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Contracts - Duty of Good Faith and Honesty
MORE CASES
Part 2
. Wastech Services Ltd. v. Greater Vancouver Sewerage and Drainage District
In Wastech Services Ltd. v. Greater Vancouver Sewerage and Drainage District (SCC, 2021) the Supreme Court of Canada considered the content of the relatively new doctrine of contractual duty of good faith. In this case the issue was whether the duty extended beyond what the purposes of the contract called for (SS: almost a fiduciary duty of 'best interests' of the other party) - it didn't [paras 61-95].
. C.M. Callow Inc. v. Zollinger
In C.M. Callow Inc. v. Zollinger (SCC, 2020) the Supreme Court of Canada considered and elaborated on the relatively new contractual doctrines of the duty of honesty and the duty of good faith [para 44-75, 105-114]. The context was a finding of breach of the duty of honesty in the termination of a contract.
Firstly, on the general status of the duty of good faith as an organizing principle in Canadian law:[44] As a further preliminary matter, I recall that the organizing principle of good faith recognized by Cromwell J. is not a free-standing rule, but instead manifests itself through existing good faith doctrines, and that this list may be incrementally expanded where appropriate. ....
[45] While these two existing doctrines [SS: good faith and honesty] are indeed distinct, like each of the different manifestations of the organizing principle [SS: of good faith], they should not be thought of as disconnected from one another. Cromwell J. explained that good faith contractual performance is a shared “requirement of justice” that underpins and informs the various rules recognized by the common law on obligations of good faith contractual performance (Bhasin, at para. 64). The organizing principle of good faith was intended to correct the “piecemeal” approach to good faith in the common law, which too often failed to take a consistent or principled approach to similar problems and, instead, develop the law in this area in a “coherent and principled way” (paras. 59 and 64).
[47] The specific legal doctrines derived from the organizing principle rest on a “requirement of justice” that a contracting party, like Baycrest here in respect of the contractual duty of honest performance, have appropriate regard to the legitimate contractual interests of their counterparty (Bhasin, at paras. 63‑64). It need not, according to Bhasin, subvert its own interests to those of Callow by acting as a fiduciary or in a selfless manner that would confer a benefit on Callow. To be sure, this requirement of justice reflects the notion that the bargain, the rights and obligations agreed to, is the first source of fairness between parties to a contract. But by the same token, those rights and obligations must be exercised and performed, as stated by the organizing principle, honestly and reasonably and not capriciously or arbitrarily where recognized by law. This requirement of justice, rooted in a contractual ideal of corrective justice, ties the existing doctrines of good faith, including the duty to act honestly, together. The duty of honest performance is but an exemplification of this ideal. ... Secondly, the court holds that breach of the duty of honesty is a contractual breach - and expands on what that means in contrast with other doctrines involving dishonesty (civil fraud and estoppel). As well, breach of the duty of honesty does not entitle the plaintiff to claim an act is void, just to sue for damages [paras 47-55, 66, 75].
Lastly, damages for such a breach are the normal contractual measure of 'expectation' (even though they might incidentally be the same on a tort reliance measure: paras 108-109):[106] On the first point, I note that the trial judge correctly proceeded on the premise that, “[d]ue to the breach of contract, [Callow] is entitled to be placed in the same position as if the breach had not occurred” (para. 79). Indeed, as Cromwell J. explained in Bhasin, breach of the duty of honest contractual performance supports a claim for damages according to the ordinary contractual measure (para. 88).
[107] The ordinary approach is to award contractual damages corresponding to the expectation interest (Atlantic Lottery Corp. Inc. v. Babstock, 2020 SCC 19, at para. 108). That is, damages should put Callow in the position that it would have been in had the duty been performed. . Atlantic Lottery Corp. Inc. v. Babstock
In Atlantic Lottery Corp. Inc. v. Babstock (SCC, 2020) the Supreme Court of Canada explains that recognizing a duty of good faith in contract is categorical (ie. by types of relationships), likely due to it's novel development in Canadian law:[65] As this Court explained in Bhasin v. Hrynew, 2014 SCC 71, [2014] 3 S.C.R. 494, however, not every contract imposes actionable good faith obligations on contracting parties. While good faith is an organizing principle of Canadian contract law, it manifests itself in specific circumstances. In particular, its application is generally confined to existing categories of contracts and obligations (para. 66). The alleged contract between ALC and the plaintiffs does not fit within any of the established good faith categories. Nor did the plaintiffs advance any argument for expanding those recognized categories. . Bhasin v Hrynew
In this important case, Bhasin v Hrynew (SCC, 2014), the Supreme Court of Canada, albeit half-heartedly, affirmed the existence of an uncertain and inconsistent contractual duty of 'good faith'. It also established a new and broader 'duty of honesty' (which "flows directly from" the duty of good faith). Key passages of the ruling on the duty of good faith are quoted here:[63] The first step is to recognize that there is an organizing principle of good faith that underlies and manifests itself in various more specific doctrines governing contractual performance. That organizing principle is simply that parties generally must perform their contractual duties honestly and reasonably and not capriciously or arbitrarily.
