Contractual Duty of Good Faith: Judicial Krazy Glue?

Contractual Duty of Good Faith: Judicial Krazy Glue?

In late 2020 and early 2021, the Supreme Court of Canada revisited the duty of good faith in contract in two hotly anticipated decisions. In this paper, we will review these important decisions and how they have been interpreted by lower courts before identifying the key takeaways from these updates.

Bhasin v Hrynew: introducing the organizing principle of the duty of good faith

By way of background, the duty of good faith and honest performance in contract was articulated by the Supreme Court in Bhasin v Hrynew.[1] Acknowledging the “piecemeal” development of the law in this area to date, the Court unanimously took “two incremental steps” towards a more coherent and more just common law.[2]

The first step was acknowledging that good faith contractual performance is a general organizing principle of the common law of contract, one which underlies and manifests itself in other more specific doctrines governing contractual performances.[3]  In sum:

The organizing principle of good faith exemplifies the notion that, in carrying out his or her own performance of the contract, a contracting party should have appropriate regard to the legitimate contractual interests of the contracting partner. While “appropriate regard” for the other party’s interests will vary depending on the context of the contractual relationship, it does not require acting to serve those interests in all cases. It merely requires that a party not seek to undermine those interests in bad faith.[4]

The second step was recognizing the duty of honest performance as a manifestation of this organizing principle, resulting in a common law duty, applicable to all contracts, to act honestly in the performance of contractual obligations.[5] The duty of honest performance “means simply that parties must not lie or otherwise knowingly mislead each other about matters directly linked to the performance of the contract.”

The Supreme Court revisited two manifestations of the duty of good faith in contract, the duty of honest performance and the duty to exercise discretion in good faith, recently.

C.M. Callow v Zollinger: the duty of honest performance

In late 2020, the Supreme Court of Canada released a 4-3-1 split decision in C.M. Callow v Zollinger.[7]  The facts are quite straightforward: in 2012, a group of condominium corporations (collectively, “Baycrest”) entered into two separate contracts with C.M. Callow Inc. (“Callow”). One was a summer maintenance contract running May 2012-October 2014, and other a winter maintenance contract running November 2012-April 2014.

The winter maintenance agreement contained a clause allowing Baycrest to unilaterally terminate the contract for unsatisfactory performance of services or for any other reason with 10 days’ notice. Around May 2013, Baycrest decided it would terminate the winter maintenance contract but decided not to advise Callow of the termination to ensure performance under the summer maintenance contract would not be jeopardized. Throughout the spring and summer of 2013, Callow had discussions with Baycrest regarding the renewal of the winter maintenance contract, leading Callow to believe that Baycrest was satisfied with its services and would renew the contract. Callow also performed work above and beyond the terms of the summer maintenance contract at no charge in the hopes of incentivizing the winter contract renewal. Nonetheless, come September 2013, Baycrest provided Callow with 10 days’ notice on the winter maintenance contract.

At trial,[8] Justice O’Bonsawin made several key findings of fact, in particular with respect to credibility of the witnesses. She found that Mr. Callow, the principal of C. M. Callow, was credible during his testimony. He did not exaggerate, over-state, or put forth illogical propositions. He also did not hesitate during cross-examination and agreed with opposing counsel even when it cast a negative light on him. For example, when it was put to him that he had blocked a fire exit, he agreed that he had done so even though instructed against it.[9]

On the other hand, the Baycrest witnesses were not credible. The main witnesses often over-exaggerated, over-stated, and provided comments contradicting the ample written evidence before the court. During cross-examination, the witnesses “worsened or tried to change any positive comments made about Callow’s performance.”[10]   Mr. Peixoto, one of the two witnesses who was actively involved in misleading Callow as was evidenced by email correspondence, tried to present as the “good guy, the helpful witness” in a manner that negatively impacted his testimony. The other, Mr. Campbell, referred, in one email, to keeping “a back pocket option” for the winter maintenance services contract, which Justice O’Bonsawin found “unsettling”.[11]

Consequently, Justice O’Bansawin preferred Mr. Callow’s evidence. She also held that although there were issues with Mr. Callow’s performance under the winter maintenance contract, in particular with snow removal in parking lots, one of the problems was that the residents did not move their cars and thus the accumulated snow could not be removed. This was a known issue Mr. Callow attempted to address with residents. She found that Mr. Callow thought it likely the winter maintenance contract would be renewed following discussions with Mr. Peixoto and Mr. Campbell – and that both understood Mr. Callow was performing additional “freebie work” above and beyond the contract to incentivize a contractual renewal.

