For generations, the prevailing wisdom in commerce has been “a deal is a deal.” Business owners in Ontario have long operated on the understanding that the “four corners” of a written contract define the beginning and end of their obligations. If a contract provided a party with a specific right, such as the right to terminate an agreement on 30 days’ notice for any reason, the exercise of that right was considered unchallengeable, regardless of the motive or the impact on the other party.
This traditional, almost adversarial, view of contractual relationships has been fundamentally altered. In the last decade, the Supreme Court of Canada (SCC) has introduced and solidified a “silent partner” in every Canadian contract: the duty of good faith and honest performance.
This doctrine, now woven into the fabric of Canadian common law, means that parties can no longer hide behind the literal text of an agreement to engage in what courts might view as “sharp dealing.” Recent landmark decisions have clarified that how a party exercises its contractual rights is just as important as what those rights are.
For Ontario businesses, understanding this evolving area of law is not merely an academic exercise; it is a critical component of effective risk management.
The Foundational Shift: Bhasin v. Hrynew
The modern era of good faith in Canadian contract law began in 2014 with the unanimous SCC decision in Bhasin v. Hrynew. The Court declared that good faith is an “organizing principle” of Canadian contract law. This principle, it held, manifests in a number of existing doctrines, but it also required the Court to recognize a new, general duty of honest performance as a component of all contracts.
The Court was clear: this does not create a “fiduciary” duty. A party to a contract is not required to put the other party’s interests ahead of its own. Commercial parties are still entitled to pursue their own self-interest.
However, Bhasin established an undeniable minimum standard of conduct. Justice Cromwell, writing for the Court, stated that this duty of honest performance means “parties must not lie or otherwise knowingly mislead each other about matters directly linked to the performance of the contract.” At the time, this was seen as a relatively straightforward prohibition on active deception. The actual scope of this duty, however, would only become clear in the years to follow.
The Expansion: C.M. Callow and When Silence Becomes a Lie
The “topical” and most impactful development for Ontario businesses came with the 2020 SCC decision in C.M. Callow Inc. v. Zollinger. This case answered the critical question: Can you breach the duty of honesty by failing to disclose something? The answer was a resounding yes.
The facts of Callow are a stark warning. A group of condominium corporations (Zollinger) had a two-year winter maintenance contract with C.M. Callow. The contract contained a clause allowing the condos to terminate the agreement for any reason with just 10 days’ notice. In the spring of 2013, the condos decided to terminate the contract, but, critically, they kept this decision to themselves.
Throughout the summer, the condo’s property manager communicated with Callow, implying that the contract was safe and that a renewal for the following two years was likely. Callow, believing the contract was secure, performed “freebie” summer landscaping work to maintain a good relationship. In September 2013, the condos finally gave Callow its 10-day notice.
Callow sued, arguing that while the condos had the right to terminate, the manner in which they did so was dishonest. The SCC agreed.
The Court clarified that the duty of honest performance is not confined to avoiding active lies (lies of commission). It also prohibits “lies of omission,” half-truths, or remaining silent when one knows the other party is operating under a mistaken belief that the first party helped to create. The condos had a right to terminate, but they did not have the right to mislead Callow for months, allowing him to perform free work based on a false sense of security, and then exercise the termination right. They breached the duty of honest performance.
The Callow Implication for Ontario Businesses
The Callow decision has profound implications. For anyone managing a commercial agreement in Ontario, from a simple supply contract to a complex development deal, this case changes the calculus for exercising contractual rights.
Termination Clauses:
The “termination for convenience” clause is no longer a bulletproof shield. If you have decided to terminate a contract, you must be careful not to actively mislead the other party about the future of the relationship. While you may not have a duty to disclose your decision immediately, you cannot lead the other party on, especially if you are benefiting from their mistaken belief.
Performance Reviews:
Honesty is paramount in all communications. Telling a supplier “everything is fine” while simultaneously documenting reasons for termination in an internal file is a strategy fraught with legal risk.
Renewals:
Negotiations surrounding contract renewals are now under scrutiny. Implying a contract will be renewed to extract concessions or better performance, all while knowing a non-renewal notice is pending, is precisely the kind of conduct Callow targets.
The Other Side of the Coin: Wastech and Contractual Discretion
In Wastech Services Ltd. v. Vancouver (City), the SCC addressed a different facet of good faith: the exercise of contractual discretion.
