



COURT OF APPEAL FOR ONTARIO

CITATION: 2161907 Alberta Ltd. v. 11180673
    Canada Inc., 2021 ONCA 590

DATE: 20210830

DOCKET: C68698

Rouleau, Hoy and van Rensburg
    JJ.A.

BETWEEN

2161907 Alberta Ltd.

Applicant (Appellant)

and

11180673 Canada Inc.

Respondent
    (Respondent)

J. Thomas Curry, Brian Kolenda and
    Aoife Quinn, for the appellant

Jeffrey Hoffman, for the respondent

Heard: June 3, 2021 by video conference

On appeal from the judgment of Justice Cory
    A. Gilmore of the Superior Court of Justice, dated September 11, 2020, with
    reasons reported at 2020 ONSC 5409.

Rouleau J.A.:

OVERVIEW

[1]

2161907 Alberta Ltd. (
216
) holds the Ontario rights to
    the Tokyo Smoke cannabis brand, which it licenses to various retail
    operators. 11180673 Canada Inc. (
111
)
    and its principal, Mr. Robert Heydon, won a cannabis retail operator license in
    the allocation lottery held by the Alcohol and Gaming Commission of Ontario (
AGCO
) in August 2019.

[2]

In November 2019, the parties entered into a series
    of agreements for the operation of a Tokyo Smoke-branded cannabis store in
    Toronto. These agreements included a License Agreement for the use of the Tokyo
    Smoke brand and a Sublease whereby 111 rented the retail premises from 216. 216
    offered 111 funding for start-up costs, including rent, and an inducement of
    approximately $2 million to open under the Tokyo Smoke banner (the Branding
    Fee). The Branding Fee would come due once 111 obtained its Retail Store
    Authorization from the AGCO.

[3]

Two days before the store was supposed to open,
    a dispute arose as to 216s obligation to fund the payment of 111s rent for the
    month of opening. Faced with 216s refusal to pay, 111 advised 216 that it
    would not be opening the store as planned. 216 took the position that this was
    a threat to cease carrying on business and accordingly constituted a breach of
    their agreement. 216 terminated its relationship with 111, refusing to pay the Branding
    Fee.

[4]

216 brought an application seeking a declaration
    that 111 had breached the various agreements in effect between the parties,
    that the Branding Fee was not payable to 111, and that 111 must therefore
    vacate the retail premises. 111 brought a counter-application seeking, among
    other things, payment of the Branding Fee and a declaration that 216 had wrongfully
    terminated the License Agreement and breached its duty of good faith in the
    performance and enforcement of contractual relations. The application judge
    dismissed 216s application and granted 111s application. She declared that
    216 had no valid reason to terminate the agreements, that it had acted in bad
    faith, and ordered 216 to pay the Branding Fee.

Issues

[5]

216 raises three issues on appeal:

a.

Did
    the application judge err in finding that 216s termination of the License
    Agreement was invalid?

b.

Did
    the application judge err in finding that 216 had breached the duty of good
    faith?

c.

Did the application
    judge err in failing to issue a declaration that the Sublease between the
    parties was validly terminated on August 5, 2020?

[6]

For the reasons that follow, I would set aside
    the finding of bad faith, but would dismiss the balance of the appeal.

FACTUAL BACKGROUND

[7]

In August 2019, 111 won the right to apply for a
    Retail Operator Licence and Retail Store Authorization in the AGCO allocation
    lottery, permitting 111 to open a retail cannabis store.

[8]

216 approached Mr. Heydon with a proposal that
    he open his retail location under the Tokyo Smoke banner for which 216 held
    the Ontario rights under licence from a subsidiary of Canopy Growth Corporation
    (Canopy).

[9]

Between November 1 and November 7, 2019, the
    parties entered into the three agreements at issue in this case:

a.

Under the Sublease, 111 rented the retail
    premises, as Subtenant, from 216, as Sublandlord, at a monthly rent of
    $105,409.03. 216 in turn rented the premises from First Capital Holdings
    (Ontario) Corporation.

b.

Under the License Agreement, 216 granted 111 the
    right to use Tokyo Smoke brand marks in the retail storefront and in its
    marketing materials subject to 216s rights of supervision. The License
    Agreement stipulated that 216 would pay 111 an up-front Branding Fee of approximately
    $2 million upon the fulfillment of certain conditions, including the issuance
    of a Retail Store Authorization by the AGCO.

c.

Under the Loan Agreement, 216 agreed to advance
    roughly $1.5 million in start-up costs to 111.


i.

Loan A
    provided for a maximum loan of up to $750,000, plus the aggregate amount of
    rent due under the Sublease up to the opening of the store. Loan A was intended
    to finance construction improvements to the premises, decorations, security,
    point of sale systems, and other equipment.


ii.

Loan B provided for a
    maximum loan of up to $750,000 to finance the purchase of inventory, insurance,
    and human resources.

[10]

The parties anticipated that the store would
    open in early June 2020.