Overall, Justice O’Bansawin concluded that Callow’s work was not below standard and that he had been misled and lied to by Baycrest. She concluded that the Condominium Management Group (“CMG”), Baycrest’s property manager, had breached its contract with Callow, notwithstanding compliance with the contract’s terms, by acting in bad faith in two ways:

    1. 1 Withholding information to ensure Callow performed the summer maintenance contract; and
    2. 2 Continuing to represent that the contract was not in danger despite CMG’s knowledge that Callow was doing “freebie work” to increase the chances of renewing the winter maintenance contract.

Baycrest appealed the trial decision. The Ontario Court of Appeal[12]  overruled Justice O’Bansawin’s trial finding and held that the contract was not breached. The Court held that the duty of honest performance requires parties to be honest with each other concerning matters “directly linked to the performance of the contract” – specifically, the winter maintenance contract that was then in effect. The duty did not apply so as to limit CMG’s freedom concerning prospective future contracts not yet negotiated or entered into. The Court of Appeal noted: “[c]ommunications between the parties may have led Mr. Callow to believe that there would be a new contract, but those communications did not preclude the appellants from exercising their right to terminate the winter contract then in effect.”[13]

Callow appealed to the Supreme Court of Canada.

The four-judge majority in C.M. Callow held that Baycrest violated the duty of honest performance by knowingly misleading Callow into believing that the winter maintenance agreement would not be terminated.

The majority reasons provide that the examination of whether or not the duty of honest performance is violated requires two considerations.

First, was the alleged dishonesty directly linked to the performance of the contract? In order to constitute a breach, dishonest or misleading conduct must be directly linked to performance under the contract – otherwise there would be a much broader duty “not to tell a lie.”[14]  The Supreme Court deferred to the trial judge’s finding of fact that Baycrest had acted dishonestly towards Callow by representing the contract was not in danger despite already having decided to terminate the contract. There was no basis to interfere in that finding, and it flowed that Baycrest had deceived Callow and breached its duty of honest performance.

The Supreme Court held that a direct link between dishonesty and performance exists “when the party performs their obligations or exercises their right under the contract dishonestly.”[15]  The Court of Appeal had erred in finding the dishonesty was only about a future contract: “Properly understood, the alleged dishonesty in this case was directly linked to the performance of the contract because Baycrest’s exercise of the termination right provided to it under the contract was dishonest.”[16] There was no disputing that Baycrest had a unilateral termination right. What mattered was the manner in which that right was exercised. It seems from the Supreme Court’s reasons that the fact that the right itself was granted by the contract’s terms brought it within the realm of the “direct link” required between dishonesty and performance.

Second, was it actually dishonest within the meaning of the duty of honest performance? Failure to disclose a material fact alone does not meet this standard.[17] Whether dishonesty rises to the level of breaching a duty of honest performance is a highly specific, case-by-case determination. The Supreme Court provided some guidance on applying this standard, noting that misleading conduct can include lying, half-truths, omissions, and even silence.[18]  This is not a question of whether or not the contractual term is adhered to, but whether it was performed honestly.

The Supreme Court disagreed with the trial judge’s conclusion that the minimum standard of honesty was addressing alleged performance issues, providing prompt notice, or refraining from representations in anticipation of the notice period. The first two would amount to an alteration of the actual bargain struck by the parties. However, the latter was a minimum standard. Baycrest had to refrain from false representations in anticipation of the notice period. Having failed to correct Mr. Callow’s misapprehension which arose due to its false representations, Baycrest violated the duty of honest performance.

In addition to the clarification of the duty of honest performance offered by the Supreme Court in C.M. Callow, it is important to emphasize the crucial role played by the trial judge’s fact finding in this case.

