Previously, we wrote about the Supreme Court of Canada ("SCC") deciding that there is a duty of good faith in all contracts1. The SCC has revisited this contract law doctrine in its decision in C.M. Callow Inc. v. Zollinger2.
In this new case, a group of condominium corporations ("Baycrest") had separate winter maintenance contracts and summer maintenance contracts with C.M. Callow Inc. ("Callow"). One winter, Baycrest decided to terminate the winter maintenance agreement but chose not to inform Callow of its decision at that time. However, throughout the following spring and summer, Callow and Baycrest discussed renewal of the winter maintenance agreement. Callow thought that it was likely to get a two-year renewal of the winter maintenance contract and that Baycrest was satisfied with its services. Baycrest did not correct its misrepresentation even after knowing that Callow had drawn a false inference. Callow did not seek out another maintenance contract from a third party for the upcoming winter. Baycrest then informed Callow in September that it was terminating the winter maintenance agreement - there were clear termination clauses permitting termination if Callow's services were no longer required or if service was unsatisfactory.
Callow filed a statement of claim for breach of contract, alleging that Baycrest acted in bad faith. Callow's position was that it would not have suffered its loss except for its reliance on the misleading representation.
In this type of case, unlike many other contract cases, the issue was not that the Baycrest failed to perform in accordance with the contract. Baycrest was operating within its contractual rights. However, the Court found that Baycrest caused Callow's loss by making dishonest extra-contractual misrepresentations relating to contractual performance, which Callow relied upon to its detriment.
The Court decision engaged the organizing principle of good faith performance and the duty of honest performance. It was determined that Baycrest actively deceived Callow from the time the termination decision was made to September 2013. It was bad faith to i) withhold that information to ensure Callow performed the summer maintenance contract and ii) represent that the contract was not at risk of termination, despite knowing that Callow was taking on work above and beyond the summer maintenance contract to bolster the chances of the winter maintenance contract being renewed (i.e. Callow tried to provide incentive for Baycrest to renew the winter maintenance agreement). The Court found that by exercising the termination clause dishonestly, Baycrest breached the duty of honesty on a matter directly linked to the performance of the contract, even if the 10-day notice period for termination was satisfied. Callow was awarded damages in order to place it in the same position it would have been if the breach had not occurred.
A key point of emphasis in the Court decision is that Baycrest's mistake was not in deciding to terminate the contract. The mistake was also not in delaying informing Callow of the termination. The duty of honest performance is not a positive obligation of disclosure. The main issue was the Court's finding that Baycrest knowingly misled Callow into believing that the winter maintenance agreement would not be terminated. As well, Baycrest did not attempt to correct the false impression that it created through its actions.
Another important takeaway is that the duty of honesty as contractual doctrine can have a limiting function on the exercise of an otherwise complete and clear right to terminate. The duty does not prevent the decision to terminate (the termination right could be exercised), but it can come into play if the termination is exercised in a dishonest manner.
The rights and obligations of a contract must be exercised and performed honestly and reasonably. There is a risk of liability for breach of the duty of good faith if performing capriciously or arbitrarily. The bottom line is that when carrying out a contract, any material misleading behaviour may breach the duty of good faith, whether lies, half-truths, omissions, or even silence, depending on the circumstances. If performing dishonestly, then there is risk of liability for damages for the commercial partner's loss of opportunity from reliance on the misleading representations.
Footnotes
1 Bhasin v. Hrynew, 2014 SCC 71, [2014] 3 S.C.R. 494. There were two concurring decisions in C.M. Callow Inc. v. Zollinger which disagreed on a particular legal issue. The majority relied on the civilian concept of "abuse of rights" in its analysis. The concurring opinion took the position that the principles that apply to this appeal were the same as those in its analysis in the earlier Bhasin case.
2 2020 SCC 45.
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