The Supreme Court of Canada recently released two decisions, each dealing with the duty of good faith in contractual relationships.

The first decision clarified the scope of the duty of honesty in contractual performance, while the second clarified the nature and scope of the duty to exercise contractual discretion in good faith.

The Duty of Honesty in Contractual Performance

 In the first decision, a group of condominium corporations had entered into a two‑year winter maintenance contract in 2012 with the owner of a maintenance company, which allowed the group to terminate the agreement for any reason if it gave the owner 10 days’ written notice.

Even though the group had decided in early 2013 that they wanted to terminate the agreement, they only gave the owner his notice in September 2013. Up until that point, it was the owner’s understanding that the contract would continue.

The owner went to court, claiming breach of contract and that the group had acted in bad faith in terminating the contract.

The trial judge found in favour of the owner and awarded him damages, but the Ontario Court of Appeal set aside that decision. While the trial judge found that the group had breached its duty of honest performance, the Court of Appeal held that the trial judge had erred by improperly expanding the duty beyond the terms of the parties’ agreement.

The Supreme Court of Canada allowed the appeal, finding in favour of the owner.

The court explained that the duty of honest performance in contract applies to all contracts and requires that parties must not lie or otherwise knowingly mislead each other about matters directly linked to the performance of the contract. To determine whether the duty has been breached, a court must consider whether a right under a contract was exercised, or an obligation under that contract was performed, dishonestly. The court stated that exercising a contractual right in a dishonest manner is contrary to the requirement of good faith, which includes not lying or knowingly deceiving the other party in a matter directly linked to the performance of the contract.

The court further clarified that each case is fact-specific and to knowingly mislead a party to a contract is not confined to direct lies but can include half-truths, omissions, and even silence, depending on the circumstances.

In finding that the group had breached its duty of honest contractual performance, the majority of the court wrote:

“While the duty of honest performance is not to be equated with a positive obligation of disclosure, this too does not exhaust the question as to whether [the group]’s conduct constituted, as a breach of the duty of honesty, a wrongful exercise of the termination clause. [The group] may not have had a free‑standing obligation to disclose its intention to terminate the contract before the mandated 10 days’ notice, but it nonetheless had an obligation to refrain from misleading [the owner] in the exercise of that clause. In circumstances where a party lies to or knowingly misleads another, a lack of a positive obligation of disclosure does not preclude an obligation to correct the false impression created through its own actions.”

As a result, the court held that the group had knowingly misled the owner in the manner in which it exercised the termination clause and its wrongful exercise of the termination clause amounted to a breach of contract. It therefore set aside the order of the Court of Appeal and reinstated the judgment of the trial judge.

The Duty to Exercise Contractual Discretion in Good Faith

In the second decision, a waste transportation and disposal company (the “company”), and Metro, a statutory corporation responsible for the administration of waste disposal for the Metro Vancouver Regional District, had a long‑standing contractual relationship. The contract contemplated the removal and transportation of waste by the company to three disposal facilities. It stated that Metro could choose to send the waste to any of three different disposal sites and the company would be paid a different rate depending on which site was chosen. The contract also gave Metro absolute discretion to send the waste to the site of its choice.

Then, as a result of Metro reallocating waste from a disposal facility further away to one that was closer in 2011, the company’s operating profit fell short of its target. The company thus alleged that Metro had breached the contract by allocating waste among the facilities in a manner that deprived it of the possibility of achieving its target profit for that year and it sought compensatory damages.

The matter was referred to arbitration, where the arbitrator found that a duty of good faith applied, that Metro had breached that duty, and that the company was entitled to compensation. The Supreme Court of British Columbia allowed Metro’s appeal and set aside the arbitrator’s award on the basis that the imposition of a contractual duty to have appropriate regard for the interests of another contracting party must be based on the terms of the contract itself, and that the parties had deliberately rejected a term constraining the exercise of discretionary power to allocate waste. The Court of Appeal dismissed the company’s appeal.

The Supreme Court of Canada also dismissed the company’s appeal, finding that Metro had not breached its duty to exercise contractual discretion in good faith. While the court explained that such a duty exists, it explained that the duty requires the parties to exercise their discretion in a manner consistent with the purposes for which it was granted in the contract, or to exercise their discretion reasonably. Therefore, the duty to exercise contractual discretion is breached only where the discretion is exercised unreasonably, in a manner unconnected to the purposes underlying the discretion.

The court thus held that Metro did not exercise its discretionary power in breach of a good faith duty because the company was asking the court to award it an advantage not provided for in the agreement. The court dismissed the appeal, concluding:

“Like the distinct duty of honest performance, the duty to exercise contractual discretionary powers in good faith is not a fiduciary duty. In exercising a contractual discretionary power, “a party may sometimes cause loss to another — even intentionally — in the legitimate pursuit of economic self-interest” […]. Doing so is not necessarily exercising discretion wrongfully or in “bad faith”.”

For Help 

Appeals are reviews of decisions made by lower court judges.  Judicial review is an appeal of a decision of an agency, tribunal, board or commission outside of the Court system.  These proceedings are essentially a reconsideration by a higher court of a lower court or decision-maker’s decision. Appeals and judicial review rarely involve a whole new trial, new evidence or re-examination of witnesses, but rather, they are a means of testing the legal soundness of the original decision based on the same information.

At Campbell Litigation in Waterloo, we rely on our significant trial experience to effectively represent our clients at all levels of appeal and judicial review including at the Ontario Court of Appeal and the Ontario Divisional Court. Our clients can be confident knowing that their matter is in the hands of skilled advocates with an in-depth understanding of the unique nature of the appeal process and the appellate system. We offer our clients effective, high-quality legal representation throughout the appeal and review process and enjoy a reputation for excellent service.

Contact the experienced appeal lawyers at Campbell Litigation for dedicated and proficient representation of your appeal or judicial review. We represent clients throughout southern Ontario, including the communities of Cambridge, Guelph, Elmira, Brantford, Fergus, Elora and the surrounding area. Call us 519-886-1204 or contact us online for a consultation.