Wastech Services Ltd. v Greater Vancouver Sewerage and Drainage District: the duty of exercising discretion in good faith

In early 2021, and shortly after C.M. Callow, the Supreme Court released another decision dealing with the duty of good faith in contract, which this time focused on the duty to exercise contractual discretion in good faith.

In Wastech Services Ltd. v Greater Vancouver Sewerage and Drainage District,[19]  Wastech Services Ltd. (“Wastech”), a waste removal company, contracted with the Metro Vancouver Regional District (“Metro”) for the removal and transportation of waste to three disposal facilities. Wastech had different rates of payment depending on which disposal facility the waste was transported to and how far away such facility was located. The contract gave Metro absolute discretion to allocate the waste.

In 2011, Metro reallocated waste from one disposal facility to another, considerably closer facility. As a consequence, Wastech recorded an operating profit below its target for the year as revenues (primarily for transportation) were materially decreased. Of note, the operating profit target was defined within the contract; however, it was not guaranteed that the target would be achieved in any given year.[20]  Wastech alleged that Metro’s waste allocation breached the contract by making it impossible for Wastech to earn the level of profit it had bargained for under the contract. In so doing, Wastech alleged that Metro had failed to meet the standard of honesty and reasonableness required by Bhasin.

Wastech referred the dispute to arbitration and sought compensatory damages. The arbitrator held in favour of Wastech.

Metro appealed the arbitrator’s decision to the Supreme Court of British Columbia.[21] The Chambers Judge, Justice McEwan, held that the arbitrator correctly held that a finding of dishonesty was not necessary to prove a breach of good faith in the exercise of a party’s contractual power of discretion. However, McEwan, J. found that the arbitrator had erred by finding that the denial of a party’s contractual expectations, which were not entrusted in the contract at issue, can form the basis for a breach of duty of good faith.

Justice McEwan held that the parties had considered the implication of granting Metro absolute discretion over waste allocation and chose not to ensure Wastech was compensated for the consequences of such an allocation. The fact that the parties had considered the possibility of this event “unlikely” did not change that it was directly considered and rejected as part of the agreement under the contract. These were sophisticated parties who had opted to leave aside a term addressing the very problem at issue. This was not a scenario where the parties had overlooked or failed to consider a provision. A finding that Metro’s conduct was dishonest simply because it was at odds with the legitimate contractual expectations of Wastech could only be found by ignoring the contract.

In conclusion, Justice McEwan allowed the appeal, noting:

In the circumstances of this case the Arbitrator attempted to do what is fair, not as grounded in the [contract] but in a more general sense. Bhasin is not authority for the proposition that contracts may be adjusted to accommodate situations where one party regrets the contract in hindsight.[22]

The British Columbia Court of Appeal[23]  dismissed Metro’s appeal – but for different reasons than those provided by Justice McEwan. The Court of Appeal held that Justice McEwan did not expressly answer the two questions of law which were before him namely:

    1. Did the Arbitrator err in law in failing to apply proper principles in holding that the exercise of a bargained-for right could be “dishonest” and an act undertaken in bad faith simply because it was wholly at odds with the expectations of the counter-party, which expectations were not embodied in the contract?
    2. Did the Arbitrator err in law by confusing the “organizing principle” stated in Bhasinwith a free-standing obligation of contractual good faith, disregarding the applicable principle of good faith as found in the authorities?[24]

Although distinct, there was significant overlap between the questions, which were dealt with by the Court of Appeal concurrently.

The Court of Appeal stated that Wastech was not relying on a “new” duty of honest performance as outlined in Bhasin, but on older case law dealing with exercises of contractual discretion. Such law stood for the proposition that “a party who has discretion under a contract may not exercise it so as to “nullify the benefits reasonably expected to be obtained from the contract by another party.”[25] In this context, what is relevant is not merely the legitimate expectations of the other party, but the legitimate contractual expectations or interests.

