Back Version française

On October 27, the Supreme Court of Canada rendered a decision on civil liability with respect to implied contractual obligations: Ponce v. Société d'investissements Rhéaume ltée, 2023 SCC 25.

Context

In 2002, Antoine Ponce (hereinafter "Ponce") and Daniel Riopel (hereinafter "Riopel") were appointed presidents for a group of three companies operating in the insurance industry[1]. Ponce is the President of L'Excellence, a life insurance company owned by Michel Rhéaume (hereinafter "Rhéaume") and André Beaulne (hereinafter "Beaulne") who holds 93% of the share capital through investment companies[2]. Riopel is president of Michel Rhéaume & Associates Inc. and Beaulne & Rhéaume Insurance Ltd., brokerage firms that are wholly owned by Rhéaume and Beaulne through investment firms.[3]

Following their hiring as President, Ponce and Riopel negotiated an agreement with the three companies known as the "Incentive Pay Agreement" (hereinafter the "Agreement")[4]. The Agreement covers the parties' commitments to ensure the success of the three companies and the various forms of incentive pay for Ponce and Riopel as President[5]. The Agreement is succinct and does not contain explicit obligations for Ponce and Riopel[6].

In 2005, Industrial Alliance and Financial Services Inc. (hereinafter "IA") informed Ponce and Riopel of their interest in acquiring the three companies[7]. This was followed by discussions and exchanges of documents between Ponce, Riopel and IA, which resulted in the parties signing a confidentiality agreement regarding any potential transaction[8]. This confidentiality agreement provided, in addition to the sharing of confidential information between the parties, that IA undertook to deal exclusively with Ponce and Riopel in connection with this transaction, without informing Rhéaume and Beaulne[9]. Rhéaume and Beaulne were never informed of IA's interest in acquiring the three companies[10]. In fact, in 2006, when Rhéaume and Beaulne were evaluating the possibility of selling their shares in the three companies, Beaulne asked Ponce if IA would be interested in acquiring their shares, to which Ponce replied in the negative[11].

While ignoring IA's interest in acquiring the three companies, Rhéaume and Beaulne decided to sell their shares in the companies to Ponce and Riopel[12]. Rhéaume received $23,500,000 for his shares and Beaulne received $10,371,210 for his[13]. A few months later, Ponce and Riopel sold the newly acquired shares to IA for $74,280,000[14]. Following a press release from IA announcing the acquisition of the three companies, Rhéaume and Beaulne learned of the transaction for the resale of the shares by Ponce and Riopel and decided to file a lawsuit claiming $24,000,000 from Ponce and Riopel for the gains they allegedly obtained for the resale transaction to IA.[15]

Trial Judgment

In their lawsuit, Rhéaume and Beaulne allege that Ponce and Riopel breached, among other things, their duty of good faith, loyalty and transparency by wilfully failing to inform them of AI's interest in acquiring the three companies[16].

In their defence, Ponce and Riopel responded, inter alia, that they had no obligation to the shareholders Rhéaume and Beaulne and that they had fulfilled all of their obligations under the Agreement[17].

In his judgment[18], the Honourable Michel Déziel, J.S.C. partially agreed with Rhéaume and Beaulne and ordered Ponce and Riopel to pay them nearly $12,000,000.[19] The judge held that Ponce and Riopel owed the three companies’ duties of honesty, loyalty, prudence and diligence[20]. Also, the judge concluded that these duties extend to the shareholders of the companies where there is an independent relationship between the shareholders and the directors[21]. As a result, the judge concluded that Ponce and Riopel had breached their obligations to the shareholders, Rhéaume and Beaulne[22]. Ponce and Riopel appealed the trial decision.

Judgment on appeal

In its judgment[23], the Court of Appeal unanimously dismissed the appeal and affirmed the trial judgment[24]. However, the Court of Appeal pointed out that the trial judge had erred in extending the directors' duties of honesty and loyalty to the shareholders[25]. The Court of Appeal considered this error to be non-determinative since Ponce and Riopel were also held liable by virtue of their contractual obligations of good faith and information[26]. Ponce and Riopel appealed the Court of Appeal's decision to the Supreme Court.