[64] As the Court has recognized, an organizing principle states in general terms a requirement of justice from which more specific legal doctrines may be derived. An organizing principle therefore is not a free-standing rule, but rather a standard that underpins and is manifested in more specific legal doctrines and may be given different weight in different situations: see, e.g., R. v. Jones, 1994 CanLII 85 (SCC), [1994] 2 S.C.R. 229, at p. 249; R. v. Hart, 2014 SCC 52 (CanLII), [2014] 2 S.C.R. 544, at para. 124; R. M. Dworkin, “Is Law a System of Rules?”, in R. M. Dworkin, ed., The Philosophy of Law (1977), 38, at p. 47. It is a standard that helps to understand and develop the law in a coherent and principled way.
[65] 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. This general principle has strong conceptual differences from the much higher obligations of a fiduciary. Unlike fiduciary duties, good faith performance does not engage duties of loyalty to the other contracting party or a duty to put the interests of the other contracting party first.
[66] This organizing principle of good faith manifests itself through the existing doctrines about the types of situations and relationships in which the law requires, in certain respects, honest, candid, forthright or reasonable contractual performance. Generally, claims of good faith will not succeed if they do not fall within these existing doctrines. But we should also recognize that this list is not closed. The application of the organizing principle of good faith to particular situations should be developed where the existing law is found to be wanting and where the development may occur incrementally in a way that is consistent with the structure of the common law of contract and gives due weight to the importance of private ordering and certainty in commercial affairs.
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[69] The approach of recognizing an overarching organizing principle but accepting the existing law as the primary guide to future development is appropriate in the development of the doctrine of good faith. Good faith may be invoked in widely varying contexts and this calls for a highly context-specific understanding of what honesty and reasonableness in performance require so as to give appropriate consideration to the legitimate interests of both contracting parties. For example, the general organizing principle of good faith would likely have different implications in the context of a long-term contract of mutual cooperation than it would in a more transactional exchange: Swan and Adamski, at § 1.24; B. Dixon, “Common law obligations of good faith in Australian commercial contracts — a relational recipe” (2005), 33 A.B.L.R. 87.
[70] The principle of good faith must be applied in a manner that is consistent with the fundamental commitments of the common law of contract which generally places great weight on the freedom of contracting parties to pursue their individual self-interest. In commerce, a party may sometimes cause loss to another — even intentionally — in the legitimate pursuit of economic self-interest: A.I. Enterprises Ltd. v. Bram Enterprises Ltd., 2014 SCC 12 (CanLII), [2014] 1 S.C.R. 177, at para. 31. Doing so is not necessarily contrary to good faith and in some cases has actually been encouraged by the courts on the basis of economic efficiency: Bank of America Canada v. Mutual Trust Co., 2002 SCC 43 (CanLII), [2002] 2 S.C.R. 601, at para. 31. The development of the principle of good faith must be clear not to veer into a form of ad hoc judicial moralism or “palm treeˮ justice. In particular, the organizing principle of good faith should not be used as a pretext for scrutinizing the motives of contracting parties. On the new 'duty of honesty' the Court stated:[73] In my view, we should. I would hold that there is a general duty of honesty in contractual performance. This means simply that parties must not lie or otherwise knowingly mislead each other about matters directly linked to the performance of the contract. This does not impose a duty of loyalty or of disclosure or require a party to forego advantages flowing from the contract; it is a simple requirement not to lie or mislead the other party about one’s contractual performance. Recognizing a duty of honest performance flowing directly from the common law organizing principle of good faith is a modest, incremental step. The requirement to act honestly is one of the most widely recognized aspects of the organizing principle of good faith: see Swan and Adamski, at § 8.135; O’Byrne, “Good Faith in Contractual Performance”, at p. 78; Belobaba; Greenberg v. Meffert (1985), 1985 CanLII 1975 (ON CA), 50 O.R (2d) 755 (C.A.), at p. 764; Gateway Realty, at para. 38, per Kelly J.; Shelanu Inc. v. Print Three Franchising Corp. (2003), 2003 CanLII 52151 (ON CA), 64 O.R. (3d) 533 (C.A.), at para. 69. For example, the duty of honesty was a key component of the good faith requirements which have been recognized in relation to termination of employment contracts: Wallace, at para. 98; Honda Canada, at para. 58.