The arbitrator had concluded that there was no implied term in the contract that Metro could not redirect or re-allocate waste in a manner that would deprive Wastech of the possibility of achieving its target operating revenue. However, the arbitrator then imposed this same term through the duty of good faith. Given that the implied term was something intentionally excluded, Wastech could not then have had a legitimate expectation arising out of the contract that Metro would not exercise its discretion in this manner. Furthermore, the fact that the parties had considered and rejected such a provision “substantially took away” from the argument in support of the breach of the duty of good faith.[26]

Finally, the arbitrator made no finding that Metro sought to undermine Wastech’s interests or to do so in bad faith. In fact the arbitrator found that Metro’s decision to reallocate waste was “honest and reasonable.” The answers to both questions of law were affirmative of the chambers judge’s decision to allow the appeal, although for different reasons.[27]

The Supreme Court dismissed Wastech’s appeal.

The Supreme Court held that the duty to exercise contractual discretion in good faith is breached where the discretion is exercised unreasonably and in a manner unconnected to the purposes underlying the discretion. [28] This will be the case where the exercise is capricious or arbitrary because it has “fallen outside the range of behaviour contemplated by the parties.”[29]  Even where the parties have agreed to terms granting one party unfettered discretion, the contractual duty of good faith is nonetheless a standard underpinning any exercise of such discretion.
[30]  In short, the Supreme Court held that this duty is inescapable.

So what exactly does it mean for a party to exercise contractual discretion in good faith?

The Supreme Court answered that it means exercising this discretion “in a manner consistent with the purposes for which it was granted in the contract, or, [in other words] reasonably.”[31]  What matters is not whether the discretion exercised was moral or wise in a business sense, but whether it was exercised reasonably in light of the bargain the parties actually made:

The touchstone for measuring whether a party has exercised a discretionary power in good faith is the purpose for which the discretion was created. Where discretion is exercised in a manner consonant with the purpose, that exercise may be characterized as reasonable according to the bargain the parties had chosen to put in place. Perforce, the exercise of power consonant with purpose may be thought of as undertaken fairly and in good faith on the parties’ own terms…[32]

In some cases, the discretionary clause alone will be sufficient to determine the parties’ contractual purposes. In others, only reading the clause in the context of the whole contract will suffice. Still in others, courts may have to step in to determine the ambit of the discretionary power.[33]

Essentially, the Supreme Court held that where a party is granted discretion in a contract there will be a range of choices through which that party can exercise its power and from which a range of outcomes will flow. Some of the choices will be connected to the purpose for which the discretion was granted by the contracting parties. Some of the choices will not. The duty of good faith in contractual discretion limits the range of legitimate choices to those that fall within the first category (the purpose of the contractual discretion). The range of reasonable outcomes will generally be smaller if the issues subject to the contractual discretion are  capable of objective measurement; the range of reasonable outcomes will be relatively larger if the contractual discretion is not capable of such objective measurement.[34]

Wastech argued that Metro could not exercise its discretion in a way that denied Wastech the fundamental benefit of its legitimate contractual expectations – i.e. the target profit. Wastech argued that allowing Metro to exercise its discretion in this manner nullified its bargained objective. Once again, the Supreme Court disagreed, holding that the duty to exercise discretion in good faith does not turn only on whether a contracting party loses some or all of its anticipated benefit under the contract.[35]

The purpose of the discretion provided to Metro under the contract was to allow it the flexibility required to maximize efficiency and minimize the cost of operations. By granting this discretion, the parties were able to adapt to changing circumstances over the course of the contract’s life.[36]  As well, the contract also included out a framework for adjusting payments on the level of profitability negotiated by the parties, contradicting the idea that the purpose of the discretion was to provide Wastech with a certain amount of profit. Metro’s exercise of discretion in re-allocating the waste was done to maximize efficiency, preserve site capacity, and operate the system in a cost-effective manner in furtherance of its own business objectives. As such, Metro’s exercise of discretion was connected to the contractual purposes for which it was granted. Wastech sought judicial ratification of an advantage which it did not bargain for – and in fact both parties had foreseen the risk of this scenario during negotiations and chose not to make arrangements accordingly.[37]

Lower court decisions

Brant Tractor Ltd v BOMAG (Canada) Inc[38] . was the first lower court decision applying C. M. Callow. The plaintiff, Brandt Tractor Ltd. (“Brandt”), applied for an interlocutory injunction against the defendants, BOMAG (Canada) Inc and SMS Equipment Inc. Pursuant to a Heavy Equipment Distributor Agreement with BOMAG, Brandt had the non-exclusive right to sell certain products. The contract expressly allowed for non-renewal by either party without cause.

