Contract negotiation can be a difficult process to navigate through, involving strategic thinking not only before the contract but also after a contract is in place and leading up to renewal. How a party to a contract behaves throughout the performance of a contract can have an impact on contract renewal. In a recent landmark decision from the Supreme Court of Canada, the country’s highest court found that the duty of honest performance in a contract applies not only to the work being carried out and the obligations of the existing contract but also to matters directly linked to the performance of a contract; in this case, a contract’s renewal.

Parties enter into a two-year maintenance contract

The appellant in the case is a company referred to as “Callow” who entered into contracts to provide maintenance for the respondents, a group of condominium corporations referred to collectively as “Baycrest.”

There were two contracts in place. There was a two-year winter contract as well as a summer contract. The winter contract stated that Baycrest could terminate the agreement if Callow failed to provide satisfactory service, or with 10-days-notice for any other reason.

The contracts were signed in 2012, but by early 2013 Baycrest had determined they would terminate the winter contract. However, they did not tell this to Callow, who finished the first year of the winter contract and began to work through the summer contract.

Negotiations continue throughout the summer

Despite knowing they would be terminating the winter contract when it entered its second year, Baycrest continued to have discussions with Callow about the renewal of the winter contract. Callow stated that it went above and beyond during those summer months in the hopes that it would encourage Baycrest to renew the winter contract.

The decision to terminate the winter contract was shared with Callow in September 2013. As a result of this, Callow filed a statement of claim for breach of contract, alleging that Baycrest had acted in bad faith.

Both parties awarded victories on way to Supreme Court

The original trial judge ruled in favour of Callow, stating that Baycrest actively deceived Callow from the time it made the decision to terminate the contract in early 2013 to when that decision was shared in September 2013. This delay caused Callow to believe the contract was not in jeopardy, taking on extra tasks to improve the opportunity of renewal.

When the matter reached the court of appeal, the decision was reversed, with the court finding that the duty of honest performance could not extend beyond the summer contract that the parties were acting under at the time of negotiations and the sharing of the news of termination. The court also held that any deception on the part of Baycrest was in relation to a new contract that was not in place at the time.

Duty of honest performance extends beyond contract

The majority of the Supreme Court of Canada stated that the duty of honest performance in the contract applies to all contracts and requires that parties cannot lie or knowingly mislead one another about matters directly linked to the performance of that contract.

The court stated that while the duty of honesty does not bring with it a positive obligation of disclosure, it does mean that a party cannot knowingly mislead another party, which is what Baycrest did when it acted as though the winter contract could be counted on and discussed renewals with Callow.

This means that the duty of honest performance as it related to Baycrest did not just mean they couldn’t lie to callow, it meant half-truths, omissions, and silence.

In this particular case, even though Baycrest had every right to terminate the winter contract with 10 days’ notice, that decision to terminate still required that it be exercised in keeping with the duty to act honestly.

The Supreme Court awarded Callow $64,306.96 in damages, equal to the profit it would have expected to receive had they been able to perform the rest of the contract. The court also followed the trial judge’s decision to award Callow $14,835.14, representing the cost of a piece of machinery it leased to perform the contract.

At HMC Lawyers, we believe that many of the disputes that arise over the course of a project can be avoided through proactive legal advice, careful drafting, and thoughtful negotiation. To speak with one of our construction contract lawyers about a construction contract or delay claim, contact us online or call 1-800-480-3534. We represent construction clients in Calgary, throughout Alberta, and across Western Canada.