SCC revisits good faith in contracts — the lessons for business

SCC revisits good faith in contracts — the lessons for business

by | Jan 25, 2022 | Uncategorized

The duty of honest performance is a relatively new doctrine in Canadian common law that was established in 2014 and requires parties to be honest with each other concerning the performance of their contractual obligations.

Not lying or misleading the other party seems straightforward, but what about half-truths, omissions, or radio silence? Depending on the circumstances, you can be in breach of contract by failing to correct a misapprehension as a result of your conduct — or lack thereof.

The Supreme Court of Canada (SCC) recently expanded on the duty of honest performance established in 2014’s Bhasin v. Hrynew, a seminal decision involving good faith performance of contracts. In C.M. Callow Inc. v. Zollinger, the top court attempts to clarify the application of the duty of honest performance.

Facts of the case

The case involved Baycrest, a group of condo corporations, that entered into a two-year winter maintenance contract and a separate summer maintenance contract with Callow.

As part of the winter contract, Baycrest could terminate the agreement if Callow failed to give satisfactory service. As well, if Callow’s services were no longer required for any reason, Baycrest could terminate the contract with 10 days’ written notice.

In early 2013, Baycrest decided to terminate the winter contract but didn’t inform Callow of its decision at the time. Throughout the spring and summer of 2013, Callow had discussions with Baycrest regarding the renewal of the winter contract and, as a result, thought the condo corporation was satisfied with its services and would renew.

During the summer of 2013, Callow performed work above and beyond the summer maintenance contract at no charge, hoping it would incentivize Baycrest to renew the winter contract. In September 2013, Baycrest informed Callow of its decision to terminate the winter contract, leading Callow to file a statement of claim for breach of contract, alleging that Baycrest acted in bad faith.

Failing to correct a misapprehension

At trial, the judge ruled in Callow’s favour and was satisfied that Baycrest actively deceived Callow from the time the termination decision was made to September 2013 and found that Baycrest acted in bad faith by withholding that information to ensure Callow performed the summer contract. As well, Baycrest was aware that Callow was taking on extra tasks to boost the chances of the winter contract being renewed.

At appeal, the court set aside the judgment, finding that the trial judge erred by improperly expanding the duty of honest performance beyond the terms of the winter contract. Further, it held that any deception in the communications during the summer of 2013 related to a new contract not yet in existence, and therefore was not directly linked to the performance of the winter contract.

At the SCC, the appeal was allowed, and the trial judge’s ruling was reinstated. While the court affirmed that there is no positive duty to disclose a material fact such as a decision to terminate a contract, it could be a breach of the duty of honest contractual performance to fail to correct a party’s misapprehension.

As for damages, the SCC put Callow in the position that it would have been in and awarded more than $80,000, an amount equivalent to the one year remaining on the winter contract.

Lessons for Canadian business

Although Callow provides further guidance on the duty of honest performance, it may present ambiguities for businesses determining when and if disclosure is required. While the SCC states that contracting parties do not have a duty to disclose, they should divulge information when a party is actively misled.

This decision is highly fact-specific and will not apply to every situation, but the bottom line is that if you have service providers on multi-term contracts with a renewal period and there’s something you think you should disclose to them, you ought to.

For example, if your web designer is going over and above what they are contracted to do — maybe they’re writing blog posts and posting to social media at no added cost — these are implications that could be relied on in the event you don’t renew their contract.

Think twice about accepting offers for freebies — particularly if the board or partners are discussing renewing the services the vendor is contracted to do. Instead, ask to be invoiced for the additional services or politely decline the offer for any work beyond the contract.

As well, if you have already made an internal decision and the vendor asks about it, withholding that information could be considered a breach of contract. Baycrest knew it would not renew the contract yet continued to let Callow provide free services without a heads up. If Callow had known the agreement would be terminated, it likely wouldn’t have spent time providing free services and instead would have started looking for a new winter contract elsewhere.

Perhaps the decision might have been different if Callow hadn’t done the free work and Baycrest cancelled the contract earlier in the season. However, allowing Callow to think there wasn’t any danger of the existing contract being terminated well after a decision had been made is where the breach of contract occurred.

The idea behind the duty of honest performance is that good faith dealing protects small companies that rely on big contracts. While it’s a minimal subset of contracts that this decision applies to, those who do rely on multi-term contracts with a renewal period may be massively