[11]

On May 31, 2020 Mr. Heydon wrote to 216 to
    confirm that he could draw on Loan A to pay June rent. 216s representative,
    Mr. Graydon Calvert, advised Mr. Heydon that the draw was limited to the
    prorated amount of $10,540 for the first three days of June before the store
    opened. This left 111 with a shortfall of $95,000 in rent for the month.

[12]

The next day, June 1, Mr. Heydon sought the
    additional $95,000 in rent for June. Mr. Justin Farbstein, the president of
    216, responded that Mr. Heydon was at the max of the facility and that he was
    not able to grant more. As it turned out, Mr. Farbstein was mistaken. He would
    later admit on cross-examination that Loan A should have covered the amounts
    sought by Mr. Heydon.

[13]

Faced with 216s refusal to fund the balance of
    the June rent, Mr. Heydon responded: Please inform Canopy that we will NOT be
    opening. I will lay off the staff tomorrow. Mr. Farbstein called Mr. Heydon
    that same evening to calm him down, indicating that he could likely arrange
    to have the rent payment deferred and that, in any event, the Branding Fee
    would soon be paid. It was more than sufficient to cover rent for June.

[14]

On the morning of June 2, the AGCO gave 111
    final approval to open for business. 111 forwarded the approval notice to 216 as
    proof that the final condition for the payment of the Branding Fee had been
    satisfied. Mr. Farbstein again confirmed, on behalf of 216, that the Branding
    Fee would be paid later in the week in accordance with the License Agreement
    now that all conditions for the payment of the Branding Fee had been met.

[15]

In the late morning of June 2, Mr. Farbstein reviewed
    the License Agreement and concluded that Mr. Heydons statements  the previous
    day that 111 would not be opening the store constituted a threat to cease to
    carry on business contrary to the License Agreement. Mr. Farbstein indicated
    in cross-examination that he sought instructions from 216s parent company and
    communicated with both external and internal counsel. Then, at around noon on
    June 2, Mr. Farbstein instructed external counsel to begin drafting a notice
    terminating the License Agreement. 216 pulled its staff from the retail
    premises and, at 4:26 p.m., sent 111 a Notice of Defaults indicating that the
    License Agreement had been terminated.

[16]

Mr. Heydon did not follow through on his threat.
    111 responded to 216s Notice of Defaults through counsel and carried on with
    the planned opening. The store opened to the public on June 3, 2020.

[17]

216 did not pay the Branding Fee. On July 2,
    2020, it commenced this application seeking, among other things, a declaration
    that the License Agreement was validly terminated.

[18]

111 did not make its June and July rent
    payments. On August 5, 2020, 216 gave notice of termination of the Sublease,
    citing the missed rent payments. 216 subsequently amended its notice of
    application to seek a further declaration that the Sublease was validly
    terminated on August 5 as a result of unpaid rent.

Decision
    below

[19]

The application judge found that Mr. Heydons
    communication to the effect that he would not be opening the store and would be
    laying off staff was not an event of default under the License Agreement. It
    was an emotional response to being given incorrect information at a critical
    time. As a result, she concluded that 216s termination of the License
    Agreement was invalid. The application judge went on to find, based on Mr.
    Farbsteins admission in cross-examination that on the morning of June 2, 2020,
    216 was looking for a way to end the relationship with 111, that 216 had
    pounced on the statement made by Mr. Heydon as a way to terminate the
    relationship and avoid paying the Branding Fee, and therefore that 216s
    termination of the agreements was not done in good faith.

[20]

The application judge also found that the Branding
    Fee was due and owing, subject to certain deductions, including set-off for
    111s unpaid rent between June and September 2020. The issue of damages was
    left to be determined at trial or by agreement between the parties.

DID THE APPLICATION JUDGE ERR IN FINDING THAT 216S
    TERMINATION OF THE LICENSE AGREEMENT WAS INVALID?

[21]

216 submits that it validly terminated the
    License Agreement in response to a genuine threat to cease carrying on business
    by Mr. Heydon. 216 relies on the following paragraph of the License Agreement:

26.
    The Licensor has the right, without liability, cost or penalty, to terminate
    this agreement with immediate effect on written notice to the Licensee if one
    or more of the following occurs.

(c) the Licensee ceases or
threatens to cease to
    carry on business
, or takes
    or threatens to take any action to liquidate its assets, or stops making
    payments in the usual course of business; [Emphasis added.]

[22]

216 argues that the application judge erred in
    finding that Mr. Heydons statement that he intended to cease operations did
    not constitute grounds for termination under the License Agreement because it
    was an emotional response. 216 submits that there were in fact several
    statements made to different representatives of 216 and Canopy. 216 further
    submits that it was an error of law for the application judge to have expected 216
    to discern Mr. Heydons subjective intention for the statements, and for the
    application judge to have relied on Mr. Heydons subjective intention to
    determine whether those statements were indeed threats to cease to carry on
    business.

