The Supreme Court of Canada recently clarified the duty of honest contractual performance in C.M. Callow Inc. v. Zollinger. In a nutshell, the Supreme Court has clarified that silence, omissions, and half-truths can be deceptive and a breach of the duty of honest contractual performance. The remedy to such a breach is damages that place the injured party in the same position as if the breach had not occurred.
While the duty of honesty is not a new concept in the realm of contract law, this case helps to define the scope of that duty.
Callow builds on pre-existing case law that establishes a duty of good faith in contractual performance and extends this duty to circumstances where a party knowingly misleads a counterparty or fails to correct the counterparty's mistaken assumptions. The leading case on this duty prior to Callow was the Supreme Court decision in Bhasin v. Hrynew, which discussed an organizing principle of good faith that parties must perform their contractual duties honestly, and that a contracting party should have appropriate regard to his counterparty's legitimate contractual interests.
C.M. Callow Inc. ("Callow"), the plaintiff, was a contractor who had a contract with the defendants, a group of condominium corporations ("Baycrest"). In 2010, Baycrest entered into a two-year winter maintenance agreement with Callow for snow removal and other winter services. This agreement was renewed upon its conclusion with an additional summer maintenance agreement, from November 1, 2012 to April 30, 2014.
Under the contract, Baycrest was allowed to terminate the contract if Callow's service was not satisfactory or if Baycrest no longer required Callow's service, on 10 days' written notice.
In March or April of 2013, Baycrest decided that it would end the contract with Callow, but did not tell Callow at the time that the contract would be terminated. Callow thought there was a chance that its contract would be renewed a further time, and discussed a renewal with Baycrest. One of Baycrest's chief board members suggested that the contract was likely to be renewed. Callow went above and beyond its summer maintenance obligations, even providing some free summer maintenance to incentivize Baycrest to renew the agreement.
On September 12, 2013, Baycrest told Callow that it would terminate the contract within 10 days, the notice that was required under the contract. Callow sued Baycrest for breach of contract, arguing that Baycrest acted in bad faith by accepting what the Supreme Court described as "freebies" when knowing that Callow was offering these freebies to maintain their future relationship.
Baycrest Acted Deceptively, Even Though It Did Not Lie to Callow
Baycrest argued that it did not engage in "active deception" by not telling Callow that it would be terminating the contract. It argued that there was no duty to disclose this fact to Callow. Indeed, both parties agreed that failing to disclose a material fact, without more, would not breach the duty of good faith performance of a contract.
While the Supreme Court noted that the contract, on its face, did not impose a duty on Baycrest's part to disclose its intention to terminate the contract beyond the 10 day notice requirement, Baycrest was prohibited by law from knowingly misleading Callow.
Baycrest's Two Active Deceptions
The Supreme Court accepted the findings of the trial judge that Baycrest actively deceived Callow in the following two ways:
- After Baycrest had voted to terminate the contract, its representative spoke with Callow and led Callow to believe that the contract would be renewed.
- Baycrest accepted Callow's free summer maintenance work, which Callow offered as an incentive for renewal of the contract.
One particularly damning email between Baycrest representatives highlights Baycrest's knowledge of the deception:
It's nice he's doing it but I am sure it's an attempt at us keeping him. Btw, I was talking to him last week as well and he is under the impression we're keeping him for winter again. I didn't say a word to him cuz I don't wanna get involved but I did tell [Ms. Zollinger] that [Mr. Callow] thinks we're keeping him for winter.
The Supreme Court held that Baycrest intentionally withheld information, knowing that such silence, combined with its active communications, had deceived Callow. Baycrest should have corrected Callow's misunderstanding. By failing to correct Callow's misunderstanding, Baycrest breached its contractual duty of honest performance.
Consequences of this Decision
The Supreme Court also clarified that parties to a contract are entitled to protect their interests, and that there was no requirement for one party to subordinate its interests to another. There is also no free-standing positive duty to disclose information to a counterparty where nothing in the contractual relationship brings a duty to do so. However, in some situations, like in the Callow case, failure to speak out can be actively deceiving. The Supreme Court noted that it is not always obvious when silence can constitute "knowingly misleading" a counterparty. Some examples can include:
- Failing to correct a misapprehension caused by one's own misleading conduct
This is not a closed list, and whether a party has "knowingly misled" its counterparty is determined by the specific facts. This case does create uncertainty about when disclosure is required. It also means that contracting parties should be very careful about communications (or silence) that could mislead counterparties. Contracting parties should consider whether counterparties have a mistaken belief about the contract, as there may be a requirement to correct that misapprehension, particularly if a party has already made a decision. Depending on the facts, there will be a grey area where the duty to disclose is unclear and in which future courts may set guidelines.
The Callow case will not be the final word on the duty of good faith in contractual performance: the Supreme Court's upcoming decision in Wastech Services Ltd. v. Greater Vancouver Sewerage and Drainage District, which was heard at the same time as Callow, is yet to be released.
Since there is not always a clear-cut answer, we would be happy to discuss any questions you may have about your liability in contractual negotiations, or to explore whether you may have a claim against a counterparty for breach of the duty of honest performance in contractual performance.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.