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By Scott McGrath, Litigation Lawyer

The Supreme Court of Canada (“SCC”) acknowledged that good faith contractual performance is a general organizing principle of contract law and recognized that there is a duty to act honestly in the performance of contractual obligations in its unanimous 2014 decision in Bhasin v Hrynew.^[1]

This December the SCC will be considering these issues again in two appeals concerning good faith obligations in contract: Greater Vancouver Sewerage and Drainage District v Wastech Services Ltd ^[2] and CM Callow Inc v Zollinger.^[3]

Both of the cases were decided in favour of the plaintiffs at first instance, with findings that the defendants had breached the duty of good faith in contractual performance and to act honestly in the performance of contractual obligations, respectively.  Both decisions, however, were overturned on appeal.^[4]

The plaintiffs in the two cases seek to push the boundaries of Bhasin in different ways.  Zollinger focuses on the termination of a contract, and what a terminating party’s duties are with respect to disclosure of its decision to do so.  Wastech focuses more on the duty of good faith in the performance of one’s contractual obligations, and the proper exercise of contractual discretion.

Refresher on the Principles in Bhasin

In noting good faith as a “general organizing principle” in contractual performance, and recognizing the duty of honesty in the performance of contractual obligations as a new common law duty, the SCC made several guiding observations in Bhasin, including:

• Good faith may be invoked in widely varying contexts and the requirements of honesty and reasonableness in performance will be highly context-specific. For example, it will have different implications in the context of a long-term contract of mutual cooperation than in a more transactional exchange.
  
  
• Contracting parties are free to pursue their individual self-interest, and in commerce a party may sometimes cause intentional loss to another in the legitimate pursuit of its economic self-interest.
  
  
• The general duty of honesty in contractual performance means that parties must not lie or otherwise knowingly mislead each other about matters directly linked to the performance of the contract; however, it does not impose a duty of loyalty or of disclosure or require a party to forego advantages flowing from the contract.
  
  
• The duty of honesty in contractual performance poses no risk to commercial certainty in the law of contract, because no reasonable commercial person would expect that the other party would be dishonest about his or her performance.

The Decision in Zollinger: Honesty in the Termination of a Contract

In Zollinger, the plaintiff, C.M. Callow Inc. (“Callow”), provided maintenance services to ten condominium corporations managed by Condominium Management Group (“CMG”).  In April 2012, Callow and CMG entered into two two-year maintenance contracts: one for summer maintenance work, and the other for winter.

The winter contract contained a provision that permitted CMG to terminate it without cause on ten days’ notice.  That is what CMG did, terminating the winter contract in September 2013, after only one year of the contract’s two-year term, by giving ten days’ notice. 

Callow alleged that the termination of the winter contract violated CMG’s duty of honest performance in contract, and commenced a proceeding.

After an eight-day trial, the trial judge concluded that CMG decided in March or April 2013 not to renew the winter contract, but it waited until September 2013 to communicate that decision – after Callow had completed the summer contract obligations, which included “freebie” services in an attempt to encourage CMG to renew the maintenance contracts further.

The trial judge found that while CMG did not have a positive duty to disclose its decision to terminate the winter contract when it made that decision, it was not free to actively deceive Callow into thinking that its winter contract was not at risk.  She awarded damages to Callow.

The Court of Appeal for Ontario overturned the trial decision.  In a brisk, 23-paragraph decision, the Court of Appeal unanimously found that the trial judge had gone beyond what the duty of honest performance requires or permits.  It found that the parties had only bargained for a contract that could be terminated on ten days’ notice without cause, and that is what the parties received.  It did not matter whether there was deception about extending the contract or signing a new contract, but rather what mattered was what the parties had bargained for in the written contract.

Argument in Zollinger on Appeal to the SCC

In Bhasin, the SCC found that a contracting party must not lie or otherwise knowingly mislead its counterparty about matters directly linked to the performance of the contract.  It also found that this duty did not impose a duty of disclosure on a contracting party.  The potential conflict between those two findings is exemplified squarely in Zollinger: CMG had no duty to disclose to Callow that it has decided to terminate the winter contract, but by withholding information from Callow and representing that the contract was not in danger, did it cross the line into knowingly misleading Callow?

