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Legal Notes: Honest performance of contracts reaffirmed by the Supreme Court

John Bleasby
Legal Notes: Honest performance of contracts reaffirmed by the Supreme Court

Surely the concept of fair play should be an intrinsic part of any contract.

Lies, deception and dishonesty have no role to play.

Recalling an important Supreme Court ruling back in 2014, Robert Rakochey and Jason Wolcott of Field LLP write, “Good faith contractual performance is a general principle in the common law of contracts and that there is a common law duty applicable to all contracts to act honestly in the performance of obligations. The result or goal of this new duty was to ensure that the other party would have a chance to protect their interests if the contract did not work out.”

Recently, the concept of honest performance returned to the Supreme Court in 2020.

Property maintenance provider C.M. Callow had a pair of two year contracts with condominium corporation Baycrest, one covering winter work between Nov. 1 and April 30, the other for the remaining months. Under the winter contract, Baycrest was obliged to give Callow 10 days notice of termination.

After performing its duties under the winter contract, Callow began its summer work. While doing so, they chose to do some extra work for Baycrest at no charge, hoping it would provide an incentive for Baycrest to renew the winter contract for a further two years.

However, Baycrest had already made the decision internally not to renew Callow’s winter contract. Not only was this information kept from Callow, but members of the Baycrest board even inferred to Callow that the winter contract would, in fact, be renewed. They believed that to do otherwise might affect Callow’s ongoing performance of the summer work.

Later, with the approach of the 10 day notification period, Baycrest officially informed Callow that their winter contract would not be renewed.

“Callow sued for unjust enrichment for the freebies provided during the summer, the cost of the subcontracts entered into in reliance on the winter contract continuing, and expected profits,” write Rakochey and Wolcott.

At trial, it was determined that Baycrest had actively deceived Callow and violated the principle of good faith and the duty of honest performance.

However, the Ontario Court of Appeal reversed that ruling.

Summarising the court’s ruling, Rakochey and Wolcott write, “The duty of honest performance required that the parties be honest with each other concerning matters ‘directly linked to the performance of the contract.’ That is, linked to the winter contract then in effect.”

In other words, discussions not related directly to the winter contract had no bearing, and Baycrest was within its rights to terminate the winter contract with 10 days notice.

Callow then appealed to the Supreme Court of Canada. Here it was ruled that Baycrest’s exercise of the termination clause was wrong. By doing so, the Supreme Court clarified two key points, write Rakochey and Wolcott.

“The issue was not whether Baycrest had the right to exercise the termination clause but whether the manner in which the right was exercised ran afoul of the duty to act honestly. Stated simply, no contractual right can be exercised dishonestly because…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.”

Secondly, the court ruled while Baycrest had no obligation to display loyalty or offer disclosure, “the parties must refrain from lying or knowingly misleading their counterparty.”

The lessons to be learned by the construction industry are summarized in part by Paul Conrod and Faren Bogach of WeirFoulds LLP.

“Owners, contractors, consultants, suppliers, and various other members of a construction project should be aware that if their silence misleads other parties to the contract regarding the performance of the contract, their silence may be a breach of the duty of honest performance.”

Rakochey and Wolcott add, “Anything you do that might cause misapprehension by the other party about performance of the contract might create an obligation for you to correct their misapprehension.”

 

John Bleasby is a Coldwater, Ont.-based freelance writer. Send comments and Legal Notes column ideas to editor@dailycommercialnews.com.

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