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Introduction:

Contracts and agreements appeared long before the creation of modern law which are the natural product of consensus ad idem between parties, yet law and rules are designed to confirm and enhance the enforceability especially in the circumstances of disputes and conflicts. The law and rules on contracts are not static, and always fathoming the latest development on principles of contracts, particularly those derived from contemporary court decisions, is the best way to understand the tendency of the development of contract law. This paper aims to provide a legal analysis on one of the latest contractual cases in order to articulate such tendency.

Case Facts:

C.M. Callow Inc. v. Zollinger¹ is a recent decision from the Supreme Court of Canada (“SCC”) which will be used by this case commentary to demonstrate the latest determination on duty of honest performance in the sense of contractual implementation. The fact of the case is not complicated, which illustrates the full applicability of such principle in dealing with all kinds of contracts despite simplicity or complexity. In 2012, a group of condominium corporations (“B Inc.”) and C.M. Callow Inc. (“C Inc.”) have entered into a two-year winter maintenance contract. In accordance with clause 9 of the contract, B Inc. was given the right to terminate the contract with or without cause² upon ten days prior written notice. Sooner termination clause is getting more and more popular in modern contract drafting, especially between parties with uneven bargaining powers, yet its legality has always been facing challenges in various jurisdictions based on the unfairness it may bring to the less prevailing party as well as the inherent instability to the contractual relationship. In this case at issue, however, none of these issues is in conflict, and the core issue of the dispute is the principle of honest performance despite the sooner termination clause. As the case fact confirms that in early 2013, B Inc. has decided to terminate this contract but no information was given to C Inc., and the latter therefore was put into a false impression that the contract will be renewed. In order to give some incentive to sweeten the renewal, C Inc. had provided some free work, which B Inc. had happily accepted even though the decision-maker at B Inc. was well aware that the contract will not be renewed at all. When the termination was notified, C Inc. sued B Inc. for breach of contract acting in bad faith, together with claims for recovery of damages and adjustment of unjust enrichment. C Inc.’s claim has been partially supported by trial judge, however denied by the judge in the Court of Appeal but finally restored by the majority of judges in SCC. In my opinion, this SCC decision sheds some great lights on understanding the nuance of the duty of honest performance among other similar legal concepts and I am in full agreement with the decision of SCC. 

Legal Analysis:

Both in Common Law jurisdiction and Civil Law jurisdiction, there are express obligations and implied obligations for all parties of contracts. Even though certain obligations were not provided in black and white, it does not mean that the obligated party could legally be exempted from such obligations. The duty of honest performance is one of these implied obligations that all parties to contracts have to bear in mind and obey throughout the performance of contracts, yet some of such obligation extends to pre-contract stage and post-contract stage in order to bring fundamental fairness to the parties. “The obligation of parties to a contract to act or perform in good faith is ubiquitous in the law of contracts …”³. Obviously, such obligation has been firmly engraved into the history of contract law.

The principle of honest performance could be better understood if it acted alone, nevertheless, in reality, it is often interwoven with other legal concepts which could easily confuse parties of contracts, even legal professionals. A thorough analysis on these similar principles would be rather salutary to all stakeholders to understand the nuance of these legal concepts, which could avoid unnecessary confusion when dealing with contracts.

Starting from the duty of honest performance in contract, “formulated in Bhasin v. Hrynew⁴, [this duty] 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”⁵.  “The Supreme Court of Canada in Bhasin states that the duty of honesty is not a term and therefore it ‘operates irrespective of the intentions of the parties’”⁶. Such duty seems adding a colossal of burdens to the parties as it covers not only positive actions but also passive conducts. To take the initiative to deceive the counterpart is obviously a breach of this duty, however, would any inaction be counted as a violation of such duty? The inaction here may bring another interesting topic, viz. the duty of disclosure. B Inc. argued in the proceedings that it does not have extra obligation of disclosure to C Inc. except the ten-day prior written notice and therefore, from this perspective, B Inc. alleged that it was in no position breaching this contract as well as its duty of honest performance. In the understanding of the SCC justices, which I fully concur, to perform the duty of disclosure should not be tantamount to duty of honest performance, and obviously, the latter raises the bar higher than just stringently performing the terms of the contract. Due to the imbalance of bargaining powers appearing in almost every contractual negotiation, some terms are meant to limit the scope of contractual obligations at a minimum level to the prevailing parties, however, it does not mean the duty of honest performance has been achieved even though the minimum obligation is so performed. “In Bhasin, the [SCC] recognized good faith as an ‘organizing principle’ of the common law of contract. The Court additionally held that the good faith principle creates a new contractual duty; honest contractual performance. The practice effect of Bhasin, [as reiterated in the C.M. Callow Inc.], when considered within the context of pre-existing Canadian jurisprudence and foremost theories of contract law and good faith, makes a welcome change in the Canadian approach to good faith and to contract law generally”⁷.

