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.

Application of Limitation Periods to Breaches of Bylaws

My experience with enforcing against some breaches of bylaws on behalf of condominium corporations is that the Court may consider a breach of a bylaw to be a recurring breach.  As such the Court does not prohibit the enforcement as a consequence of the passage of time in excess of that provided for by the Limitations Act (Alberta).  That is, until the breach is rectified it is considered to be a fresh breach daily.  A recent case out of the Supreme Court of Ontario Waterloo North Condominium Corp v. Silacshi, 2012 ONSC 5403 has recently affirmed this principal.  The Honourable Justice D.A. Broad stated:

"[16] As pointed out by Quigley, J. in Toronto Common Element Condominium Corporation No. 1508 v. Stasyna, 2012 ONSC 1504 at para. 40, the proposition that questions of enforcement and compliance under the Condominium Act may be subject to the application of a limitation period is well recognized in the case law. However, as further pointed out by Quigley, J. in Stasyna at para. 41, the cases that support that proposition do not relate to actions commenced to enforce compliance with the Act itself, but rather with internal governance documents. Where there is a breach of the statute itself, such as here, the Limitation Act, 2002 can have no application."
This rationale places some legal colour to the rationalization of recurrence of the breach.

Imposing Fines Against Owners in a Condominium

A more illustrative case of how NOT to impose fines may not be found.  In the case
Condominium Corporation No. 042 5636 v. Chevillard, 2012 ABQB 131 Master Smart denied a condominium corporation the right to collect fines imposed and legal fees incurred in respect of fines imposed based on an owner's not cleaning up after the owner's dog.  Amng other things, Master Smart took issue with the failure of the condominium corporation to follow its bylaws.  Particularly, Master Smart stated that the Board of the condominium corporation was required to and failed to:

1. Pass a resolution declaring the owner in default of the bylaws based on the owner's failure to clean up after the owner's dog;
2. Provide written notice to the owner to rectify the breach of the bylaws; and
3. Check to see if the dog had been removed prior to filing its Application in the Court of Queen's Bench.

As a result of these three failures Master Smart dimissed the application and did not award costs to the condominium corporation for the legal fees incurred by the condomnium corporation.  Hence, how does a condominium corporation properly impose and collect fines?  The following list is suggested as good practice:

1. Make sure the condominium bylaws comply with section 35(2) of the Condominium Property Act (Alberta); 35(2)  A bylaw under which sanctions are imposed must (a) set out the sanctions that may be imposed, and (b) in the case of monetary sanctions, set out the amount of the monetary sanctions   or the range of monetary sanctions that may be imposed.
2. Look to both the Condominium Property Act  and the bylaws of the condominium corporation for guidance.
3. The Board of Directors should gather the evidence that an owner has breached the bylaws; this should be done in writing and it is not sufficient, in this blogger's opinion, to rely on verbal/spoken evidence.
4. The Board of Directors should meet to discuss the allegation of breach and review the evidence which has been gathered; the Board of Directors should then make a decision whether the bylaw has been breached and evidence this by way of resolution in the Minutes of the Board of Directors (the resolution should reflect a summary of the nature of the complaint and the conclusion of the Board.
5. The Board of Directors should be guided by the requirements of the bylaws; many bylaws require that the condominium corporation give the offending owner notice of the breach and an opportunity to rectify the breach before proceeding with fining an owner.  The bylaws may be even more detailed in respect of steps which need to be taken prior to collecting the fines (this blogger suggests that condominium corporations obtain independent legal advice on the requirements of their specific bylaws to avoid a result such as occurred in the Chevillard case).
6. The Board of Directors should be sure to inspect the unit or common property prior to proceding to Court and the Board of Directors should utilize the services of a lawyer familiar with the area of condominium law.

What makes a good lawyer? Howard Levitt knows.

I am a regular reader of the online version of the Financial Post.  I recently came across an article entitled "What makes a good lawyer?"  written by Howard Levitt who is a senior partner at Levitt LLP a law firm in Toronto, Ontario.  I thought Mr. Levitt's comments were interesting and I am sharing an abridged version of the article (the reason I am doing this as well as providing the link is that one day the link may not work).


"What makes a good lawyer:

