The Bhasin case is significant because it implied that two parties to a contract have an obligation to not unfairly disregard each other’s contractual interests. The legal community accepted this to mean that parties to a contract must treat each other fairly as there is an implied principle of good faith in Canadian contracts.

The business community has grappled with the correct way to respond to the Bhasin case. Many may view it as inappropriate for the courts to say that parties to a contract have to follow implied rules that are not explicitly written in a contract. On the other hand, some have viewed this as a welcomed change as modern commerce requires contracting parties to treat each other fairly.

It is not just the business community that has struggled with interpreting the principle of good faith in contracts. Many courts have similarly struggled to determine how far the duty extends. That is, how much regard should one party to a contract have for the interests of the other party. This is usually not a concern while business relationships are positive and productive. However, when relationships break down, parties to a contract may wonder how they can get out of the contract in a way that maximizes their bottom line without resulting in a lawsuit for breaching the principle of good faith.

The Supreme Court of Canada recently revisited the topic in a lawsuit called C.M Callow Inc. v Zollinger. This case involved a company named Callow that provided maintenance services for a group of condominium corporations. The contracts were divided into winter contracts and summer contracts that allowed the condominium corporations to cancel a contract by providing 10-days notice.

In early 2013, the condominium corporations decided to terminate the winter maintenance contract with Callow but did not tell Callow of this decision until September of 2013. However, in the summer of 2013, Callow provided services above and beyond what was required in the summer contract to secure the winter contract. The condominium corporations knew that Callow was providing “freebies” to secure the winter contract, but chose to not tell Callow that the decision was already made to terminate it. Callow claimed that it was dishonest for the condominium corporations to accept free services that it knew were being provided to secure the winter contract while allowing Callow to operate based on its mistaken belief. The Supreme Court of Canada agreed with Callow.

Many businesses may be concerned to know that in some situations, they may not rely on a clear term of a contract that states, for example, that 10-days notice is required for termination. However, what the Supreme Court of Canada emphasizes is that parties to a contract must be honest with each other when they exercise certain rights in a contract. That is, the court clarified that the condominium corporations were indeed allowed to terminate their contract with Callow on 10-days notice. However, it was not fair and honest to allow Callow to provide free services while it was under the impression that it could still receive the winter maintenance contract. The court summarized this finding when they stated simply, "no contractual right can be exercised in a dishonest matter.”

The takeaway for businesses is that you can rely on the terms of a contract, but you must do so honestly. What is often looked at by the court is how a contractual right was exercised. If a contractual right was exercised in a manner that involved deceit or dishonesty, the principle of good faith in contracts may very well have been violated.