[23]

According to 216, the application judge had to
    determine what a reasonable person, circumstanced as the actual parties were,
    would have had in mind when Mr. Heydons statements were made. See
Goodyear
    Canada Inc. v. Burnhamthorpe Square Inc.
(1998), 41 O.R. (3d) 321 (C.A.),
    at para. 88. 216 cites three communications:

a)

Mr. Heydons June 1 email to 216 stating:
    Please inform Canopy we will NOT be opening. I will lay off the staff tomorrow;

b)

Mr. Heydons June 1 email to a representative of
    Canopy with the subject line Still no rent on the table stating I also have
    to pay payroll this week. So if we cannot sort by tomorrow, I will be forced to
    lay off the staff;

c)

Mr. Heydons oral communications with 216s on-site
    staff, whom he advised that the store would not be opening due to issues
    regarding rent with 216.

[24]

216 argues that, viewed objectively, these three
    communications from Mr. Heydon to 216, Canopy and 216s on-site representatives
    clearly constituted a threat to cease to carry on business entitling 216 to
    terminate the agreement.

[25]

I disagree.

[26]

The interpretation of commercial agreements
    involves questions of mixed fact and law. A trial judges interpretation and
    application of contractual terms is owed deference on appeal:
Sattva
    Capital Corp. v. Creston Moly Corp.
, 2014 SCC 53, [2014] 2 S.C.R. 633.

[27]

In this case, the application judge was called
    upon to determine whether the statements made by Mr. Heydon on June 1
    constituted a threat to cease to carry on business for the purposes of paragraph
    26(c) of the License Agreement. As the Supreme Court stated in
Sattva
,
    at para. 47, [t]he overriding concern is to determine the intent of the
    parties and the scope of their understanding by reading the contract as a
    whole and giving the words used their ordinary and grammatical meaning
    consistent with the surrounding circumstances known to the parties at the time of
    formation of the contract.

[28]

Unfortunately, the application judge did not
    expressly grapple with the scope or purpose of paragraph 26(c), nor did she explore
    the parties intentions in including it in their agreement. On appeal, neither
    party sought to explain the rationale for paragraph 26(c). Without this crucial
    framing, it is difficult to determine whether Mr. Heydons statements were, as
    a matter of contractual interpretation, threats for the purposes of paragraph
    26(c). In other words, while, on their face, Mr. Heydons statements were a
    threat not to open, were these threats that would trigger default under the
    License Agreement?

[29]

In my view, there are at least two possible
    interpretations of paragraph 26(c), one of which the application judge
    implicitly adopted and the other she implicitly rejected.

[30]

Under the first interpretation, paragraph 26(c)
    seeks to prevent the licensee from making what are, on their face, threats to
    cease carrying on business or threats to take any action to liquidate its
    assets. In other words, the clause is directed at preventing the licensee from
    making these kinds of statements whether or not the licensee intends to carry
    out the threatened action or the licensor expects that the threat will be
    carried out. The logic behind such an interpretation would be that the License
    Agreement was set to last for a 10-year initial term. Threats and brinkmanship
    exhibited by the licensee would be corrosive to such a long-term relationship,
    especially if such threats were used as a negotiating or pressure tactic.
    Moreover, as Mr. Farbstein repeatedly stressed in his evidence, 216 was
    concerned about preserving its relationship with Canopy, the master licensor of
    the Tokyo Smoke brand. Threats of closure by a branded store, whether acted
    upon or not, might be viewed as injuring the brand.

[31]

The second interpretation would require the
    threat to be objectively credible in order to trigger default under the
    agreement. This second interpretation recognizes that the language of paragraph
    26(c) contemplates more than threats to cease to carry on business: it is also
    an event of default under paragraph 26(c) for 111 to take action or threaten to
    take action to liquidate its assets, or to stop making payments in the usual
    course of business. Taken as a whole, paragraph 26(c) can be viewed as seeking
    to preserve the licensors rights in the event of a looming insolvency. Indeed,
    paragraph 26(d), addresses formal insolvency proceedings, and paragraph 26(e)
    makes it an event of default for 111 to cease to operate the Business at the
    Store for a period of more than thirty (30) consecutive days. It is reasonable
    that 216 would seek to preserve its right to terminate the License Agreement in
    such circumstances, both to pre-empt the uncertainty associated with insolvency
    and to avoid its brand materials becoming associated with a defunct or
    inoperative storefront in a fashionable neighbourhood. Viewed through this
    lens, paragraph 26(c) is directed toward credible threats to cease to carry on
    business which would require 216 to take action to preserve its intellectual
    property rights. From the application judges reasons, it is apparent that she
    interpreted paragraph 26(c) in this way. Such an interpretation is reasonable
    in the circumstances and I see no basis to interfere.

[32]

The application judge correctly noted that 111s
    communications during the evening of June 1 had to be viewed in context. Mr. Heydon
    had just been told that 216 would not be advancing the money needed to pay the
    June rent. He believed that this was a breach of 216s obligation pursuant to
    the agreements between the parties. It turned out that he was in fact correct
    in that regard and 216 ought to have financed the payment of the June rent.

