The Contractual Duties of Good Faith & Honest Performance

Introduction

Imagine for a moment that you are a property manager or director of a condominium corporation. One of your responsibilities is to ensure that the condominium’s grounds and outside common areas are kept clean and orderly throughout the year. You enter into two maintenance services contracts with a company for that purpose. Each contract is for two years, the one covering the summer, the other the winter. The winter contract provides for early termination on ten days’ notice.

There are some issues with performance, especially in the winter. There have been complaints from unit owners about slow snow removal and slippery surfaces. One summer, you decide that the winter contract will be terminated before the next winter.

In order to ensure that the contractor maintains the quality of its current, summer work and continues to provide “freebie” (aimed to secure the winter contract), you decide to delay notifying the contractor until just before the winter contract is to commence. Unfortunately, when you give him notice, he decides to sue the condominium corporation for breach of contract. Did your decisions create liability for the condominium corporation?

C.M. Callow Inc. v. Tammy Zollinger

Trial Decision:

This was the very issue before the Court in C.M. Callow Inc. v. Tammy Zollinger. The trial judge found the condominium corporation liable to the contractor for breach of contract in the amount of $80,000. She did so on the basis that the condominium corporation had breached its contractual duty of honest performance by acting in bad faith as follows:

  • failing to disclose the intention to terminate the winter contract to ensure the performance of the summer contract; and,
  • continuing to “represent” to the contractor that the winter contract was not at risk of not being renewed.

In her findings, the trial judge concluded that the minimum standard of honesty required the condominium corporation to address the performance issues, provide prompt notice of intention, and refrain from any “representations” in anticipation of the notice period.

The Appeal:

The condominium corporation was successful in overturning the trial judge’s decision on appeal. The Ontario Court of Appeal acknowledged the existence of both an obligation in the law of contract to good faith contractual performance and to the duty of honest performance. These obligations stemmed from the Supreme Court of Canada’s decision in Bhasin v. Hrynew.

Good Faith Performance

The Courts have recognized a general, organizing principle that parties must perform contracts in good faith. This principle “underpins and informs” various rules governing specific contractual relationships in particular situations.

Honest Performance

This duty of honest performance prohibit contracting parties from lying to or knowingly misleading each other about matters directly linked to their performance of the contract. It is not a duty of loyalty or of disclosure, and does not require a party to forego advantages flowing from the contract.

Analysis

The meaning of the contract here was not in dispute. The condominium corporation had the right to terminate the winter contract on ten days’ notice, was not bound to disclose its decision to terminate at an earlier date, and its decision to do so was not evidence of bad faith.

“Putting the case for the respondent at its highest, then, the appellants decided to terminate the winter contract and chose not to inform the respondent until some months later, in order not to jeopardize the respondent’s performance of the summer contract. Not only did the appellants fail to inform the respondent of their decision to terminate, but they actively deceived [the contractor] as to their intentions and accepted the “freebie” work he performed, in the knowledge that this extra work was performed with the intention/hope of persuading them to award the respondent additional contracts once the present contracts expired.”

Although arguably less than honourable, these actions did not rise to the high level required for a finding of bad faith or of a breach of the duty of honest performance. Both principles must be applied consistently with the law of contract at common law, including freedom of contract and the legitimate pursuit of economic self-interest (even to the detriment of others). The principles must not be used to give effect to ad hoc judicial moralism.

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