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The Supreme Court of Canada Extends the Duty of Honesty in Contractual Performance

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A recent landmark decision from the Supreme Court of Canada has expanded the duty of honesty that parties owe to each other in performing a contract.

In C.M. Callow Inc. v. Zollinger, 2020 SCC 45, on appeal from the Ontario Court of Appeal, the Supreme Court held that the duty of honest performance extends to all contracts and requires that parties not mislead one another in the performance of their contractual obligations. While the rights and obligations agreed to in the contract are still paramount, those rights and obligations must be exercised or performed with honesty. And while there may not be a duty of positive disclosure, the law now says that there is a duty not to mislead and to correct misapprehensions caused by the conduct of one of the parties.

In this case, the plaintiff (“Callow”) entered into two contracts with a group of condominium corporations (“Baycrest”) to provide maintenance services. The first contract was for winter maintenance (the “Winter Contract”), which was set to expire in April 2014. The Winter Contract provided that Baycrest could terminate the contract on 10 days’ written notice (the “Notice Period”). The second contract was for summer maintenance (the “Summer Contract”), which expired in October 2013.

In early 2013, Baycrest decided to terminate the Winter Contract and did not inform Callow of its decision until September 2013. Throughout the summer of 2013, while performing the Summer Contract, Callow did extra work for Baycrest free of charge hoping for Baycrest to renew the Winter Contract. Baycrest was aware of the extra work and the reason for it. Baycrest also represented to Callow that it was satisfied with Callow’s work and that the Winter Contract was likely to be renewed, despite having decided earlier to terminate the Winter Contract.

When it was informed that the Winter Contract was being terminated, Callow sued Baycrest for breach of contract, alleging that Baycrest acted in bad faith.

At trial, the judge considered the duty of good faith owed by Baycrest and the doctrine of honest contractual performance and concluded that Baycrest acted in bad faith by deceiving Callow. Baycrest withheld information about its decision to terminate the Winter Contract and represented that the contract was not in danger. Baycrest acted in this manner despite being aware of Callow’s extra work.

The trial judge explained that, in order to meet the minimum standard of honesty, Baycrest was required to address any issues that it had with Callow’s performance, provide prompt notice of termination, or to refrain from representing that the contract may be renewed.

The trial judge’s decision was overturned by the Court of Appeal on the basis that the deception in the communications between the parties related to a contract not yet in existence; namely, the renewed Winter Contract. As such, Callow’s deceptive behavior was deemed not to be directly linked to the performance of the Winter Contract. It was therefore held that the trial judge erred by improperly expanding the duty of honest performance beyond the terms of the Winter Contract.

The Supreme Court of Canada disagreed and granted Callow’s appeal. The Supreme Court found that the duty of honest performance of a contract precludes the type of active deception that Baycrest committed. In an important statement, the Court found that no contractual right can be exercised dishonestly and contrary to the requirements of good faith. While the duty of honest performance is not equivalent to a duty of disclosure, it still requires parties not to “knowingly mislead” one another. Parties can mislead through lies, half-truths, omissions, and even silence, depending on the circumstances.

In this case, Baycrest actively deceived Callow by leading them to believe the Winter Contract would not be terminated, despite having already decided to terminate it. The fact that Baycrest otherwise complied with the contractual notice requirements contained in the Notice Period clause was not sufficient to overcome the dishonesty in the exercise of the notice requirements. Baycrest made a series of “active communications” to deceive Callow by suggesting that renewal of the Winter Contract was likely and by knowingly accepting Callow’s free work as an incentive to renew the Winter Contract, after Baycrest already knew that the contract was being terminated.

However, the majority of the Supreme Court stated that the trial judge went too far in suggesting that Baycrest was required to address alleged issues with Callow’s performance, provide prompt notice of its decision to terminate the Winter Contract, or refrain from making any representations in anticipation of the Notice Period. Rather, it was held that Baycrest had to refrain from making false representations to Callow in anticipation of the termination. In other words, Baycrest could not lead Callow to believe that the Winter Contract was to be renewed, when they already knew that it was to be terminated.

The court was split, however, when it came to the measure of damages. The majority view, and therefore the accepted view today is that the appropriate approach was to award expectation damages, which would put Callow in the position it would have been in had the duty of good faith been performed. This is the ordinary measure of damages when it comes to breach of contract. Accordingly, in this case, the appropriate measure of damages was deemed to be the value of the Winter Contract.

Callow marks an important expansion of the duty of honest performance in contract law. Namely, it is now clear that no contractual right, including a right of termination can be exercised dishonestly. It is also now clear that dishonesty will include conduct that knowingly misleads another party or fails to correct a false impression created by the conduct of the parties.


The authors would like to thank Allan Tung and Lucas Morini, Students-at-Law, for their assistance with this article.


 

We have used over 10 Pallett Valo lawyers on different matters and find that they are always responsive.
Dr. Don Pinchin, Pinchin Environmental Ltd.