Canada: Keeping Good Faith: The Supreme Court Of Canada Clarifies The Duty Of Honest Contractual Performance

In C.M. Callow Inc. v. Zollinger, 2020 SCC 45, the Supreme Court of Canada continued to gradually expand the duty of honesty by outlining those actions that may give rise to a breach. This decision provides important guidance on how parties to a contract must conduct themselves when carrying out or terminating a contract.

Background:

In 2012, a group of condominium corporations ("Baycrest") entered into a two year winter maintenance contract and into a separate summer maintenance contract with C.M. Callow Inc. ("Callow"). The winter contract contained a termination clause providing that if Callow's services were no longer required, Baycrest could terminate the contract on 10 days' notice.

In early 2013, Baycrest decided to terminate the winter maintenance agreement allegedly because of issues with Callow's performance, but chose not to inform Callow at that time. During the summer of 2013, Callow performed work above and beyond the summer maintenance contract at no charge, which it hoped would act as an incentive for Baycrest to renew the winter maintenance agreement.

After Callow had completed its obligations under the summer contract, Baycrest informed Callow of its decision to terminate the winter maintenance agreement in September 2013. Callow filed a statement of claim for breach of contract, alleging that Baycrest acted in bad faith.

Lower Court Decisions:

The trial judge was satisfied that Baycrest actively deceived Callow from the time the termination decision was made to September 2013, and found that Baycrest acted in bad faith by withholding that information to ensure Callow performed the summer maintenance contract. Further, by continuing to represent that the contract was not in danger despite knowing that Callow was taking on extra tasks to bolster the chances of the winter maintenance contract being renewed, Baycrest also acted in bad faith.¹

The Ontario Court of Appeal held that the trial judge erred by improperly expanding the duty of honest performance beyond the terms of the winter maintenance agreement. Any deception in the communications during the summer of 2013 related to a new contract not yet in existence – the renewal that Callow hoped to negotiate. Therefore, the alleged breach was not directly linked to the performance of the winter contract.²

Supreme Court Decision:

A five-member majority of the Supreme Court—joined by three judges in concurrence, with Justice Côté dissenting—ruled that the duty of honest performance precludes active deception, and that Baycrest breached this duty by knowingly misleading Callow into believing the winter contract would not be terminated. When Baycrest exercised the termination clause dishonestly, it breached the duty of honesty on a matter directly linked to the performance of the contract, even if the notice period was satisfied.

Baycrest breached its duty of good faith in the exercise of its right of termination. The Supreme Court held that Baycrest knew Callow had drawn a false inference and should have corrected any misrepresentation. If Baycrest had done so, Callow would have had the opportunity to secure another contract for the upcoming winter.³

Key Issues:

Direct link to contract:

In Bhasin v. Hrynew, the Supreme Court found the duty of honest performance applies to all contracts and requires that parties must not lie or otherwise knowingly mislead each other about matters directly linked to the performance of the contract.⁴ To determine whether dishonesty is connected to the contract at bar, a Court must examine whether a right under that contract was exercised, or an obligation under that contract was performed, dishonestly.

In Callow, the Supreme Court confirmed that the duty of honest performance is not to be equated with a positive obligation of disclosure. However, in circumstances where a contracting party lies to or knowingly misleads another, a lack of a positive obligation of disclosure does not preclude an obligation to correct a false impression created through that party's own actions.⁵

Dishonesty in contractual performance:

The organizing principle of good faith recognized in Bhasin manifests itself through existing good faith doctrines. Although the duty of honest performance and the duty to exercise discretionary powers in good faith are distinct, they should not be conceptualized as disconnected from one another as each principle rests on the requirement of justice that a contracting party have appropriate regard to the legitimate contractual interests of their counterparty.⁶

Scope of duty:

The Supreme Court held the duty of honest performance attracts damages where the manner in which the right was exercised was dishonest. The Supreme Court's focus on the manner in which the termination right was exercised in Callow should not be confused with whether the right could be exercised. The duty of honest performance requires that no contractual right, including a right of termination, be exercised dishonestly and thus, contrary to the doctrine of good faith.

Measure of damages:

A breach of the duty of honest performance will attract damages according to the ordinary contractual measure. The ordinary measure awards contractual damages in line with the expectation interest (damages aimed at putting the injured party in the position that it would have been in had the duty been performed). The majority held there is no basis to hold a breach of the duty of honest performance should be compensated by way of reliance damages as the two species of damage are conceptually distinct. In Callow, the majority assumed that the appropriate measure of damages was the value of the contract that Callow had with Baycrest.

In determining the appropriate measure of damages when a breach occurs, the Supreme Court employed a comparative legal analysis of civil and common law principles. This process continues the Supreme Court of Canada's unique trend of using both legal frameworks to interpret each other and reinforces the importance of comparative legal analysis in Canadian jurisprudence.

Conclusion:

The Callow decision informs us that the requirements of honesty in performance can go further than prohibiting outright lies. Determining whether a party has knowingly misled another is a highly fact specific determination, which can include lies, half truths, omissions, and even silence; honesty cannot be restricted to simply not lying. Through Callow, the Supreme Court broadens the range of actions that may attract liability in this context.

Callow instructs contracting parties to be mindful about their interactions with one another vis-à-vis the contract. In doing so, the parties will need to turn their mind to whether their counterparty is under a mistaken belief with respect to contractual performance and consider correcting any discrepancies to ensure consensus ad idem.

Footnotes

1. 2020 SCC 45, [Callow] at para 21.

2. Callow, at para 25 – 26.

3. Callow, para 116 – 117.

4. 2014 SCC 71, [2014] 3 S.C.R. 494, [Bhasin].

5. Callow, at para 38.

6. Callow, para 45.

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