[33]

On June 1, 2020, as a consequence of 216s
    mistake, Mr. Heydon was faced with an unexpected shortfall of $95,000. There
    was therefore uncertainty as to whether 111 could be ready to open on June 3.

[34]

The application judge had before her the email
    chain between Canopy and Mr. Heydon and between 216 (represented by Mr. Calvert
    and Mr. Farbstein) and Mr. Heydon from June 1. These emails show that Mr. Heydon
    was reacting to the fact that he had been denied the June rent advance:

Canopy - 4:00 pm: Can we confirm that we will
    be opening the doors as per your regular store hours?

Heydon - 4:26 pm: No, we are not. Just need to
    sort out rent.

Calvert - 6:48 pm: Can you clarify your
    comments? As discussed in last nights email we fund the prorated portion of
    June rent ($10k) in Loan A. Is there something outside of this that would
    prevent you from opening?

Heydon - 7:38 pm: The other 95k

Farbstein - 7:41 pm: Rob  you are at the max
    of the facility. I am not able to grant more.

Heydon - 7:48 pm:
    Ok, thank you. Please inform Canopy we will NOT be opening. I will lay off the
    staff tomorrow.

[35]

In a separate email to Canopy at 8:16 p.m. with
    the subject line Still no rent on the table Mr. Heydon wrote: I also have
    to pay payroll this week. So if we cannot sort by tomorrow I will be forced to
    lay off the staff.

[36]

Significantly, during the evening of June 1,
    with these exchanges ongoing, Mr. Farbstein called Mr. Heydon to calm him
    down and reassure him that everything was going to be ok. He reiterated that
    216 would pay 111 the Branding Fee as agreed. In other words, Mr. Farbstein responded
    to the threat in a manner suggesting that he could address Mr. Heydons
    concerns and that a closure could and would be avoided. In fact, by the time
    the Notice of Defaults was sent, it would have been apparent that Mr. Heydon
    was moving forward with the planned opening.

[37]

Given the context, I see nothing unreasonable in
    the application judges conclusion that Mr. Heydons communication did not
    constitute a threat entitling 216 to terminate the License Agreement. An
    objective observer would understand that Mr. Heydon was facing a problem: how
    was he to cover the June rent and open on June 3 given the last-minute wrongful
    withholding of needed funds? Indeed, despite Mr. Heydons threat not to open
    and to lay off staff, his frustration provided an objective manifestation of
    his strong desire to open as planned, not an intent to shutter the store.

[38]

Contrary to 216s submission, the application
    judges finding that Mr. Heydons behaviour was an emotional response to being
    given incorrect information at a critical time was not simply based on Mr. Heydons
    subjective frustration. It was based on the application judges objective
    assessment of the parties exchanges in light of the language of the agreement
    and the factual context.

[39]

In my view, on this record, the application
    judges finding that Mr. Heydons emotional frustration, viewed in context, did
    not meet the requirements of the parties termination clause was clearly reasonable.
    For the threats to be treated as an event of default under the License
    Agreement, a degree of objective credibility  or objective intent  or a real
    risk that Mr. Heydons threats would be carried out was required. As a finding
    of mixed fact and law, the application judges conclusion is owed deference on
    appeal and I see no basis to interfere.

Did the application JUDGE err
    in finding that 216 had breached its duty of good faith?

[40]

216 acknowledges that the License Agreement
    contained an express contractual duty of good faith that bound both parties.
    However, 216 argues that the application judge erred in law in finding that 216
    had breached that duty or the common law duty of good faith in contractual
    performance. In 216s submission, the application judge equated what she held
    was an invalid termination of the License Agreement with bad faith because 216 was
    looking for a way to get out of the relationship. 216 takes the position that a
    party does not act in bad faith merely because its error concerning its
    contractual termination rights achieved an additional objective, fulfilling its
    desire to end the relationship.

[41]

111 for its part argues that 216 acted in bad
    faith by misleading 111 about the funds available to it under Loan A and by
    leading 111 to believe that the Branding Fee would be paid and the rent
    deferred. Shortly after giving these assurances, 216 terminated the License
    Agreement. In its factum, 111 submits that this conduct revealed 216s true
    intention, namely, to seek to end its relationship with 111 and seize 111s
    business without paying the Branding Fee and without compensating 111. 111
    submits that all of these findings were open to the application judge on this
    record and constitute a breach of 216s duty of honest performance.

The Law

[42]

The Supreme Court in
Bhasin v. Hrynew
, 2014 SCC 71, [2014] 3 S.C.R. 494,
explained that good faith contractual performance is a general organizing
    principle of the common law of contract. The court also recognized a more
    specific manifestation of the organizing principle in the duty to act
    honestly in the performance of contractual obligations: at para. 33. In this
    case, there is no issue as to the existence of a duty of good faith since the
    parties expressly stipulated such a duty in the License Agreement. The issue is
    therefore to determine the content of that duty in the circumstances and
    whether it was breached.

