In a recent Supreme Court of Canada decision, the court clarified the scope of the duty of honesty in contractual performance. While the facts of the case involved a dispute over a maintenance contract, the principles established by the decision apply to all types of contractual relationships.
Contract Terminated in Bad Faith
In 2012, a consortium of condominium corporations entered into a two‑year winter maintenance contract and into a separate summer maintenance contract with the owner of a maintenance company. Under the contract, the consortium could terminate that agreement if it did not receive satisfactory service. If the consortium wanted to terminate the contract for any other reason, it was required to give the owner 10 days’ written notice.
In early 2013, the consortium had decided it would terminate the winter maintenance agreement. However, it did not tell the owner of its decision until September 2013, with the required 10 days’ notice, during which time the owner continued to work and assumed the contract would be renewed. In fact, the owner had turned down other work on this assumption.
As a result, the owner alleged breach of contract and that the consortium had acted in bad faith.
The trial judge held that the organizing principle of good faith performance and the duty of honest performance had been engaged and found that the consortium had actively deceived the owner from the time the termination decision was made in early 2013 to September 2013. The trial judge found that the consortium had acted in bad faith by withholding that information to ensure that the owner continued to perform the summer maintenance contract and by continuing to represent that the contract was not in danger despite knowing that the owner was taking on extra tasks to bolster the chances of the winter maintenance contract being renewed. She awarded damages of approximately $80,000 to the owner in order to place him in the same position as if the breach had not occurred.
However, on appeal, the Ontario Court of Appeal set aside the judgment at first instance, holding that the trial judge had erred by improperly expanding the duty of honest performance beyond the terms of the winter maintenance agreement. Further, it held that any deception in the communications during the summer of 2013 related to a new contract not yet in existence, and therefore was not directly linked to the performance of the winter contract.
Supreme Court of Canada Finds in Favour of Owner
The majority of the Supreme Court of Canada began by explaining that the duty of honest performance in contract, as formulated in its 2014 Bhasin v. Hrynew decision, 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. It stated that the relevant question in determining whether dishonesty is connected to a given contract is whether a right under that contract was exercised, or an obligation under that contract was performed, dishonestly. The court then stated:
“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 consortium]’s conduct constituted, as a breach of the duty of honesty, a wrongful exercise of the termination clause. [The consortium] 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.”
Stated simply, the court explained that no contractual right can be exercised in a dishonest manner because, pursuant to Bhasin, that would be contrary to an imperative requirement of good faith, i.e. not to lie or knowingly deceive one’s counterparty in a matter directly linked to the performance of the contract.
As to whether the consortium lied to or knowingly misled the owner, and thus breached the duty to act honestly, the court explained:
“At the end of the day, whether or not a party has “knowingly misled” its counterparty is a highly fact-specific determination, and can include lies, half-truths, omissions, and even silence, depending on the circumstances. I stress that this list is not closed; it merely exemplifies that dishonesty or misleading conduct is not confined to direct lies.”
Ultimately the court ruled in favour of the owner, finding that the consortium 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 under Bhasin. The court also upheld the trial judge’s damages award, finding that the damages flowed for the owner’s consequential loss of opportunity.
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