On December 6, 2019, the Supreme Court of Canada (“SCC”) heard two appeals relating to the duty of good faith in performance of contracts. These much anticipated appeals consider the seminal decision from the SCC in Bhasin v. Hrynew, where the Court held that there is an organizing principle of good faith that underlies contractual performance requiring parties to perform their respective contractual duties honestly and reasonably, and not capriciously and arbitrarily.
Bhasin was the first time the SCC fully addressed the idea of a contractual duty of good faith. Cromwell J., writing for the Court, held that the decision would make the law “more certain, more just, and more in tune with reasonable commercial expectations”.
Less than five years after its release, the SCC commented that “more words have been written about Bhasin v. Hrynew than any other case in the Canadian law of contracts.” Not all of the commentary has been positive, however, and some critics have claimed that Bhasin has muddied the waters with respect to the contractual duty of good faith. The hope is that the two decisions on appeal will clarify or restrict the doctrine of good faith as envisaged in Bhasin.
Wastech Services Ltd. v. Greater Vancouver Sewerage and Drainage District
In Wastech Services Ltd. v. Greater Vancouver Sewerage and Drainage District, a waste-management contract was at issue. Wastech Services Ltd. (“Wastech”) and the Greater Vancouver Sewerage and Drainage District (“Greater Vancouver”) entered into a 20-year contract for the transportation of solid waste. The contract provided for a “Target Operating Ratio” (the “Target OR”) and complex formulae that became engaged in the event that the Target OR was not achieved. In 2011, Greater Vancouver exercised its discretion under the contract and began diverting waste in such a way that Wastech could not obtain its Target OR. As a result, Wastech’s ability to earn its specified profit margin was negatively affected.
The matter first went to arbitration, where the Arbitrator concluded that Greater Vancouver breached its duty of good faith. In his reasons, the Arbitrator held that a party to a long-term, relational contract, involving elements of trust and confidence may not unilaterally exercise its discretionary contractual power in such a way as to substantially nullify the bargained benefit.
Greater Vancouver appealed the Arbitrator’s decision to the Supreme Court of British Columbia, where McEwan J. found the Arbitrator erred in his treatment of the duty of good faith. In doing so, McEwan J. held there was no express or implied term in the agreement between the parties whereby Greater Vancouver had to exercise its discretion in good faith.[i]
Wastech appealed to the British Columbia Court of Appeal where Justice Newbury, for the Court, concluded that the Arbitrator erred in law in by: (1) failing to address whether Wastech had a legitimate expectation, founded in the contract, that Greater Vancouver would compensate Wastech over and above the adjustments provided for in the contract if it exercised discretion in the way that it did; (2) failing to consider the effect of rejecting an implied term of good faith; (3) effectively concluding the duty of good faith is breached whenever a contracting party fails to have “appropriate regard” for the other; and (4) finding “dishonesty” and thus a breach of the duty of good faith on Greater Vancouver’s part without any subjective element of dishonesty.[ii]
On appeal to the SCC, the primary question for the Court in Wastech was whether or not the duty of good faith can be breached in the absence of dishonesty, in particular where an agreement has not been found to have been nullified or eviscerated.[iii]
C.M. Callow Inc. v. Zollinger et al.
The second decision on appeal to the SCC was C.M. Callow Inc. v. Zollinger et al. In Callow, the defendant condominiums (the “Condo”) hired Callow to perform winter and summer landscape maintenance. The Plaintiff’s position was that Callow would not have entered into the summer agreement without the winter agreement because the latter contract was worth 8 times more than the former. One of the standard terms of the winter agreement was a unilateral termination right in the Condo’s favour upon 10 days’ notice being provided to Callow. In the spring of 2013, the Condo voted to terminate the winter agreement. However, the Condo failed to inform Callow that the winter agreement was terminated until half a year later, after summer services were completed.
At trial, the trial judge found that the Condo deliberately kept its decision to terminate the winter agreement a secret because it did not want to jeopardize Callow’s performance of the summer agreement. Accordingly, the trial judge held that the Condo breached the duty of honest contractual performance by actively deceiving Callow about the termination of the winter agreement.[iv]
On appeal, the Ontario Court of Appeal held that while the trial judge’s findings may have suggested the the Condo failed to act honourably, its actions did not rise to the high level required to establish a breach of the duty of honest performance.[v]
The appellants in Callow put forward three arguments in their factum to the SCC: (1) the Condo’s silence about the termination of the contract breached the duty of honest performance, as articulated in Bhasin; (2) the Condo breached the duty not to abuse discretionary contractual rights; and (3) in the alternative, the Court should create a new duty of good faith whereby liability can be imposed for activate non-disclosure in the performance of a contract.[vi]
What Will These Decisions Mean?
While these decisions arise in the context of a party’s duty to act in good faith when exercising a discretionary contractual right or obligation (like a unilateral right to terminate), and in a long-term, relational contract, we expect the implications to be far reaching.
In the upcoming Wastech decision, we can expect the SCC to decide whether the duty of good faith in contract can be breached by looking at the effect of the offending party’s conduct, even in the absence of dishonesty. In Callow, we can expect for the SCC to clarify whether silence can constitute a breach of the duty of good faith when such silence is coupled with active misstatements and conduct that misled one of the contracting parties about contractual performance.
No matter how the Court decides these appeals, the law of surrounding the contractual duty of good faith will be impacted, and we anticipate further clarity on the application of the principles set out in Bhasin. Commercial parties looking to exercise a discretionary right in an existing contract, or draft appropriate clauses in upcoming contracts, should consider these upcoming decisions in order to fully understand their good faith obligations.
We will be monitoring the release of the above-noted decisions, so please look back here for further updates.
[i] Wastech Services Ltd. v. Greater Vancouver Sewerage and Drainage District,  BCJ No 684, 2018 BCSC 605, see full decision: https://www.canlii.org/en/bc/bcsc/doc/2018/2018bcsc605/2018bcsc605.html
[ii] Wastech Services Ltd. v. Greater Vancouver Sewerage and Drainage District,  BCJ No 236, 2019 BCCA 66, see full case: https://www.canlii.org/en/bc/bcca/doc/2019/2019bcca66/2019bcca66.html
[iii] Factum of the Appellant, Wastech Services Ltd., at para. 52, see: https://www.scc-csc.ca/WebDocuments-DocumentsWeb/38601/FM010_Appellant_Wastech-Services-Ltd..pdf
[iv] C.M. Callow Inc. v. Zollinger et al., 2017 ONSC 7095,  OJ No 6176, see full decision: https://www.canlii.org/en/on/onsc/doc/2017/2017onsc7095/2017onsc7095.html?autocompleteStr=2017%20ONSC%207095&autocompletePos=1
[v] C.M. Callow Inc. v. Zollinger et al., 2018 ONCA 896,  OJ No 5855, see full decision: https://www.canlii.org/en/on/onca/doc/2018/2018onca896/2018onca896.html
[vi] Factum of the Appellant, C.M. Callow Inc., at paras.46 to 85, see: https://www.scc-csc.ca/WebDocuments-DocumentsWeb/38463/FM010_Appellant_CM-Callow-Inc.PDF
Written by Joseph Romanoski with contribution from articling student, Madeline Green.