Canada: Bhasin Revisited: C.M. Callow Inc. v. Zollinger Provides Straightforward Example Of Breach Of Honest Contractual Performance

On Friday, the Supreme Court of Canada released its long-awaited decision in C.M. Callow Inc. v. Zollinger.¹ The decision provides a significant elaboration of the scope and implications of the doctrine of good faith in Canadian contract law from the Court's landmark 2014 decision in Bhasin v. Hyrnew.²

In 2014, the Supreme Court of Canada in Bhasin v, Hrynew recognized a "general organizing principle" of good faith to address the types of situations and relationships where the law requires honest, candid, forthright or reasonable contractual performance.³ The Court's decision, however, left important questions about the scope of this organizing principle and the particular duty of honest contractual performance.

In Callow, the Supreme Court revisited the doctrine of good faith. It emphasized that the duty of honest performance is not an implied contractual term or a guide to interpretation of language. Instead, the duty of honest performance as a contractual doctrine has a limited function, which is to attract damages where the manner in which a right under a contract was exercised dishonestly.

Background:  C.M. Callow Inc. ("Callow"), a winter and summer maintenance services provider, was engaged to provide snow removal and general landscaping services to a group of condominium corporations ("Baycrest") pursuant to two separate winter and summer maintenance service contracts. Callow was initially retained to provide winter maintenance services from 2010 to 2012, but renewed its contract in 2012 for an additional two-year term. Callow's winter contract contained a termination clause permitting the contract to be unilaterally terminated, without cause, on 10 days' written notice.

In or around March 2013, Baycrest decided to terminate the winter maintenance contract due to allegedly "poor workmanship in the 2012-2013 winter", but waited until September 2013 to inform Callow of its decision. In the intervening period, however, Baycrest deliberately withheld this information and allowed Callow to believe that Baycrest was satisfied with Callow's performance under the winter contract. Baycrest even accepted "freebie" summer work from Callow, which it knew was being performed by Callow with the hopes of having its winter contract renewed for a third term.

Shortly after Baycrest gave notice of termination, Callow commenced an action claiming damages for breach of contract in an amount equivalent to the one year remaining on the winter maintenance agreement (a gross value of $80,383.70).

The Lower Court Decision:  Following her review of the circumstances of the dispute, the trial judge considered Baycrest's argument that this was a matter of simple contractual interpretation and that the termination clause in the winter contract stipulated that Baycrest could terminate the contract for any reason by giving ten days' notice in writing.⁴

The trial judge dismissed these arguments.⁵ In her view, the principle of honest contractual performance was engaged, and breached, by the manner in which Baycrest terminated the winter contract. The trial judge found that Baycrest actively deceived Callow by, among other things, withholding disclosure of termination until September 2013, despite having previously made representations that suggested that the winter contract was not in danger of being terminated.

The trial judge held that, as a result, Baycrest did not perform the contract pursuant to the minimum standard of honesty. Her Honour awarded Callow damages equal to the value of the remaining year of the winter contract, less expected operating expenses, for a total recovery of the approximately $64,000 that would have been earned, but for Baycrest's breach of contract.

The Appellate Court Decision:  In brief reasons overturning the trial decision, the Court of Appeal held that: (i) Bhasin did not impose a duty to disclose information (in this case, that was relevant to termination); (ii) Baycrest was free to terminate the winter contract provided (only) that it gave the required notice; and (iii) the contract termination provision "is all that the respondent bargained for, and all that he was entitled to."⁶

The Court of Appeal made these findings despite recognizing that Baycrest actively deceived Callow regarding its intention to terminate the contract; it held that this did not give rise to the high level required to establish a breach of the duty of honest performance.⁷

The Supreme Court Decision:  The Supreme Court disagreed. It held that, while the duty of honest performance is not to be equated with a positive obligation of disclosure, Baycrest nevertheless had an obligation to refrain from misleading Callow in the exercise of termination clause. That Baycrest had no positive obligation of disclosure did not preclude its obligation to correct the false impression created by its own actions.⁸

The Supreme Court noted that the duty of honest performance and the duty to exercise discretionary powers in good faith are but two doctrines through which the organizing principle of good faith manifests itself, which list of doctrines may be incrementally expanded as appropriate. While these doctrines are distinct, the organizing principle is intended to correct the "piecemeal" approach to good faith that previously existed in the common law, and to develop the law in this area in a coherent and principled way.

Here, the Supreme Court held no incremental expansion was necessary. Rather, the duty to act honestly about matters directly linked to the performance of the contract, including the exercise of the termination clause, was sufficient to dispose of the appeal.⁹

The Court repeated that the duty of good faith contractual performance is not an implied term, but a general doctrine of contract law that imposes a minimum standard of honest contractual performance. For such a duty to exist, the dishonest or misleading conduct must be directly linked to performance. A breach of the duty of good faith contractual performance is a breach of contract, not a tort. Unlike the tort of misrepresentation, such a breach does not require that the defendant intended the plaintiff to rely on the representation or false statement.

In discussing the kind of performance that would constitute dishonesty, the Supreme Court held that a party must refrain from lying or knowingly misleading their counterparty.¹⁰ If there has been no deception or misrepresentation, then there is no duty of general disclosure of information among contracting partners. However, where the exercise of a contractual right is undertaken dishonestly, the exercise is in breach of contract and this wrong must be corrected.¹¹ Whether a party has "knowingly misled" its counterparty is a highly fact-specific determination, and can include lies, half-truths, omissions, and even silence, depending on the circumstances.¹²

On damages, the Supreme Court held that the duty of honest performance is a doctrine of contract law, and not tort. Damages should put the parties in the position that they would have been in had the breach not occurred, and the duty had been performed honestly.¹³ The Court found that Callow had been prevented by Baycrest's dishonesty from bidding on other contracts, and had therefore lost at least the profit it would have made on the winter maintenance contract. The Supreme Court therefore upheld the trial judge's award of approximately $64,000, or the profit lost on the remaining year of the winter contract.

Takeaway:  The Supreme Court's decision in Callow is significant for at least three reasons: (1) it lays out a straightforward guide to advancing claims for breach of honest contractual performance; (2) it confirms that a party can knowingly mislead its counterparty by lies, half-truths, omissions, and even silence, depending on the circumstances; and (3) it clarifies that the breach of the duty of honest performance will ordinarily attract expectation damages, as the innocent party is to be put in the position it would have been in, had the breach not occurred.

Look for the Supreme Court's decision in another good faith in contract case shortly. At the same time the Court heard C.M. Callow, it heard the companion appeal in Wastech Services Ltd. v. Greater Vancouver Sewerage and Drainage District.¹⁴ In Wastech, the Court will consider whether the duty of good faith in contract applies to discretionary rights contained in a contract.

Footnotes

1. 2020 SCC 45 [Callow SCC].

2. 2014 SCC 71 [Bhasin].

3. Bhasin at para 66.

4. C.M. Callow Inc. v. Tammy Zollinger et al., 2017 ONSC 7095 [Callow ONSC] at para 56.

5. Callow ONSC at para 58.

6. CM Callow Inc. v. Zollinger, 2018 ONCA 896 at para 17 [Callow ONCA].

7. Callow ONCA at pars 15-16.

8. Callow SCC at para 38.

9 .Callow SCC at para 44.

10. Callow SCC at para 86.

11. Callow SCC at para 87.

12. Callow SCC at para 91.

13. Callow SCC at para 107.

14. https://www.scc-csc.ca/case-dossier/info/sum-som-eng.aspx?cas=38601

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