Has the Ontario Court of Appeal Issued an Invitation to Sharp Practice?

Christopher Callow provided summer and winter maintenance to ten residential condominiums at Baycrest Gardens. The condos are managed by Condominium Management Group (CMG) and in particular by Tammy Zollinger, a Property Manager. A representative of each of the condo corporations formed the Joint Use Committee (JUC). CMG terminated Mr. Callow’s winter maintenance contract earlier than expected and did not offer him, contrary to his expectations, a subsequent winter contract.

Justice O’Bonsawin at trial, after a lengthy consideration of the testimony of Mr. Callow and seven witnesses for CMG, as well as the circumstances surrounding performance of the winter contract, found in favour of Mr. Callow, holding that CMG had acted in bad faith in terminating the contract. In a terse decision, the Ontario Court of Appeal (per Lauwers, Huscroft and Trotter JJ.A.) reversed that finding and allowed CMG’s appeal, observing that CMG may have not acted “honourably”, but that it did not breach the duty of “honest performance”. The Supreme Court of Canada has granted leave to appeal the OCA’s decision, one of the relatively few contract cases it hears (for example, in 2017, contract cases constituted 4% of applications for leave to appeal and 3% of appeals the SCC heard). It will be interesting to see whether the SCC is as sanguine about CMG’s conduct as was the OCA.

The trial and OCA decisions in Callow provide a vivid contrast with each other in several respects. Most notably, Justice O’Bonsawin discussed the testimony of the witnesses at length, was concerned about the way in which CMG treated Mr. Callow and took a broad view about what it means to act in good faith in relation to a contract. The OCA, on the other hand, paid no attention to Justice O’Bonsawin’s assessment of the witnesses because it took a narrow view of honest performance.

Mr. Callow and CMG had entered into two contracts, one for winter maintainance (November 1, 2012 to April 30, 2014) and one for summer maintenance (May 1, 2012 to October 31, 2013). He had also previously been contracted to carry out winter maintenance work. The Minutes of a March 19, 2013 meeting of the Joint Use Committee, composed of a representative of each of the condo corporations, indicated that the Property Manager, Ms Zollinger, was considering terminating the winter contract “due to poor workmanship in the 2012-13 winter” and the JUC voted in April 2013 to terminate the contract. As permitted under the contact, however, Ms Zollinger did not advise Mr. Callow of this decision until September 12, 2013, providing the required 10 day notice; she also indicated that the reason was poor performance, although the contact did not require a reason.

As far as Justice O’Bonsawin was concerned, the situation was somewhat more complicated than the above description suggests. She found that two members of the JUC in particular had led Mr. Callow to believe that he would be awarded a subsequent two-year winter maintenance contract. Furthermore, Mr. Callow undertook voluntary work over the summer as an incentive for the JUC to renew his winter contract. She found specifically that Joseph Peixoto, a member of the JUC who negotiated the financial terms of the winter contract, “led Mr. Callow to believe that all was fine with the winter and summer maintenance services contracts and that the former was interested in a future extension of Callow’s contract” and that another JUC member, Kyle Campbell, “told Mr. Callow that he thought the winter maintenance services contract would be renewed”, asking him for a quote for the following winter. Significantly, as emails between them showed, both Mr. Peixoto and Mr. Campbell knew that Mr. Callow was performing free services during the summer and deliberately decided to keep to themselves that the JUC had decided not to continue the existing contract or to offer a renewal.

It is clear that the trial judge considered Ms Zollinger to be responsible for the termination of the contract, even though the JUC voted to terminate it (either unanimously, according to Ms Zollinger, or with dissents, according to other evidence) and that she was acting in bad faith:

As for Ms. Zollinger, she got stuck in Baycrest’s [where the condos were located] parking lot on her first day as Project Manager. This event likely negatively impacted her view of Callow moving forward. it is clear from her testimony, especially during cross-examination, the path that she took afterwards was not appropriate and did not fall in line with the principle of good faith dealings in contractual performance. (trial decision, para. 14) (emphasis added)

Although termination of the contract did not require poor performance, Justice O’Bonsawin considered complaints that had been made against Mr. Callow’s work, including from Ms Zollinger, and found that they were not justified and that CMG did not activate opportunities to take action in case of poor performance (such as imposing a fine for not clearing the main roadways, among other examples), indicating that there were no problems. Ms Zollinger also said that CMG should not have the same contractor for both winter and summer maintenance.

As far as the facts are concerned, the OCA acknowledged that the JUC delayed advising Mr. Callow about the termination of the winter maintenance contract, that Mr. Callow had provided free services, believing he was probably going to have the contract renewed and that the JUC knew he was providing free services in the belief of renewal of the contract. (OCA, para. 5) The OCA was not concerned with issues of performance, either as a factual matter or what lay behind the allegations of poor performance, because performance was irrelevant to their analysis.

Callow raises the following question: what constitutes good faith in dealings under a contract and what constitutes honest performance? Here the trial and appellate courts differ dramatically.

