The Supreme Court Changes the Law of Contract

This article was originally prepared for and published by ARLA in the Rental Gazette.

by E. (Sonny) Mirth, Q.C.

I hesitate to write about court cases; that subject might seem to be relevant only to lawyers. But a Supreme Court of Canada ruling in December, just before Christmas, has real potential impact for all kinds of contracts: C.M. Callow Inc. v. Zollinger, 2020 SCC 45 (“Callow Case”).

Actually, it is not so much this ruling as the prior ruling of the Court in 2014 that wrought an important change in the law for all contracts in Alberta and elsewhere in Canada: Bhasin v. Hrynew, 2014 SCC 71 (“Bhasin Case”)1.

The Bhasin Case came out of Alberta; the Callow case arose in Ontario. Together they bring important new limits to most contracts made anywhere in Canada west of the Quebec border or east of New Brunswick (Quebec and New Brunswick already had similar limits).

So, what was the change? In simple terms, it was the statement of an over-arching duty of a party to a contract not to lie or actively mislead another party to a contract. This might not, at first blush, seem like much of a change; but when it is a concept applied in circumstances like those in the Callow Case, the perspective changes.

Before the Bhasin Case, the law in Alberta generally gave effect to the freedom of people to make their own contracts: a concept called “freedom of contract”. If A and B wanted to agree (to make a contract) that A would have B do work for A for a set price and under a set piece of rules, the Courts generally would enforce whatever A and B agreed to. They were free to make their own contract, or rules of conduct if you like. So, if B agreed to shovel A’s snow for 2 years and also agreed that A could at any time unilaterally terminate the contract on 10 days’ notice the Courts would say, if A exercised the notice as stated in the contract, that the contract was over. End of story. There have, of course, always been exceptions to such “freedom of contract”. For example, a contract to do something illegal could not be validly made; and a contract that was so grossly unfair as to be unconscionable would not be enforced. But those were exceptional cases.

Some places, like Quebec and some U.S. states, have for many years limited the freedom to contract by placing an overlay of a duty to act in good faith2 in the exercise of contractual rights. Alberta (and Ontario) law has heretofore not done so; and the law here was pretty clear: there was no “good faith” duty applicable to most contracts.

With the stroke of a pen, the Supreme Court changed that in the Bhasin Case by saying henceforth a duty of good faith will be applied to all contracts in Alberta. And Callow extended the treatment of that duty, and applied it, to a contract in Ontario.

In the Bhasin Case, the parties had a sort of dealership agreement which either party could end by giving advance notice (no cause to end required). One of the parties gave such a notice. However, the Court found that the party who gave the notice had lied (been dishonest) about some aspect of what it was doing. That lie allowed the other party to sue for damages for loss of the contract because the lie was a breach of the duty of good faith applicable to the parties’ performance of the contract.

In the Callow Case, the one party hired the other party for 2 years to remove snow on some condo projects. The contract said it could be terminated on 10 days’ notice. No cause was required for such termination. In this case, there was no outright lie to, or active misleading of the snow removal party, as to the condo operator’s intent. Other conduct, however, led the snow remover to believe his contract would actually be renewed. He plainly did not think his existing contract would be terminated. Despite the absence of any outright falsehood towards or even active misleading of the snow remover, the majority of the Supreme Court found that there was a breach of the good faith duty and allowed the snow remover damages for such breach.3 So, in the end, though no one lied or actively misled, and though the judges all agreed there was in general no legal obligation to disclose facts to the snow remover, there was a breach of this newly-imposed duty.

The Court in these 24 cases made it clear that the duty of good faith applies to contracts generally. It cannot be waived. It does not need to be written in; it applies without statement.

The new law will affect conduct in long-term contracts more than it will on transactional contracts, obviously. It applies to all contracts. However, a purchase of a television for cash may not have much scope for its application. If there is a warranty on the T.V., however, the impact on the warranty to be observed over months or years will be otherwise. Application to service contracts (e.g. for apartment maintenance or management), and even to leases, will generate greater reason for concern. They typically last over longer periods, and typically have notice and remedy statements that will need to be exercised “in good faith”. That is to say without falsehood or active misleading or (as per the Callow Case) even conduct the other party may feel is misleading.

It will take time for the commercial community to adjust to these new rules. Obviously, the Bhasin Case has been on the books for 6 years now, and there does not appear to have been widespread change in contract forms or performance treatment in that time. But, with the expansion of the risks as seen in the Callow Case, it is clearly now time to start paying attention!

1 There is a third case, out of BC, that was argued in the Supreme Court at the same time as the Callow Case: Wastech Services v. Greater Vancouver Sewerage (B.C.C.A., leave to appeal granted). A ruling, in this case, was delivered February 5, 2021. This case states a general extension of the “good faith” concept to require exercise of discretions under contracts to be sort of “reasonable”. So, if a contract says party A can change something “in his sole discretion”, that discretion must not be exercised unreasonably.

2 Sometimes described as a “duty of honesty”.

3 This fact statement is not fully accurate: even the judges expressed different views on the facts, and one judge dissented, saying there was in fact no breach of the duty.

4 Now 3 cases.

This post is meant to provide information only and is not intended to provide legal advice. Although every effort has been made to provide current and accurate information, changes to the law may cause the information in this post to be outdated.