Discretion is not unfettered between contracting parties. There are limits. On December 18, 2020, two Supreme Court of Canada decisions imposed limits on how discretion provided for in a contract may be exercised. In C.M. Callow Inc. v. Zollinger (2020 SCC 45) and Wastech Services Ltd. v. Greater Vancouver Sewerage and Drainage District (2021 SCC 7) Justice Kasirer, for the majority in both, wrote that parties to a contract are impressed with a duty of good faith towards one another, which includes a duty of honest performance. A breach of the duty of honest performance amounts to a breach of contract, and when the breach occurs, the plaintiff is entitled to be placed in the same position as if the breach had not occurred.
In C.M. Callow Inc., Mr. Callow ran a property maintenance business and had a contract for snow removal with a group of condominium corporations. The term of the contract was for two years; however, the condo corporations had a right to terminate for any reason upon ten days’ notice.
Shortly after the 2012-2013 winter season, the property manager decided to terminate Mr. Callow’s contract before the next winter season and received approval to do so from the boards. However, Mr. Callow was not immediately informed that the winter maintenance contract would be terminated prior to the next season. While there had been some issues with timely snow removal, he had addressed the problem and believed the condo corporations were happy with his work. Representatives from the condo corporations even led Mr. Callow to believe that he would receive a two-year renewal after the following winter, and, therefore, the coming winter service agreement was not in danger. Throughout the 2013 summer, Mr. Callow performed additional services for the condo corporations, without charge, which he hoped would act as an incentive for the condo corporations to provide him a two-year renewal after the 2013-2014 winter season.
Nevertheless, in September 2013, Mr. Callow was informed that the snow removal contract would be terminated. While he was given ten days’ notice, he believed the contract had not been terminated fairly, and the condo corporations did not live up to their duty of honest performance. The corporations knew the contract would be terminated, but actively misled Mr. Callow into thinking that the contract would continue. The majority of the Supreme Court agreed: the condo corporations acted dishonestly when terminating the contract and breached their duty of honest performance. Callow was awarded damages that placed it in the same position as if the breach had not occurred. The Supreme Court did not interfere with the trial judge’s determination that had the defendant acted honestly, Callow would have had an opportunity to bid on other winter maintenance work during the summer of 2013. Accordingly, Callow was awarded damages equal to the profits it lost under the winter maintenance agreement, as well as the costs related to a piece of machinery that Callow had leased specifically to perform the winter maintenance agreement.
Wastech Services Ltd. was heard on the same day as C.M. Callow Inc. and similarly regarded a service contract, this time between a waste disposal company and the Metro Vancouver Regional District. The contract stated that Metro could send the waste to any of three different disposal sites. Wastech’s pay rate varied depending on the site – the further away the site, the higher the pay. The contract also aimed to pay Wastech a target operating ratio of .89, or costs being 89% of revenue, but did not guarantee a specific operating ratio for any year the contract was effective. Metro had the discretion to send the waste to the site of its choice.
Using its discretion, Metro chose to send the waste to a closer location for 2011. Because of this, Wastech did not meet its target operating ratio that year. Wastech said by doing this, Metro violated its duty to exercise contractual discretion in good faith.
While at first instance, an arbitrator agreed that Metro had breached its duty to exercise its contractual discretion in good faith, the Supreme Court of British Columbia, the Court of Appeal, and the Supreme Court of Canada disagreed – Metro’s exercise of discretion was not unreasonable with regard to the purposes for which the discretion was granted. Good faith does not eliminate a party’s ability to make a choice using discretion; it only limits the range of choices to the parameters that the parties contemplated when they entered into the contract.
In Wastech’s case, the parties agreed that Metro would have discretion to direct the waste to any of the three sites with the understanding that Metro would aim to operate in a cost-effective way. Metro was not required to modify its discretion to allow Wastech to meet its annual target operating ratio. Metro did not breach its duty of good faith by choosing to send the waste to a closer site, as that decision was within the reasonable parameters of discretion that the parties contemplated when entering into the contract.
The takeaway is that contract law includes a general doctrine for parties to conduct themselves in good faith and to honestly perform the contract. The Supreme Court of Canada has cautioned that these duties should not be equated with a positive obligation of disclosure; however, in circumstances where a contracting party lies to or knowingly misleads another, a lack of a positive obligation of disclosure does not preclude an obligation to correct a false impression created through that party’s own actions.
Acting in good faith can be as simple as acting honestly. The parties should not mislead one another, offer information they know to be false, or improperly cause the other party to suffer a loss.
This entry was authored by Scott Lemke and Emma Chapple.
Information herein is NOT legal, financial or investment advice. Should you have questions with respect to the information herein, please contact Lemke Law Professional Corporation.