Good Faith in Contract Law

Good Faith in Contract Law

By Jared D. Epp, Robertson Stromberg LLP

Although no one on a construction project would argue that good faith is not important, what it means to act in good faith can mean different things to different people. The concept of good faith can often be relevant in the context of termination notices. It is not uncommon, where a party’s contract is terminated, for that party to allege, whether formally or informally, that some aspect of the termination was not done “in good faith”. The issue of good faith, in the context of a termination notice, was recently the subject of a decision by the Ontario Court of Appeal in CM Callow Inc. v. Zollinger.

In this decision, a condominium corporation, through its property manager, had two different maintenance contracts with Callow in relation to a number of condominiums. One contract was for summer maintenance work, while the other contract was for winter maintenance services. The summer maintenance contract was in effect between May 2012 and October 2013, while the winter maintenance contract was in effect from November 2012 until April 2014. Significantly, the winter maintenance contract could be terminated, prematurely, on 10 days’ notice without cause.

Although Callow’s work during the summer seemed to be largely satisfactory, the property manager received a number of significant complaints with respect to Callow’s snow removal services. As a result, in early 2013, the condominium management group (“CMG”) decided that it would terminate Callow’s winter maintenance contract.

However, the CMG specifically chose not to inform Callow of its decision to terminate the winter contract in order to ensure that Callow would complete its summer maintenance work. Not only did Callow complete this work, it also performed a number of additional summer maintenance services in “good faith” and free of charge. Callow also took steps during the summer to lease equipment for the upcoming winter season. Throughout this entire time, CMG did not give Callow any indication that it had decided to terminate Callow’s contract, however, as soon as the summer work was finished, CMG served notice of its intention to terminate Callow’s winter maintenance contract.

After being terminated, Callow decided to sue CMG alleging, among other things, that CMG failed to treat them in “good faith” by failing to let Callow know once a decision had been made to terminate Callow’s contract. At trial, Callow succeeded with this argument and was awarded its lost profit, from the income it would have generated from the winter work, less expenses. Callow was also compensated for the funds that it expended to lease winter equipment which it no longer needed.

However, this decision was over-turned by the Court of Appeal. Although the Appeal Court agreed that CMG had acted “dishonourably”, their deception of Callow did not amount to a breach of CMG’s duty to perform its contractual obligations in good faith. In coming to this conclusion, the Court of Appeal stressed the fact that no one, including CMG, has a duty to disclose information “relevant to termination” nor did the lack of forthright communication by CMG to Callow mean that CMG had forfeited its right to terminate the winter maintenance contract in accordance with that contract’s terms. Callow has since sought leave to appeal this case to the Supreme Court of Canada.

At its core, this decision serves to highlight the uncertain nature of good faith in contract law. Although the Court of Appeal did not believe that CMG had done anything “legally wrong”, the initial judge who heard the case came to the opposite conclusion. It also seems to highlight the difference between a deception by omission and a deception by action, two decidedly unclear legal categories. This is something that the Supreme Court of Canada may very well clarify once they make a decision. However, in the interim, it is a good reminder of the potential perils that can accompany a situation where a decision to terminate is made, but the actual implementation of that decision is deliberately delayed to the prejudice of the party performing the work

Month: November 2019