LAWS 3003 ASU Contracts Essay

DescriptionContracts
Lecture Six
Outline

Lecture Five:

Recap

The Parole Evidence Rule (PER)

Lecture Six:

The Good Faith Doctrine
The Parol Evidence Rule
• Gives priority to written agreement as the most reliable record of
the parties’ agreement


Limits reference to other evidence of parties’ intention
Cannot look into anything outside the written document (the contract)
• But in many cases the parties may not have agreed that the
written document was to be the sole source of understanding their
obligation

Evidence may be needed to address this issue if it is raised in a
contract dispute
• Restricting the enquiry to the words used may be insufficient to
determine parties’ intention
• Many exceptions created in case law
The Parol Evidence Rule


Traditional version: Evidence of an oral “collateral” contract or term that
contradicts the terms of the written contract not considered (Bauer SCC 1980)
Contemporary version: Gallen (1984) reinterprets parol evidence rule as not an
“absolute rule”

Rule does not apply where there is evidence that the written record is not
the whole contract

Evidence that there is separate collateral contract or term can be
considered

If does not contradict the written contract – it can be given effect

Even if does contradict written agreement there is only a “strong
presumption in favour of written agreement”

BUT if clear on evidence that oral contract or term to prevail – it will
prevail
The Parol Evidence Rule

Gallen:

E.g. Rule does not exclude evidence outside written document
where party pleads that
• Document ambiguous
• Document executed by mistake
• Contract induced by misrepresentation regarding what contract
requires

In general, can fit within one of the exceptions in most cases with
appropriate pleadings

Sometimes lawyers will try to buttress effect of parol evidence rule
with
“Entire Agreement” clause
The Good Faith Doctrine
Three types of situations in which a duty relating to contract performance was
previously recognized:
1) Duty of cooperation between the parties to achieve the objects of the contract (reasonable
effort)
2) Duty to exercise contractual discretion in good faith (“reasonable fair market value”)
3) Duty not to evade contractual obligations in bad faith.
What did Bhasin change?
Two incremental steps to make the common law less unsettled and piecemeal,
more coherent and just:
i.
Acknowledge that good faith contractual performance is a general organizing principle
of the common law of contract;
• Not a legal rule.
• Categories not closed but Can-Am’s conduct does not fit any existing category where good
faith required.
ii.
Recognize a fourth manifestation of this organizing principle of good faith, that there is a
common law duty which applies to all contract to act honestly in the performance of
contractual obligation.


Applies as a matter of law – cannot be excluded by parties
Content varies with context – including provisions of contract – but cannot lie
or knowingly mislead – here Can-Am breached.
Application of the new duty to the facts in the Bhasin
case
• Entire Agreement clause included in the Contract does not preclude the application of
this new duty because it applies to all contracts.
• Can-Am acted dishonestly with Bhasin throughout the period leading up to its exercise
of the non-renewal clause, both with respect to its own intentions and with respect to
Hrynew’s role as PTO.
• SCC upheld the trial judge finding that this dishonesty on the part of Can-Am was
directly and intimately connected to Can-Am’s performance of the Agreement with Mr.
Bhasin and its exercise of the non-renewal provision.
• Damages to be assessed on the basis that if Can-Am had performed the contract
honestly, Bhasin would have been able to retain the value of his business rather than
see it, in effect, expropriated and turned over to Hrynew.
• Bhasin is entitled to damages in the amount of $87,000, which was the value of the
business around the time of non-renewal.
C.M. Callow Inc. v Zollinger, 2020 SCC 45

SSC decided the duty of honest performance was sufficient to deal with the case.
Duty of Honest Performance

The duty to act honestly in the performance of the contract precluded the active deception by
Baycrest by which it knowingly misled Callow into believing that the winter maintenance agreement
would not be terminated. By exercising the termination clause dishonestly, it breached the duty of
honesty on a matter directly linked to the performance of the contract, even if the 10-day notice
period was satisfied.

