The duty to perform a contract honestly and in good faith will now be implied as a term of a contract; this will likely apply to condominium corporation bylaws

The way in which the common law will look at contracts has changed dramatically with the decision of the Supreme Court of Canada in Bhasin v. Hrynew 2014 SCC 71.  The Honorable Justice Cromwell, concurred with by the Honourable Chief Justices McLachlin, Lebel, Abella, Rothstein, Karakatsanis, and Wagner, has found that the duty to perform a contract honestly and in good faith will now be implied as a term of contracts and will, subject to very careful drafting, not be precluded by an entire agreement clause.  This will likely be applicable to all condominium corporation's bylaws which have been determined by the Court to be a contract among owners.

 

What follows are quotes from this ground breaking case which will be a welcome relief to many contracting parties frustrated by what are alleged to be dishonest dealing motivated by male fides; two paragraphs, [33], [74] and [86], summarize the new obligations:

 

"[33] In my view, it is time to take two incremental steps in order to make the common law less unsettled and piecemeal, more coherent and more just. The first step is to acknowledge that good faith contractual performance is a general organizing principle of the common law of contract which underpins and informs the various rules in which the common law, in various situations and types of relationships, recognizes obligations of good faith contractual performance. The second is to recognize, as a further manifestation of this organizing principle of good faith, that there is a common law duty which applies to all contracts to act honestly in the performance of contractual obligations."   

 

“[74] There is a longstanding debate about whether the duty of good faith arises as a term implied as a matter of fact or a term implied by law: see Mesa Operating, at paras. 15_19. I do not have to resolve this debate fully, which, as I reviewed earlier, casts a shadow of uncertainty over a good deal of the jurisprudence.  I am at this point concerned only with a new duty of honest performance and, as I see it, this should not be thought of as an implied term, but a general doctrine of contract law that imposes as a contractual duty a minimum standard of honest contractual performance. It operates irrespective of the intentions of the parties, and is to this extent analogous to equitable doctrines which impose limits on the freedom of contract, such as the doctrine of unconscionability.”

 

“[86] The duty of honest performance that I propose should not be confused with a duty of disclosure or of fiduciary loyalty.  A party to a contract has no general duty to subordinate his or her interest to that of the other party. However, contracting parties must be able to rely on a minimum standard of honesty from their contracting partner in relation to performing the contract as a reassurance that if the contract does not work out, they will have a fair opportunity to protect their interests."

 

Justice Cromwell reflected on three circumstances which historically have attracted the duty of good faith and unpin the manner in which the Court will impose this duty; at paragraph 47 and 48:

 

[47] “By way of example, Professor McCamus has identified three broad types of situations in which a duty of good faith performance of some kind has been found to exist: (1) where the parties must cooperate in order to achieve the objects of the contract; (2) where one party exercises a discretionary power under the contract; and (3) where one party seeks to evade contractual duties (pp. 840_56; CivicLife.com Inc. v. Canada (Attorney General) (2006), 215 O.A.C. 43, at paras. 49_50).

 

[48] While these types of cases overlap to some extent, they provide a useful analytical tool to appreciate the current state of the law on the duty of good faith."

 

Justice Cromwell then went on to make it clear that this obligation will apply to real estate contracts and will be applied to prevent contracting parties who regret a bargain from reneging on the bargain:

 

"[49] The first type of situation (contracts requiring the cooperation of the parties to achieve the objects of the contract) is reflected in the jurisprudence of this Court. In Dynamic Transport Ltd. v. O.K. Detailing Ltd., [1978] 2 S.C.R. 1072, the parties to a real estate transaction failed to specify in the purchase_sale agreement which party was to be responsible for obtaining planning permission for a subdivision of the property. By law, the vendor was the only party capable of obtaining such permission. The Court held that the vendor was under an obligation to use reasonable efforts to secure the permission, or as Dickson J. put it, “[t]he vendor is under a duty to act in good faith and to take all reasonable steps to complete the sale”: p. 1084."

