Canada: C.M. Callow Inc. V. Zollinger: The Duty Of Honest Contractual Performance Clarified

Introduction

In the recent decision of C.M. Callow Inc. v. Zollinger¹ , the Supreme Court of Canada ("SCC") clarified the scope of the duty of honest contractual performance, as recognized by the Court in Bhasin v. Hrynew² over six years ago. As explained in Bhasin, and further expanded on in C.M. Callow, the duty of honest contractual performance is one of the manifestations of the organizing principle of good faith in performance of contracts. While the organizing principle of good faith usually manifests itself in specific legal doctrines, such as the doctrine of unconscionability, and in specific types of contractual relationships, such as those where the parties are required to cooperate to achieve the objectives of the contract and those where parties may exercise contractual discretion, the duty to act honestly in the performance of contractual obligations applies to all types of contracts.

The SCC's decision has practical implications for contracting parties and their conduct when exercising their bona fide contractual rights. In C.M. Callow, the Court acknowledged that the defendants were in compliance with the contractual term at issue, however it was the manner in which they exercised their right that breached the duty of honest performance.³ In essence, the concept of a duty of honest contractual performance allows parties to claim breach of contract in situations where the contract is technically complied with, but some specific rights or obligations under that contract are abused in a dishonest manner that undermines the legitimate contractual interests of the contracting partner.

While the duty of honest contractual performance does not impose obligations of loyalty or disclosure on the contracting parties, the Court held that the party's exercise of contractual rights and obligations may be found to be dishonest where it fails to correct a false impression created through its own actions, and/or misleads the other by "half-truths, omissions, and even silence".

Facts

In 2012, the plaintiff, C.M. Callow Inc. ("Callow") entered into two separate two-year maintenance agreements (one for summer, one for winter) with the defendants, a group of condominium corporations ("Baycrest"). The contract included a clause that allowed for Baycrest to terminate its contract with Callow, without cause, upon giving 10 days' written notice.

In early 2013, Baycrest decided that it would be terminating its winter maintenance agreement with Callow later that year. However, to avoid jeopardizing Callow's performance of its summer maintenance contract, Baycrest withheld this decision until September 2013, when it terminated the winter maintenance contract with nearly immediate effect. Unaware of Baycrest's intentions, throughout the summer of 2013 Callow performed work "over and above" its maintenance agreement in the hopes that this would incentivize Baycrest to renew the winter maintenance agreement. Baycrest accepted these "freebies", and maintained active communications with Callow, suggesting the renewal was likely.

Following Baycrest's termination of the winter maintenance agreement in September 2013, Callow filed a statement of claim for breach of contract, alleging that Baycrest had acted in bad faith and, that as a result of being mislead by Baycrest, it missed the window to bid on other contracts for winter 2013-2014 and beyond. Callow was successful at trial, however, the Court of Appeal for Ontario set aside the judgment in favour of Callow, holding that the trial judge had erred in improperly expanding the duty of honest performance beyond the four corners of the winter maintenance agreement and that "there [was] no unilateral duty to disclose information relevant to termination".

Key Takeaways

The SCC restored the Ontario Superior Court judgment, with Justice Kasirer writing for the majority.

In its holding that Baycrest had breached its duty of honest performance, the Court determined that Baycrest had: (1) knowingly misled Callow through its active communications, leading to Callow's reasonable inference that the contract was likely to be renewed, (2) allowed Callow to rely on its misapprehension that the contract was in good standing, and (3) failed to correct this mistaken belief.

Affirming Bhasin: In Bhasin, the SCC held that the novel duty of honest contractual performance meant "simply that parties must not lie or otherwise knowingly mislead each other about matters directly linked to the performance of the contract"⁴ . However, the Court in Bhasin also made it clear that the novel duty does not impose on the contracting parties a duty of loyalty or of disclosure, as long as they do not actively mislead or deceive each other in relation to performance of the contract.

In affirming Bhasin, the Court noted in C.M. Callow that "requiring a party to speak up in service of the requirements of good faith where nothing in the parties' contractual relationship brings a duty to do so could be understood to confer an unbargained-for benefit on the other that would stand outside the usual compass of contractual justice".⁵ However, the SCC further expanded the scope of the duty of honest performance by noting that "where the failure to speak out amounts to active dishonesty in a manner directly related to the performance of the contract, a wrong has been committed".⁶ The Court clarified that "knowingly misleading" one's counterparty can include "half-truths, omissions, and even silence".⁷ The duty of honest performance may be breached if a party fails to "correct a false impression created through the party's own actions".⁸ Thus, it was held that while Baycrest did not have a "free-standing obligation" to disclose that it would be terminating the winter maintenance agreement, it did have an "obligation to refrain from misleading Callow in the exercise of that clause".⁹

Similarities with Civil Fraud: As noted in Bhasin, the duty of honest performance has similarities with the existing law in relation to civil fraud, albeit without the requirement that the defendant intend that his or her representation be relied on.¹⁰ In the concurring reasons in C. M. Callow, Justices Moldaver, Brown and Rowe further considered the parallel between the duty of honest performance and the doctrine of fraudulent misrepresentations. Despite the fact that the duty of honest performance applies after a contract is formed, the concurring justices affirmed that the same settled principles apply to both doctrines¹¹ , namely that silence or half-truths may amount to a statement.¹²

The Required Link: The SCC restated that the duty of honest performance is a contractual law doctrine, rather than a tort. As a contractual law doctrine, there is a required nexus with a contractual relationship. In other words, a breach must be directly linked to the dishonest performance of a term of the contract. Citing Bhasin, the Court in C.M. Callow specified that, in the context of dishonesty and performance, a direct link will exist when the party performs their obligation or exercises their right under the contract dishonestly.¹³ The Court reasoned that Baycrest's alleged deception was directly linked to the contract because its exercise of the termination clause was dishonest.¹⁴

Expectation Damages and Honest Performance: The duty of honest performance serves to make the plaintiff whole. In the event of a breach of the duty of honest performance, a plaintiff will be entitled to expectation damages, which effectively "give[s] the innocent party the full benefit of the bargain by placing it in the position it would have occupied had the contract been performed".¹⁵

In awarding damages, the SCC deferred to the trial judge's finding that Baycrest had prevented Callow from taking proactive steps to bid on other contracts for the upcoming winter. As a result, the Court upheld the trial judge's award of $64,306.96, representing an amount that was "at least equal to the profit it lost under the winter maintenance agreement"¹⁶ , less expenses. In addition, the SCC affirmed the trial judge's finding that Callow receive $14,835.15 for the cost of leasing a piece of machinery for one year, as Mr. Callow had testified that he had leased the machinery specifically for his performance of the winter maintenance agreement.¹⁷

Footnotes

1. 2020 SCC 45 [C.M. Callow].

2. 2014 SCC 71 [Bhasin].

3. C.M. Callow at para.52, emphasis added.

4. Bhasin at para. 73.

5. C.M. Callow at para. 81

6. Ibid at para. 81

7. C.M. Callow at para.91.

8. Ibid at para. 38.

9. Ibid at para. 38.

10. Bhasin at para. 88

11. C.M. Callow at para. 132.

12. C.M. Callow at para. 132.

13. Ibid at para. 67.

14. Ibid at para. 37.

15. Ibid at para. 141.

16. Ibid at para. 117.

17. Ibid at para. 118.

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.