• Knowing the law: The better you know the law, the more defences you can construct, which slip undetected by those less knowledgeable.
• Understanding the "hidden persuaders: " This combines an instinct for the jugular with a knowledge of legal regulations and corporate practices.
• Most cases settle. The amount of that settlement may have more to do with the company's need to settle than with the case's intrinsic merit. 
• Analytic skills: Ultimately, employment litigation (or any litigation) is about placing the "facts" within an impregnable theory of the case. To do so, you have to command a mastery of the weaknesses of your side as well as its strengths and synthesize the entire case into a three-dimensional picture, which is impenetrable to opposing theories. To accomplish this, you have to anticipate all lines of attack and ensure your theory of the case, and your witnesses, can withstand them.
• Understanding psychology: This not only assists in probing the other side's weaknesses, but provides insight into how to "tell your story" in the manner most likely to be believed. It also instructs what to emphasize and when to settle.
• Understanding negotiations: There is a propitious time to settle and there are times to do nothing. If, for example, you are about to go to mediation or a pretrial, any offer made will simply be used as the basis for yet further increases. A lawyer's job is to assuage the clients' anxieties and conceal their vulnerabilities;
• Sales skills: Ultimately, lawyers are salespeople. You have to sell yourself to the other side, the mediator and the judge and convince them that your case is overwhelming. If you lack those skills, your prospects of success are limited.
• Client control: A lawyer's advantage is detachment from the client's anxieties and personal views of their case. Ultimately, you must do as the client instructs. However, your job is to strongly influence that. (Some litigants) are desperate to settle as quickly as possible, often at the expense of their case. (A lawyer's) job is to influence their subjective views with informed ones. At the end of the day, that is much of the reason why they are not representing themselves - and shouldn't be.
• Witness-preparation skills: How a client performs has everything to do with preparation. Counsel must have suffi-cient trial experience to accurately predict what is coming and assist in coaching their witnesses as to how to answer. I try to anticipate questions in cross-examination and prepare answers that will explode on opposing counsel when that question is asked.
• Trial experience: Shockingly, only a handful of members of the employment bar, even senior ones, have conducted trials or, at least, any major ones. Few have done appeals. This impacts on how they are perceived by opposing counsel and how strong their actual bargaining power is in settling cases.
• Proportionality: However brilliant their victory, no client is happy when their legal fees are disproportionate to the result. Not every case can be treated with the rigour of one involving tens of millions of dollars, or of an appearance before the Supreme Court of Canada. Clients think in terms of paying for the developments in a case, not for how many hours the lawyer spent on it. I also urge my juniors to ensure they spend their energy accordingly. Clients never appreciate handholding when they receive the bill for it.
• Digging deeper: Some cases have come to me over the years that appear, on their face, to be almost hopeless. Few turn out to be. Good lawyers keep digging into the facts and are alert to the opportunities when they arise."

         (My emphasis)

Morrison Hershfield; Presentation of Michael Ball to CCI-SAC on the Role of the Consultant in a Major Condominium Capital Project

Every once in a while the Canadian Condominium Institute - South Alberta Chapter will host a lunch speaker whose presentation is stellar.  This happened on March 23, 2011 when Michael Ball of Morrison Hershfield presented on the Role of the Consultant in Major Condominium Capital Projects.  Mr. Ball took those in attendance through the story of a very poorly built multi-unit condominium which had a total breakdown of the condominium's building envelope.  This multi-million dollar project exemplified the value in involving a consultant/engineer knowledgeable in the area in which the capital project is being done to avoid the ugliness and cost of capital expenditures being done improperly.  Without limitation, Mr. Ball indicated that an engineers as consultants could provide:

1. Investigative services with respect to leakage (roof/walls/below grade/windows), premature deterioration of cladding/roofing, structural capacity, warranty claims, and indoor air quality (mold);
2. Detailed design (technical specifications and drawings, best-practice design);
3. Construction services (tendering, contract administration, quality assessment and quality control)
4. Litigation support and expert witness services; and
5. Non biased third party facilitation between owners and contractors.

Without limitation, Mr. Ball noted that no project should proceed without detailed technical drawings being produced.  On its own insisting that a set of instructions - detailed technical drawings - be provided and followed creates accountability which otherwise may not exist.  Notwithstanding this plethora of support services which an engineer can provide, many condominium corporations make large capital expenditures without any assistance from an engineer/consultant.  Instead condominium corporations, to save money, sometimes rely entirely on the services of a self interested contractor and unfortunately sometimes to their detriment.


In the writer's opinion the most important distinctions between many contractors and engineers are the fact that engineers go through a rigorous education and engineers are professionals who are obliged by their professional organization, APEGGA, to act ethically.  Lawyers are similar bound to act ethically.  The Law Society of Alberta has endorsed a Code of Conduct which all lawyers must abide by in their relationships with their clients and with society at large.


Consultants without affiliation with an organization have no ethical obligation imposed upon them and may have insufficient education in the matters subject of the capital improvement.  It is imperative that condominium corporations ascertain this before proceeding with a capital project.  This is the heart of why I described contractors as potentially "self interested".  A less than knowledgeable contractor may recommend an intervention to a condominium corporation without a substantive basis for doing so simply because the contractor wants or needs the work or is ignorant.  Without an affiliation with a professional organization imposing an ethical obligation on the contractor a condominium corporation is relying entirely on the individual conscience of the contractor in respect of whether the intervention is necessary or if necessary if the contractor is sufficiently educated and skilled enough to conduct the capital improvement. 


