As we discussed in Part One of our blog on the recent judgment from the Supreme Court of Canada (the “SCC” or the “Court”) in C.M. Callow Inc. v. Zollinger¹C.M. Callow Inc. v. Zollinger, 2020 SCC 45 [“Callow”]. (“Callow”), the SCC has expanded upon the duty of honest performance in contract law, a principle originally set out by Justice Cromwell in the milestone 2014 SCC case of Bhasin v. Hrynew²Bhasin v. Hrynew, 2014 SCC 71 [“Bhasin”]. (“Bhasin”).

The majority in Callow found that the Respondent dishonestly exercised its termination right under the Contract with the Appellant by actively misleading and deceiving the Appellant during contract renewal discussions. This was considered to be a breach of the Contract.

Although the majority of the SCC (the “Majority Judgment”) found the Respondent’s dishonest performance to be dispositive of the appeal, the Callow judgment is also notable for the majority’s discussion on the interpretation and expansion of existing good faith doctrines in contract law, as well as the Court’s dissenting and concurring opinions.

FURTHER CONSIDERATION: CAN A CONTRACT BE VALIDLY TERMINATED BUT STILL IN BAD FAITH?

One issue Callow leaves unresolved is the extent to which good faith, beyond the duty of honesty, will substantively constrain a contractual termination right. Callow makes clear that silence can constitute dishonesty, particularly in the form of omissions and half-truths, or in a failure to correct an active dishonesty or misapprehension. The SCC also highlights that the question of whether a contracting party has acted honestly in its performance of the contract is a highly fact-specific determination that will depend on the facts of each case.^{3Callow at para 91.}

However, beyond being dishonest in the exercise of a right or the performance of an obligation under a contract, there may still be instances of conduct that the SCC considers to be a breach of contract where a contractual termination right is exercised, in accordance with contractual requirements (such as notice periods), due to a violation of existing good faith doctrines. The Court has yet to provide direction on this specific legal issue, so there is still uncertainty regarding what “good faith” is required of contracting parties when unilaterally exercising a termination right under a contract. The SCC may provide further direction and clarity with respect to this issue when it releases its outstanding decision in the Wastech Services Ltd. v. Greater Vancouver Sewerage and Drainage District appeal, which was heard at the same time as the Callow appeal.

THE DUTY TO EXERCISE DISCRETIONARY POWERS IN GOOD FAITH 

Neither does the result in Callow, by extension, offer guidance on the good faith requirements for contracting parties exercising discretionary rights under a contract.  Although this doctrine was invoked by the Appellant, the Court did not find it necessary to rule on the issue, instead basing its holding on the duty of honest performance.^{4Bhasin at para 65; Callow at paras 44-46.}

Nonetheless, the Majority Judgment still proceeded to comment on the duty to exercise discretionary powers in good faith in order to “illustrate” this existing doctrine, and to clarify what the Court characterized as being “misconstrued” by the Ontario Court of Appeal. What follows in the Majority Judgment is a discussion by the SCC on its understanding of how the organizing principle of good faith, not being a free-standing rule, underpins and relates to each of the different manifestations of the “good faith” doctrines. 

The SCC makes clear in this discussion that the list of existing good faith doctrines may be expanded incrementally where appropriate, and that there is a shared “requirement of justice” that underpins and informs the various rules recognized by the common law on obligations of good faith contractual performance.

THE “REQUIREMENT OF JUSTICE” UNDERPINS ALL GOOD FAITH DOCTRINES 

The Majority Judgment repeatedly references the “requirement of justice”, which is rooted in a contractual idea of corrective justice and ties the existing doctrines of good faith together, including the duty of honesty.^{5Callow at para 47.} Although the Court does not go so far as to enumerate what types of conduct/performance may be required by the “requirement of justice” (or conversely, what would not satisfy the requirement of justice), it explains in general terms that rights and obligations exercised under a contract must be exercised and performed honestly and reasonably and not capriciously or arbitrarily where recognized by law.^{6Callow at para 47.}

REFERENCE TO QUEBEC CIVIL LAW

The Majority Judgment also discusses at length how referring to good faith legal concepts in Quebec civil law can help to illustrate good faith principles in the common law, serving as persuasive authority by shedding light on how the jurisdictionally applicable rules work.^{7Callow at para 58.} The majority draws on the Quebec concept of abuse of rights to conduct a comparative analysis of how dishonest performance under the contract is directly linked to the principle of good faith.^{8Callow at paras 67-68.}

Notably, the concurring reasons for judgement (“Concurring Reasons”) by three Justices on the Court, disagreed with the majority’s reference to and use of the Quebec civil law doctrine of abuse of right, characterizing such “digression” as neither “useful” nor “helpful” to judges and lawyers who must try to understand the common law principles of good faith as developed in the Majority Judgment, positing that it will only inject uncertainty into the law.^{9Callow at para 122.}

The Concurring Reasons agree with the majority that the duty of honest performance is dispositive of the appeal in this case, but strongly disagree with: (1) the comparative analysis undertaken by the majority with respect to referring to Quebec civil law; and (2) what it characterizes as the majority’s “digression” into any discussion on the duty to exercise discretionary powers in good faith.

IMPLICATIONS OF CALLOW FOR CANADIAN CONTRACT LAW

Although Callow leaves certain good faith legal issues unresolved for the time being, including when the valid exercise of a unilateral termination right under a contract will be considered to be in breach of good faith, and elements of the duty to exercise discretionary principles in good faith, it is a significant judgment from the SCC that builds upon the jurisprudence first established in Bhasin. As with Bhasin, we can expect that Callow will lead to further judicial consideration of good faith doctrines at all levels of courts and legal arguments that both invoke and expand upon the existing caselaw related to good faith performance in contract law. We expect that the companion Wastech judgment, once released, will provide further clarity on some of these unresolved legal issues and good faith principles, including what components of good faith performance the Court will look for in determining whether a party has acted in good faith under a contract.

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• 1
  C.M. Callow Inc. v. Zollinger, 2020 SCC 45 [“Callow”].
• 2
  Bhasin v. Hrynew, 2014 SCC 71 [“Bhasin”].
• 3
  Callow at para 91.
• 4
  Bhasin at para 65; Callow at paras 44-46.
• 5
  Callow at para 47.
• 6
  Callow at para 47.
• 7
  Callow at para 58.
• 8
  Callow at paras 67-68.
• 9
  Callow at para 122.