In its written argument before the SCC, Callow argues that it is well-accepted that silence can be tantamount to a positive representation if it creates a misleading impression when combined with a party’s active statements or conduct, and that this principle squarely applies given the trial judge’s findings that CMG had actively deceived, misled and lied to Callow. 

According to Callow, while CMG may not have had an automatic duty to tell Callow in March or April 2013 that it had decided to terminate his contract in the winter, that is not the same as saying that it was free to deceive, mislead and/or lie to him all summer long.  Callow argues that once CMG took those active steps of interacting with Callow, accepting free services and generally leading Callow to believe that the contract may actually be extended, it was crossing into prohibited territory and breaching its duty of good faith.

The Decision in Wastech: Good Faith in Exercising Discretion

In the other appeal, the contract at issue was between Wastech Services Ltd. (“Wastech”) and the Greater Vancouver Sewerage and Drainage District (“Metro”) for the transport and disposal of solid waste over a 20-year term.  There were three potential destinations for the waste being hauled: the Cache Creek Landfill (“CCL”), Vancouver Landfill (“VLF”) or the Burnaby Waste to Energy Facility (“Burnaby Incinerator”).  The payment scale differed depending on the destination.  A higher long haul rate was payable for the transfer, transport and disposal of solid waste to the CCL, while a lower short haul rate applied to waste sent to the VLF and the Burnaby Incinerator.  The contract set out Wastech’s target profit margin (12%), which was calculated using a “target operating ratio” of operating costs to total revenues.

The contract permitted Metro the discretion to determine which of the three facilities would receive any given load of waste.  While the arrangement worked well for the first 15 years of the contract, it broke down when Metro decided that in order to save on some costs, it would shift the proportion of waste being sent to CCL, and would instead prefer sending waste to VLF or the Burnaby Incinerator.  This shift meant that Wastech’s operating revenues fell dramatically.  Wastech commenced arbitration proceedings against Metro, arguing that it should be compensated for what it would have earned had Metro not decided to favour sending waste to VLF and the Burnaby Incinerator.

The arbitrator found that there had been a breach of the duty of good faith.  He found that, although there was no contractual prohibition on Metro reallocating where the waste was sent (and in fact, it was an explicit right it had in the contract to choose which site would take the waste), Metro could not exercise its discretion in a way that ignored Wastech’s interests, harming it in the process.

That finding was overturned on appeal.  The Court of Appeal for British Columbia unanimously concluded the following, among other things:

• Wastech could not have had a legitimate expectation arising out of the Agreement that Metro would not exercise its discretion in the way it did. This was especially so given evidence that the parties turned their minds during negotiations to what would happen if Metro reallocated the waste and decided not to insert any language into the contract to govern that situation.
  
  
• That there can be no breach of the organizing principle of good faith in contract without at least a subjective element of improper motive or dishonesty. Here, Metro had a legitimate reason for reallocating distribution of the waste and was not acting in bad faith.

Argument in Wastech on Appeal to the SCC

The written argument on behalf of Wastech at the SCC focuses on the prerequisites for a finding of a breach of the organizing principle of good faith.  In particular, Wastech argues that it only had to identify its reasonable expectations and demonstrate that there had been a “significant impact” on it contrary to those reasonable expectations caused by the exercise of discretion by Metro.  It argues that it is not required to show that there was an express contractual provision that was violated or that there was any animus or dishonesty on the part of Metro.

Wastech also raises arguments related to the deference that appellate courts show arbitrators.  In Wastech’s view, the Court of Appeal for British Columbia impermissibly preferred its own conclusions over the arbitrator’s without identifying extricable errors of law made by the arbitrator.

Concluding Thoughts

In a general sense, courts in Canada (and especially appellate courts) have been loath to find breaches of the duty of honesty in the performance of contractual obligations since Bhasin, favouring commercial certainty over breaches of implied terms.  This is so much so that several commentators have questioned whether Bhasin, despite professing a change to the common law, actually changed anything in practice.^[5]

The appeals in Zollinger and Wastech will give the SCC^[6] its first opportunity to weigh in on the application of Bhasin.  To date, it appears the impact of Bhasin on the law has been minimal.  It will be interesting to see whether the SCC will plot a course correction on the application of Bhasin to increase that impact and expand the application of Bhasin to additional fact scenarios, or whether the SCC will be content for Bhasin to continue being interpreted as a more modest, incremental step in the law.