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Upcoming Clarifications to Contractual Good Faith

Last December, the Supreme Court of Canada heard two appeals concerning contractual good faith issues. The first involved an appeal of the British Columbia decision Greater Vancouver Sewerage and Drainage District v. Wastech Services Ltd., 2019 BCCA 66. The second involved an appeal of the Ontario decision C.M. Callow Inc. v. Tammy Zollinger, 2018 ONCA 896. 

The Supreme Court of Canada’s decisions on both of these cases have not yet been rendered, but have the potential to either clarify or change the scope and extent of good faith contractual obligations in Canada. Given the December hearing date, it is likely these cases will be rendered soon.

The Wastech decision involved a dispute stemming from a 20-year solid waste disposal contract. During the course of that contract, the regional district responsible for waste exercised its discretion to allocate solid waste between various dump sites. The regional district’s decisions resulted in negative impacts to the waste disposal contractor’s profits.  This caused a dispute, which was determined by an arbitrator. 

The arbitrator held that although the regional district did not exercise its discretion arbitrarily or capriciously, that it breached its duty of good faith. This was because the arbitrator found the exercise of discretion lacked the appropriate regard for the legitimate expectations of the waste contractor. The arbitrator held that the regional district was free to exercise its discretion, but could not do so in a manner that eliminated any possibility for the contractor to achieve its profit margins.

The arbitrator’s decision was appealed to the British Columbia court system, and eventually reached the Court of Appeal, which overturned it. The Court of Appeal for British Columbia held that bad faith requires conduct involving malice, untruthfulness, ulterior motive, or intentional conduct equivalent to fraud, or in situations where a party acts so recklessly that bad faith can be presumed from the absence of good faith.

In the present case, the arbitrator had made no finding that the regional district’s conduct involved this type of subjective dishonesty, improper motive, or bad faith (and instead found that the district’s decision-making, from its own point of view, was both honest and reasonable). As a consequence, the Court of Appeal overturned the arbitrator’s decision on the good faith issue.

The Zollinger decision involved a contract in which a maintenance contractor provided maintenance services to a group of ten condominium corporations. The ten corporations managed the contract by way a joint use committee, which entered into two, two-year maintenance contracts with the contractor: one for summer work, and one for winter work. 

The winter contract contained an early termination provision allowing for termination after 10 days’ notice. The committee made a decision in the spring of 2013 to terminate the winter contract, but did not give notice of termination until much later in the fall of 2013. During the summer of 2013, the contractor performed free services as a courtesy in the hopes that the committee would have incentive to renew the contracts. The committee accepted these services, knowing it was planning to terminate the winter contract, which it did in September, 2013.

As a result of the termination, the contractor sued the committee. At trial, the Ontario Superior Court of Justice held that the committed breached their duty of honest contractual performance by acting in bad faith. The judge found that this duty was breached when: 1) the committee withheld the fact that it intended to terminate the winter contract to ensure that the summer contract was performed, and 2) the committee continued to represented that the winter contract was not in danger of non-renewal (when the decision to terminate had already been made). 

The trial judge concluded that the minimum standard of honesty would have required the committee to address their concerns with the contractor, or provide prompt notice, or refrain from representations in anticipation of the notice period.

The Court of Appeal reversed that decision, finding that the contract obligated the committee to simply provide 10 days’ notice of termination, and nothing more. The Court of Appeal held that the trial judge improperly expanded the duty of honest contractual performance in a manner that went beyond the terms of the actual contract itself.  

The Court re-iterated how Supreme Court of Canada’s  Bhasin decision simply meant that parties could not “lie or otherwise knowingly mislead each other”, but did not “impose a duty of loyalty or of disclosure or require a party to foregoes advantages flowing from the contract”. The Court concluded that while the committee’s conduct “may well suggest a failure to act honourably” that it did not “rise to the high level required to establish a breach of the duty of honest performance”. The committee had no obligations to disclose anything about its decision to terminate, and only had to provide 10 days’ notice. That was all the contractor “bargained for, and all that he was entitled to”.

Both of these cases, when decided, have the potential to cause a significant impact on how parties to any kind of contract deal with and communicate with one another. For more complex situations, such as construction projects, these new obligations will be of particular importance. After all, construction projects are complex affairs where parties must cooperate in order to achieve the objects of the contract, and where one or both parties have the ability to exercise discretionary powers to effect those aims—and hence fall into the “broad types of situations in which a duty of good faith performance of some kind has been found to exist” the Supreme Court explained had been found to exist in the past.   

The details of how that duty operates might just be fleshed out a bit more by the upcoming Zollinger and Wastech decisions.