[43]

Good faith requires simply that parties
    generally must perform their contractual duties honestly and reasonably and not
    capriciously or arbitrarily:
Bhasin
, at para. 63. The duty requires
    that in carrying out his or her own performance of the contract, a contracting
    party should have appropriate regard to the legitimate contractual interests of
    the contracting partner:
Bhasin
, at para. 65. It does not require
    that contracting parties serve each others interests. However, they may not
    seek to undermine those interests in bad faith.

[44]

In
Bhasin
, the
    court identified four distinct legal doctrines operating as manifestations of
    the general organizing principle: 1) the duty of cooperation between the
    parties to achieve the objects of the contract; 2) the duty to exercise
    contractual discretion in good faith; 3) the duty not to evade contractual
    obligations in bad faith; and 4) the duty of honest performance. These
    doctrines generally reflect the situations and relationships in which the law
    requires contracts to be performed honestly, and reasonably, and not capriciously
    or arbitrarily. Accordingly, the list of recognized duties is not closed:
Bhasin
,
    at para. 66
.

[45]

The application judge did not specify which of
    these doctrines was at play in this case, nor did she have the benefit of the
    Supreme Courts decisions in
C.M. Callow Inc. v. Zollinger
, 2020 SCC 45, 452 D.L.R. (4th) 44, or
Wastech
    Services Ltd. v. Greater Vancouver Sewerage and Drainage District,
2021 SCC 7, 454 D.L.R. (4th) 1, both of which were
    released after her decision
. In its notice of counter-application
    and its factum, 111 focusses on the duty of honest performance. 111 alleges
    that 216 knowingly misled 111 about the amounts available to it under the Loan
    Agreement, that the Branding Fee would be paid and that rent would be deferred.
    After knowingly misleading 111 in this way, it simply terminated the agreement.
    111 further alleges that 216 terminated the agreement to avoid payment of the Branding
    Fee. All of this conduct, in 111s submission, amounts to a breach of the duty
    of honest performance.

Analysis

[46]

The application judge set out her finding of bad
    faith in five paragraphs at the end of her reasons. She concluded as follows:

While I do not
    find that 216 lied to 111, it pounced on a single statement made by Mr. Heydon
    as a basis to trigger default, thereby achieving its goal of ending the relationship
    with Mr. Heydon and attempting to discharge its obligation to pay the Branding
    Fee.

[47]

While the application judges conclusion clearly
    rested on her finding that 216 pounced on Mr. Heydons threat, 111 argues
    that the record discloses, and it is implicit from her reasons, that other
    sources of bad faith informed the application judges analysis.

[48]

In what follows, I address four potential
    sources or instantiations of bad faith: first, that 216 knowingly misled 111;
    second, that 216 pounced on a default that it did not believe had occurred;
    third, that 216 sought to evade payment of the Branding Fee in bad faith; and
    fourth, that 216 seized upon a breach of its own making as in
Mason v. Freedman
,
    [1958] S.C.R. 483.

(1)

216 did not knowingly mislead 111

[49]

I turn first to the question of whether 216
    knowingly misled 111 at any point. In my view, the application judges finding
    that 216 did not lie to 111 and that Mr. Farbstein did not act dishonestly is
    critical in this respect. As I will explain, it is apparent from the
    application judges finding on this point that, when Mr. Farbstein informed 111
    about the amounts available to it under the Loan Agreement and that he intended
    to pay the Branding Fee and seek to have the June rent deferred, he was not, as
    111 alleges, knowingly misleading Mr. Heydon.

[50]

I accept that it is possible to mislead in many
    ways: lies, half-truths, omissions, and even silence. In this case, it is
    acknowledged that at various points, 216 misled or misinformed 111, or changed its
    position. The critical issue, however, is whether Mr. Farbstein or 216
    knowingly misled 111:
Bhasin
at para. 73. In this respect, it is
    significant that the application judge found that Mr. Farbstein did not lie to
    111 at any point. Further, nothing in the application judges reasons suggest
    that she rejected any element of Mr. Farbsteins testimony or made an adverse
    credibility finding against him. Mr. Farbsteins evidence on at least three key
    points indicates that he never intended to mislead 111 or Mr. Heydon.

[51]

First, Mr. Farbstein admitted on
    cross-examination that he was mistaken when he told Mr. Heydon that 216 was not
    required to fund the June rent. He did not lie or knowingly withhold
    information. Thus, while 111 received false information, there is no basis for
    saying that 216 knowingly misled 111.

[52]

Second, Mr. Farbstein gave evidence that when he
    called Mr. Heydon during the evening of June 1 to calm him down, he did not
    say that 111 was in default because he did not believe 111 was in default at
    that time. He told Mr. Heydon that 216 would pay the Branding Fee later in the
    week and that it would work with the landlord to defer rent until 111 was able
    to pay, as appears from the following excerpt from Mr. Farbsteins cross-examination:

Q: Say, at the time you made this statement
    that you would pay the Branding Fee later that week and you would go speak to
    the landlord about deferring rent, those statements were true at the time you
    made them, right?

A: Correct.
Those are
    true
.

Q: And you didnt tell him in that phone call
    that his agreements with 216 were at risk of being terminated, did you?

