In a recent case addressed by the Canadian Supreme Court, the scope of duty of honesty within a contractual agreement was clarified. In this ruling, the Supreme Court also clarified that even though the current case was with regards to a maintenance contract, its hearing shall also apply to all contracts of other natures. To understand what the court deems as termination of a contract in bad faith, let us look at a previous hearing of a similar context.
Instance of Contract Terminated In Bad Faith
In 2012, an institution of condominium corporations signed a two?year winter maintenance agreement and an independent summer maintenance agreement with the owner of a maintenance business. Under this contract, the group were entitled to terminate the contracts if they found the services to be below their standards. In case the said consortium wished to terminate the contract based on any other causes, it was required to provide the owner a write notice 10 days’ prior to the cessation of such services.
In early 2013, the group decided to terminate the winter maintenance contract. However, they failed to inform the owner of such a decision till September 2013, with the prerequisite 10 days’ notice. However, during this time, the owner had been working on their project under the assumption of the contract being renewed. In fact, the owner claimed to have rejected other offers due to such an assumption.
Hence, the owner alleged a breach of the corporate law contract on behalf of the consortium claiming they acted in bad faith.
The trial judge found that the conglomerate acted in bad faith by withholding information from the owner to ensure that they continued service of the summer maintenance agreement. She ordered them to pay the owners damages worth approximately $80,000 to put them in a financial position in the case of a breach not occurring.
However, the Ontario Court of Appeal set aside this ruling at first instance based on an appeal, holding that the judge had made an error by inappropriately expanding the duty of honest performance beyond the purview of the consortium’s winter contract. Additionally, it also held that any bad faith shown in communications while the summer of 2013 was based on the possibility of a new contract which was not in existence yet. Hence, the deception was not directly connected to the winter agreement.
The majority of the Supreme Court of Canada clarified that the duty of honest performance in contract applies to all types of contracts and needs both parties to uphold the truth and not knowingly deceive each other about subject matters linked to the performance of the agreement (Ref Bhasin v. Hrynew, 2014). It stated that the question to determine whether or not such dishonesty is in relation to a given agreement is:
“Whether a right under that agreement was exercised, or a duty under such a contract was served dishonestly.”
Finally, the court held in favor of the owner, upholding the trial judge’s award of damage charges to be paid to the owner, ruling that the consortium knowingly deceived the owner in the manner where they exercised their termination rights. However, the wrongful exercise of such termination clause was tantamount to a breach of contract.
