Case Study: C.M. Callow Inc. v. Zollinger1
The Supreme Court recently undertook to further refine the duty of honest performance in contract law. In a significant ruling on December 18, 2020, the Court held that this duty of honest contractual performance extends beyond lies to include knowingly misleading another party, whether through a partial truth, an omission, or even silence.
C.M. Callow Inc. is a company that contracted with several condominium corporations known together as Baycrest to provide summer and winter maintenance services. The specifics of the arrangement between the parties was outlined within two separate contractual agreements; a summer contract that was set to expire in October 2013, and a winter contract that was set to expire in April 2014. Baycrest decided to terminate their winter contract with C.M. Callow in early 2013, however, in spite of a termination clause in the agreement that allowed Baycrest to terminate for any reason on ten days' notice, they did not notify C.M. Callow of the decision until September 2013. Over that time, C.M. Callow performed a substantial amount of free landscaping work during their fulfilment of the summer contract in hopes that Baycrest would renew their winter maintenance agreement. Despite knowing that C.M. Callow was doing this extra work, Baycrest deliberately did not inform C.M. Callow of their decision to terminate the winter contract due to concerns that they would abandon the summer maintenance contract. Notably, Baycrest went as far as to tell C.M. Callow that they were happy with their maintenance services and that the contract would likely be renewed. Upon termination, C.M. Callow sued Baycrest for breach.
Initial rulings on the matter concerned the interpretation of the standard laid out in the case of Bhasin v. Hrynew2 which stands to recognize the organizing principle of good faith in contracts and developed the duty of honest performance. It was held at the trial level that by actively deceiving C.M. Callow, Baycrest had breached the aforementioned duty of honest performance through their bad faith tactics, failing to uphold a minimum standard of honesty in their dealings.
At the Court of Appeal, however, it was held that while Baycrest had actively deceived Callow, they did not breach their duty of honest performance of the contract. The Court of Appeal stated that the trial judge had gone too far in claiming the minimum standard for honesty in this particular case would have been for Baycrest to address alleged performance issues and provide prompt notice of the cancellation of the contract. This is because those requirements would extend beyond the contractual relationship between the parties, significantly altering the agreement they intended to contract to.
Upon arrival at the Supreme Court, the ruling of the Court of Appeals was upheld that Baycrest did not breach the duty of honest performance. The Court took this opportunity though to further clarify the duty of honest contractual performance. It was held that the Bhasin requirement of not knowingly misleading another party to a contract should, extend beyond outright lies to half-truths, omissions and even silence depending on the circumstance. The Court further went on to state that while there is no duty to disclose a material fact, failing to correct the misapprehension of another party to the contract could be deemed a breach of the duty of honest performance as part of a court's fact-based analysis.
Furthermore, the majority held that a successful plaintiff in a breach of duty of honest performance claim should receive expectation damages, placing them back in the position they would have been had the duty been performed. The reasoning for this was that expectation damages would hopefully serve as a deterrent to dishonest acts in the performance of contracts. A concurrence of the court, however, argued instead that there were no grounds for expectation damages as the defendant fulfilled the contract and the loss instead stems from reliance damages.
The Court's decision, in this case, demonstrates a commitment to enforce good faith contractual dealings and a strong stance against those who wish to avoid the duty of honest performance. This slight expansion of good faith requirements to include half-truths, omissions and silence puts a renewed emphasis on party's to a contract to ensure that everyone has the same understanding and mistaken beliefs are quickly corrected.
1 C.M. Callow Inc. v. Zollinger, 2020 SCC 45
2 Bhasin v. Hrynew, 2014 SCC 71
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