Appeal Watch: SCC Revisits Bhasin and the Duty of Good Faith in Contract

The Supreme Court of Canada (“SCC”) heard two cases on the contractual duty of good faith last month. The date of the hearings landed coincidentally close to the five-year anniversary of Bhasin v Hrynew, known to many as a watershed decision in Canadian contractual law and the decision widely discussed in these two appeals. In Bhasin, the SCC affirmed the organizing principle of good faith and introduced the duty of honest performance. The court acknowledged the “general organizing principle” of good faith,  a standard of conduct requiring contracting parties have “appropriate regard” for the interests of the other contracting party. In his reasoning, Cromwell J. explained that the new duty of honest performance, “is a simple requirement not to lie or mislead the other party about one’s contractual performance.” (Bhasin, 73).

Despite all of the commentary, the impact of Bhasin is still widely disputed – some believed it would drastically alter the contractual landscape while others felt it would result in little to no change, specifically for long-term, relational contracts. What was not controversial however, was the idea that the judgment would require much testing through litigation in order to determine how far the implications could stretch. All parties on appeal seek further clarification of Bhasin as each challenge the scope of its principle.

C.M. Callow Inc. v Zollinger

In C.M. Callow Inc. v Zollinger, 2018 ONCA 896, [Callow] C.M. Callow Inc. (owned and operated by Christopher Callow) performed summer and winter maintenance services for ten condominium corporations. These corporations formed a Joint Use Committee (“JUC”) which made, among other things, decisions for maintenance contracts. Mr. Callow entered into two two-year maintenance contracts with the JUC, one covering summer maintenance and the other covering winter. The winter contract ran from November 1, 2012 to April 30, 2014 and contained a provision for early termination on ten days’ notice. In March or April of 2013, the JUC decided to terminate the contract but did not notify Mr. Callow until September of 2013. Over the course of the summer, Mr. Callow was in casual communication with two JUC members and was under the impression that his contract would likely be renewed. Mr. Callow performed “freebie” work in an effort to further win over the JUC and at least some of its members were aware of Mr. Callow’s impression of renewal. Mr. Callow sued for breach of contract.

The trial judge found the condominium corporations (“Condos”) have breached its contractual duty of honest performance, introduced in Bhasin, and awarded Callow $80,000. The basis of the trial judge’s finding and award was the corporation’s failure to disclose its intention to terminate sooner and the continuing representation of the possibility of renewal.

The Ontario Court of Appeal allowed the appeal and found that while the condominium corporations may have failed to act honorably, the conduct did not rise to a level required to establish a breach of the duty of honest performance.

Appeal to the SCC

On appeal to the SCC, Mr. Callow’s position is that by positively misleading the renewal, the Condos breached the duty of honest performance. In this submission, the Appellants ask the Court to confirm that an “active non-disclosure” breaches the duty of honest performance, the duty not to abuse discretionary powers or a new duty under the organizing principle of good faith (Appellant’s Factum (“Callow AF”), 2).

As evidence, the appellants cite a finding of fact of the trial judge who concluded that the respondent “led Mr. Callow to believe that all was fine” with the winter contract (Callow AF, 24). The Condos knew Mr. Callow had drawn a false inference from their own positive acts after they had already made the decision and yet, deliberately chose not to correct him and continued to keep the termination a secret. It was dishonest to deliberately refuse to correct this “misapprehension”, Brandon Kain, counsel for Mr. Callow, claimed in his oral submissions. As a result, the appellants argue, there was an obligation stemming from the duty of honest performance to correct this inference that he had falsely drawn from their positive actions.

The Respondent argues that this would expand the scope of the duty of honest performance to require disclosure, which is what Cromwell J. specifically distinguished between in Bhasin. In oral submissions, Abela J. addresses this distinction when she asks the Respondent the difference between a duty of disclosure and the duty not to behave in a misleading way. Anne Tardif, counsel for the Respondent responds by suggesting that in order to breach the duty of honest performance through non-disclosure there firstly be active conduct on the part of the defendant and secondly, this conduct must be deceitful.

Tarif states that they do not disagree that Mr. Callow was under a misapprehension but deny themselves as the cause of such misapprehension. In finding that Mr. Callow was misled, the trial judge relied on a conversation between Mr. Callow and the President of the JUC in which the President stated with respect to the renewal, “it looks goods…I’m sure they’ll be up for it”. When this quote arose in submissions, Tarif argued that it was a conversation with only one out of the ten members of the board and such words did not give rise to deceit. Moldavor J. seemingly took issue with this proposition, stating that, “they knew at the time that they were misleading this man into thinking that things were going good…things weren’t going good at all.”