In August 2019, BOMAG learned that Brandt was acquiring a competitor equipment dealer. The following month, BOMAG indicated it was not renewing the contract between the parties, which would expire December 31, 2019. In October, SMS issued a press release stating that BOMAG and SMS had entered into an agreement under which SMS would replace Brandt as the exclusive dealer of BOMAG products in Canada.

Essentially, BOMAG entered into the agreement to replace Brandt prior to the termination of their contract but after giving notice to Brandt. BOMAG also maintained that Brandt was in breach of the contract prior to its termination. Brandt sought an injunction prohibiting BOMAG from distributing construction equipment to SMS, prohibiting SMS from selling and serving BOMAG products, and reinstating Brandt as a non-exclusive distributor of BOMAG products.

In determining whether to grant the injunction, the court first considered whether there was a serious issue to be tried. The court declined to find that BOMAG had knowingly misled Brandt by creating a false impression by its conduct, noting that BOMAG gave notice of termination shortly after learning of Brandt’s proposed acquisition of a competitor. This analysis leaves something lacking given that the Supreme Court in C. M. Callow did not make a finding of misleading inaction because of the duration between the time Baycrest chose to terminate the winter maintenance contract and when it actually gave notice of same. What mattered was Baycrest’s conduct in the interim.

SCP 173 Dining Limited v Costa Del Sol Holding Ltd.[39]  deals with alleged breaches of a commercial lease and whether the tenant’s exercise of an option to renew the lease was valid. The lease provided for an option to renew, provided that the tenant paid its rent (both minimum rent and additional rent) regularly and on time and observed all of its obligations under the lease. The tenant tried to exercise the option to renew. The landlord provided notice of termination, claiming the tenant was in arrears for additional rent for three years – and later adding that the tenant was in breach of the lease’s repair provisions. The tenant denied owing additional rent, arguing that the landlord’s irregular demands for additional rent were not in compliance with the lease and the varying amounts claimed were not recoverable.

The contractual duty of good faith only briefly appears in this decision. Finding that the tenant was not in breach of the lease, the court added that the landlord was required to organize its contractual performance in accordance with the duty of good faith. Here, the landlord’s duty to honestly and reasonably perform its obligations could be served by providing all the documents forming the basis for annual rent adjustments, which the landlord had not done. Failing to do so was a failure to honestly and reasonably perform its obligations under the lease.[40] > Once again, this decision is lacking and seems to conflate a negative duty not to mislead with a positive duty to furnish the plaintiffs with documents in the circumstances of the case.

Where a contracting party knew that the other party intended to stay on and continue with its contract and nonetheless engaged in serious negotiations with another party in secrecy, the Ontario Superior Court held that the duty of honest performance was breached. In 2505243 Ontario Limited o/a v Princes Gate GP Inc. et al.,[41]  the defendant hotel owner knew that the plaintiff lessee was continuing to fulfill its obligations under their contract, including recruiting food and beverage personnel. Meanwhile, the defendant was making arrangements with a new food and beverage service provider with which it promptly replaced the plaintiff after terminating the agreement reportedly due to unpaid rent. The hotel’s inaction despite knowing the plaintiff’s expectations was found to be misleading.

The Alberta Court of Queen’s Bench also held that a party acting carelessly and indifferently to ensure the truth of what was said about an employee during a termination process had breached the duty of honest performance: Haack v Secure Energy (Drilling Services) Inc.[42]  Similarly, the same court held that knowledge of a falsehood can be proven by actual knowledge or recklessness to its truth, either of which is sufficient for a finding that a party misled another and was dishonest: NEP Canada ULC v MEC OP LLC.[43]