A: I didnt tell
    him because at that point, I had  it wasnt in my head at risk of being 
I hadnt thought about terminating at that point
. I was
    thinking to try and just  so I do tell him that.

[53]

Third, Mr. Farbstein admitted that his email of
    June 2 at 9:24 a.m., in which he reiterated that the Branding Fee would be paid
    and a rent deferral sought, was honest and reflected his true intention at the
    time, despite the fact that 216 was considering ways to terminate the
    relationship. He stated:

Q: Did you say at that point in time, 9:24 a.m. on June 2nd,
    you didnt think he was in default or you wouldnt have written that, right?

A: Thats what I said.



A:
At that point at
    9:24, I did not think he was in default because at that point, I had not
    re-reviewed the License Agreements
. So I thought at that point he
    wasnt in default and that I owed him the Branding Fee at that point in time,
    9:24, when I sent that email. Youre correct.



Q: Was [216] looking for a way to get out of the relationship
    with 111?

A: On the morning of June 2nd, it
    was looking for a way to end the relationship with 111, correct.

[54]

Taken together, the uncontradicted evidence is
    that 216 did not, at any point, knowingly mislead 111 about its intention with
    respect to the Branding Fee or the deferral of rent. In fact, because the
    application judge made a finding that Mr. Farbstein did not lie to 111, it is
    apparent that the assurance given to Mr. Heydon reflected Mr. Farbsteins
    honest belief at the time they were made. He had not reviewed the agreements or
    spoken with counsel. Mr. Farbstein explained that he did not form a concrete
    intention to terminate the agreement until after 9:24 a.m. on June 2, at which
    point he had reviewed the License Agreement and determined that Mr. Heydons
    threat gave 216 cause to terminate and that the Branding Fee was no longer due.
    He then contacted internal and external counsel to validate his thoughts on
    the termination before instructing external counsel to draft a notice.

[55]

216 did not, as 111 suggests, actively mislead 111.
    It simply changed positions in light of new information. The application judge
    made no finding that the change in position was taken dishonestly or
    unreasonably nor is there any suggestion that it was taken capriciously or arbitrarily.

(2)

Pouncing by 216 did not constitute bad faith

[56]

The application judges conclusion that 216
    acted in bad faith is more plausibly anchored to her finding that 216 pounced on
    a single statement made by Mr. Heydon as a basis to trigger default, thereby
    achieving its goal of ending the relationship  and attempting to discharge its
    obligation to pay the Branding Fee. In my view, however, 216s act of pouncing
    did not constitute bad faith in this case.

[57]

Setting aside the factual question of whether Mr.
    Heydon made a single statement or several statements, the more fundamental difficulty
    I have with this as a basis for finding that there was a breach of the duty of honest
    performance and bad faith on the part of the appellant is that the application
    judge made no finding of dishonesty and such a finding cannot be inferred from
    her reasons. A party is not prevented from exercising a right of termination
    simply because it wishes to bring its relationship with the other party to an
    end. Nor should a party be prevented from ending a relationship because it will
    deprive the defaulting party of a payment that it would have received had the
    relationship continued. Where a party is anxious to end a relationship, and a valid
    reason to do so presents itself, that party is not, in the absence of some
    other relevant fact, prevented from pouncing on it.

[58]

While 216s basis for terminating the License
    Agreement ultimately proved invalid, as discussed above, its position on
    termination was not unreasonable, malicious, or so inconsiderate of 111s
    legitimate contractual interests as to constitute bad faith. It was neither
    manufactured nor concocted. Mr. Farbstein believed Mr. Heydons threat
    constituted a breach.

[59]

I also see no basis for concluding that 216s
    change in position was capricious or arbitrary. Mr. Farbstein reviewed the
    License Agreement and spoke with counsel before taking the position that Mr.
    Heydons threat constituted an event of default.

[60]

Mr. Farbsteins conduct following Mr. Heydons
    threatening statements is consistent with Mr. Farbstein having viewed Mr.
    Heydons communication as a genuine and credible threat, even if he did not
    immediately recognize that such a threat could constitute an event of default
    under the License Agreement. Mr. Farbstein called Mr. Heydon because at ten
    months trying to get the store opened and I was threatened two nights before
    the store was opened that it wasnt going to be open, and so, my reaction was
    to try to calm him down  If I wasnt concerned, I wouldnt call him. I was
    concerned. He then promised and ultimately did speak with the landlord about a
    possible rent deferral, and reported on the situation to 216s parent company
    at least twice between 8:30 p.m. on June 1 and 10:00 a.m. on June 2. Mr.
    Farbsteins actions suggest that he saw Mr. Heydons communications as more than
    empty threats or posturing.