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[77] That said, I would not rule out any role for the agreement of the parties in influencing the scope of honest performance in a particular context. The precise content of honest performance will vary with context and the parties should be free in some contexts to relax the requirements of the doctrine so long as they respect its minimum core requirements. The approach I outline here is similar in principle to that in § 1-302(b) of the U.C.C. (2012):The obligations of good faith, diligence, reasonableness and care . . . may not be disclaimed by agreement. The parties, by agreement, may determine the standards by which the performance of those obligations is to be measured if those standards are not manifestly unreasonable. [78] Certainly, any modification of the duty of honest performance would need to be in express terms. A generically worded entire agreement clause such as cl. 11.2 of the Agreement does not indicate any intention of the parties to depart from the basic tenets of honest performance: see GEC Marconi Systems Pty Ltd. v. BHP Information Technology Pty Ltd., [2003] FCA 50 (AustLII), at para. 922, per Finn J.; see also O’Byrne, “Good Faith in Contractual Performance”, at p. 96.
[79] Two arguments are typically raised against an increased role for a duty of good faith in the law of contract: see Bridge, Clark, and Peden, “When Common Law Triumphs Equity: the Rise of Good Faith and Reasonableness and the Demise of Unconscionability”. The first is that “good faith” is an inherently unclear concept that will permit ad hoc judicial moralism to undermine the certainty of commercial transactions. The second is that imposing a duty of good faith is inconsistent with the basic principle of freedom of contract. I do not have to decide here whether or not these points are valid in relation to a broad, generalized duty of good faith. However, they carry no weight in relation to adopting a rule of honest performance.
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[88] The duty of honest performance has similarities with the existing law in relation to civil fraud and estoppel, but it is not subsumed by them. Unlike promissory estoppel and estoppel by representation, the contractual duty of honest performance does not require that the defendant intend that his or her representation be relied on and it is not subject to the uncertainty around whether estoppel can be used to found an independent cause of action: Ryan v. Moore, 2005 SCC 38 (CanLII), [2005] 2 S.C.R. 53, at para. 5; Maracle v. Travellers Indemnity Co. of Canada, 1991 CanLII 58 (SCC), [1991] 2 S.C.R. 50; Waddams, The Law of Contracts, at paras. 195-203; B. MacDougall, Estoppel (2012), at pp. 142-44. As for the tort of civil fraud, breach of the duty of honest contractual performance does not require the defendant to intend that the false statement be relied on and breach of it supports a claim for damages according to the contractual rather than the tortious measure: see, e.g., Parna v. G. & S. Properties Ltd., 1970 CanLII 25 (SCC), [1971] S.C.R. 306, cited with approval in Bruno Appliance and Furniture, Inc. v. Hryniak, 2014 SCC 8 (CanLII), [2014] 1 S.C.R. 126, at para. 19.
[89] Mr. Bhasin, supported by many judicial and academic authorities, has argued for wholesale adoption of a more expansive duty of good faith in contrast to the modest, incremental change that I propose: A.F., at para. 51; Summers, at p. 206; Belobaba; Gateway Realty. In many of its manifestations, good faith requires more than honesty on the part of a contracting party. For example, in Dynamic Transport, this Court held that good faith in the context of that contract required a party to take reasonable steps to obtain the planning permission that was a condition precedent to a sale of property. In other cases, the courts have required that discretionary powers not be exercised in a manner that is “capricious” or “arbitrary”: Mason, at p. 487; LeMesurier v. Andrus (1986), 1986 CanLII 2623 (ON CA), 54 O.R. (2d) 1 (C.A.), at p. 7. In other contexts, this Court has been reluctant to extend the requirements of good faith beyond honesty for fear of causing undue judicial interference in contracts: Wallace, at para. 76. In summary, the court stated:[93] A summary of the principles is in order:(1) There is a general organizing principle of good faith that underlies many facets of contract law.
(2) In general, the particular implications of the broad principle for particular cases are determined by resorting to the body of doctrine that has developed which gives effect to aspects of that principle in particular types of situations and relationships.
(3) It is appropriate to recognize a new common law duty that applies to all contracts as a manifestation of the general organizing principle of good faith: a duty of honest performance, which requires the parties to be honest with each other in relation to the performance of their contractual obligations. As can be seen the doctrine of duty of good faith is not so much clarified as affirmed in it's scattered state. The duty of honesty though is a highly useful addition to the plaintiff arsenal, and can expect much activity and development.