Kasirer J. for the majority relied extensively on civil law principles. Like in the Quebec civil law, no
contractual right may be exercised dishonestly and therefore contrary to the requirements of good
faith. (paras. 57-71). Court of Appeal erred when it concluded that the dishonesty was only about a
future contract.
C.M. Callow Inc. v Zollinger, 2020 SCC 45
Whether the Conduct Constituted Dishonesty

SCC reiterates that Parties are “not free to exclude” the duty altogether Right to terminate for
convenience cannot be exercised in a manner that transgresses the core expectations of honesty
required by good faith in the performance of contracts.

“knowingly misled” is a highly fact-specific determination. It can include the following:


outright lies.

half-truths.

active deception.

omissions, and even silence, depending on the circumstances.

One can mislead through action, by saying something directly to its counterparty, or through
inaction.

by failing to correct a misapprehension caused by one’s own misleading conduct.
This list is not closed; it merely exemplifies that dishonesty or misleading conduct is not confined
to direct lies.
C.M. Callow Inc. v Zollinger, 2020 SCC 45
Damages for Breach of Honest Performance

The duty of honest performance attracts damages according to the ordinary
contractual measure. It should put the injured party in the position that it would
have been in had the duty been performed. Not be compensated by way of
reliance damages that are awarded in torts.

Had Baycrest acted honestly in exercising its right of termination, and thus
corrected Mr. Callow’s false impression, Callow would have taken proactive steps
to bid on other contracts for the upcoming winter, which amounts to $64,306.96.
Wastech Services Ltd. v. Greater Vancouver Sewerage and Drainage
District, 2021 SCC 7
Duty to Exercise Discretion in Good Faith
The duty to exercise contractual discretion in good faith requires the parties to exercise their
discretion in a manner consistent with the purposes for which it was granted in the contract,
or, to exercise their discretion reasonably. It is breached only where exercised in a manner
unconnected to the purposes underlying the discretion. Reasonableness determined in light
of the agreement for which the parties bargained and not in the administrative law sense.
Wastech Services Ltd. v. Greater Vancouver Sewerage and Drainage
District, 2021 SCC 7
How to Determine whether the discretionary power was exercised reasonably:

The duty is breached where the exercise of discretionary power falls outside of the range of
choices connected to its underlying purpose. Courts can intervene where the exercise of the
power is arbitrary or capricious in light of its purpose as set by the parties. Not whether the
discretion was exercised in a morally opportune or wise fashion from a business perspective.

Reasonableness of the exercise of discretion is considered in light of the purposes identified
by the contract, interpreted as a whole. Wherever a party is granted discretion, there may be
differing yet legitimate ways in which that party can exercise its power that is itself part of the
bargain. Highly context-specific.

Entire agreement clause does not exclude the duty.

In the context of the contract as a whole, the purposes of giving Metro discretion to
determine waste allocation in its “absolute discretion” were clearly to allow it the flexibility
necessary to maximize efficiency and minimize the costs of the operation.
Discretion was exercised reasonably
• The duty did not require Metro to subordinate its interests to those of Wastech.
• No guarantee that Wastech would achieve the Target Operation Ratio (OR) in any given year. The
risk that revenues could vary from one year to the next was in the contemplation of the parties, and
this variance could well be based on factors such as the exercise of Metro’s discretion to reallocate
waste.
• The impact of Metro’s exercise of discretion on Wastech reflects the allocation for which Wastech
negotiated and to which it agreed.
• Because the exercise of discretion was within the range of conduct contemplated by the purpose of
the clause, it cannot be said to be in bad faith or unfair.
• Wastech is asking for Metro’s discretion to be constrained so that it can achieve a result — an
advantage — for which it did not bargain and, in fact, that it might have been said to have
bargained away.
Conclusion

Good faith contractual performance is a general organizing principle of the common law of
contract from which more specific legal doctrines may be derived. It is not a free-standing
rule. SCC recognized to date four doctrines or duties and claims must generally fall within
one of them. The list is not closed and the SCC may recognize new ones incrementally,
where needed, in a manner that is consistent with the freedom of contracting parties to
pursue their individual self-interest.

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