THE FUTURE OF CONTRACTING and GOOD FAITH IN ALBERTA
The SCC’s Decision in C.M. Callow Inc. v Zollinger
Good faith has found its place in contract law as the manner in which the parties manage their relationship though only as organising principle (Bhasin v Hyrnew 2014 SCC 71)or supplemental to the terms of the contract and not a stand-alone cause of action or breach of contractual obligations, at least not until now and the decisions of the SCC in C.M. Callow Inc. v Zollinger 2020 SCC 45 and Greater Vancouver Sewerage and Drainage District v Wastech Services Ltd., 2021 SCC 7.
Good faith in a contract should include an objective standard to promote fairness, consistency (Lisa D. Sparks, The Regression of Good Faith in Maryland Commercial Law) and reasonable expectations. Acting honestly is not adequate to qualify as good faith. In other words, parties should refrain from conduct that would be considered by reasonable and honest people to be commercially unacceptable. However, an enquiry arises whether the doctrine of good faith in performance of the contractual obligation has to prevail over contractual expressions in commercial contracts Wastech.
In the case of Callow as part of the winter maintenance agreement, Baycrest notified Callow of the termination of their maintenance agreement contract. Callow performed the summer maintenance contract with utmost proficiency, and he even undertook additional voluntary tasks in order to sustain his opportunity in the renewal of the winter maintenance contract. Callow, alleged that Baycrest acted in bad faith by breaking the duty of honesty that Baycrest should have owed to them. Since the termination decision was already taken when Callow was still involved in the summer agreement contract.
The Trial Judge declared Baycrest actively misled Callow and acted in bad faith. However, the Court of Appeal reversed the first instance judgment, ruling that the trial judge erred by extending the duty of honest performance beyond the terms of a winter maintenance contract, which in the Bhasin case was not clearly defined. Consequently, the Court of Appeal ruled that the renewal of the winter agreement was not a contractual obligation since it was merely a promise (or part of the negotiation process), therefore not binding. This ruling is consistent with the established legal principle that there is no obligation to negotiate in good faith (Martel Building Ltd. V Canada  2 S.C.R. 860).
The Supreme Court of Canada overturned the Court of Appeal decision finding that the dishonesty was directly linked to the performance of the contract. The SCC stated that good faith should be considered in this case realizing that Callow was under this false impression, the corporations should have corrected Callow’s misapprehension; by failing to do so, they breached the Bhasin duty of honest performance in the context of the renewal/termination of a service contract, finding that, in certain circumstances, dishonesty by silence or omission may be sufficient to establish a breach of the duty of good faith. However, Justice Côté in her dissent (of the majority) stated that the common law, as it stands, doesn’t include a duty of honest performance and noted that in Bhasin the Court found the duty of honest performance was a “simple requirement” not to lie or knowingly mislead, and it shouldn’t be confused with a duty to disclose (para 195 – 196). Côté J. concluded that the majority’s ruling would create confusion. A contracting party wouldn’t know when “permissible silence could turn into non-permissible silence that may constitute a breach of contract” (para 197), and that Baycrest was not required to correct Callow’s mistaken belief (para 234), on the basis that, absent a duty of disclosure, a party shouldn’t have an “obligation to dissuade his counterparty from persisting in mistaken belief” (para 207). It’s worth noting at this point that both concurring and dissenting positions allude to difficulties and uncertainty in the application of the SCC’s ruling.
In the case of Wastech, Metro allocated waste among the facilities in a manner that prevented Wastech from reaching the target, which, according to Wastech, would have breached the contract. It requested a compensatory damages award from the arbitrator.
An Arbitrator determined that Wastech was entitled to compensation due to the defendant breaching the duty of good faith. The Supreme Court of British Columbia reversed the arbitrator’s decision.
The Supreme Court of Canada dismissed Wastech’s appeal because the Court must determine what restrictions the duty to exercise contractual discretion in good faith imposes on the individual holding these powers. According to the SCC, Metro did not breach its duty of good faith by exercising its discretion pursuant to the clause’s business purpose. This has the effect of preserving the courts’ ability to intervene in private contracts while still preserving the parties’ freedom to contract. The SCC confirmed that the duty of good faith contains a duty to exercise contractual discretion in good faith. Importantly, the Court held that this duty exists regardless of whether the contract purports to confer absolute discretion on a particular matter. The SCC held that the duty to exercise contractual discretion is only breached when the discretion is exercised unreasonably, in an “arbitrary or capricious” manner. In this case, there was no evidence that Metro had acted capriciously, arbitrarily, or in a dishonest fashion. However, Metro was not required to act in a manner that subordinated its own interests to that of Wastech or give a benefit to Wastech that Wastech did not bargain for.
What do I gather from Callow and Wastech?
(1) Silence can constitute a breach of contract, expanding the duty of honest performance articulated in Bhasin; (2) The decisions have opened the floodgates for claims arising out of “active deception” or having “knowingly misled” a counterparty for breach of the duty of honesty and will entitle a counterparty to damages; (3) It appears that the awareness of a misapprehension is sufficient cause to require disclosure to correct that misapprehension, even if a party did not contribute to it; And (4) based on the previous points, a level of uncertainty.
It remains to be seen how significantly the decisions in Callow and Wastech which expanded on Bashin, will impact honesty in contractual performance and good faith exercise of contractual discretion going forward. However, parties to contracts should be mindful of misapprehension by their counterparties, and absolutely avoid any active deception surrounding performance of their contracts. This may prove more difficult to manage and put into practice, balancing what amounts to “dishonesty” versus “a competitive advantage”. The extent of a party’s duty or obligation to disclose may hinge on the specific facts of the case. If anything this trilogy of cases has explored the extent to which express contractual language can be varied from in the context of the conduct of the contractual parties.
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Written by: Clifford Andrew Sukhai
Assisted by: Anwer Al-jawhar (Law Sudent)