Judgment of the Supreme Court

The Supreme Court began its analysis by focusing on the "fiduciary" duty of loyalty owed by directors to shareholders[27]. The Supreme Court upheld the Court of Appeal's reasoning to the effect that the directors' duty of loyalty to the corporation did not extend to shareholders[28]. The Court reiterated that there are two types of loyalty which must be distinguished[29]. First, there is contractual loyalty arising from good faith, which requires a contracting party to "take the other party’s interests into account".[30] Second, there is loyalty in the exercise of a power to be exercised only in the interest of the recipient or for achieving the purpose for which the power was entrusted[31]. The duty of loyalty imposed on directors of a corporation falls into the second type, that is, the duty of loyalty relating to the exercise of powers that are defined in terms of purpose[32].

Subsequently, the Supreme Court considered the extra-contractual duty to provide information in the negotiation and formation of the contract[33]. The Court reiterated that the requirements of good faith from which the obligation to provide information arises must be complied with when the contract is formed[34]. This duty to provide information must be assessed in the light of the relationship between the parties and the climate of trust that prevails between them, without necessarily requiring the parties to renounce their own interests or to subordinate them to those of others[35].

Next, the Supreme Court dealt with the implied contractual duty to inform[36]. The Court concluded that Ponce and Riopel were wrong to argue that the Agreement did not include an implied duty to provide information[37]. Under article 1434 of the Civil Code of Québec, the contract binds the parties not only for what is expressed, but also "as to what is incident to it according to its nature and in conformity with usage, equity or law"[38] The nature of a contract is the source of an implied obligation where it is necessary for the contract to be coherent and to do so in the general scheme of the contract[39]. In short, the implied obligation arising from the nature of the contract does not have the effect of adding new obligations, but rather of filling in the gaps in its explicit content[40].

When analysing the general scheme of the Agreement, the Court concluded that the purpose of the Agreement was to formalize a business relationship between the parties based on a high degree of trust[41]. The nondisclosure of IA's interest in the three companies contravened this implied obligation[42]. In addition, the Supreme Court added that, in addition to breaching their implied duty to provide information arising from the nature of the Agreement, Ponce and Riopel had performed the Agreement in a manner that did not comply with the requirements of good faith[43]. The Court reiterated that there is a distinction between the non-performance of a contractual obligation and the performance of that obligation in breach of the requirements of good faith[44]. In the first case, it is a question of the fulfilment of the content of the contractual obligation, while in the second case, it is a question of the way in which the contractual obligation is performed[45]. While this distinction may not always be helpful or necessary, it may be relevant to show that, in addition to breaching its contractual obligation, the party is liable for a second additional breach of wrongful performance in contravention of the requirements of good faith[46]. This may have an impact on the remedy awarded[47].

Subsequently, the Court focused on the obligation to perform the contract in accordance with the requirements of good faith[48]. Good faith is a legislative norm of public order which, through articles 1375 and 1434 of the Civil Code of Québec, constitutes an implicit obligation included in any contract[49]. Article 1434 "sets out a mechanism of implied prestations", while Article 1375 requires the contracting parties to maintain a general attitude in the conduct of their contractual relationship[50]. This implicit duty of good faith is justified in the sense of contractual justice, not by the principle of the autonomy of the will of the parties, but on the basis of public policy[51]. The Supreme Court noted that "good faith differs from the implied prestations that arise, in part, from the nature of the contract. The imperative standard of good faith applies to all contracts; its implementation varies with the circumstances"[52]. Thus, even if Ponce and Riopel did not owe a duty of loyalty to Rhéaume and Beaulne for the exercise of powers in the interest of others, i.e. society, they still owed a duty of contractual loyalty arising from the duty of good faith.[53] The Court defines contractual loyalty as "the general attitude of a contracting party in good faith, who must take the other party’s interests into account".[54]

Good faith, depending on the circumstances, may be prohibitive or proactive[55]. Depending on the prohibitive dimension, the parties must refrain from performing the contract dishonestly[56]. The prohibitive dimension of good faith "requires each contracting party not to jeopardize the existence or equilibrium of the contractual relationship".[57] The Court concluded that Ponce and Riopel had breached the prohibitive dimension of good faith[58]. The proactive dimension of good faith "requires, from each contracting party, active behaviour that is intended to assist their contracting partner but that still remains compatible with the party’s own interests".[59] Depending on the context, the contracting party must warn its contractual partner during the course of the contract of events that would be in its interest to know for the performance of the contract[60]. The Court concluded that Ponce and Riopel also breached the proactive dimension of good faith[61].