Despite the principle of fairness that universally enshrined in contract legislation in various jurisdictions, unfairness is still what the world really is. The role of courts is to mitigate such unfairness when claim is made and therefore, duty of honest performance is the least the court could request in performing contracts for contracting parties. One may challenge the legal grounding of such duty when it is conflicting with other equally important principles such as rule of law and free will when contracting. Even if the duty of honest performance has not been codified in all legislation or provided in every contract, it derives from human nature and good faith which underpins the human civilisation since its infancy. Without the duty of honest performance or any attempt to lower down the standard of such duty would bring more turmoil to performance of contracts and diminish all endeavors that court takes to balance the unfairness of contracting process.

By proving the justification of the duty of honest performance, the next question would be the extent of the duty of honest performance. Do parties bear indefinite duty of honest performance and if not, what is the boundary of such duty? This question has been answered by Cromwell Justice in Bhasin case and restated in C.M. Callow Inc. case by the majority of the judges of the case, namely “the breach must be directly linked to the performance of the contract”⁸. This statement sets a clear scope for the duty of honest performance, which the requirements of both reasonableness and practicability are satisfied. Neither in legal perspective, nor in practice sense, the duty of honest performance should be unlimitedly extended, where the corollary would be no contract can be performed based on the indefinite duty of honest borne by the parties of contracts.

As indicated by Cromwell Justice, such duty and the role of court in implementing this duty have its echo in civil law in Quebec, “[t]his statement applies equally to the duty of good faith in Quebec civil law”⁹,  evident by Churchill Falls (Labrador) Corp. v. Hydro Quebec¹⁰. This fact further demonstrates the universal application of the duty of honest performance as well as justification.

Another interesting topic about this case at bar is that how badly a party should act in order to violate the duty of honest performance? B Inc. argued that it did not take any positive action to lie to C Inc. about the non-renewal, namely, B Inc. did neither actively inform C Inc. that it wants to renew the contract, nor giving any explicit or implicit expression that C Inc. might stand a better chance in renewing this contract among other competitors. What B Inc. had done was just quiet acceptance of all “freebie” work conducted by C Inc. and leave it alone in its own fantasy that it will get the contract renewed for sure. This could be a strong argument in some sense, especially when we were talking about there is an extent for duty of honest and good faith and it is not the court’s intention to extend such burden to an unlimited state. In light of this question, the majority of the judges has given a very unequivocal answer: “I recognize that in cases where there is no outright lie present, like the case before us, it is not always obvious whether a party ‘knowingly misled’ its counterparty. Yet, [B Inc.] is wrong to suggest that nothing stands between the outright lie and silence”¹¹. The attempt to eliminate anything between outright and silence is a dangerous tendency as its purpose is to actually lower down the standard of duty of honest performance. In the sense of contract law, honest has more meaning than just not to lie. In this case at bar, the witness statements reveal that the personnel in B Inc. had either made decision or known that no renewal will be given, yet accepting all kinds of free work from C Inc., which they knew or should have known the fundamental purpose of such free work is for the renewal of the contract. Such behavior is obviously dishonest, even though they did not lie about the perspective renewal. Had a statement been made based on honest intention, if the party recognized it is no longer correct, the party shall have the obligation to correct the misrepresentation¹². “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”¹³. Based on the case-specific fact, it is fair to draw a conclusion that B Inc. has failed to act in an honest manner, which generates a cause of action for C Inc. to sue.  

