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Contract - Duty of Good Faith - CM Callow v Zollinger (SCC, 2020). C.M. Callow Inc. v. Zollinger
In C.M. Callow Inc. v. Zollinger (SCC, 2020) the Supreme Court of Canada considered and elaborated on the relatively new contractual doctrines of the duty of honesty and the duty of good faith [para 44-75, 105-114]. The context was a finding of breach of the duty of honesty in the termination of a contract.
Firstly, on the general status of the duty of good faith as an organizing principle in Canadian law:[44] As a further preliminary matter, I recall that the organizing principle of good faith recognized by Cromwell J. is not a free-standing rule, but instead manifests itself through existing good faith doctrines, and that this list may be incrementally expanded where appropriate. ....
[45] While these two existing doctrines [SS: good faith and honesty] are indeed distinct, like each of the different manifestations of the organizing principle [SS: of good faith], they should not be thought of as disconnected from one another. Cromwell J. explained that good faith contractual performance is a shared “requirement of justice” that underpins and informs the various rules recognized by the common law on obligations of good faith contractual performance (Bhasin, at para. 64). The organizing principle of good faith was intended to correct the “piecemeal” approach to good faith in the common law, which too often failed to take a consistent or principled approach to similar problems and, instead, develop the law in this area in a “coherent and principled way” (paras. 59 and 64).
[46] By insisting upon the thread that ties the good faith doctrines together — expressed through the organizing principle — courts will put an end to the very piecemeal and incoherent development of good faith doctrine in the common law against which Cromwell J. sought to guard. While the duty of honest performance might bear some resemblance to the law of misrepresentation, for example, in a way that good faith in other settings may not, Bhasin encourages us to examine how other existing good faith doctrines, distinct but nonetheless connected, can be used as helpful analytical tools in understanding how the relatively new duty of honest performance operates in practice.
[47] The specific legal doctrines derived from the organizing principle rest on a “requirement of justice” that a contracting party, like Baycrest here in respect of the contractual duty of honest performance, have appropriate regard to the legitimate contractual interests of their counterparty (Bhasin, at paras. 63‑64). It need not, according to Bhasin, subvert its own interests to those of Callow by acting as a fiduciary or in a selfless manner that would confer a benefit on Callow. To be sure, this requirement of justice reflects the notion that the bargain, the rights and obligations agreed to, is the first source of fairness between parties to a contract. But by the same token, those rights and obligations must be exercised and performed, as stated by the organizing principle, honestly and reasonably and not capriciously or arbitrarily where recognized by law. This requirement of justice, rooted in a contractual ideal of corrective justice, ties the existing doctrines of good faith, including the duty to act honestly, together. The duty of honest performance is but an exemplification of this ideal. ... Secondly, the court holds that breach of the duty of honesty is a contractual breach - and expands on what that means in contrast with other doctrines involving dishonesty (civil fraud and estoppel). As well, breach of the duty of honesty does not entitle the plaintiff to claim an act is void, just to sue for damages [paras 47-55, 66, 75].
Lastly, damages for such a breach are the normal contractual measure of 'expectation' (even though they might incidentally be the same on a tort reliance measure: paras 108-109):[106] On the first point, I note that the trial judge correctly proceeded on the premise that, “[d]ue to the breach of contract, [Callow] is entitled to be placed in the same position as if the breach had not occurred” (para. 79). Indeed, as Cromwell J. explained in Bhasin, breach of the duty of honest contractual performance supports a claim for damages according to the ordinary contractual measure (para. 88).
[107] The ordinary approach is to award contractual damages corresponding to the expectation interest (Atlantic Lottery Corp. Inc. v. Babstock, 2020 SCC 19, at para. 108). That is, damages should put Callow in the position that it would have been in had the duty been performed. . CM Callow Inc. v. Zollinger [Ont CA extract]
In CM Callow Inc. v. Zollinger (Ont CA, 2018) the Court of Appeal elaborates on the contractual duties of good faith and honest performance:The duty of good faith and honest performance
[10] The Supreme Court held in Bhasin v. Hrynew, 2014 SCC 71 (CanLII), [2014] 3 S.C.R. 494, at para. 33, that good faith contractual performance “is a general organizing principle of the common law of contract which underpins and informs the various rules in which the common law, in various situations and types of relationships, recognizes obligations of good faith contractual performance.” In addition, the Court held that there is a duty of honest performance “which requires the parties to be honest with each other in relation to the performance of their contractual obligations”: at para. 93.
[11] The Court was at pains to emphasize that the concept of good faith was not to be applied so as to undermine longstanding contract law principles, thereby creating commercial uncertainty. Cromwell J. explained at para. 70:The principle of good faith must be applied in a manner that is consistent with the fundamental commitments of the common law of contract which generally places great weight on the freedom of contracting parties to pursue their individual self-interest. In commerce, a party may sometimes cause loss to another — even intentionally — in the legitimate pursuit of economic self-interest: A.I. Enterprises Ltd. v. Bram Enterprises Ltd., 2014 SCC 12 (CanLII), [2014] 1 S.C.R. 177, at para. 31. Doing so is not necessarily contrary to good faith and in some cases has actually been encouraged by the courts on the basis of economic efficiency: Bank of America Canada v. Mutual Trust Co., 2002 SCC 43 (CanLII), [2002] 2 S.C.R. 601, at para. 31. The development of the principle of good faith must be clear not to veer into a form of ad hoc judicial moralism or “palm tree” justice. In particular, the organizing principle of good faith should not be used as a pretext for scrutinizing the motives of contracting parties. [12] The same is true of the new duty the Court recognized as flowing from the good faith organizing principle, the duty of honesty in contractual performance. As Cromwell J. explained, at para. 73:[The duty] means simply that parties must not lie or otherwise knowingly mislead each other about matters directly linked to the performance of the contract. This does not impose a duty of loyalty or of disclosure or require a party to forego advantages flowing from the contract; it is a simple requirement not to lie or mislead the other party about one’s contractual performance. [13] This, he emphasized at para. 73, was a “modest, incremental step” in the development of the law of contract.
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