Justices Lauwers, Huscroft and Trotter accepted GMC’s position that “the trial judge erred by improperly expanding the duty of honest performance in a manner that went beyond the terms of the winter contract”. (OCA, para.8-9) The OCA relied on the 2014 Supreme Court of Canada decision in Bhasin v. Hrynew to limit the application of good faith contractual performance, although Bhasin itself appears to say otherwise.

Mr. Bhasin, through his business, was an enrollment director for Canadian American Financial Corp.’s (Can-Am) education plans with a three-year contract which would automatically renew unless one of the parties gave six months notice. After failing to convince Mr. Bhasin to merge with his business or to convince Can-Am to force a merger, Mr. Hrynew, a competitor of Mr. Bhasin’s, pressured Can-Am to end the relationship with Mr. Bhasin. When the Alberta Securities Commission (ASC) required Can-Am to appoint a single provincial trading officer (PTO) to conduct audits of the enrollment directors, Can-Am appointed Mr. Hrynew, over the objections of Mr. Bhasin and another enrollment director. Can-Am had discussions with the ASC about restructuring, including having Mr. Bhasin working for Mr. Hrynew, quite unbeknownst to Mr. Bhasin. Speaking for a seven-member bench, Justice Cromwell, relying on the findings of the trial judge, stated,

Can-Am repeatedly misled Mr. Bhasin by telling him that Mr. Hrynew, as PTO, was under an obligation to treat the information confidentially and that the Commission had rejected a proposal to have an outside PTO, neither of which was true…It also responded equivocally when Mr. Bhasin asked in August 2000 whether the merger was a “done deal”… When Mr. Bhasin continued to refuse to allow Mr. Hrynew to audit his records, Can-Am threatened to terminate the 1998 Agreement and in May 2001 gave notice of non-renewal under the Agreement….(SCC, para. 12, citations to trial decision omitted)

As a result, Mr. Bhasin, who had been very successful with Can-Am, ended up working for one of Can-Am’s competitors for less financial benefit. Justice Cromwell summarized the trial judge’s conclusions as follows:

[I]t was an implied term of the contract that decisions about whether to renew the contract would be made in good faith. The court held that the corporate respondent was in breach of the implied term of good faith, that Mr. Hrynew had intentionally induced breach of contract, and that the respondents were liable for civil conspiracy.

The trial judge found that Can-Am acted dishonestly with Mr. Bhasin throughout the events leading up to the non-renewal: it misled him about its intentions with respect to the merger and about the fact that it had already proposed the new structure to the Commission; it did not communicate to him that the decision was already made and final, even though he asked; and it did not communicate with him that it was working closely with Mr. Hrynew to bring about a new corporate structure with Hrynew’s being the main agency in Alberta. The trial judge also found that, had Can-Am acted honestly, Mr. Bhasin could have “governed himself accordingly so as to retain the value in his agency”…. (SCC, paras. 14 and 15)

The Alberta Court of Appeal “held that the lower court erred by implying a term of good faith in the context of an unambiguous contract containing an entire agreement clause” (SCC, para. 16) While good faith is relevant to contracts of particular types, such as employment contracts, and that in a limited way, it is not applicable to all contracts. However, Justice Cromwell determined otherwise:

The notion of good faith has deep roots in contract law and permeates many of its rules. Nonetheless, Anglo-Canadian common law has resisted acknowledging any generalized and independent doctrine of good faith performance of contracts. The result is an “unsettled and incoherent body of law” that has developed “piecemeal” and which is “difficult to analyze” [citation omitted]. This approach is out of step with the civil law of Quebec and most jurisdictions in the United States and produces results that are not consistent with the reasonable expectations of commercial parties.

In my view, it is time to take two incremental steps in order to make the common law less unsettled and piecemeal, more coherent and more just. The first step is to acknowledge 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. The second is to recognize, as a further manifestation of this organizing principle of good faith, that there is a common law duty which applies to all contracts to act honestly in the performance of contractual obligations.

In my view, taking these two steps is perfectly consistent with the Court’s responsibility to make incremental changes in the common law when appropriate. Doing so will put in place a duty that is just, that accords with the reasonable expectations of commercial parties and that is sufficiently precise that it will enhance rather than detract from commercial certainty. (SCC, paras. 32-34)

After reviewing the piecemeal development of good faith in various contractual contexts, Cromwell J. recognizes not everyone agrees that there should be a general obligation of good faith and would “prefer the traditional, organic development of solutions to address particular problems as they arise”. He goes on, “However, foreclosing some incremental development of the law at the level of principle would go beyond what prudent caution requires and evidence an almost “perverted pride” — [citation omitted] — in the law’s failings.” (SCC, para. 59) Parties expect a basic level of honesty and “even in transactional exchanges, misleading or deceitful conduct will fly in the face of the expectations of the parties” (SCC, para.60).

Accordingly, Cromwell J. acknowledges an “organizing principle of good faith that underlies and manifests itself in various more specific doctrines governing contractual performance … is simply that parties generally must perform their contractual duties honestly and reasonably and not capriciously or arbitrarily” (SCC, para.63), a principle that “is not a free-standing rule, but rather a standard that underpins and is manifested in more specific legal doctrines and may be given different weight in different situations” (SCC, para.64). It means that each party must have regard for the interests of the other, that is, that it “not seek to undermine those interests in bad faith”.

