Canada: Supreme Court To Revisit Good Faith

Last Updated: September 16 2019
Article by Thomas P. O'Leary

On June 26, 2019, the Supreme Court of Canada (SCC) granted leave to appeal the Ontario Court of Appeal's decision in CM Callow Inc. v. Zollinger (Callow),1 a case involving the scope of the organizing principle of good faith and related duty of honest performance. The case will require the SCC to revisit these issues for the first time since 2014.

Legal background

In 2014, the SCC recognized in Bhasin v. Hyrnew,2 that there was an "organizing" principle in contract law. The SCC provided a broad framework for the application of the good faith principle, and established a universal duty of honest performance in contractual relationships as an aspect of good faith. However, within that the broad framework of good faith, much uncertainty remained. One aspect of uncertainty was to what extent good faith can supplement, modify or qualify bargained for contractual rights. This has been illustrated in the context of contractual termination rights since 2014.

Two relatively recent cases highlight this uncertainty. In Styles v. Alberta Investment Management Corp,3 an employee lost entitlement to payment under a long-term incentive plan due termination of employment without cause. At issue was whether good faith and honest performance required the employer to exercise its discretion reasonably when terminating an employee without cause, where doing so would deprive the employee of a substantial benefit. The Alberta Court of Appeal concluded that the employer had the right to terminate the employee's contract on appropriate notice at its absolute discretion, even if the termination prevented the employee from becoming entitled under the long-term incentive plan. It was considered that a finding of liability would improperly expand the principle of good faith to include a new common law duty of reasonableness and would override the terms of the bargain made by the parties.4

The ruling in Styles seems at odds with a recent decision from the Ontario Court of Appeal (OCA). In Mohamed v. Information Systems Architects Inc,5 Information Systems Architects Inc. (ISA), a consulting firm, exercised its express contractual right to terminate Mohamed's employment in its absolute discretion. ISA did so when its client demanded such due to Mohamed's criminal record. The OCA held that, despite ISA having a seemingly unfettered contractual right to terminate, good faith restricted that right, and required ISA to, at least, offer a job to Mohamed before terminating his contract. The OCA noted that "although the appellant had a facially unfettered right to terminate the contract, it had an obligation to perform the contract in good faith, and, therefore, to exercise its right to terminate the contract only in good faith."6 In doing so, the OCA seemed to have imposed a duty of reasonableness to the exercise of an expressly bargained for contractual right.

The contrast between the reasoning and results in the Styles and Mohamed cases is stark. In Styles, the Alberta Court of Appeal declined to utilize the organizing principle of good faith to qualify express exercising powers of termination, whereas, in Mohamed, the OCA arguably extended the good faith principle to limit the scope of discretion to terminate that was expressly provided. This issue is central to the dispute in Callow

C.M. Callow Inc v. Zollinger

Callow was sole principal of C.M. Callow Inc. (Callow Inc.), which provided winter and summer maintenance services to 10 condominium corporations managed by the Condominium Management Group (CMG). The condominium corporations formed a Joint Use Committee (JUC) to make decisions regarding the joint and shared assets of the condominium corporations. The termination clause in the winter contract stipulates that CMG could terminate the contract for any reason by providing Callow Inc. with 10 days' notice in writing. In the spring of 2013, the JUC voted to terminate the winter maintenance contract with Callow Inc. However, CMG, and/or their agent Ms. Zollinger, decided not to do so until September 12, 2013, which would satisfy the express contractual requirement to provide 10 days' notice.

It was alleged that from March or April to September 12, 2013, CMG falsely represented to Mr. Callow that the winter contract would be extended or renewed. Callow Inc. argued that this constituted a breach of CMG's common law duty of honest performance, a similar fact pattern to Bhasin. CMG took the position that no active dishonestly existed and disclosure was not required, and that this was a simple matter of contract interpretation. The key issue was whether the good faith duty of honest performance applied to CMG's decision to exercise their contractual right to terminate Callow Inc.

The Ontario Superior Court of Justice

The Court found that CMG actively deceived Callow Inc. from the time it made the decision to terminate the winter contract until September 12, 2013. The Court held that CMG breached their contractual duty of honest performance by acting in bad faith, in particular: (1) by withholding the information to ensure Callow Inc. performed the summer maintenance services contract; and (2) by continuing to represent that the contract was not in danger, despite CMG's knowledge that Callow Inc. was taking on extra tasks to bolster the chances of renewing the winter contract.7 The Court reiterated that a duty of honest performance should not be confused with a duty of disclosure, but rather "the standard of honesty in relation to the contract's performance is meant to ensure that the parties will have a fair opportunity to protect their interests if the contract does not work out."8 It was held that the minimum standard of honesty required CMG to address Callow Inc.'s alleged performance issues, to promptly disclose its intentions to terminate and to refrain from any misrepresentations in anticipation of the notice period.9 Thus, as in Mohamed, although CMG appeared to have an express and unfettered right to terminate the contract on notice, the trial judge held that good faith restricted that right.

Ontario Court of Appeal

The OCA granted CMG's appeal. It concluded that the trial judge had erred by improperly expanding the duty of honest performance in a manner that went beyond and conflicted with the express terms of the winter contract. It warned against application of the good faith principle when such could undermine longstanding contract law principles, thereby creating commercial uncertainty. The OCA concluded the trial judge's decision that imposing good faith obligations to address performance issues, provide prompt advance notice of intent to terminate, or to refrain from representations in anticipation of the notice period had the effect of substantially and improperly modifying CMG's express contractual right to terminate the contract, without cause, on 10 days' notice.10

Implications

The SCC's determination in Callow may have significant repercussions on the scope of good faith and the duty of honest performance in contract law, and, particularly, the extent to which such may modify or qualify contractual rights and discretion. Whatever the outcome, the decision will undoubtedly discuss when, and under what circumstances, a court will imply duties of good faith in the performance of a party's otherwise unambiguous contractual obligations.

We will continue to monitor and report on any developments in this matter. For more information, please contact Thomas O'Leary, Partner in our Calgary office.

This article was co-authored by Elizabeth Allum, Articling Student. 

Footnotes

1 2017 ONSC 7095, rev'd 2018 ONCA 896 [Callow].

2 2014 SCC 71 [Bhasin].

3 2015 ABQB 621, rev'd 2017 ABCA 1 [Styles].

4 Styles (Alta CA), supra note 3 at para 9.

5 2017 ONSC 5708, aff'd 2018 ONCA 428 [Mohamed].

6 Mohamed (Ont CA), supra note 5 at para 18.

7 Callow (Ont SC), supra note 1 at para 76.

8 Ibid. at para 60.

9 Ibid. at paras 60-61.

10 Callow (Ont CA), supra note 1 at paras 16, 19.

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