In CWB Maximum Financial Inc. v 2026998 Alberta Ltd.,[44] the Alberta Court of Queen’s Bench also held there was no breach of the good faith where was no evidence that the contracting parties engaged in dishonesty or lying. The Court noted that although Party A had not disclosed that the ultimate decision-making authority for corporate restructuring was Party B, the contracting Party C “would have some general understanding, as a business person of his experience, that there was an approval process beyond [Party A].”[45] The Court also stated that the common law concepts of good faith outlined in Bhasin and C.M. Callow, informed the good faith requirement found in section 4.2 of the Bankruptcy and Insolvency Act.[46]

Although recognizing that the duty of good faith is not a duty that requires disclosure, this decision does raise the issue as to what extent the knowledge, or commercial sophistication, of the parties is relevant in determining whether a party has been misled by action or omission. The decision also reiterates the critical important of the facts put before a judge when seeking to rely on the duty of good faith performance.

In Fram Elgin Mills 90 Inc. v Romandale Farms Limited the Ontario Court of Appeal cautioned against leaning on the duty of good faith in complex commercial settings.[47]  In a fulsome decision on the contractual duty of good faith, the court considered competing claims to undeveloped land in Markham, Ontario by multiple parties. The factually complicated decision has a number of moving parts, but Justice Lauwers  provides helpful remarks regarding the duty of good faith.

Disagreeing with the trial judge’s invocation of the duty to act in good faith (in reliance on Bhasin, the only decision released at the time), Lauwers, JA noted:

It is not obvious to me what role the doctrine of good faith in contractual performance should play in this complex commercial setting. Courts should be very reluctant to interfere in the dealings of hard-headed business people pursuing their competitive goals. This pursuit is not forbidden in a market economy: it is expected, as the Supreme Court observed in Hodgkinson

The parties were sophisticated, resourced and professionally advised throughout. No doubt both Fram and Kerbel [parties to the transaction’s at issue] have deeper pockets but there is no scope for invoking the concept of unequal bargaining power in this context without, by necessary implication, imperilling [sic] any larger corporation’s ability to engage in commerce with smaller entities. The language in all of the agreements was carefully negotiated and chosen to allocate the parties’ respective risks and responsibilities, benefits and burdens.

This case illustrates operations in the real world…[48]

In Basyal v Mac’s Convenience Stores Inc.,[49] the BC Supreme Court refused to hold that the duty of honest performance is expressly limited to dishonest behaviour after the parties enter into a contract or commence performance under a contract. Such a decision was left for trial.

In Stoni Consolidated Holdings Inc. v Maple Reinders Capital Corp.,[50] Justice Gomery held that after a contract terminated, the defendant did not owe the plaintiff a contractual duty of good faith even though the parties continued to negotiate on the terms of the contract following its lapse. Given that the contract had ended, neither party exercised any contractual powers or owed the other a contractual duty.[51]

Justice Kimmel of the Ontario Superior Court has similarly held that the duty of good faith does not apply where the parties were not operating under a contract, the plaintiff having failed to prove the existence of oral contracts beyond ad hoc commission-fee arrangements: Core Insight Strategies Inc. v Advanced Symbolics (2015) Inc..[52]

In Koutsikaloudis v Maple Leaf Academy Ltd.,[53]  the Alberta Provincial Court held that an employer had failed to exercise its discretion in good faith by terminating a teacher because she had refused to sign a revised form of contract – and not because of funding or enrollment concerns, as intended by the non-renewal provisions in the contract. This straightforward decision on the duty to exercise discretion in good faith featured the court turning to the entire contract to determine the parties’ intentions.

The Ontario Superior Court of Justice held in The Riverside Professional Centre Inc. v The Ottawa Hospital,[54]  that the defendant, Ottawa Hospital (“Hospital”), had not breached the duty to exercise contractual discretion in good faith when administering the parking provisions of a lease. The crux of the claim was that the Riverside Professional Centre (“Professional Centre”) alleged that the Hospital had breached the terms of its lease by not ensuring there were 250 parking spaces available to its tenants.