Good faith is, one might observe, a subtext for situations in which the law requires “honest, candid, forthright or reasonable contractual performance”; this is not a closed list, but one that can be expanded as the law requires, but also one the application of which may differ depending on circumstances (it may be different in long-term contract of mutual cooperation from its application in a more transactional exchange, for example) and it must recognize that parties are free to pursue their individual self-interests (within certain parameters).

Justice Cromwell concludes,

I would hold that there is a general duty of honesty in contractual performance. This 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. (SCC, para.73)

Final word in the Bhasin case: Can-Am did act dishonestly in its dealings with Mr. Bhasin. While applying good faith doctrine to the contract between Mr. Bhasin and Cam-Am cannot lead to renewal of his contract, it does mean that he ought to be awarded damages in the loss of value of his business. How does the development in Bhasin apply to the circumstances in Callow?

The OCA interpreted Bhasin in its narrowest way, emphasizing that “the concept of good faith was not to be applied so as to undermine longstanding contract law principles” (OCA, para.11), that it was a “‘modest, incremental step'” (OCA, para.13) and that Cromwell J. explained that the duty of honesty in contractual performance does not impose a duty of loyalty, disclosure or loss of advantages given by the contract (OCA, para.12). For the OCA, all that matters as far as the Callow-CMG contract was concerned in the context of the case is the termination clause: all CMG had to do was notify Mr. Callow of the termination in a timely way and they did that. After all, “That is all that [Callow] bargained for, and all that he was entitled to.” Regardless of what anyone from the JUC suggested to Mr. Callow, CMG had the right to terminate. The trial judge was in error in effectively “modifying [CMG’s] right to terminate the contract” by imposing a “minimum standard of honesty” requiring addressing performance issues, advising Mr. Callow earlier and not making representations about renewal.

For Justices Lauwers, Huscroft and Trotter, CMG’s (JUC’s) conduct “may well suggest a failure to act honourably, but [does] not rise to the high level required to establish a breach of the duty of honest performance“. (OCA, para.16) (emphasis added).

Justice O’Bonsawin interpreted Bhasin differently. Applying the “overarching organizing principle” of good faith does not require changing the terms of the contract. Rather, it reflects that the parties should be able to expect a reasonable standard of honesty in carrying out the contract. Here CMG did not manifest basic honesty because it, through members of the JUC, deceived Mr. Callow about the likelihood of renewal of the contract and accepted Mr. Callow’s free work, knowing that he thought it might be an incentive for CMG to renew the contract, despite having decided not to renew it. Justice O’Bonsawin held that because of the deception, there was a duty on CMG to disclose the decision to terminate the contract prior to the notice period. It might better be said that while CMG had no obligation to provide an earlier notice than that provided by the contract, it did have a good faith obligation not to deceive Mr. Callow.

The Ontario Court of Appeal failed to consider the behaviour of the members of the JUC within the parameters of the Bhasin obligation to act in good faith. The three justices effectively ignore this obligation, while at the same time treating the contract as a discrete set of terms without assessing adequately the behaviour related to the realization of those terms. They also placed emphasis on the fact that the parties did not have an ongoing relationship, even though Cromwell J. had indicated that even transactional arrangements could attract this duty of good faith.

Regardless of how one seeks to narrow the duty, two members of the JUC actively deceived Mr. Callow, misleading him about his future prospects while accepting free work, and, while it is true that CMG did not need to provide a reason to terminate the contract, Ms Zollinger set the stage for terminating the contract by, on the trial judge’s assessment, misrepresenting Mr. Callow’s performance. CMG did fail to act honourably, but it also failed to meet the obligation of acting in good faith, seen in the context of an organizing principle that allows assessment of the behaviour of its representatives.

As the Cromwell J. discusses in Bhasin and O’Bonsawin J. outlines in Callow, there are many ways in which the straightforward notion of freedom of contract, as well as the process of bargaining, is bounded by obligations that relate to fairness in some way: unconscionability, long established to remedy imbalance in bargaining power that results in a seriously unjust contract; independent legal advice in family contracts to offset the dynamic of uneven bargaining power that can exist in that context; bargaining in good faith in the employment context, including disclosing circumstances that might have a material impact on the employees, or exercising good faith in termination of an employee; good faith itself, limited, however, to specific types of contractual relationships; and others. Not all of these are the same as the circumstances in Callow, which relate to an existing contract rather than to negotiating a contract, but they do have one thing in common: the expectation of honesty between the parties. Viewing the obligation of good faith — to be honest — runs throughout the law affecting contractual arrangements.

The Court of Appeal’s decision has the potential to minimize the value of Bhasin, contrary to the obvious intention of the Supreme Court in that case. It gives a green light to parties who decide that in asserting their rights under a contract, as they are entitled to do, they are also entitled to assert those rights through deception and underhandedness, something some might term “sharp practice”.

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