Assignment of Contracts and Good Faith

Assignment of Contracts and Good Faith

August 21, 2020

By Brian Babcock

Does an agreement that requires consent to its assignment carry with it an implied understanding that consent will not be unreasonably withheld?

Commercial contracts often include a clause which requires the consent of one party to the assignment of the contract by the other party to an outsider. Where these clauses deal with assignment of a lease, in Ontario, the Commercial Tenancies Act prohibits the unreasonable withholding of consent. That Act however does not apply to other types of agreements.

A recent Ontario Court of Appeal decision clarified the obligations of a party called upon to consent to a transfer of credit/debit card agreements. The consenting party withheld consent, demanding an extension of the leases and other operating agreements associated with the credit/debit card agreement. There was no evidence that the assignment of the agreements would create any additional risk for the party required to consent.

The court found that:

a provision in a contract that requires one party to consent to the assignment of the contract by the other party, has implicit in it the requirement that the party, whose consent is necessary, will not withhold that consent for an improper or ulterior purpose.

This obligation of good faith is consistent with a prior Supreme Court of Canada decision which imposed a duty of good faith performance of contracts generally.

Key principles are:

  1. parties generally must perform their contractual duties honestly and reasonably and not capriciously or arbitrarily; and
  2. a contracting party should have appropriate regard to the legitimate contractual interests of the contracting partner

In the case before the court, the refusal of consent was “a prohibited attempt to obtain benefits exceeding its rights in those contracts, and inconsistent with the duty of good faith performance.”

The Court also noted that consistency between assignment of leases and other agreements was desirable.

As the principle of good faith performance of contracts increases its scope of application, business people need to embrace and act upon the key principles of this obligation. Contracting parties who believe that they are not having their legitimate business interests considered fairly by the other party may seek a remedy.