Supreme Court of Canada Dissects “Honesty” Element of Good Faith Performance Duty
In 2014, the Supreme Court of Canada issued a landmark ruling in a case called Bhasin v. Hrynew 2014 SCC 71, [2014] 3 S.C.R. 494. That ruling confirmed that all Canadian contracts are underpinned by an “organizing principle” of good faith performance, requiring parties to fulfill their contractual duties honestly and reasonably, and not in a capricious or arbitrary manner.
In a just-released decision in C.M. Callow Inc. v. Zollinge 2020 SCC 45 (CanLII), the Supreme Court of Canada has re-affirmed the good faith performance concept, but with added clarity around the embedded duty of “honesty” as it relates to contractual rights and obligations.
The Background Facts
Callow was a company providing seasonal maintenance services, such as snow removal in the winter. Pursuant to a two-year contract, it agreed to provide winter maintenance services to Baycrest, which owned and managed a group of 10 condominium developments. The contract contained a provision allowing Baycrest to unilaterally terminate Callow’s services for any reason, upon giving 10 days’ notice.
About a year into the two-year term, Baycrest decided to terminate the agreement early, but deliberately withheld that decision from Callow for a few months. Indeed, Baycrest led Callow to believe that it was not only satisfied with the services provided, but that it would likely renew Callow’s two-year contract when the first one expired.
Based on those representations, Callow did not bother to look for winter maintenance work from other parties for the latter half of its agreed term with Baycrest. Also, in the hope of bolstering Baycrest’s incentive to renew for two more years, Callow overperformed on some of its existing maintenance services at no charge – to which Baycrest readily acquiesced, despite knowing Callow’s likely motive for doing so.
Soon after – and much to Callow’s surprise – Baycrest notified Callow that it was terminating, and gave the requisite 10-days’ notice.
Callow sued for breach of the initial two-year contract. It claimed that in view of the broader circumstances, Baycrest had failed to act in good faith when it purported to exercise its rights under the unilateral termination clause. Callow claimed damages for lost opportunity, to compensate for losing out on other work during the second year, based on the understandable expectation that Baycrest would continue until the term’s end. Callow also asked for payment on the free services that Baycrest had accepted even while knowing it had not only decided not to renew, but was planning to terminate the initial contract early.
In the earlier stages of the lawsuit, Callow had mixed success. At trial, it obtained a favorable outcome, with the judge awarding damages equivalent to what it would have earned if the balance of the original two-year contract with Baycrest had been fully performed. However, the Court of Appeal overturned that judgment; it found that while Baycrest may have been deceptive about the likelihood of a future renewal, it had legitimately exercised its unilateral right to terminate the current two-year contract.
The Nature of the Duty to Act Honestly in Contract Performance
On appeal to the Supreme Court of Canada, the majority of the 9-judge panel overruled the Court of Appeal, and restored the trial judge’s decision awarding Callow damages.
The Court began by revisiting the key principles it had laid down previously in Bhasin v. Hyrnew. It reconfirmed that the duty of honest performance applies to all contracts, and requires that each party must not lie or otherwise knowingly mislead the other about matters that are “directly linked to the performance of the contract”. This requires looking at whether a contractual right was exercised, or a contractual obligation was performed, in a manner that was dishonest.
Next, the Court emphasized that the duty of honesty is a contractual doctrine that does more than just prohibit outright lies; it also covers misleading conduct. As the Court explained:
[91] At the end of the day, whether or not a party has “knowingly misled” its counterparty is a highly fact-specific determination, and can include lies, half-truths, omissions, and even silence, depending on the circumstances. I stress that this list is not closed; it merely exemplifies that dishonesty or misleading conduct is not confined to direct lies.
That said, the Court noted that the duty generally stops short of imposing a positive disclosure obligation on the contracting parties, but does encompass the obligation to correct any false impressions that are created in one party by the words or actions of the other.
Applying the Principles
With those concepts in mind, the Court confirmed that in the present case: 1) the organizing principle of good faith performance and the duty of honest performance had been engaged; and 2) Baycrest had breached its duty in the course of its dealings with Callow.
Specifically, Baycrest had actively and knowingly deceived or misled Callow into believing that the existing two-year winter maintenance contract would not be terminated. In the time leading up to giving notice, Baycrest misrepresented its intentions and the overall state of affairs, and knowingly failed to correct Callow’s misapprehensions as they arose.
More importantly, Baycrest had exercised its contractual termination rights in a wrongful manner, owing to the surrounding dishonesty and its misrepresentations on matters that were directly linked to the agreement with Callow. The Court noted that Baycrest’s termination rights in the agreement were not unfettered; they had to be exercised honestly and in accord with the pervasive requirement of good faith, which went beyond merely giving Callow the required 10 days’ notice stipulated.
Since Baycrest had breached its duty of honest performance, Callow was entitled to damages equivalent to those awarded for breach of contract. Those damages strived to put Callow, as the injured party, in the same position it would have been if Baycrest had properly performed its full contractual obligations under the two-year agreement.
These included Callow’s consequential loss of opportunity caused by Baycrest’s breach – meaning unrealized new contracts for the second winter that Callow could have secured had it known of Baycrest’s early-termination plan. Callow was also awarded full payment for the gratis work that, to Baycrest’s knowledge, it had fruitlessly performed in a bid to persuade Baycrest to renew with Callow for another two years.
The Takeaway Message
In its latest decision, the Supreme Court of Canada has added helpful clarity around the concept of “honesty” as it relates to the duty of good faith contractual performance. The Court makes it abundantly clear that the duty will be breached if one contracting party deceives the other about a matter that is linked to the performance of the contract. Moreover, in the right circumstances that culpable deception can take many forms: outright lies, half-truths, omissions, and even silence.
For anyone in the business sector, this is an important message to incorporate into present-day contractual dealings, and to carry-forward when negotiating new obligations.
Disclaimer: The content in this article is provided for general information purposes only. It does not constitute legal advice. All rights are reserved).