Ten years ago today, the Supreme Court of Canada (SCC) made legal headlines when it released Bhasin v Hrynew and created a new common law duty of honest contractual performance. The SCC described the new duty as “two incremental steps” forward in Canadian law – one involving the concept of honest performance and the other involving the concept of good faith.
Here’s a sampling of what legal commentators were saying at the time –
“This could potentially open the floodgates for future litigation on the duty of good faith in the performance of contracts”
“Businesses should be mindful of the fact that not only their conduct, but also their intentions, will be examined under a microscope when contractual relationships turn sour”
“Parties are going to have to be dramatically more careful in how they communicate with other parties to a contract”
Since Bhasin, the SCC took two opportunities to speak to and refine this new common law duty – CM Callow Inc v Zollinger in 2020 and Wastech Services Ltd v Greater Vancouver Sewerage and Drainage District in 2021.
Were the commentators right? Has the landscape of business deals and contractual relationships changed over the past decade?
Let’s find out.
Step 1 (honest performance) – Liar, liar, performance on fire
CM Callow concerned a group of condo corporations called Baycrest that hired CM Callow for summer and winter maintenance services. Baycrest decided to terminate CM Callow’s contract in early 2013, but kept that information to itself until September 2013, and instead led CM Callow to believe the contract would be renewed despite its knowledge that CM Callow was taking on free extra tasks to bolster the chances of renewal. CM Callow sued, alleging Baycrest did not act honestly in its performance of the contract.
Baycrest took things a step too far, and the SCC ruled that Baycrest’s dishonesty amounted to a breach of the duty. It did not matter that Baycrest had a “seemingly unfettered, unilateral termination clause” – parties cannot lie or intentionally mislead each other regarding their performance of a contract. While Baycrest had no obligation to tell CM Callow about its decision back in early 2013, it did have an obligation once it made that decision not to suggest the opposite was true.
The key common-sense takeaway? Don’t lie about your contractual decisions, and yes, leading someone to believe a thing that isn’t true probably counts as a lie.
Step 2 (good faith) – With great power comes related responsibility
In Wastech, the Greater Vancouver Sewerage and Drainage District hired Wastech to remove and transport waste, but the district had absolute discretion to decide where the waste should go. During the contract, the district changed disposal locations in such a way that increased Wastech’s costs and reduced profit. Wastech sued, claiming the district’s decision to change disposal locations did not adequately consider Wastech’s interests, and this constituted bad faith.
The SCC confirmed that contractual discretion of any type needs to be exercised in good faith, but did not agree the district breached that duty. The purpose of the absolute discretion in this contract was to allow the district to maximize efficiency and minimize costs. That is precisely what the district did when it changed disposal locations. The fact Wastech lost money as a result of the district’s decision is irrelevant, absent some proof that the decision fell outside the purposes for which the discretion was granted.
The takeaway here? Even absolute discretion isn’t “absolute” – it still has to be exercised consistently with the reason it was granted in the first place.
How are these steps applied today?
Bhasin has been cited more than 1,300 times on CanLII. CM Callow takes silver with 200+, and Wastech trails not far behind.
The duty of honest contractual performance is here to stay, so let’s see where we are in 2024.
The Alberta Court of Appeal examined the duty in Pacific Atlantic Pipeline Construction Ltd v Coastal Gaslink Pipeline Ltd. There, one of the parties left a meeting and acted as though a deal had been reached, despite no one else thinking they had a deal. The chambers judge found that this was at best a “misunderstanding induced by wishful thinking,” which did not amount to lying or misleading as required by CM Callow.
This case confirms that a certain level of ill-intent or deception is required to breach the duty – bad communication will not do it.
In British Columbia, the Court of Appeal dealt with an employment issue in British Columbia v Taylor. A public sector employee, Ms. Taylor helped investigate a potential misuse of confidential data at the Ministry of Health back in 2012. The ministry ultimately terminated several employees in a manner that attracted considerable public attention, and Ms. Taylor was caught in the fallout. The BC Ombudsperson released a report in April 2017 criticizing the 2012 terminations, and implicating Ms. Taylor. She herself was terminated two months later, and she responded with a lawsuit alleging (among other things) a “breach of the duty of good faith.”
The court confirmed that the decision to terminate an employee is often within the discretion of the employer, and therefore should be exercised in good faith as described in Wastech and subsequent cases. Equally important, the decision reminds us to give a broad meaning to the term “dishonesty” – a straight lie is an obvious example, but omissions and misleading conduct are captured as well.
The commentators were right!
In a way, this is obvious. Any court decision cited more than 1,300 times qualifies as having changed the landscape.
While the gates may not have opened on a flood of never-before-seen litigation, it is now common to see the duty of honest contractual performance cited in litigation between two distrusting parties. It has taken root in employment relationships, corporate contracts, real estate, public services, and beyond. The landscape is now such that any party to any contract should think carefully before relying on a contractual power to carry out a dishonest act. “I had absolute discretion” may no longer be a defence.
Will there be a correction back in favour of discretion, or will the court continue expanding the types of scenarios to which a duty of honest performance applies? Check back in 10 years to find out.
The author would like to thank Jonah Secreti, articling student, for his contribution to preparing this legal update.