Justice Smith concluded that the purpose of the lease, and the reasonable expectation of the parties, was that the Hospital was unrestricted in issuing parking passes – so long as the number of passes issued did not prevent the Professional Centre tenants from accessing up to 250 (of 325) parking spaces. If the Hospital had issued 2000 parking passes for lot B, for example, such an exercise of contractual discretion would violate the duty of good faith because it was not in accordance with the expectations or intentions of the contracting parties. By hiring a parking attendant to “jockey the vehicles” as needed, segregating 250 spaces for the Professional Centre, and preventing monthly pass holders from parking in the segregated area, the Hospital had met its good faith obligations under the lease.[55]

All in all, lower courts have begun to test the boundaries of the Supreme Court’s decision and raise questions such as what are the temporal limitations on the duty of contractual good faith? Does it exist during contract negotiations? Does it exist after one contract lapses, but while negotiation of the same contract’s terms continues? How significant is the relative commercial sophistication of the parties? Is there a baseline of understanding that a contracting party is expected to have, and how does that affect any potential misapprehensions by one party to the other?

Conclusion and Takeaways

There are several key takeaways from these recent developments in contract law.

Firstly, the facts in any given situation are critical. The contractual duty of good faith is highly context-specific and it is difficult to predict how courts will interpret the duty in a given situation without details of that given situation. In C.M. Callow, the trial judge relied on, inter alia, emails between defendant board members at clearly showing that they knew that its plaintiff service provider was operating under the mistaken assumption that a contract would not be terminated.[56]

Secondly, the organizing principle of good faith applies to contracts regardless of the provisions of the contract or the intention of parties. The tenor of the Supreme Court decisions suggests that good faith in contract fills in the gaps based on the parties’ own expectations – and, for the duty to exercise discretion in good faith, relies on the contract as a barometer for the measure of good faith. Nonetheless, this allows courts to have a say in the manner in which contracts are executed and bakes in oversight over even specifically delegated discretionary decision. How these decisions will affect commercial arrangements remains to be seen, although the Supreme Court in Wastech clearly stated that the duty of good faith “does not displace the detailed, negotiated bargain as the primary source of justice between the parties.”[57]

Thirdly, strict adherence to the terms of a contract are insufficient to prevent liability for breach of contract. Parties also must take due care to consider how their actions, or inactions, may be received by other contracting parties.

Much remains to be seen as the jurisprudence in this area develops. Best practice continues to be being attentive to the expectations of contracting parties during negotiations, specific in drafting, and careful in exercising rights under the contract, particularly where termination and renewal clauses are concerned.

[1]  2014 SCC 71 [“Basin”].

[2]  Ibid at para. 32.

[3]  Not to be confused with a free-standing rule. Ibid at para. 64.

[4]  Ibid at para. 65.

[5]  Ibid at para. 33.

[6]  Ibid at para. 73.

[7]  2020 SCC 54 [“C.M. Callow”]. The basis for the split was on a particular legal issue regarding whether or not the “abuse of rights” framework from Quebec’s civil law was properly relied on by the majority in its analysis. The three concurring judges held that the only relevant principles for this analysis are as set out in Bhasin.

[8]  2017 ONSC 7095.

[9]  Ibid at para. 10.

[10]  Ibid at para. 16.

[11]  Ibid at para. 13.

[12] 2018 ONCA 896.

[13]  Ibid at para. 18.

[14]  C.M. Callow, supra note 7 at para. 49.

[15]  Ibid at para. 67.

[16]  Ibid at para. 74.

[17]  Note that the duty of honest performance is not a duty of disclosure or of fiduciary loyalty. In Bhasin, the court distinguished a dealership agreement from contracts of utmost good faith, like insurance contracts, which do require parties to disclose material facts. Supra note 2 at para. 86.

[18] Ibid at para. 91.

[19] 2021 SCC 7 [“Wastech”].

[20]  During negotiations Wastech and Metro recognized the possibility that Metro could decide to reduce the waste transported to the further site in favor of one of the closer sites. They recognized such an allocation could preclude Wastech from achieving its target profits, although both parties thought this scenario was unlikely. They agreed not to include provisions dealing with such circumstance. Ibid at para. 14.

[21]  2018 BCSC 605.

[22] Ibid at para. 63.

[23]  2019 BCCA 66.

[24]  Ibid at para. 65.

[25]  Ibid at para. 66, citing Mannpar Enterprises v HMTQ, 1999 BCCA 239.

[26]  Ibid at para. 69.

[27]  Ibid at para. 74.