 

"[51] This Court’s decision in Mason v. Freedman, [1958] S.C.R. 483, falls in the third type of situation in which a duty of good faith arises (where a contractual power is used to evade a contractual duty). In that case, the vendor in a real estate transaction regretted the bargain he had made. He then sought to repudiate the contract by failing to convey title in fee simple because he claimed his wife would not provide a bar of dower. The issue was whether he could take advantage of a clause permitting him to repudiate the transaction in the event that he was “unable or unwilling” to remove this defect in title even though he had made no efforts to do so by trying to obtain the bar of dower.  Judson J. held that the clause did not “enable a person to repudiate a contract for a cause which he himself has brought about” or permit “a capricious or arbitrary repudiation”: p. 486. On the contrary, “[a] vendor who seeks to take advantage of the clause must exercise his right reasonably and in good faith and not in a capricious or arbitrary manner”: p. 487."

 

Justice Cromwell makes it clear that commercial parties reasonably expect what he referred to as a basic level of honesty and good faith in their commercial dealings:

 

"[60] Commercial parties reasonably expect a basic level of honesty and good faith in contractual dealings. While they remain at arm’s length and are not subject to the duties of a fiduciary, a basic level of honest conduct is necessary to the proper functioning of commerce. The growth of longer term, relational contracts that depend on an element of trust and cooperation clearly call for a basic element of honesty in performance, but, even in transactional exchanges, misleading or deceitful conduct will fly in the face of the expectations of the parties: see Swan and Adamski, at §1.24." 

 

Justice Cromwell also suggests that the duty of honesty and good faith leads to the conclusion that contracting parties should have “appropriate regard” for their contracting parties “legitimate contractual interests and makes it clear that this duty is distinct from a fiduciary duty.  Justice Cromwell makes it clear that it is not okay to lie or mislead contracting parties but such obligation does not create a duty of disclosure:

 

“[65] The organizing principle of good faith exemplifies the notion that, in carrying out his or her own performance of the contract, a contracting party should have appropriate regard to the legitimate contractual interests of the contracting partner. While “appropriate regard” for the other party’s interests will vary depending on the context of the contractual relationship, it does not require acting to serve those interests in all cases. It merely requires that a party not seek to undermine those interests in bad faith. This general principle has strong conceptual differences from the much higher obligations of a fiduciary.  Unlike fiduciary duties, good faith performance does not engage duties of loyalty to the other contracting party or a duty to put the interests of the other contracting party first.”

 

“[73] In my view, we should. I would hold that there is a general duty of honesty in contractual performance. This means simply that parties must not lie or otherwise knowingly mislead each other about matters directly linked to the performance of the contract. This does not impose a duty of loyalty or of disclosure or require a party to forego advantages flowing from the contract; it is a simple requirement not to lie or mislead the other party about one’s contractual performance. Recognizing a duty of honest performance flowing directly from the common law organizing principle of good faith is a modest, incremental step. The requirement to act honestly is one of the most widely recognized aspects of the organizing principle of good faith.”

 

The Bhasin case will have far reaching implications.  It will be interesting to see how creative lawyers try to limit the scope of the duty of good faith without suggesting that dishonesty is contemplated by the contracting parties.  I query if much of the attempt to exculpate such obligations may simply be unenforceable as against public policy in light of Bhasin.  More significantly litigating parties and their litigators will add this to their pleadings and it will create potential liability even in the face of the well drafted contracts often foisted upon less powerful contracting parties.

Reimbursement by an owner of a condominium unit of the payment of an insurance deductible by the condominium corporation

It is settled law that condominium corporations in Alberta are not permitted to sue an owner for loss or damages caused by an owner if such loss or damages are required to be covered by insurance placed by the condominium corporation.  However, the law is not as clear in respect of whether a condominium corporation can seek reimbursement from an owner of a deductible which has been paid by a condominium corporation pursuant to an insurance policy in respect of an insurance claim made in respect of the owner.  It is suggested that in light of recent decisions of the Alberta Courts that the ability to claim reimbursement is dependent on the manner in which such obligation is stated in the bylaws of the condominium corporation.

