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Contract - Duty of Good Faith - Duty of Honesty
COMMENT
This honesty doctrine plainly prohibits outright 'lying', but still unclear is any duty to disclose obviously necessary contractual information as opposed to self-serving silence. The best we may have on this so far is from Bhasin v Hrynew (SCC, 2014), were it is stated that contractual parties "must not lie or otherwise knowingly mislead each other about matters directly linked to the performance of the contract" [para 73]. 'Misleading' is a broad concept, leaving it open to the court to resolve the issues on a full factual and legal context - which may be the best we can get given human's well-honed propensity to exploit one another.
. Spina v. Shoppers Drug Mart Inc.
In Spina v. Shoppers Drug Mart Inc. (Ont CA, 2024) the Ontario Court of Appeal considered class action franchise appeals (direct and cross) from summary judgment decisions.
Here the court considered the common law duty of 'good faith' in contract dealings, here the sub-category of 'duty of honesty':[164] The issue is whether these actions constituted a breach of Shoppers’ duties related to good faith, which it owed to the Associates.
[165] Our courts have recognized obligations of good faith in contract. In Bhasin v. Hrynew, 2014 SCC 71, [2014] 3 S.C.R. 494, the Supreme Court recognized an organizing principle of good faith performance in contract and specific duties derived from this organizing principle. The law has recognized the importance of respecting the intention of the parties as embodied in their agreement and the role of the obligation of good faith.
[166] In Bhasin, the Supreme Court held that there is a duty of honesty in contractual performance applicable to all contracts. This duty means that parties must refrain from lying or otherwise knowingly misleading one another about matters directly related to the performance of the contract: Bhasin, at para. 73. “Knowingly misleading” another is not confined to direct lies – it can also include “half-truths, omissions, and even silence, depending on the circumstances”: C.M. Callow Inc. v. Zollinger, 2020 SCC 45, [2020] 3 S.C.R. 908, at para. 91. The court in Bhasin also held that, “[i]n carrying out his or her own performance of the contract, a contracting party should have appropriate regard to the legitimate contractual interests of the contracting partner.” This requires that a party not seek to undermine those interests in bad faith. However, unlike higher obligations of a fiduciary, good faith performance does not require the other contracting party to put the interests of the other contracting party first: Bhasin, at para. 65. . Bhatnagar v. Cresco Labs Inc.
In Bhatnagar v. Cresco Labs Inc. (Ont CA, 2023) the Court of Appeal considered damages in an 'honest performance' contract case. In these quotes the court considers, and dismisses, the proposition that a cause of action grounded in breach of the duty of honest performance creates a presumption of lost oppourtunity (aka 'loss of chance'):[45] On the Application, the Appellants submitted that, if the court found that Origin House had breached its duty of honest performance, the court was required to presume damages – its only task was to quantify those damages. Their submission was based on para. 116 of Callow, which reads, in part, as follows:[E]ven if I were to conclude that the trial judge did not make an explicit finding as to whether Callow lost an opportunity, it may be presumed as a matter of law that it did, since it was Baycrest’s own dishonesty that now precludes Callow from conclusively proving what would have happened if Baycrest had been honest. [Emphasis added.] [46] The application judge rejected the Appellants’ submission that the emphasized words in para. 116 of Callow (the “Emphasized Words”) create a legal presumption of loss once a breach of the duty of honest performance has been found: at paras. 83, 88 of the Reasons.
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Analysis
[55] I do not accept that Callow stands for the proposition that, where a party is found to have breached its duty of honest performance, the court must presume the aggrieved party is entitled to damages in the absence of an evidentiary foundation of a lost opportunity. I understand the majority decision in Callow to place the burden on the claimant to show some evidence on which the court can find that the breach of the duty of honest performance resulted in the claimant failing to have a fair opportunity to protect its interests or caused it to lose an opportunity.
[56] Before addressing para. 116 of Callow, it is useful to recall its facts. In that case, a group of condominium corporations (“Baycrest”) entered into two contracts with C.M. Callow Inc. (“Callow”), a corporation owned and operated by Christopher Callow. The contracts consisted of a winter maintenance agreement with a two-year term and a summer maintenance agreement. A clause in the winter contract gave Baycrest the right to terminate the contract, for any reason, upon giving ten days’ notice in writing. Baycrest decided to terminate the winter contract after the first winter. Callow was not informed of that decision and proceeded to fulfill its contractual obligations. During the spring and summer, Baycrest then engaged in a series of “active communications” with Mr. Callow that (a) suggested that a renewal of the winter contract was likely; and (b) deceived him into thinking that his “freebie” work would both improve his chances of earning a renewal and ensuring the contract would not be terminated. Callow was ultimately informed the contract was terminated in September of that year.
