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Contracts - Duties of Good Faith and Honesty (2). Metro 1 Development Corp. Ltd. v. Michael Garron Hospital
In Metro 1 Development Corp. Ltd. v. Michael Garron Hospital (Ont CA, 2023) the Court of Appeal notes a limit the extent of a contractual duty of good faith:[13] ... We also disagree with the submission that MGH was obliged to offer any prospective Tim Horton franchisees to Metro 1 as sublease prospects to cure its breach. The duty of good faith in contract law does not require a party to subordinate its interests to those of the other party: Wastech Services Ltd. v. Greater Vancouver Sewage and Drainage District, 2021 SCC 7, 454 D.L.R. (4th) 1 at paras. 6, 112-113. ... . Ponce v. Société d’investissements Rhéaume ltée
In Ponce v. Société d’investissements Rhéaume ltée (SCC, 2023) the Supreme Court of Canada considered a Quebec fact situation where corporate officers ('presidents'), hearing of third party interest in purchasing shares in the corporation, hid the interest from their shareholders and then purchased the shares personally to resell them to the third parties at a profit. Through this time there was also an 'incentive pay agreement' between the officers and the shareholders, which "governed the parties’ relationship and entailed implied obligations for the presidents."
In these quotes the court comments on the content of the duty of good faith (which is a Quebec statutory duty as well as a common law one), particularly it's element of 'loyalty' - examined here in a 'duty to disclose' context:[76] First, the prohibitive dimension of good faith requires, among other things, that parties to a contract not act dishonestly in performing it (Lefebvre (2015), at p.93). In this case, contractual loyalty did not require the appellants to forsake their own interests to benefit the respondents, let alone to refrain from exercising the legal rights they had under the Agreement. But in the pursuit of their interests and the exercise of their rights, parties to a contract must conduct themselves loyally by not unduly increasing the burden on the other party or behaving in an excessive or unreasonable manner (see Churchill Falls, at paras. 112‑13, per Gascon J., and para. 177, per Rowe J., dissenting, but not on this point). The prohibitive dimension of good faith also requires each contracting party not to jeopardize the existence or equilibrium of the contractual relationship (Lluelles and Moore, at No. 1979).
[77] However, I agree with the trial judge that in this case the appellants conducted themselves in a disloyal manner and lacked probity when they failed to disclose the interest expressed by IA to the shareholders and when they signed the Undertaking of Confidentiality with IA (paras. 544‑47). They were, of course, not obliged to subordinate their interests to those of the respondents in performing the Presidents’ Agreement, but they did have to look out for the interests of the respondents in the legitimate pursuit of their own interests (see Dunkin’ Brands, at paras. 74‑75; Provigo, at pp. 24‑25; see also Bhasin, at para. 70). The respondents could therefore legitimately expect the appellants to refrain from scheming in any way to enrich themselves at their expense. In the context of the business relationship in question, the appellants thus engaged in dishonest conduct that thwarted the respondents’ legitimate expectations in pursuing the goal they all had, which was to maximize the profits and value of the Groupe Excellence companies for the benefit of both the appellants and the respondents.
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[80] Second, in addition to these breaches of the prohibitive dimension of good faith, the appellants also contravened its proactive dimension. In this regard, good faith requires, from each contracting party, active behaviour that is intended to assist their contracting partner but that still remains compatible with the party’s own interests. Based on the circumstances, each party must, in particular, [translation] “inform [their partner], in the course of the contract, of events they had better know about for the performance of the contract” (Lluelles and Moore, at No. 1997 (footnote omitted)). Good faith thus imposes on each contracting party a duty to inform that [translation] “encompass[es] their partner’s legitimate expectations” (D. Mazeaud, “Chronique de jurisprudence civile générale: Obligations et protection des consommateurs”, in Répertoire du notariat Defrénois (1996), at p. 1010, quoted in Lluelles and Moore, at No. 2001; see also Desjardins Financial Services Firm Inc. v. Asselin, 2020 SCC 30, [2020] 3 S.C.R. 298, at para. 61). In keeping with this proactive dimension, as Professor Cantin Cumyn helpfully notes, [translation] “the duty of [contractual] loyalty requires [a contracting party] to provide the other party with the information that is relevant to the performance of their prestation, in order to facilitate it or avoid making it more onerous than originally intended” (Cantin Cumyn (2012), at p. 20). Like its prohibitive counterpart, the proactive dimension of contractual good faith does not require a contracting party to act selflessly. However, it does always require a contracting party to consider the other party’s perspective when exercising the legal rights conferred by the contract (p. 21; see, e.g., Dunkin’ Brands, at para. 74).
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[82] All that remains to be determined is the extent of this duty to inform in the specific context of the business relationship that existed here. For this purpose, I will refer to the landmark decision in Bail. In that case, the Court outlined a general theory regarding the duty to inform arising from the obligation of good faith in contractual matters, which served to determine whether particular information fell within this duty. As the Court of Appeal properly noted, this Court laid down the following three criteria in Bail (at pp. 586‑87): (1) knowledge of the information, whether actual or presumed, by the party owing the obligation to inform; (2) the fact that the information in question is of decisive importance; (3) the fact that it is impossible for the party to whom the duty to inform is owed to inform itself, or that the creditor is legitimately relying on the debtor of the obligation. . Will v. Geo. A. Kelson Company Limited
In Will v. Geo. A. Kelson Company Limited (Ont CA, 2023) the Court of Appeal cited a test for contractual 'good faith':[20] She referred to the correct legal test to establish a breach of good faith, as set out in Bhasin v. Hrynew, 2014 SCC 71, [2014] 3 S.C.R. 494 and C.M. Callow Inc. v. Zollinger, 2020 SCC 45, 452 D.L.R. (4th) 44, and she noted that the test provides that the parties must perform their contractual duties honestly and reasonably and not capriciously or arbitrarily. . 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. . 100 Bloor Street West Corporation v. Barry's BootCamp Canada Inc.