Wastech had a long-term contract with the City of Vancouver to transport waste. The contract gave the City the “absolute discretion” to allocate waste between different disposal sites. The City’s allocation decisions directly impacted Wastech’s profitability. In one year, the City made a decision that, while allowed under the contract, caused Wastech to suffer a significant financial loss. Wastech sued, arguing that the City breached the duty of good faith by exercising its discretion in a manner that deprived Wastech of the contract’s expected benefits.
The SCC disagreed with Wastech. The Court clarified that the duty of good faith in exercising discretion is different from the duty of honest performance. When a party has contractual discretion (e.g., to set a budget, approve a design, or allocate resources), it must exercise that discretion reasonably.
“Reasonably,” in this context, means the discretion must be exercised in a manner consistent with the purpose for which it was granted. It cannot be used arbitrarily, capriciously, or for a purpose unconnected to the contract’s objectives. In Wastech, the City’s purpose was to manage its waste disposal efficiently and cost-effectively, which it did precisely. The fact that it was a reasonable decision that harmed Wastech’s profit was not, in itself, a breach of good faith.
Good Faith Embedded in Ontario Statute
The duty of good faith is not only a common law principle, but it is also explicitly written into key Ontario statutes.
The Arthur Wishart Act (Franchise Disclosure), 2000:
The Arthur Wishart Act (Franchise Disclosure), 2000, governs franchise relationships in Ontario. Section 3 contains a powerful statutory duty of “fair dealing.” It states, “Every franchise agreement imposes on each party a duty of fair dealing in its performance and enforcement.” This duty includes the right to act honestly and in good faith. In the franchise context, Ontario courts have used this section to hold franchisors accountable for conduct that, while not a specific breach of the written agreement, undermines the franchisee.
The Sale of Goods Act:
Ontario’s Sale of Goods Act contains numerous implied conditions and warranties. For example, Section 14 implies a condition that goods will be “reasonably fit” for the purpose for which they are sold and will be of “merchantable quality.” These statutory terms are, in effect, a legislated form of good faith, ensuring that a buyer receives goods that function as expected, even if the contract is silent on the matter.
What This Means for Business Contracts
The rise of good faith as a central, enforceable doctrine means that Ontario businesses must adopt a new mindset.
1. Contract Drafting:
When drafting contracts, businesses must understand that the duty of honest performance cannot be waived or contracted out of; it stands as a mandatory, baseline standard for all agreements in Canada. Furthermore, drafters should be wary of relying on language that grants “sole” or “absolute” discretion. Following the Wastech decision, Ontario courts will read down such clauses, interpreting them to require that the discretion be exercised “reasonably” and in a manner consistent with the underlying purposes of the contract.
2. Contract Management and Performance:
In terms of contract management and performance, the old “gotcha” tactics are no longer viable. An attempt to rely on a strict technicality to default a party, especially while ignoring one’s own contributions to the issue, will be viewed poorly by the courts. It is now crucial to maintain a clear, honest, and contemporaneous written record of all performance-related matters. If a party is underperforming, they should be told, and these external communications must align with internal records. Before exercising any seemingly “absolute” right, the critical internal question must be: “Am I exercising this right honestly and for a purpose consistent with the contract?”
3. Termination and Non-Renewal:
The area of termination and non-renewal presents the highest risk for businesses in light of these developments, making a review of the Callow case essential. Once an internal decision to terminate an agreement has been made, all subsequent communications with the other party must be handled with extreme care. While the law may not require you to provide a warning beyond the contract’s notice period, it absolutely prohibits you from providing false reassurances or creating a misleading impression about the future of the relationship.
A New Standard of Commercial Morality
The Supreme Court of Canada, through its decisions in Bhasin, Callow, and Wastech, has fundamentally recalibrated the scales of commercial relationships. The law now demands a baseline of honesty and reasonableness.
It is no longer enough to ask, “What does the contract let me do?” The modern, and legally crucial, question is, “How must I exercise my contractual rights?” The answer is clear: honestly, reasonably, and in good faith. The silent partner in your contract has found its voice, and Ontario courts are listening.
Experienced Ottawa Business Lawyers Helping You Achieve Contractual Compliance
The evolving duty of good faith is a critical development that profoundly impacts how your Ontario business must manage contracts, exercise discretion, and handle termination. Do not wait for litigation to discover your current practices are outdated. At Tierney Stauffer LLP, our experienced business lawyers provide forward-thinking, practical advice to help you navigate this new standard of commercial morality, ensuring your contracts and communications align with the demands of honesty, fair dealing, and reasonable discretion. Contact us today at 1-888-799-8057 or online to arrange a consultation and review your contractual risk.