[57] At trial, Mr. Callow gave evidence that he typically bid on winter contracts during the summer and, thus, it was too late to find replacement work by the time he was notified of the termination. There was also evidence that Mr. Callow had opportunities to bid on other winter contracts but chose to forgo them due to his misapprehension about the status of the contract with Baycrest. After finding Baycrest breached the duty of honest performance, the trial judge awarded Callow damages equal to the profit lost under the winter contract. The Supreme Court upheld that damages award.
[58] I now return to the Appellants’ submission based on the Emphasized Words in para. 116 of Callow.
[59] The Emphasized Words are part of one sentence in para. 116. They must be read within para. 116 as a whole. In para. 116, Kasirer J. began by referring to the trial judge’s finding that Baycrest failed to provide Callow with a fair opportunity to protect its interest. He then stated that, had Baycrest acted honestly and corrected Mr. Callow’s false impression, he would have taken proactive steps to bid on other contracts for the upcoming winter. Next, Kasirer J. observed there was “ample evidence” before the trial judge that Callow had opportunities to bid on other winter maintenance contracts but chose to forego those opportunities due to its misapprehension about the status of its contract with Baycrest.
[60] Thus, it can be seen, in the sentences leading up to the one that contains the Emphasized Words, Kasirer J. explicitly found an evidentiary foundation for Callow’s claim of lost opportunity. This is significant when considering the full sentence in which the Emphasized Words are found. For ease of reference, I set it out again:[E]ven if I were to conclude that the trial judge did not make an explicit finding as to whether Callow lost an opportunity, it may be presumed as a matter of law that it did, since it was Baycrest’s own dishonesty that now precludes Callow from conclusively proving what would have happened if Baycrest had been honest. [Emphasis added.] [61] The Appellants’ submission that lost opportunity must be presumed fails to account for both the permissive language in the Emphasized Words and the qualifying language that immediately follows them.
[62] The Emphasized Words are permissive, not mandatory: they state that it “may” be presumed in law that a loss occurred. The use of the word “may” runs contrary to the Appellants’ submission that once the court found a breach of the duty of honest performance, it was obliged to presume that they had suffered a loss of opportunity.
[63] Further, and in any event, the Appellants’ submission fails to recognize that the Emphasized Words are followed by two qualifications: it might be presumed in law that Callow lost an opportunity (1) since it was Baycrest’s own dishonesty that precluded Callow from (2) conclusively proving what would have happened. In this case, neither qualifier applies.
[64] In terms of the first qualifier, it was not Origin House’s failure to advise the Appellants of the delayed closing date that precluded the Appellants from proving what would have happened had they been so advised. On the findings of the application judge, there was “little or no chance” of the Appellants achieving the 2019 revenue targets and nothing the Appellants could have done to force a change in the closing date.
[65] In terms of the second qualifier, as I have explained, in Callow there was an evidentiary foundation for the claim of lost opportunity and Baycrest’s dishonesty precluded Callow from “conclusively proving” lost opportunity. That was not this case: the Appellants had no evidentiary foundation for their claim of loss of opportunity.
[66] Accordingly, in my view, this ground of appeal fails. . 2505243 Ontario Limited (ByPeterandPaul.com) v. Princes Gates Hotel Limited Partnership [silence as dishonesty]
In 2505243 Ontario Limited (ByPeterandPaul.com) v. Princes Gates Hotel Limited Partnership (Ont CA, 2022) the Court of Appeal quoted a characterization of the contractual 'honesty' duty:[26] We are not persuaded by this submission. We find no error in the trial judge’s finding that PG misrepresented its intention to continue the parties’ agreements. In Callow Inc. v. Zollinger, 2020 SCC 45, Kasirer J. set out the context and contours for the role of good faith in contract interpretation. He said, at paras. 53 and 81:Good faith is thus not relied upon here to provide, by implication, a new contractual term or a guide to interpretation of language that was somehow an unclear statement of parties’ intent. Instead, the duty of honesty as contractual doctrine has a limiting function on the exercise of an otherwise complete and clear right because the duty, irrespective of the intention of the parties, applies to the performance of all contracts and, by extension, to all contractual obligations and rights. This means, simply, that instead of constraining the decision to terminate in and of itself, the duty of honest performance attracts damages where the manner in which the right was exercised was dishonest.
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[W]here the failure to speak out amounts to active dishonesty in a manner directly related to the performance of the contract, a wrong has been committed and correcting it does not serve to confer a benefit on the party who has been wronged. . Greta Energy Inc. v. Pembina Pipeline Corporation
In Greta Energy Inc. v. Pembina Pipeline Corporation (Ont CA, 2022) the Court of Appeal considers the contractual 'duty of honesty':[26] As for disclosing information to the appellants, as the motion judge noted, C.M. Callow Inc. v. Zollinger, 2020 SCC 45, 452 D.L.R. (4th) 44 does not impose a duty of disclosure so long as a party does not knowingly mislead the other party. ...
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