. High Tower Homes Corporation v. Stevens
In High Tower Homes Corporation v. Stevens (Ont CA, 2014) the Court of Appeal discussed the recent Supreme Court of Canada case of Bhasin v Hrynew as to when the duties of good faith and honesty would be implied in a contract, particularly in the face of a 'whole agreement' clause in the contract (ie. a clause that purported to exclude any terms other than those expressly set out in a written contract itself):[35] The issue in CivicLife was whether the contract included a duty of good faith performance. Weiler J.A., writing for the court, concluded that it did, using the device of an implied term. At para. 52, she held that the wording of the entire agreement clause did not preclude the implication of such a term because it was already part of the contract. She further held that even if the entire agreement clause precluded such an implication on its face, the court had the discretion not to enforce the clause when to do so would be unconscionable, unfair, unreasonable or otherwise contrary to public policy.
[36] In Bhasin v. Hrynwew, 2014 SCC 71 (CanLII), 27 B.L.R. (5th) 1 – a decision released after this appeal was argued and on which the parties subsequently made written submissions – Cromwell J., writing for a unanimous court, clarified that the duty of good faith should not be thought of as an implied term. He recognized a new duty of honest contractual performance as a general doctrine of contract law that operates irrespective of the intentions of the parties. As such, the parties cannot exclude it by an entire agreement clause: Bhasin, at para. 74.
[37] Seen in the light of Bhasin, CivicLife is about the importance of acting in good faith in contractual dealings, and not about the general ability to imply terms – whatever their nature – notwithstanding an entire agreement clause.
[38] Because he was of the view that the entire agreement clause precluded the Purchaser from asserting that there were implied terms as to the manner of giving of notice, the motion judge did not expressly address whether a term should be implied that notice waiving the conditions in favour of the Purchaser could be given by fax to the Vendor’s solicitor and by hand delivery to Blue Water.
[39] I would decline to imply such a term. As Cory J.A. (as he then was) held in G. Ford Homes Ltd. v. Draft Masonry (York) Co. (1983), 1983 CanLII 1719 (ON CA), 43 O.R. (2d) 401 (C.A.), at p. 403: “no term will be implied that is inconsistent with the contract.” As mentioned above, the Agreement expressly provided a way in which the Vendor could be served: personally. There was no indication that the Vendor was evading personal service of the notice, and the Purchaser made no effort to serve the Vendor personally. To imply other terms in relation to notice would run contrary to the express notice provisions in the Agreement. The device of implying contractual terms is to be used sparingly and with caution: John D. McCamus, The Law of Contracts, 2nd ed. (Toronto: Irwin Law, 2012) at p. 774. Finally, I agree with the Vendor that implying the terms sought by the Purchaser is not necessary to give business efficacy[3] to the Agreement. Therefore, these terms should not be implied as a matter of presumed intention. . CM Callow Inc. v. Zollinger
In CM Callow Inc. v. Zollinger (Ont CA, 2018) the Court of Appeal elaborates on the contractual duties of good faith and honest performance:The duty of good faith and honest performance
[10] The Supreme Court held in Bhasin v. Hrynew, 2014 SCC 71 (CanLII), [2014] 3 S.C.R. 494, at para. 33, that good faith contractual performance “is a general organizing principle of the common law of contract which underpins and informs the various rules in which the common law, in various situations and types of relationships, recognizes obligations of good faith contractual performance.” In addition, the Court held that there is a duty of honest performance “which requires the parties to be honest with each other in relation to the performance of their contractual obligations”: at para. 93.
[11] The Court was at pains to emphasize that the concept of good faith was not to be applied so as to undermine longstanding contract law principles, thereby creating commercial uncertainty. Cromwell J. explained at para. 70:The principle of good faith must be applied in a manner that is consistent with the fundamental commitments of the common law of contract which generally places great weight on the freedom of contracting parties to pursue their individual self-interest. In commerce, a party may sometimes cause loss to another — even intentionally — in the legitimate pursuit of economic self-interest: A.I. Enterprises Ltd. v. Bram Enterprises Ltd., 2014 SCC 12 (CanLII), [2014] 1 S.C.R. 177, at para. 31. Doing so is not necessarily contrary to good faith and in some cases has actually been encouraged by the courts on the basis of economic efficiency: Bank of America Canada v. Mutual Trust Co., 2002 SCC 43 (CanLII), [2002] 2 S.C.R. 601, at para. 31. The development of the principle of good faith must be clear not to veer into a form of ad hoc judicial moralism or “palm tree” justice. In particular, the organizing principle of good faith should not be used as a pretext for scrutinizing the motives of contracting parties. [12] The same is true of the new duty the Court recognized as flowing from the good faith organizing principle, the duty of honesty in contractual performance. As Cromwell J. explained, at para. 73:[The duty] means simply that parties must not lie or otherwise knowingly mislead each other about matters directly linked to the performance of the contract. This does not impose a duty of loyalty or of disclosure or require a party to forego advantages flowing from the contract; it is a simple requirement not to lie or mislead the other party about one’s contractual performance. [13] This, he emphasized at para. 73, was a “modest, incremental step” in the development of the law of contract.
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