YOUR FOLKS WERE RIGHT: HONESTY IS THE BEST POLICY & YOU SHOULD ALWAYS MIND YOUR MANNERS

In 2014, the Supreme Court of Canada (“SCC”), in its seminal decision Bhasin v. Hrynew, formulated the new duty of honest performance which manifested from the organizing principle of good faith. The Court recognized that the duty of honest performance applied to all contracts and required all parties to not lie or otherwise knowingly mislead each other about matters directly linked to the performance of a contract. In a recent decision, CM Callow Inc. v. Zollinger, the SCC took the opportunity to expand on the duty of honest performance; specifically, in regard to characterizing a party’s conduct as “knowingly misleading” within the context of exercising contractual rights and obligations.

The contract at issue in CM Callow Inc. v. Zollinger was a two-year winter maintenance contract between a group of condominium corporations (“Baycrest”) and C.M. Callow Inc. (“Callow”). The winter contract, which was executed in 2012, contained a termination provision which entitled Baycrest to terminate the contract, irrespective of cause, upon giving 10 days’ written notice. In early 2013, Baycrest internally decided to terminate the winter contract unbeknownst to Callow. Thereafter, throughout the spring and summer months of 2013, Callow continued rendering services pursuant to a separate summer maintenance contract with Baycrest. During this time, Callow remained in constant communication with several Baycrest representatives regarding the renewal of the winter contract. From those discussions, Callow was led to believe that the winter contract was likely to be renewed for another two-year period and that the current contract was in good standing. In September 2013, Baycrest informed Callow of their decision to terminate the winter contract by providing the requisite 10 days’ notice. Callow then initiated an action for breach of contract wherein they alleged Baycrest acted in bad faith.

In the lower court decisions, the trial judge held that the organizing principle of good faith and the duty of honest performance were engaged. The trial judge was satisfied that Baycrest’s conduct in withholding information regarding their decision to terminate the winter contract actively deceived Callow. Baycrest successfully appealed the trial judge’s decision. The Court of Appeal for Ontario held that Baycrest’s conduct may very well suggest a failure to act honourably, but it did not rise to the high level required to establish a breach of the duty of honest performance. On appeal to the SCC, the majority held that Baycrest did, in fact, breach its duty to act honestly in the performance of the contract by “knowingly misleading Callow into believing the winter maintenance agreement would not be terminated.”

There were several key takeaways from the SCC decision.

First, whether or not a party has “knowingly misled” its counterparty is highly fact-specific. Wrongful conduct by a party may include lies, half-truths, omissions, and even silence, which was found to be the case here. The Court stressed that this list is not exhaustive by any means and that it merely exemplifies that dishonesty or misleading conduct is not confined to direct lies.

Next, the Court emphasized that there were no validity issues regarding Baycrest’s unfettered right to terminate the winter contract, but rather the dispute turned on the manner in which Baycrest exercised that right. Simply stated, no contractual right can be exercised in a dishonest manner because that would be contrary to an imperative requirement of good faith.

With that said, we can expect the SCC to shed further light on issues surrounding the principle of good faith in contracts in the near future. Another matter, Wastech Services Ltd. v. Greater Vancouver Sewerage and Drainage District, was before the Court concurrently with CM Callow v. Zollinger. The matter involved a dispute regarding a 20-year waste-management contract, wherein one party to the contract exercised its discretionary contractual right in a manner which ultimately nullified a benefit its counterparty bargained for. The issue before the Court was whether a party’s exercise of a discretionary contractual right may be restricted by a duty of good faith. The SCC has yet to render a decision in Wastech Services Ltd. v. Greater Vancouver Sewerage and Drainage District, and it remains to be seen whether the SCC will expand further on common law duties arising from the overarching principle of good faith in contracts.