Contract drafting in good faith times

A recent decision answered the question of when not volunteering information becomes impermissible

Neill May

As a corporate lawyer often engaged in contractual drafting, I’m an automatic contestant in the discretion Olympics. In the conventional world, the word “discretion” often implies tactfulness and caution. But in the commercial legal realm, the focus is on the other meaning, and caution is tossed to the wind. Judging in these Olympics is based on the mandatory elements — absolute discretion, unfettered discretion, sole discretion and unchained, unbounded and unrestrained discretion — and then there are, of course, points for artistic impression.

The funny thing about the discretion Olympics, based on some recent jurisprudence, is that there truly are no prizes. No matter how artistic the drafting of limitless discretion, the principle of good faith in contractual performance may intervene.

The baron de Coubertin (father of the modern Olympic Games) of this narrative is the Supreme Court of Canada’s 2014 decision in Bhasin v. Hrynew. In that case, the court unanimously held that there is a common law duty applicable to all contracts to act honestly in the performance of contractual obligations. The Supreme Court recently further addressed the duty of honesty in contractual performance in C.M. Callow Inc. v. Zollinger, and with it the omnipresent question of what conduct by a contractual party causes the permissible act of not volunteering information to the other party to become impermissible misleading conduct.

The central issue in Callow was whether a group of condominium corporations in Ontario, known as Baycrest, had breached the duty of honesty in relation to its maintenance contracts with C.M. Callow Inc. Baycrest had two maintenance contracts with Callow, one for winter and one for summer. Baycrest decided to exercise its right to terminate the winter contract, but it did not notify Callow. Instead, it engaged in discussions about renewal, and it allowed Callow, which believed that renewal was likely, to perform “freebie” landscaping work in order to encourage Baycrest to renew. Baycrest eventually terminated, and Callow sued.

At trial, Baycrest was found to have breached its contractual duty of honest performance due to its delay in invoking the termination right while actively deceiving Callow. That decision was overturned by the Ontario Court of Appeal, essentially on the basis that Baycrest was free to terminate pursuant to the agreement and had no unilateral obligation to disclose information relevant to the exercise of that right.

A majority of the Supreme Court restored the judgment of the trial judge. The Supreme Court recognized that the duty to refrain from lying to or knowingly misleading the other party about matters linked to the performance of the contract generally does not impose a positive obligation on contracting parties to disclose. The majority nevertheless determined that the manner in which Baycrest exercised its termination right breached its duty of honest performance, which applies to all contractual rights and obligations, even seemingly “unfettered” contractual rights. The majority held that Baycrest’s deceptive conduct was sufficient to establish a breach of its duty of honest performance.

The concurring judges took a similar approach, focusing on Baycrest’s conduct preceding the termination to determine that Baycrest was required to correct Callow’s misapprehension. The lone dissenting judge concluded that Baycrest had not materially contributed to Callow’s misapprehension and, therefore, had not breached its duty.

The decision poses natural challenges for commercial lawyers advising clients about contract drafting and compliance. There may be obligations — or limitations — in relation to contractual provisions other than what is written in the document. Further complicating matters is the issue of consequence. The court’s majority held that expectation damages (that is, damages that put the injured party in the position that it would have been in had the duty been performed) should be awarded, and the concurring opinion believed reliance damages (that compensate the injured party for losses sustained in reliance on the dishonest performance) to be appropriate. Advising on the relevant standard, therefore, is uncertain, putting aside how standards would apply in a given circumstance.

There is some irony in Callow’s name, in this case, in that the word means inexperienced or immature, suggesting a naiveté. That would be unfair, in that Callow was misled, and might lead to a whole unfair string of Callows humour. On the other hand, nothing in this Supreme Court judgment suggests that we should not be entitled to our unqualified indiscretions.

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