One of the issues that has not been discussed in the case at bar is the argument that whether the freebie work conducts by C Inc. can be considered as some gratuitous performance, as C Inc. has not specifically informed B Inc. that the condition for such freebie will be the privilege or R.O.F.R. for contract renewal, yet such freebie work has never been requested by B Inc. with any consideration. A further contention is that C Inc. has done the freebie work based on his inherent mistake of wrongly thinking that provision of freebie work would have gained him more chance to sweeten the deal of contract renewal. The analysis of these issues inevitably goes back to the content we discussed earlier in this paper. Even though C Inc. may be in deep mistaking status to think freebie work will secure a contract renewal, B Inc. should also be under the obligation of honest performance to inform C Inc. that no matter whether freebie work is provided, no contract renewal would have granted. The conclusion we can draw from this issue is that mistake of one party will never exempt the other party from the duty of honest performance.

Conclusion:

Contracts and agreements could be one of the most important single piece of document in economic world as well as human being’s daily life, which throughout the entire human life, none could escape the coverage of contracts. As such, to understand all explicit and implicit obligations becomes critically important to all contracting parties. The case at bar reaffirms the legal principle established in the Bhasin case that the duty of honest performance shall apply to all contracts, “requires the parties to be honest with each other in relation to the performance of their contractual obligations”¹⁴. From the micro perspective, this duty brings fairness to contracting parties to request all parties performing contracts in a fair and honest way; while from the macro perspective, SCC is performing its function to minimize unfairness caused by uneven bargaining powers and bring more stability of contracts to our world as a whole. In applying the duty of honest performance, it is also necessary to fathom the nuance among other similar legal principles, such as the duty of disclosure, as well as the applications of these similar legal concepts. Obviously, the duty of honest performance is higher than any obligations established by contractual terms and even without explicit provision, the duty of honest performance is still universally applicable. The recent SCC decision reiterates the importance of the duty of honest performance as well as the recognition of such duty from the top tier of our legal system. I am of the opinion that this decision has great significance in dealing with contract law cases in the future and when advising clients, lawyers will have more contemporary stare decisis to preach the importance of honest performance. 

Bibliography

Caselaw:

C.M. Callow Inc. v. Zollinger, 2020 SCC 45

Bhasin v. Hrynew, 2014 SCC 71

Xerex Exploration Ltd. v. Petro Canada, 2005 ABCA 47

Housen v. Nikolaisen, 2002 SCC 33

Secondary Source:

Angela Swan, Jakub Adamski and Annie Y. Na, Canadian Contract Law, the fourth edition, LexisNexis Canada Inc., Toronto, 2018, Print.

Shannon O’Byrne and Ronnie Cohen, “The Contractual Principle of Good Faith and the Duty of Honesty in Bhasin v Hrynew”, (2015) 53:1 Alta L Rev 1 – 34.

Jacob Young, “Justice Beneath the Palms: Bhasin v Hrynew and the Role of Good Faith in Canadian Contract Law”, (2016), 79 Sask L Rev 79 – 112.

Footnote

1.C.M. Callow Inc. v. Zollinger, 2020 SCC 45.

2.Pursuant to Clause 9 of the Contract, sooner termination may be decided by B Inc. if C Inc. failed to give satisfactory service in accordance with its terms, or, for any other reason, upon given 10-day prior written notice, B Inc. may terminate this contract if services of C Inc. were no longer required. 

3.Angela Swan, at page 638.

4.Bhasin v. Hrynew, 2014 SCC 71.

5.C.M. Callow Inc., para 3.

6.Shannon O’Byrne, at para 20. 

7.Jacob Young, at para 3. 

8.C.M. Callow Inc., para 51.

9.C.M. Callow Inc., para 62.

10.Churchill Fall (Labrador) Corp. v. Hydro Quebec, 2018 SCC 46. 

11.C.M. Callow Inc., para 89.

12.See Xerex Exploration Ltd. v. Petro-Canada, 2005 ABCA 224, 47 at para 58.

13.C.M. Callow Inc., at para 91. 

14.C.M. Callow Inc., at para 42.