[61]

While Mr. Farbstein may well have understood by
    sometime on June 2 that, despite his threat, Mr. Heydon would in fact open the
    store on June 3, 216 had an  interest in ending such threats, especially those
    sent directly to Canopy, 216s master licensor. As I have noted, it is possible
    to read paragraph 26(c) of the License Agreement as permitting termination when
    a party makes what, on its face, is a significant threat, even if such threat is
    later withdrawn or may be considered unlikely to be carried out. Such an
    interpretation acknowledges 216s legitimate contractual interest in preserving
    its own relationship with Canopy and enjoying a commercial relationship with
    111 free of brinkmanship. As Mr. Farbstein deposed: That type of [threatening]
    behaviour by 216s sublicensees may cause Canopy to lose confidence in 216, and
    undermine its business relationship.

[62]

The evidence is that the relationship between
    216 and 111 was difficult because Mr. Heydon bristled at any intervention by
    216. The threat was, from 216s perspective, serious. As the application judge
    observed:

a)

216 saw 111s threat as a shakedown for
    additional funds;

b)

216 was concerned that Mr. Heydons behaviour
    reflected negatively on his capacity to act honestly; and

c)

the fact that Mr. Heydons threat was sent
    directly to Canopy worried 216 that this could cause Canopy to lose confidence
    in it.

[63]

Mr. Farbstein confirmed in his evidence that, by
    June 2, 216 had serious reservations about being in business with 111 for the
    next 10 years. As he admitted on cross-examination, Mr. Farbstein returned to
    the License Agreement early on June 2 with a view to determining whether the
    threat constituted a breach that justified terminating the relationship with
    111: I, you know, took some time and re-looked at the License Agreement and
    believed that the email that happened the night before may be cause for
    termination of License Agreement because I perceived that as a threat. The
    breach he ultimately invoked was based on 216s understanding that the threat
    was the type of threat contemplated by paragraph 26(c). That interpretation was
    wrong but, absent a finding that it was a position manufactured to achieve 216s
    objective of ending the relationship, an unreasonable position, or a position
    taken capriciously or arbitrarily, it constitutes an error and no more. This
    was a fluid situation at a crucial point in the commercial relationship with
    both parties evaluating and re-evaluating their legal rights in real time.

[64]

In my view, the finding that  216 had a desire
    to end its relationship with 111 and chose to pounce on what, incorrectly, it
    saw as providing the opportunity to do so was not sufficient to justify a
    finding of bad faith. I would therefore set aside the application judges
    finding of bad faith.

(3)

The Branding Fee

[65]

111 argues that 216s true intention in
    terminating the agreements was to seize 111s business without paying the
    Branding Fee. Although the application judges reasons do not set out an
    express finding on this point, 111 submits that such a finding is implied in
    her conclusion that 216 pounced on 111s statement to trigger default, thereby
    achieving its goal of ending the relationship with Mr. Heydon and attempting to
    discharge its obligation to pay the Branding Fee.

[66]

I disagree. I acknowledge that, in
Bhasin
,
    the Supreme Court explained that a party has a duty not to evade its
    contractual obligations in bad faith. As a result, a party that manufactures an
    artificial reason to terminate a contract in order to avoid future payment
    obligations would likely be found to have acted in bad faith. However, as
    explained above, 216 believed the termination was justified. The fact that
    termination releases a party from making a significant payment does not amount
    to bad faith, even where a court later finds that the termination was invalid.

[67]

The issue of the Branding Fee was put directly
    to Mr. Farbstein in cross-examination:

Q. All right. Did 216 start to regret the fact
    that it obligated itself to pay a Branding Fee, a $2 million Branding Fee, to
    Mr. Heydon once the market opened up in 2020?

A. It did not.

Q. Was it looking for a way to avoid the
    payment of that fee?

A. Nope.

[68]

The application judge did not reject this evidence.
    Without an adverse credibility finding against Mr. Farbstein or some other reason
    to reject his testimony, there is no basis for 111s suggestion that the
    termination of the License Agreement was an excuse manufactured by 216 to avoid
    payment of the Branding Fee. If 216s goal of ending the relationship with Mr.
    Heydon was achieved legitimately by the exercise of an express termination
    right, it would, as far as Mr. Farbstein understood at the time, result in the
    discharge of 216s obligation to pay the Branding Fee. This alone does not support
    a finding of bad faith.

(4)

Does the doctrine in
Mason
    v. Freedman
apply?

[69]

While it was
    not explicitly argued in this way, 111 effectively takes the position that 216
    should not be permitted to evade its contractual obligation to pay the Branding
    Fee by invoking a breach of its own making. It was Mr. Farbsteins erroneous
    interpretation of the License Agreement that caused Mr. Heydons emotional
    response, which 216 then claimed was a threat in violation of the License Agreement.
    216s attempt to seize upon the consequences of its own mistake is arguably
    another way that 216 sought to evade its contractual obligations in bad faith,
    contrary to the duty described above.

[70]

Again, I
    disagree. In
Bhasin
, the Supreme Court illustrated the duty not to evade
    contractual obligations in bad faith with reference to the case of
Mason
.
    In
Mason
, a vendor of real property attempted to repudiate an agreement
    of sale on the basis that he was unable or unwilling to remove a defect on
    title because his wife would not provide a bar of dower. The evidence, however,
    revealed that the vendor had made no effort to remove the defect on title in a
    deliberate attempt to sabotage the sale and escape his bargain.