The lesson demonstrated by Michael Ball to condominium corporations is to not be "penny wise and pound foolish" when it comes to dealing with contractors.  Obtaining the assistance of an engineer or similarly knowledgeable and skilled consultant will dramatically lessen the likelihood that condominium corporations will be taken advantage of by unscrupulous contractors.

Managing the Risks of Board Responsibility for Deficiencies in the Common Property; Requesting Reports In Contemplation of Litigation

A Board of Directors of a condominium corporation is, with some limited exceptions, responsible for the common property located within their condominium project.  This obligation is created both pursuant to the Condominium  Property Act  (Alberta) and the bylaws of the condominium corporation.  When concerns arise with elements or aspects of the common property it is prudent for the Board of Directors, usually through the assistance of the condominium corporation's property manager, to have a third party contractor assess the elements and aspects of concern.  It is best if the contractor who provides the report is not also offering to do any required work and perhaps quoting on doing the work.  The addition of the prospect of being hired to do the work creates can create a conflict of interest and can lead self interested contractors to exaggerate the conclusions reached simply to scare the Board of Directors into hiring the contractor.


When an independent contractor inspect the elements and aspects of concern in the common property the contractor will usually produce a written report or summary of the results of the assessment.  The third party contractor report will often include recommendations in respect of steps which could or should be taken to deal with the elements of the common property which are of concern.   The provision of the report by the contractor provides knowledge to the Board of Directors.


This transition from a Board of Directors with a concern about the common property to one with knowledge of a deficiency usually brings with it a concomitant obligation.  That is the Board of Directors must follow the recommendations in the report or they run the risk that they have breached their fiduciary duty which they owe to the owners in the condominium corporation.  If the Board of Directors acts on the recommendations and remedies the deficiencies then the obligation of the Board of Directors has been satisfied.  However, what happens if the Board of Directors ignores the recommendations and does nothing to remedy the deficiences?  The recent case of Guenther v. The Owners, Strata Plan KAS431 out of the Supreme Court in British Columbia demonstrates this dynamic well.


The failure to follow the recommendations could give rise to the Board of Directors and individual Directors being sued by owners or mortgagees.  In this legal action the report of the third party contractor is required to be disclosed by the Board of Directors and forms the basis of the evidence which supports the allegation of breach of fiduciary duty.  In this regard the report is usually discussed at a meeting of the Board of Directors and the Minutes of that meeting will usually make reference to the report.  This process of receipt by the Board of Directors and reflection in the Minutes creates a record, available to all owners and mortgagees, that the Board of Directors are now aware of the deficiencies with the common property. 


It is not prudent for a Board of Directors to put themselves in this situation.  In legal actions the obligation to disclose documents is limited if a document is protected by privilege.  For those of you interested in exploring privilege beyond the scope of this blog entry you may wish to review the recent report prepared by Adam Dodek B.A., J.D., LL.M., of the University of Ottawa for the Canadian Bar Association.  One of the types of privilege which would be helpful to a Board of Directors is to retain the third party contractor to assess the elements and aspects of the common property in contemplation of litigation.  This form of privilege is associated with the general proposition that consultation by a client with the client's lawyer is protected communication.  To come within this type of privilege the Board of Directors should consult with a lawyer about the potential legal issues related to the elements and aspects of the common property of concern.  Following from this the Board of Directors should instruct their lawyer to retain the third party contractor on behalf of the Board of Directors.  The third party contractor then delivers the report to the lawyer.  The lawyer in turn provides the report to the Board of Directors.  When the report is discussed at the meeting of the Board of Directors this context is clearly stated in the Minutes and the Board would be wise to go in camera (that is off the record) to discuss the report.  This minimizes the reference to the report in the Minutes and makes it clear that the Board of Directors will be treating this report as privileged.


The result of this process and treatment is that the Board of Directors can argue that the report need not be disclosed if litigation is commenced from a failure of the Board to remedy the deficiencies. Moreover, the protection of the document allows the Board of Directors to respond to the recommendations in a more orderly manner rather than becoming panicked by strong recommendations of the third party contractor or even worse by a self interested contractor.


In situations where there is a possibility that a Board of Directors will not follow or not follow the recommendations provided by an independent contractor in a timely manner, Directors and Boards of Directors would be wise to consider retaining a lawyer to do their best to cloak the production of the contractor's report under the privilege of the report being made in contemplation of litigation.

Consequences of Allegations of Improper Conduct of a Board Member

A report in Canadian Lawyer Magazine, canadianlawyermag.com, advises that a dispute in a condominium in Ontario over a condo-fee increase grew  into a "bitter feud" that resulted in the Board member "facing a number of criminal charges, including four counts of criminal harassment, intimidating a witness, and threatening death".  The consequences on the Board member was that he was prevented from joining the legal profession which he had trained for.  The Board member is now appealing the decision that "he wasn’t of good character" to a Law Society of Upper Canada panel.  Board members should always be civil in their demeanor and in their communication.