Oracle decision exposes flaws in contract language

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Some lawyers accused the Supreme Court of Canada of confusing the spirit of contract with the Spirit of Christmas in its 2014 decision in Bhasin v. Hrynew. The court's ruling imposes a duty of "good faith and fair dealing" in the performance of all contracts. Some argue that goodwill may be a great organizing principle for a year-end holiday, but it is a recipe for uncertainty in a commercial arrangement.

The court's response to this, I think, would be that a duty of good faith has existed for a long time, supported by case law, and that the Bhasin decision is merely a formal statement of that duty. What lower courts will do with this debate – is Bhasin an expansion or a restatement? – is a question of interest for all commercial lawyers, who must read the key lines of each decision on the duty of good faith and attempt to incorporate its insights into actual contracts.

Which brings us to the recent decision of Justice Edward Belobaba of the Ontario Superior Court of Justice in Data & Scientific Inc. v. Oracle Corp., a case that has both important implications for the duty of good faith and for contract drafting in Canada in general.

The facts of the Oracle case are similar to the facts in Bhasin in that they involve the non-renewal of a contract and, in both cases, the party choosing not to renew the contract was fully within its rights to do so.

Oracle declined to renew an agreement with Data & Scientific in accordance with the renewal clause in its agreement, which allowed Oracle not to renew the contract according to its "sole discretion." Data & Scientific discovered that its agreement was not renewed after it applied for renewal through its online renewal portal and Oracle rejected the application, thus ending a 20-year relationship. Upon non-renewal, Data & Scientific sued Oracle for failing to provide it with reasonable notice.

Oracle filed a motion to dismiss, based on a novel (and quite clever) reading of the Bhasin decision. It argued that the duty of good faith that the Supreme Court found in Bhasin pertained only to active dishonesty. Oracle's case was that the ruling was actually a restriction on the traditional common-law duty to provide reasonable notice when there is a discretionary non-renewal clause. Oracle's counsel argued that the brave new world of Bhasin was a more restrictive one; so long as you don't lie, you're fine.

Justice Belobaba rejected this contention, finding common-law support for the duty to provide reasonable notice, and finding that the Bhasin ruling on dishonesty did not obviate this duty to act reasonably. Oracle's counsel's attempt to use Bhasin as a shield failed.

This is not just a good lesson for the litigators, but for contract drafters as well. Namely, Oracle could have used more precise drafting to prophylactically address the issue. By using the words "sole discretion" in the contract, its contract imported an unfavourable history of common-law decisions about the term "sole discretion" into its contract. The duty to exercise discretion reasonably exists every time a contract mentions "discretion," both pre- and post-Bhasin.

It would have been better if the contract had more specifically anticipated when Oracle could choose not to renew the contract. It could have included language stating that Oracle is under no obligation to provide Data & Systems with any advance notice of renewal, and that it need not take Data & Systems' economic interests into consideration when making a decision about whether to renew. Instead, it used the broad language of discretion and the common-law baggage that goes along with that.

The advantage of such language from Oracle's perspective would be that it puts the onus back on Data & Systems. Instead of Oracle having to defend the reasonableness of its exercise of discretion, Data & Systems would have to invoke Bhasin and attack the specific, well-defined and bargained-for obligation on good-faith grounds. Using Bhasin as a sword to cut up a well-defined renewal term is a much more difficult task. This approach is favoured by both leading U.S. contractual authorities – the Uniform Commercial Code and the Second Restatement of Contracts.

Which is not to say that "discretionary" language is never appropriate. There are times when it may be useful to specify that an act is discretionary – for instance, when there are contingencies that can't be specifically anticipated (or where coming up with such a list of contingencies would not be worth the cost).

It's a lesson that every kid learns when making a Christmas list. Don't tell Santa that you want a video game when what you want is Fallout 4. If you do, don't get mad when you get a sandy copy of E.T. for an Atari that you don't own. Tell Santa that you want Fallout 4 and let mom explain why Santa didn't get it for you.

Adrian Myers is a lawyer at Torkin Manes LLP.