Duty of Honest Performance + Good Faith Cannot Be Contracted Out Of: Canlanka Ventures Ltd. + Berscheid
March 2022 -2 min read
In 2020 and 2021, C.M. Callow Inc. v. Zollinger, 2020 SCC 45 and Wastech Services Ltd. v. Greater Vancouver Sewerage and Drainage District, 2021 SCC 7, two significant Supreme Court of Canada cases, clarified and confirmed the duty of good faith and honest contract performance. These cases have since been followed several times in Alberta and Canada to confirm, clarify, or extend the duty of good faith and honest performance. Understanding the evolution of the law following Callow and Wastech is essential for all individuals and entities with contractual duties and rights.
This article aims to provide an update on how appellate courts have applied the concepts of good faith and honest contractual performance, following Callow and Wastech.
In Canlanka, the parties entered into an agreement for mortgage services. The respondent (Canlanka) purchased two mortgages from the appellant broker (Capital), and Capital was hired to administer the mortgages. The contract contained the following clause:
"The Administrator [the appellant] agrees to act in good faith and to the best of its ability in the best interest of the Mortgage Holder [the respondent]."
The contract limited that clause by following it with:
"Due to the nature of the mortgage business and the surrounding environment of notices and information from a variety of sources, the Administrator [the appellant] will strive to attend to all aspects of the Mortgage Holder's [the respondent's] mortgage interests, but cannot therefore be held liable for any oversight, errors or omissions related to the mortgage interests included under this agreement [the "exclusion clause"]."
The Court found that Capital made two deliberate misrepresentations to Canlanka:
- Capital told Canlanka that one of its mortgages was in foreclosure. Yet, when Capital determined that the foreclosure was for a third-party property and not Canlanka's, it did nothing to correct the statement.
- Capital told Canlanka that another party intended to buy out a second mortgage, which was also incorrect. As a result, Canlanka could not make an informed decision about whether to foreclose on the mortgage or buy out another.
The Court held that the duty of good faith and honest performance in contractual performance does not require an express contractual provision - the duty is implied in every contract and cannot be contracted out of. Further, the Court held that the exclusion clause only excluded liability for negligence and that these misrepresentations went beyond that: they were intentional, active, and not innocent. The lack of evidence of personal gain by the defendant was irrelevant.
Canlanka confirmed that the duty of good faith and honest performance exists separate and apart from any express contractual terms such as an exclusion clause and cannot be contracted out of.
The effect of exclusion clauses on the duty of good faith and honest performance was also canvassed by the Manitoba Court of Appeal in Berscheid. In this case, the trial judge found that an exclusion clause in the contract shielded the defendant from liability for breach of the duty of good faith and honest performance. The Court cited Callow in concluding this was an error of law:
"... I emphasize once again that it is unquestionable that the duty is imposed as a matter of contractual doctrine rather than by implication or interpretation, and, by virtue of its status as contractual doctrine, parties are "not free to exclude" the duty altogether."