Duty to Act Honestly in the Performance of Contracts: Silence is Not Golden
By Lauren Chalaturnyk
Reynolds Mirth Richards Farmer LLP
AMSC Casual Legal Service Provider
At the end of 2020, the Supreme Court of Canada released a decision which greatly expanded upon what it means to “knowingly mislead” a contracting party in the honest performance of that contract. In this case, a condominium corporation had contracted with a maintenance company to perform summer maintenance and winter maintenance at a variety of condominium properties. The central issue in the case was whether the condominium corporation’s decision to not tell the maintenance company that it would be terminating the winter maintenance contract, despite telling them that their work in the summer was satisfactory, was a breach of the condominium corporation’s duty of honest performance.
The duty of good faith and honest performance in contract has been around for a number of years. Parties to a contract cannot knowingly mislead or lie to each other in the performance of their contractual duties. They also cannot act “capriciously, unreasonably, or arbitrarily” when performing their obligations under the contract.
In this new case, the Supreme Court of Canada expanded on these requirements by clarifying that knowingly misleading the other party to a contract may include “lies, half-truths, omissions, and even silence.” Parties can mislead both through action and inaction. If a party has created a misunderstanding through its conduct and does not take any steps to correct that misunderstanding, it may have breached its duty to act honestly in the performance of a contract.
For example, if Party A has created a false impression about Party B’s performance of the contract, and Party A does not correct that false impression, which then leads to damages to Party B; Party A could be liable for breach of the duty of honest performance.
The determination of whether there has been a breach of the duty of good faith or honest performance is highly fact-specific. It is not yet possible to determine how lower courts will interpret and apply this new Supreme Court of Canada decision, but it will be important for contracting parties to be mindful of their obligations to be honest and to act in situations where they may have created misunderstanding or misapprehension in relation to the performance of a contract.
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DISCLAIMER: This article is meant to provide information only and is not intended to provide legal advice. You should seek the advice of legal counsel to address your specific set of circumstances. Although every effort has been made to provide current and accurate information, changes to the law may cause the information in this article to be outdated.