Finally, the Court concluded its analysis on the appropriate remedy[62]. First, the Supreme Court stated that the remedy of disgorgement of profits was not appropriate in this case[63]. Indeed, the appropriate remedy is an award of damages to compensate for the loss suffered[64]. To do so, the Supreme Court referred to the Baxter[65] decision of the Quebec Court of Appeal. In that decision, the Court of Appeal held that where it was not possible for one party to accurately determine the value of the loss suffered as a result of the dishonest concealment of information by the other party, it should be presumed that the loss was equivalent to the profit made by the party withholding the information[66]. Accordingly, the Supreme Court applied this presumption to the present case and concluded that "where a breach of the requirements of good faith prevents the aggrieved party from proving the injury sustained, it should be presumed that the injury is equivalent to the profits made by the party at fault".[67] The Court concluded that Ponce and Riopel had not been able to rebut this presumption and therefore, the damages that were owed were equal to the difference between the amount of the sale price received by Rhéaume and Beaulne on the sale to Ponce and Riopel and the amount received by Ponce and Riopel on the sale to IA.

[1] Supra note 1 at para. 39.

[2] Ibid.

[3] Ibid. at para. 41.

[4] Ibid.

[5] Ibid.

[6] Ibid. at para. 43.

[7] Ibid. at para. 47.

[8] Ibid. at para. 49.

[9] Ibid. at para. 50.

[10] Ibid. at para. 53.

[11] Ibid. at para. 54.

[12] Ibid.

[13] Ibid. at para. 55.

[14] Ibid.

[15] Ibid.

[16] Ibid. at para. 61.

[17] Ibid. at para. 63.

[18] Ibid. at para. 64.

[19] Ibid.

[20] Ibid. at para. 65.

[21] Ibid.

[22] Ibid. at para. 66.

[23] Ibid. at para. 70.

[24] Ibid.

[25] Ibid. at para. 71.

[26] Ibid.

[27] Ibid. at para. 72.

[28] Ibid. at para. 74.

[29] Ibid. at para. 75.

[30] Ibid. at para. 76.

[31] Ibid.

[32] Ibid. at para. 79.

[33] Ibid. at para. 80.

[34] Ibid.

[35] Ibid. at para. 81.

[36] Ibid. at para. 87.

[37] Ibid. at para. 105.

[38] Ibid.

[39] Baxter v. Biotech electronics Ltd., 1998 CanLII 10406 (QC CA).

[40] Supra note 1, at paras. 110-111.

[41] Ibid. at para. 113.

[1] Ponce v. Société d'investissements Rhéaume ltée, 2021 QCCA 1363.

[2] Ibid. at para. 4.

[3] Ibid. to the paratroopers. 78-79.

[4] Ibid. at para. 84.

[1] Ibid. at para. 23.

[2] Ibid. at para. 24.

[3] Société d'investissements Rhéaume ltée v. Ponce, 2018 QCCS 3538.

[4] Ibid. to the paratroopers. 719-720.

[5] Ibid. at para. 426.

[6] Ibid. at para. 427.

[7] Ibid. at para. 544.

[1] Ponce v. Société d'investissements Rhéaume ltée, 2023 SCC 25 at para. 14.

[2] Ibid., at para. 13.

[3] Ibid.

[4] Ibid. at para. 15.

[5] Ibid. at para. 16.

[6] Ibid.

[7] Ibid. at para. 18.

[8] Ibid.

[9] Ibid.

[10] Ibid. at para. 19.

[11] Ibid.  at para. 20.

[12] Ibid. at para. 21.

[13] Ibid.

[14] Ibid.

[15] Ibid.  at para. 22.