In the 2014 landmark decision of Bhasin v
Hyrnew,1 the Supreme Court of Canada (SCC)
confirmed that contracts are subject to a duty of good faith
performance. For the past seven years, the case has had a
significant impact on business transactions and litigation alike,
and has been the subject of much judicial and academic
commentary.
Over the last few weeks, the SCC had a chance to revisit and
clarify the two key elements of the duty of good faith performance:
(1) the duty of honesty and (2) the duty to exercise contractual
discretion in good faith.
The duty of honest performance
In CM Callow Inc v Zollinger,2 CM Callow
Inc. contracted with a group of condominium corporations (Baycrest)
to provide winter and summer maintenance services. The contract for
winter services permitted Baycrest to terminate the arrangement on
10 days’ notice. In early 2013, Baycrest decided to cancel the
winter contract, but did not immediately notify Callow.
Throughout the summer of 2013, Baycrest made statements to
Callow suggesting the winter contract would “likely” be
renewed. Callow sought to sweeten the deal by providing free summer
maintenance services, which Baycrest accepted. In September,
Baycrest revealed they were cancelling the winter contract. Callow
sued, alleging Baycrest had acted in bad faith.
The SCC confirmed that all parties to a contract have a duty to
perform their contractual obligations honestly. While parties are
not required to actively disclose information relating to the
contract, (e.g., an intention to terminate), neither are they free
to “knowingly mislead” the other party.
Ultimately, what constitutes misleading conduct will depend on
the context. The SCC provided some guidance, noting that:
- it can include half-truths, omissions, silence, and inaction,
if a party does not correct a false impression that it has created;
and - the question is not whether the contractual term was strictly
adhered to, but whether it was performed honestly.
Even though the contract granted Baycrest a largely unfettered
right to terminate, the SCC ruled that Baycrest acted dishonestly
by leading Callow to believe the contract was not in danger, and
then failing to correct that impression once created. Put another
way, Baycrest erred by suggesting the contract would be renewed
when, in fact, that was not the plan.
The takeaway here is that while the duty of honest performance
forbids outright lies and deception, it also forbids behaviour that
can mislead another party into believing something that is not
true. This is a very fact-specific issue that will change in each
case, but it is a reminder to always keep in mind whether one’s
communications with a contracting party are consistent with
internal strategy and direction.
The duty to exercise contractual discretion in good faith
In Wastech Services Ltd v Greater Vancouver Sewerage and
Drainage District,3 a waste removal company
(Wastech) contracted with a municipal district (Metro) for
transporting waste to three disposal facilities. The contract
granted Metro “absolute discretion” to apportion waste
between the facilities. Metro allocated the waste in such a manner
that Wastech complained about how its operating profits – the
target for which was 11% according to the contract – were
significantly reduced. Wastech sued, alleging Metro’s decisions
on where to allocate the waste were made in bad faith.
The SCC noted that even when a contract gives a party the
“absolute” discretion to make decisions, the discretion
isn’t truly absolute. While Canadian courts have long
permitted contractual parties to act selfishly or unwisely, they
will not permit parties to carry out discretion “in a manner
unconnected to the purposes underlying the discretion.”
What does that mean?
That depends on the wording of the contract.
In this case, three facts were critically important. First, the
contract did not provide any express limitations on Metro’s
ability to allocate where the waste went. Second, the contract
included a formula to help compensate Wastech if it did not reach
its target of 11% operating profit. Finally, the preamble to the
contract mentioned how one of its goals was to maximize the
efficiency and reduce the cost of waste disposal.
With those facts in mind, the SCC ruled there was nothing wrong
with Metro’s decision on how to allocate waste, even though it
had a direct impact on Wastech’s operating profit. While
Metro’s allocation may not have been the best decision for
Wastech’s bottom line, it was consistent with Metro’s right
of “absolute” discretion, it did not preclude Wastech
from using the formula to help compensate it for a bad year, and it
fell in line with the goals of maximizing efficiency and reducing
cost.
The takeaway here – as is often the case in contractual disputes
– is to take care when drafting your contracts. In this case, that
means thinking through the idea of how discretion ought to be
exercised. Remember: when in doubt, spell it out.
Footnotes
1 2014 SCC 71.
2 2020 SCC 45.
3 2021 SCC 7.
About Norton Rose Fulbright Canada LLP
Norton Rose Fulbright is a global law firm. We provide the
world’s preeminent corporations and financial institutions with
a full business law service. We have 3800 lawyers and other legal
staff based in more than 50 cities across Europe, the United
States, Canada, Latin America, Asia, Australia, Africa, the Middle
East and Central Asia.
Recognized for our industry focus, we are strong across all the
key industry sectors: financial institutions; energy;
infrastructure, mining and commodities; transport; technology and
innovation; and life sciences and healthcare.
Wherever we are, we operate in accordance with our global
business principles of quality, unity and integrity. We aim to
provide the highest possible standard of legal service in each of
our offices and to maintain that level of quality at every point of
contact.
For more information about Norton Rose Fulbright, see
nortonrosefulbright.com/legal-notices.
Law around the world
nortonrosefulbright.com
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