[71]

In this case,
    the evidence is that Mr. Farbstein simply misinterpreted the Loan Agreement
    when he made the statements that triggered Mr. Heydons emotional response,
    which Mr. Farbstein in turn perceived as an event of default. Unlike
Mason
,
    there was no deliberate attempt to create the conditions giving rise to 216s
    right of termination. While Mr. Heydons reaction was, in the sequence of
    events, a default of 216s own making, it is not analogous to the vendors
    actions in
Mason
. In my view, it would not be appropriate to
    characterize 216s error as bad faith simply because that error set in motion
    the events that would culminate with 216s invalid termination of the License
    Agreement. This is quite simply a case of breach of contract.

Conclusion on Good Faith

[72]

Put simply, in terminating the License
    Agreement, 216 did not seek to undermine 111s interests in bad faith. While 216s
    notice of termination was, by definition, an attempt to put an end to the agreement,
    the termination right in question formed part of the parties bargain and
    reflected, among other things, the licensors legitimate interest in protecting
    its brand in circumstances that the parties expressly stipulated would give
    rise to a right of termination. The fact that Mr. Farbstein erroneously
    believed those circumstances were present does not amount to bad faith.

[73]

As I have explained, the application judges
    findings do not, in law, make out the necessary requirements for bad faith. That
    finding must be set aside.

DID THE APPLICATION JUDGE ERR IN FAILING TO DECLARE THAT
    THE SUBLEASE WAS TERMINATED IN AUGUST 2020?

[74]

216 argues that the application judge was
    obliged to declare that the Sublease was validly terminated on August 5, 2020
    and that, consequently, the License Agreement was frustrated and at an end.

[75]

As noted, 111 failed to pay June and July rent
    after the purported termination of the License Agreement on June 2. 216 gave
    111 notice that it intended to terminate the Sublease for failure to pay, and
    it gave 111 an opportunity to cure the breach. 111 was unable to cure the
    breach and 216 terminated the Sublease for failure to pay June and July rent
    and sought a declaration that the Sublease was at an end. 216 argues that the
    application judge simply failed to address these issues.

[76]

216 maintains that once the Sublease was
    terminated the License Agreement was frustrated. The License Agreement
    permitted 111 to use the Tokyo Smoke brand only at the Store, defined as the
    Licensees retail cannabis store to be located at Unit A01131A, 21 Bloor
    Street, Toronto, Ontario. 216 suggests that this is a classic case of
    contractual frustration because the August 5 termination of the Sublease makes
    it both legally and physically impossible to operate the Store in accordance
    with the License Agreement.

[77]

For its part, 111 argues that June and July rent
    would have been paid if 216 had not wrongfully terminated the License Agreement
    and withheld payment of the Branding Fee. The purpose of the agreements between
    the parties was to ensure that 111 was funded in the early stages of the
    opening of the store. If 216 had paid the Branding Fee as agreed, 111 would
    have had no difficulty in paying June and July rent.

[78]

111 objects to 216 raising the question of
    frustration on appeal since it was not argued before the application judge.
    Nevertheless, 111 argues that there was no frustration of the License Agreement
    because there was no supervening event that made the License Agreement
    incapable of being performed. It was 216s wrongful termination of the License
    Agreement in June that brought the parties relationship to an end.

[79]

In any event, 111 notes that the parties entered
    into a consent order in connection with the judgment below. In the judgment, the
    outstanding rent obligations between June and September 2020, totalling
    $344,336.18, were set off against the unpaid Branding Fee. The consent order
    granted 216 possession of the premises as of September 2020. Accordingly, an
    order that the Sublease was terminated in August was not warranted.

Analysis

[80]

The application judges reasons only address the
    termination of the Sublease in general terms. However, her resolution of the
    issue is apparent in her judgment and in the consent order. The application
    judge awarded 216 its rent payments under the Sublease for the period June 1 to
    September 8, and the consent order granted 216 possession of the retail
    premises as of September 8. From a practical perspective, the Sublease is at an
    end and all of the outstanding issues under the Sublease are resolved.

[81]

The impact that terminating the Sublease may
    have had on the License Agreement and on the damages that flowed from 216s
    wrongful termination of the License Agreement in June 2020, were not addressed
    in the court below. Nor is that issue dealt with in the settled judgment. In my
    view, therefore, the issue as to whether the License Agreement was brought to
    an end in August by virtue of the doctrine of frustration ought not to be
    addressed for the first time on appeal. It is best left to the trial or other
    resolution of the outstanding damages issues pursuant to the application
    judges decision.

CONCLUSION

[82]

In conclusion, therefore, I would set aside the finding
    of bad faith, but would otherwise dismiss the appeal. As I consider that 111
    was largely successful on appeal, I would award it costs on a partial indemnity
    basis in the all-inclusive amount of $27,000.

Released: August 30, 2021
P.R.

Paul
    Rouleau J.A.

I
    agree
Alexandra Hoy J.A.

I agree K. van Rensburg J.A.