[28]  Wastechsupra note 19 at para. 54. Although the duty of honest performance was not contested in this appeal, the Supreme Court noted that an exercise of contractual discretion cannot be done in good faith if it is done dishonestly.

[29]  Ibid at para. 88.

[30] Ibid at para. 62.

[31] Ibid at para. 63.

[32]  Ibid at para. 70.

[33]  Ibid at para. 72.

[34]  Ibid at paras. 75-77.

[35]  Ibid at paras. 80-84.

[36]  Ibid at para. 99.

[37]  Ibid at para. 100.

[38]  2021 ABQB 71.

[39]  2021 BCSC 1252.

[40] Ibid at paras. 113-114.

[41]  2021 ONSC 4649.

[42]  Haack v Secure Energy (Drilling Services) Inc., 2021 ABQB 82.

[43] NEP Canada ULC v MEC OP LLC, 2021 ABQB 180 at para 760.

[44]  2021 ABQB 137.

[45]  Ibid at para. 205.

[46]  RSC 1985, c B-3.

[47]  2021 ONCA 201. The majority decisions held no discussion of the duty of good faith was required.

[48] Ibid at paras. 386-387.

[49]  2021 BCSC 1002.

[50]  2021 BCSC 1018.

[51]  Ibid at paras. 70-72.

[52]  Core Insight Strategies Inc. v Advanced Symbolics (2015) Inc., 2021 ONSC 1717.

[53] 2021 ABPC 136.

[54]  2021 ONSC 1705.

[55]  Ibid at para. 77.

[56]  See also Subway Franchise Restaurants of Canada Ltd. v BMO Life Assurance Company, 2021 ONCA 349, wherein the Ontario Court of Appeal upheld the application judge’s finding that there was no finding or evidence that the defendant lied or knowingly misled the plaintiff and thus no breach of the duty of good faith; Canlanka Ventures Ltd v Capital Direct Lending Corp, 2021 ABCA 115, where the Alberta Court of Appeal deferred to the findings of the trial judge that the appellant had intentionally and actively misrepresented the respondent.

[57]  Wastechsupra note 19 at paras. 4-5.

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When Cryptocurrencies and Insurance Policies collide – The D&O Securities Exclusion in the Blockchain Age - photo
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When Cryptocurrencies and Insurance Policies collide – The D&O Securities Exclusion in the Blockchain Age

During the fall of 2020, when Ontarians were hunkering down for the second COVID-19 pandemic wave, the Ontario Superior Court of Justice released its decision in Kik Interactive Inc. v. AIG Insurance Company of Canada[1]. The Court was tasked with interpreting whether the respondent insurer’s securities exclusion worked to preclude coverage for cryptocurrency sales to … Continued

The Court of Appeal Reconciles Conflicting Indemnity and Covenants to Insure: There is no Legal Rule that a Covenant to Insure necessarily bars Litigation - photo
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The Court of Appeal Reconciles Conflicting Indemnity and Covenants to Insure: There is no Legal Rule that a Covenant to Insure necessarily bars Litigation

The Court of Appeal’s latest word on tort immunity is a good reminder of the importance of proper contractual interpretation, particularly where covenants to insure and indemnity obligations conflict with each other. Tort immunity refers to both covenants to insure and waivers of subrogation that prevent one party (or its insurer through a subrogated action) … Continued

One Year Later: Looking Back at Louis v Poitras - photo
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One Year Later: Looking Back at Louis v Poitras

In January 2021, the Ontario Court of Appeal released Louis v Poitras,[1] the now definitive case on striking civil jury trials during the COVID-19 pandemic. Poitras was the culmination of the onslaught of motions to strike civil juries due to prejudice arising from pandemic-related delay. In a concise and strong decision, the Ontario Court of … Continued


Conducting Virtual Examinations - photo
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Conducting Virtual Examinations

COVID-19 and the public health response to the global pandemic has had a significant impact on the conduct of civil litigation in Ontario and elsewhere.  The Ontario Superior Court of Justice has encouraged all regions to adopt virtual proceedings wherever possible.  It has requested that counsel and parties accommodate requests made by opposing counsel or … Continued


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