Section 47 of the Condominium Property Act (Alberta) requires, among other things, that condominium corporations “place and maintain insurance on the [condominium] units, other than improvements made to the units by the owners, and the common property against loss resulting from destruction or damage caused by any peril prescribed by or otherwise required by the regulations to be insured against”.  Section 61(1) of the Condominium Property Regulation (Alberta) lists the perils which must be insured against and references “any other perils as required in the bylaws”.

The Honourable Mr. Justice Jean Côté of the Court of Appeal of Alberta in Condominium Corporation No. 9813678 v. Statesman Corporation, 2007 ABCA 216  allowed an appeal by the appellant and developer, Statesman Corporation, and concluded that the lawsuit of Condominium Corporation No. 9813678 against Statesman Corporation must fail because there is generally no right to sue a party who is also an insured under a policy of insurance.  Statesman Corporation was an owner of units in the condominium and an insured under the condominium corporation's insurance policy.  Justice Cote commented generally about the underlying purpose of condominium insurance at paragraph 35:

 “Those concerned in a condominium development do not want to have to worry about such unpredictable and complex topics. They want to exclude fault, risk, causation fights, tedious technical investigations, and expense. Statute and bylaws direct the condominium corporation to take out one policy for all, to avoid delay, expense and uncertainty. They replace lengthy litigation with an immediate no-fault purse for all.”

Justice Cote went on at paragraph 72 to state this limiting principal and clearly state that the bylaws are a contract amongst the owners and the condominium corporation:

 “The bylaws of this corporation provide that all insurance must have a waiver of subrogation against the owners and against the corporation’s manager. And they say that policies must name as insureds all owners from time to time. Those bylaws are a contract among the corporation and all its members.”

The Statesman case did not deal directly with the issue of reimbursement by an owner of a condominium unit of the payment of an insurance deductible by the condominium corporation.  However, the case clearly states the principal that all condominium owners are bound by the bylaws and that this is a contractual obligation.  Hence if the bylaws of a condominium corporation clearly state that an owner of a condominium unit should be obligated to reimburse a condominium corporation for the payment of the insurance deductible then it follows that an owner is contractually obligated to reimburse the condominium corporation.

Notwithstanding the compelling logic of this proposition, Honourable Mr. Justice Donald Lee of the Court of Queen's Bench of Alberta in Shivji v. Owners: Condominium Plan No. 0122336, 2007 ABQB 572 denied the claim of a condominium corporation for $23,467.35 for damages caused by an owner's tenant setting the thermostat to zero which caused the pipes to freeze and burst.  The deductible of the condominium corporation was $25,000.00.   Justice Lee considered the Statesman case, among other cases, in his reasons but does not address directly the issue of whether the insurance deductible should be reimbursed by an owner if the bylaws specifically state that it should.   

It is suggested that, so long as the bylaws of a condominium corporation clearly specify that it is the obligation of an owner to reimburse the insurance deductible paid by the condominium corporation, it remains open for condominium corporations to argue that by virtue of the bylaws, which the owner is contractually bound, the owner is liable to reimburse the insurance deductible.   The insurance deductible is a portion of the loss which is not paid for pursuant to the insurance policy.  The owner is through the condominium corporation the insured under the insurance policy and would normally as a home owner be required to pay the insurance deductible.  The insertion of the condominium corporation between the insurance company and the owner should not change this.  Where a deductible is required to be paid the owner must be liable for this financial connection to the loss which is being claimed pursuant to the condominium's insurance.  Otherwise this implicitly allows an owner to pass on to the balance of the owners all but the owner's proportionate unit entitlement portion of the insurance deductible.  It is suggested that this result should be avoided if the bylaws are clear. 

Some cases allow for recovery and others have not.  Of note other Provinces in Canada have allowed for the recovery of the insurance deductible if the language used in the bylaws is reflective of the owner being "responsible" for the insurance deductible regardless of fault or negligence.  Following from this it behooves condominium corporations to review their bylaws to be sure that their bylaws are clear in respect of an owner's obligation to reimburse the payment of an insurance deductible made by a condominium corporation.