The Supreme Court of Canada (SCC) originally created a duty of “good faith in contractual performance” in its 2014 decision of Bhasin v. Hrynew. In the decision, the SCC recognized an organizing principle of good faith that parties generally must observe in order to perform their contractual duties honestly and reasonably and not capriciously or arbitrarily.
An organizing principle states in general terms a requirement of justice from which more specific legal doctrines may be derived. An organizing principle, therefore, is not a free-standing rule, but rather a standard that underpins and is manifested in more specific legal doctrines and may be given different weight in different situations. It is a standard that helps to understand and develop the law in a coherent and principled way.
Good Faith Obligations Under a Contract
While setting out the organizing principle, the SCC also noted that the previously delineated categories of good faith obligations within contractual relationships should continue to be recognized. These include:
- where the parties must cooperate in order to achieve the objects of the contract;
- where one party exercises a discretionary power under the contract; and
- where one party seeks to evade contractual duties.
This requires the parties to a contract, to be honest with each other in relation to their performance of their contractual obligations. It means simply that parties must not lie or otherwise knowingly mislead each other about matters directly linked to their performance of the contract. It is not a duty of loyalty or of disclosure, nor does it require a party to forego advantages flowing from the contract.
SCC Revisits the Duty of Honesty in Exercising Rights Under a Contract
The SCC has just released its decision in C.M. Callow Inc. v. Zollinger. This was an appeal from the Ontario Court of Appeal (ONCA) which had overturned the trial decision held in favour of the plaintiff. The issue throughout was whether the duty of good faith in contractual performance had been breached.
Condominium Consortium Misleads Maintenance Provider About Renewal of Service Contract
One of the responsibilities of a condominium corporation is to ensure that the corporations’ grounds and outside common areas are kept clean and orderly throughout the year. In the case at hand, a consortium of corporations entered into two maintenance service contracts with one maintenance company for that purpose. Each contract was for two years; one covering the summer, and the other the winter. The winter contract provides for early termination upon ten days’ notice.
There were some issues with performance, especially in the winter. There had been complaints from unit owners about slow snow removal and slippery surfaces. The consortium made the decision that the winter contract would not be renewed and that the existing winter contract would be terminated early. These decisions were made during the preceding summer.
However, the consortium was concerned about jeopardizing the quality of the current work being performed under the summer contract by disclosing its plan not to renew the winter contract too soon. Further, the consortium discovered the maintenance company had been completing additional work at no charge, partially in the hope it would incentivize the consortium to renew the winter contract. In fact, representatives of the consortium had discussions with the maintenance company after making the decision to terminate the winter contract which led the maintenance company to believe it would be renewed.
Upon receiving notice of the consortium’s plan to terminate the winter contract, the maintenance provider brought an action against the consortium for breach of contract.
The trial judge found that the condominium consortium had breached its duty of good faith and honest performance. On appeal, the ONCA decided that the actions of the defendant consortium did not rise to the high level required for a finding of bad faith or of a breach of the duty of honest performance. Both principles must be applied consistently with the law of contract at common law. The premise is the right of freedom of contract and the pursuit of economic self-interest. This allows a party to cause loss to another, even intentionally, in the legitimate pursuit of economic self-interest where the contract permits them to do so.
SCC: Condominium Consortium Breached the Standard of Honesty in Exercising the Termination Clause
The majority overturned the ONCA ruling and found that the termination clause was exercised in a way that did breach the standard of honesty. The duty to act honestly in the performance of the contract would not allow for active deception. Here, the consortium knowingly misled the maintenance company into believing its winter contract would be renewed. The method of exercising the termination clause was dishonest. It was a breach of the duty of honesty on a matter directly linked to the performance of the contract despite having been exercised in a timely way and as called for in the contract.
The SCC also clarified the scope of the duty of honesty. The trial judge had ruled that the minimum standard of honesty would have required the consortium to do the following:
- address the alleged performance issues when received;
- provide prompt notice of the decision to terminate; and/or
- refrain from any representations in anticipation of the notice period.
The SCC made it clear that the first two requirements imposed by the trial judge went too far and amounted to an alteration of the original contractual bargain. The third, however, was the minimum standard of behaviour in these circumstances. In knowing of the misapprehension created by their false representations, the consortium had breached its obligations in the manner of exercising its contractual right to terminate.
At Milosevic Fiske LLP, our team of Toronto corporate commercial lawyers regularly represent clients in complex commercial litigation matters including contract disputes like the one described above. Over the years, our team of exceptional litigators has seen it all and has successfully fought for our clients’ rights. Our impressive track record speaks for itself. Call us at 416-916-1387 or contact us online to schedule a consultation.