In 100 Bloor Street West Corporation v. Barry's BootCamp Canada Inc. (Ont CA, 2023) the Court of Appeal considered the Wastech case, which limits the allowed purposes of the exercise of a contractual discretion by a party - as a matter of the contractual duty of good faith:[7] Barry’s now appeals that decision. It has constructed an elaborate argument contending that the application judge committed an extricable error of law by erroneously identifying the purpose of the discretionary attribution subclause, thereby applying a mistaken assessment of reasonableness. This argument is crafted out of the decision in Wastech Services Ltd. v. Greater Vancouver Sewerage and Drainage District, 2021 SCC 7, 454 D.L.R. (4th) 1, at paras. 88, 92, which holds that the exercise of a contractual discretion is unreasonable if it is unconnected to the purposes for which the discretion is granted. ... . 2505243 Ontario Limited (ByPeterandPaul.com) v. Princes Gates Hotel Limited Partnership
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 'good faith' 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. ... . 6844987 Canada Inc. v. The United People of Canada/Les Peuple Unis du Canada
In 6844987 Canada Inc. v. The United People of Canada/Les Peuple Unis du Canada (Sup Ct, 2022) the court considered the interaction between a contractual 'time is of the essence' provision and the duty of good faith:[53] In Deangelis v. Weldan Properties (Haig) Inc., 2017 ONSC 4155, at paras. 41 to 43, Justice Ricchetti explained why the enforcement of “time is of the essence” clauses in commercial agreement of purchase and sale does not violate the principle that a contracting party must act in good faith:It would be tempting to let principles of fairness and equity direct a finding that a three day delay in the closing in the four year history of the Agreement, is a minor breach resulting in a financial windfall to the builder and, therefore, the Agreement should be upheld.
However, in my view, it would be wrong in law to find that insisting on compliance with a term of the agreement, agreed to by both parties with the assistance of counsel, amounts to bad faith depriving a party of the ability to strictly enforce an agreement where time is of the essence. Such a determination would mean that no party could insist on strict compliance of the term of an agreement because to do so would or might amount to bad faith. This would throw the law of contract into chaos by creating uncertainty in the enforcement of contracts.
Such a decision would also be contrary to numerous authorities which provide that, when a party fails to comply with its obligation to complete the transaction at a specified time and there is a time of the essence clause, the other party has the right to terminate the agreement. . Stericycle ULC v. HealthPRO Procurement
In Stericycle ULC v. HealthPRO Procurement (Ont CA, 2021) the Court of Appeal considered the contractual duties of good faith and honesty:[43] The organizing principle of good faith in contractual dealings was addressed in Bhasin v. Hrynew, 2014 SCC 71, [2014] 3 S.C.R. 494 and expanded upon in C.M. Callow Inc. v. Zollinger, 2020 SCC 45, 452 D.L.R. (4th) 44 and Wastech Services Ltd. v. Greater Vancouver Sewage and Drainage District, 2021 SCC 7, 454 D.L.R. (4th) 1. In these decisions, the Supreme Court recognized two existing doctrines as manifestations of the principle of good faith – the duty to exercise a contractual discretion in good faith and the duty of honest performance of a contract.
[44] The duty to exercise a contractual discretion in good faith will be breached where the exercise of discretion is unreasonable, in the sense that it is unconnected to the purposes for which the discretion was granted: Wastech, at para. 88. The duty of honesty in contractual performance was explained by Cromwell J. in Bhasin as meaning “simply that parties must not lie or otherwise knowingly mislead each other about matters directly linked to the performance of the contract”: at para. 73. . Pinto v. Regan and White v. Regan
In Pinto v. Regan and White v. Regan (Div Ct, 2021) the Divisional Court considered issues of duress and the contractual duty of good faith in ordering a new hearing based on an RTA agreement to terminate a tenancy:[38] The facts on each appeal suggest that the respondent’s intention to obtain vacant possession of each unit on a permanent basis without having to give notice to each appellant under s. 50 was behind each transaction. The real substance of those transactions was not considered by the Member on either motion. Nor did the Member consider if the respondent was acting in good faith when he interacted with each appellant to obtain their signatures on the N11.
[39] The Supreme Court of Canada in Bhasin v. Hrynew, 2014 SCC 71, [2014] 3 S.C.R. 494, established the organizing principle of good faith applicable to all contracts. This principle requires the performance of contractual duties and obligations honestly, not capriciously or arbitrarily, and with regard to the legitimate contractual interests of the other party: see Bhasin, at paras. 63 and 65. The relationship between a tenant and a landlord is contractual in nature and requires that they discharge the obligations they owe to one another in good faith. This duty of good faith includes how the parties conducted themselves toward each other at the end of that relationship.
[40] Section 202 of the RTA imposed a statutory duty on the Member to determine questions of fact and to apply governing principles of law to ascertain the real substance of the transactions and activities regarding the rental units at issue, and the good faith of the parties to the N11. The Member did not consider all the evidence to determine the element of good faith on the part of the respondent other than making a passing reference in the Reasons. The Member did not take the totality of the evidence into account when he applied the substantive law. This amounted to an error of law.
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