Supreme Court of Canada Clarifies Duty of Honesty in Contractual Performance

The Supreme Court of Canada recently released a decision in which it revisited and clarified the scope of the duty of honesty in contractual performance.

Condominium Corporations End Contract with Business Owner

In 2012, a group of condominium corporations entered into a two‑year winter maintenance contract and a separate summer maintenance contract with the owner of a property maintenance business.

Under a clause in the winter maintenance contract, the group was entitled to terminate that agreement if the maintenance business failed to give satisfactory service in accordance with its terms. The clause further provided that if, for any other reason, the services of the maintenance business were no longer required, the group could terminate the contract upon giving ten days’ written notice.

In early 2013, the group decided to terminate the winter maintenance agreement after some people complained that snow wasn’t always removed from their parking spots. However, the group did not inform the owner of the maintenance business of its decision at that time.

Instead, throughout the spring and summer of 2013, the owner had discussions with the group regarding a renewal of the winter maintenance agreement. Following these discussions, the owner thought that he was likely to get a two‑year renewal of the winter maintenance contract and that the group was satisfied with his services. During the summer of 2013, the owner even performed work above and beyond the summer maintenance contract at no charge, which he hoped would act as an incentive for the group to renew the winter maintenance agreement.

The group finally informed the owner of its decision to terminate the winter maintenance agreement in September 2013, giving him ten days’ notice.

As a result, the owner filed a statement of claim for breach of contract, alleging that the condo corporations had acted in bad faith, asking the court for over $80,000to cover his damages.

The trial judge held that the organizing principle of good faith performance and the duty of honest performance were engaged and that the group had actively deceived the owner from the time the termination decision was made to September 2013. The judge found that the group had acted in bad faith by withholding information to ensure that the owner performed the summer maintenance contract and by continuing to represent that the contract was not in danger. The owner was awarded damages to place him in the same position as if the breach had not occurred.

However, the Court of Appeal set aside the judgment, holding that the trial judge erred by improperly expanding the duty of honest performance beyond the terms of the winter maintenance agreement. Further, it held that any deception in the communications during the summer of 2013 related to a new contract not yet in existence, and therefore was not directly linked to the performance of the winter contract. 

Supreme Court of Canada Finds in Favour of Business Owner

The majority of the court found that the group had breached the contract. It held that the duty to act honestly in the performance of the contract precluded the active deception by the group of knowingly misleading the owner into believing that the winter maintenance agreement would not be terminated. Therefore, by exercising the termination clause dishonestly, the group breached the duty of honesty on a matter directly linked to the performance of the contract, even if the ten‑day notice period was satisfied.

The court explained that the duty of honest performance in contract applies to all contracts and requires that parties must not lie or otherwise knowingly mislead each other about matters directly linked to the performance of the contract. In determining whether dishonesty is connected to a given contract, the court stated that the relevant question is whether a right under that contract was exercised, or an obligation under that contract was performed, dishonestly.

Further, the court stated that the duty of honest performance attracts damages where the manner in which the right was exercised was dishonest. In this case, the manner in which the group exercised the contract’s termination right was dishonest and contrary to the requirements of good faith.

Finally, the court explained the scope of the requirements of honesty in performance can go further than merely prohibiting outright lies, stating:

“At the end of the day, whether or not a party has “knowingly misled” its counterparty is a highly fact-specific determination, and can include lies, half-truths, omissions, and even silence, depending on the circumstances. I stress that this list is not closed; it merely exemplifies that dishonesty or misleading conduct is not confined to direct lies.”

Finally, in assessing the award of damages to the owner, the court upheld the trial judge’s decision, holding:

“Had [the group] acted honestly in exercising its right of termination, and thus corrected [the owner]’s false impression, [the owner] would have taken proactive steps to bid on other contracts for the upcoming winter. Indeed, there was ample evidence before the trial judge that [the owner] had opportunities to bid on other winter maintenance contracts in the summer of 2013, but chose to forego those opportunities due to [his] misapprehension as to the status of the contract with [the group].”

As a result, the court allowed the appeal, set aside the order of the Court of Appeal and reinstated the judgment of the trial judge.

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