TAR. Willowbrook
    had exhausted its existing credit and it wanted more. RBC was not obliged to accede
    to Willowbrooks requests, especially since Willowbrooks requests would have
    resulted in RBC lending $500,000 more than it had ever lent to Willowbrook before:
Barclay Construction Corp. v. Bank of Montreal
(1989), 41 B.C.L.R. (2d) 239 at para. 12 (C.A.), [1989] B.C.J. No. 2257, at
    para. 12; and
XPG v. Royal Bank of Canada
,
    2017 ONSC 2598, at paras. 321-25.

[33]

Willowbrook essentially submits that reasonable
    notice meant that RBC had to continue to agree to advance new money during the
    alleged reasonable notice period. I do not agree. Here, RBC had little time to
    assess the request for more money after receiving the recent year-end financial
    statements. Willowbrook had run out of money by exhausting its credit limit at
    a time when it would have little revenue and substantial expenses.

[34]

Bhasin
does not require a lender in
    these circumstances to lend new money. In
Bhasin
, Cromwell J. stated at paras. 73, 80, and 86 that the new duty of
    honest contractual performance in that case: (i) did not require a party to
    forego advantages flowing from the contract; (ii) did not create commercial
    uncertainty in the law of contract; (iii) was clear and easy to apply; and (iv)
    did not impose a general duty on a contracting party to subordinate his or her
    interest to that of the other party. Moreover, at para. 70, Cromwell J.
    expressly wrote:

The principle of good faith must be applied in a manner that is
    consistent with the fundamental commitments of the common law of contract which
    generally places great weight on the freedom of contracting parties to pursue
    their individual self-interest.
In commerce, a
    party may sometimes cause loss to another  even intentionally  in the
    legitimate pursuit of economic self-interest
Doing so
    is not necessarily contrary to good faith and in some cases has actually been
    encouraged by the courts on the basis of economic efficiency

[Emphasis added.
    Citations omitted.]

[35]

Accordingly, I would dismiss this ground of
    appeal.

Did RBC act in bad faith by moving Willowbrooks
    accounts into Special Loans?

[36]

The parties agreed, and the record shows, that
    RBCs power to move an account into Special Loans was a discretionary power
    provided for by the lending contract. Willowbrook concedes that RBC did not
    violate any express term of the lending contracts in doing so.

[37]

While the existence of a Special Loans
    department might be a convenient label for internal bank purposes, Special
    Loans treatment is not a monolithic legal term of art carrying in itself a requirement
    for reasonable notice. The precise conduct of a bank and its position taken has
    to be assessed. For example, it could not be argued here that RBCs decision to
    change the account manager or to demand up-to-date financial information and
    appraisals in light of the request for additional credit and the failure to
    repay the 2007 TAR amounted to bad faith or was unreasonable.

[38]

Willowbrooks real complaint is that RBC would
    not extend additional credit during the alleged reasonable notice period. The principle
    of good faith performance of contractual obligations does not extend so far as
    to require RBC to subjugate its own financial interests by extending additional
    credit that it does not want to advance. There is no basis to hold that any
    other particular aspect of the Special Loans treatment was unreasonable or
    undertaken in bad faith, or that RBC had to give notice before reacting as they
    did to Willowbrooks changed circumstances and request for additional credit.

Did RBC exercise its contractual discretionary power
    in an objectively unreasonable manner and therefore act in bad faith?

[39]

Willowbrook submits that RBC had a duty to
    exercise its contractual discretion reasonably. Willowbrook contends that RBCs
    decision to move Willowbrooks accounts into Special Loans was objectively
    unreasonable and therefore amounted to bad faith. Willowbrook accepts the trial
    judges finding that RBCs employees did not subjectively act in bad faith.

[40]

Willowbrook relies on
Greenberg v.
    Meffert
(1985), 50 O.R. (2d) 755 (C.A.), [1985] O.J. No.
    2539. In that case, a contract provided that payment of a commission to a
    salesperson was solely within the employers discretion. This court observed at
    para. 18:

[T]he companys discretion in this matter is
    not unbridled, firstly, because the nature of this contract and the
    subject-matter of the discretion are such that the companys decision should be
    construed as being controlled by objective standards and secondly, because the
    exercise of the discretion, whether measured by subjective or objective
    standards, is subject to a requirement of honesty and good faith.

[41]

The
Greenberg
decision
    makes perfect sense. The parties could not reasonably have intended that the
    employer could arbitrarily deny commission. It was implicit that the discretion
    would have to be exercised reasonably.

[42]

Willowbrook submits that RBCs decision to place
    its accounts into Special Loans is similarly reviewable on an objective standard.
    It submits that the instant case is comparable to the facts of
Marshall

v. Bernard Place Corp
(2002), 58 O.R. (3d) 97 (C.A.),
    [2002] O.J. No. 463
.
I disagree.
Marshall

dealt with the scope of a residential home purchasers discretionary
    power to decline to waive a property inspection condition in a purchase and
    sale agreement. In that case, the inspection report noted that most
    deficiencies could be remedied at a minor cost, gave a rating of seven of nine,
    and described the property as a well-built house. On those facts, this court
    held at para. 21 that absent express contractual language to the contrary, an
    inspection report which identifies deficiencies in the construction or
    integrity of a house provides an objective basis on which to assess the
    potential exercise of discretion under a discretionary property inspection
    condition.

[43]

The factual context in
Marshall

is very different from RBCs business decision to move Willowbrooks
    accounts into Special Loans. The instant case does not concern a banks
    contractual discretion to realize upon its security, or to require repayment of
    a loan where it might well be appropriate to examine the reasonableness of
    those decisions. Rather, RBC made a choice to refuse to lend Willowbrook more
    money beyond limits to which each had previously agreed. When Willowbrook
    suggested that the parties end their banking relationship, RBC gave Willowbrook
    more time than they asked for to make those arrangements.

[44]

It is inapt to subject a banks decision whether
    to lend substantial new credit to an existing customer who is at the end of
    their credit limit to an objective reasonableness analysis. The choice whether
    to lend new money is at heart, a subjective business decision to be made by a bank.
    These decisions may be based on factors unrelated to a particular customer and
    should not be assessed by a court, after the fact, for objective fiscal
    prudence. (See
Fifth Third Bank v.

MPI Packaging Inc. et al
. 2013 ONCA 5 at. para. 12-16)  Nor was this a case where a bank
    acted dishonestly by promising additional financial support while secretly
    planning a receivership.

[45]

In any event, the trial judge identified some
    reasons why RBC might have decided to exercise its discretion to move
    Willowbrooks accounts into Special Loans. He ultimately found that RBCs
    decision was neither arbitrary nor capricious and was not in bad faith. There
    was no palpable or overriding error in these factual findings and I see no
    basis to interfere with the trial judges conclusions.

Did the trial
    judge err in his assessment of damages?

[46]

It is accordingly not necessary to deal with the
    assessment of damages.

Disposition

[47]

I would dismiss the appeal. If counsel are
    unable to resolve the issue of costs, RBC may make brief written submissions
    about costs due no later than 30 days after the release of this decision. Willowbrook
    shall respond within 15 days after receipt of RBCs costs submissions.

G. Pardu J.A.

I agree G.T. Trotter
    J.A.

I agree David M.
    Paciocco J.A.

Released: December 12, 2017


