Supreme Court of Canada set to revisit the duty of honest performance of contracts
December 16, 2019 by Sonny Ingram
In 2014, the Supreme Court of Canada released its decision in Bhasin v. Hrynew, which recognized a new duty that applies to all contracts: a duty of honest performance, requiring parties to be honest with each other in relation to the performance of their contractual obligations.1 Not surprisingly, Bhasin is, to put it mildly, a seminal decision. In fact, some commentators suggest more words have been written about Bhasin than any other case in the Canadian law of contracts.2 Nevertheless, some uncertainty has followed Bhasin since its release.
Practically speaking, what does the duty of honest performance mean?
Last fall, in CM Callow Inc. v. Zollinger,3 the Ontario Court of Appeal heard an appeal that may ultimately provide further guidance on how parties are to fulfill their duty of honest performance. C.M. Callow Inc. provided maintenance services to ten condominium corporations. Those corporations formed a committee to make decisions regarding joint assets and, in April 2012, entered into a pair of two-year maintenance contracts with Callow. One covered summer, and the other, winter maintenance. The winter contract, which ran from November 2012 to April 2014, contained an early termination provision requiring 10 days’ notice.
In the spring of 2013, the committee decided to terminate the winter contract but did not provide Callow with notice of termination. Subsequently, during the summer of 2013, Callow, on its own, performed free landscaping work in the hope that this would act as an incentive for the committee to renew both contracts. However, in September 2013, the committee notified Callow that it intended to terminate the winter contract.
Callow sued for breach of contract. At trial, the Superior Court found the committee breached its contractual duty of honest performance by acting in bad faith in withholding its intention to terminate the winter contract and by continuing to represent to Callow that the winter contract was not in danger of non-renewal.
The Court of Appeal disagreed. Relying on Bhasin, the Court of Appeal held that the Committee owed Callow nothing beyond the 10-day notice period in the winter contract and that its failure to provide notice on a timelier basis was not evidence of bad faith.
In reaching its decision, the Court of Appeal emphasized the language in Bhasin, which held that the duty of honesty in contractual performance means simply that parties must not lie or otherwise knowingly mislead each other about matters directly linked to the performance of the contract. Moreover, this does not impose a duty of loyalty or 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.4
The Court of Appeal considered the committee’s failure to inform Callow of the decision to terminate and its acceptance of the free work (knowing that it was performed with the intention of leading to future contracts), but held that although such behaviour may suggest a failure to act honourably, it does not rise to the “high level required to establish a breach of the duty of honest performance.”5 The Court of Appeal noted the duty of honest performance is tied to contracts then in effect and did not limit the committee’s freedom concerning future contracts not yet negotiated or entered into.6 The contract had a 10-day notice period and more was not required.
However, the Court of Appeal is not the end of the road for Callow and the committee. Earlier this year, the Supreme Court of Canada granted leave for Callow to appeal the decision of the Court of Appeal to the Supreme Court of Canada.
The appeal is set for Dec. 6, where it is expected Callow will argue the Court’s decision in Bhasin prohibits what it describes as active non-disclosure: in particular, the committee breached its duty of honest performance by withholding from Callow the decision to terminate when it knew its silence would mislead the contractor.7
Stay tuned, as the Court’s decision could significantly influence how parties in the construction industry behave in the future.
Sonny Ingram is a Senior Associate practicing Construction Law in Borden Ladner Gervais LLP’s Toronto office. This article is provided for general information only and may not be relied upon as legal advice.
This column originally appeared in the December 2019 issue of On-Site. Click here to read through the whole issue.
1 — Bhasin v. Hrynew, 2014 SCC 71, ¶93
2 — D. Percy and D. Stollery, “Justice Jean E.L. Cote, “The Court of Appeal, and the Changing Nature of Contract Law” (2019) 56 Alta L. Rev. 1263 at 1271
3 — 2018 ONCA 896
4 — CM Callow Inc., supra, ¶12; Bhasin, supra, ¶73
5 — CM Callow Inc., supra, ¶15
6 — CM Callow Inc., supra, ¶18
7 — Factum of the Appellant, C.M. Callow Inc., S.C.C File No. 38463