Still, the Respondents maintain that the duty of disclosure has not and should not be expanded to requiring active disclosure, grounding this submission in the contractual principle that contracting parties are not “our brother’s keeper.”

Wastech Services Ltd. v. Greater Vancouver Sewerage and Draining District

In Wastech Services Ltd. v. Greater Vancouver Sewerage and Draining District, 2019 BCCA 66, Wastech Services Ltd. (“Wastech”) and Vancouver Sewerage and Draining District (“Metro”) were parties to a complex, 20 year contract for the disposal of waste from the Vancouver regional district. The waste was to be transported to a number of different landfills, some “long-hauls” and some “short-hauls”, in which Metro had discretion under the contract. The parties, under the contract, employed a mechanism known as the Target Operating Ratio (“OR”), which was 0.89. If this OR was reached, it would leave 11% of revenues as operating profits for Wastech. If the OR exceeded or was less than 0.89, the parties were to share the difference equally – they were equally to share in the risk.

In 2011, Metro exercised its discretion by reallocating some of the waste to a different facility, resulting in a reduction in its own costs but an increase in costs for Wastech. Specifically, the re-allocation meant only a 4% operating profit for Wastech in 2011.

Wastech initiated arbitration and argued that there should be a term implied within the contract that Metro cannot exercise its re-allocation discretion in such a way that erodes their profits without corresponding compensation. The arbitrator refused to imply such a term on the evidence that the parties had put their minds to such a term at negotiation but ultimately decided to exclude it from the contract. The arbitrator did, however, find that the opportunity to earn the target OR in every year was the fundamental benefit for which they bargained. This was his grounds in deciding in favour of Wastech.

The British Columbia Supreme Court (“BCSC”) overturned the arbitrator’s decision, noting that Bhasin did not provide authority for contracts to be adjusted “to accommodate situations where one party regrets the contract in hindsight” (para 63). The British Columbia Court of Appeal (“BCCA”) dismissed the appeal and upheld the BCSC. The BCCA specifically addresses the fact that contractual discretion may not be exercised in a way that nullifies the benefits reasonably expected to be obtained from the contract by the other party. The court here stresses that the expectations must be grounded in the contract and the term that Wastech wished to rely upon was expressly rejected from the contractual agreement.

On Appeal at the SCC

Wastech’s submissions rely heavily on the idea that an essential benefit of the agreement was the annual opportunity to earn the target OR, a finding of fact by the arbitrator. It also stresses the joint operation between the two – the mutual risk shared by each party. Wastech addresses the discussion and eventual agreement it made with Metro not to include the term that dealt with Metro using its discretionary power in a way that nullified the contract. Wastech takes the position that despite rejecting this contractual term, the law implies good faith and therefore Wastech’s expectations to have their interests considered by Metro was not lost. Abella J. takes issues with the logic put forth by the Appellants in this regard, specifically that there is a duty of good faith to be read into a contract that was deliberately excluded. 

The BCCA found that the arbitrator had erred in failing to consider whether Metro’s alleged impugned conduct had “nullified” the contract in the sense that it immediately deprived Wastech of all or substantially all of the benefit of the contract. The Respondent relies on this point in its oral submissions, stating that the absence of such a finding should be the end of the discussion. However, Rowe J. challenges the necessity of the wording of “substantially nullification” by the arbitrator, and he puts to the respondent that if it in effect amounted to nullification, the exact wording may not be material. This point is grounded in the fact that the arbitrator found that the discretion exercised by Metro was “wholly at odds with their reasonable expectations”. Karakatsanis J. from here also questions whether the court can even question this finding from the arbitrator, suggesting that it may be a question of fact rather than of law. 

Implications

Both cases raise significant questions regarding the scope of the duty of honest performance and the duty of good faith in contracts more broadly. In Callow, the SCC is provided with an opportunity to extend the duty of honest performance to include active disclosure if the contracting party is misled by actions of the other party. In Wastech, we may see the expansion in the duty of good faith specifically when it comes to considering the reasonable expectations of the other party.  Each appeal provides an opportunity for the SCC to give either Bhasin teeth, to water it down, or to keep status quo.