Canada’s top court to hear contract good faith case
Last week, the Supreme Court of Canada agreed to hear an appeal from the decision of the Court of Appeal for Ontario in the CM Callow Inc. v. Zollinger case relating to the relatively new and often contentious concept of good faith in the performance of contracts.
It has been less than five years since the Supreme Court of Canada caused both celebration and concern in the legal and business communities with its decision in Bhasin v. Hrynew , which recognized the “organizing principle” of good faith in contractual performance. In particular, the SCC found that there is a duty of honest performance between parties to a contract which means simply that they “…must not lie or otherwise knowingly mislead each other about matters directly linked to the performance of the contract.”
The decision in Bhasin v. Hrynew specifically stated that the obligation of good faith was a narrow one and not intended to undermine the certainty that contracts will be enforced in accordance with their terms. It also affirmed that contracting parties are entitled to act in their own commercial self-interest. However, this did not prevent litigants from seeking to expand the principle to a diverse range of circumstances of perceived unfairness between contracting parties.
In CM Callow v. Zollinger, a condominium maintenance company argued that it was bad faith for the manager of ten condominium corporations not to advise that it planned to terminate an upcoming contract for winter maintenance until after the plaintiff’s summer maintenance had been completed. Among other things the plaintiff had done “freebie” work in the expectation that its contracts were goign to be renewed at the end of the season. The trial judge accepted this argument – finding that it was bad faith for the condo companies not to tell the plaintiff that they had no intention of renewing the contract and leading the plaintiff to believe that the upcoming winter contract was not in danger of non-renewal.
The Court of Appeal overturned the trial decision, finding that there was no contractual obligation on the condo corporations to tell the plaintiffs about the non-renewal prior to the contractual 10-day notice period and that the failure to provide more notice was not bad faith. As observed by a unanimous panel the trial judge’s findings “may suggest a failure to act honourably, but they do not rise to the high level required to establish a breach of the duty of honest performance.”
It remains to be seen what the Supreme Court of Canada will do with this case. However, hopefully it will limit the applicability of the doctrine of good faith contractual performance and reiterate its support for contractual certainty and the enforcement of contracts in accordance with their express terms.
