The Supreme Court of Canada recently clarified its view of the duty of honest performance, holding that parties to a contract cannot actively mislead their counterparties as to how they intend to exercise their contractual rights. This is the first major consideration of this issue by the Court since its landmark 2014 ruling in Bhasin v. Hrynew.
C.M. Callow Inc. v. Zollinger, 2020 SCC 45 ("Callow"), released on December 18, 2020, is the latest from the Supreme Court of Canada ("SCC") on the subject of "good faith" in contractual performance. This area of the law has seen much attention and development since the 2014 decision in Bhasin v. Hrynew, 2014 SCC 71, in which the SCC recognized that good faith in contractual performance is a general organizing principle of contract law, and through this organizing principle, found that parties to a contract have a duty of honest contractual performance.
Since then, parties have sought to understand specifically what it means to contract in good faith and to honestly perform contracts, and subsequent cases have clarified the contours and limits of this new duty.
In Callow, the SCC provides guidance on the scope and operation of the duty of honest contractual performance and its practical implications for contracting parties. In particular, it confirms that:
- parties are under a duty to act honestly in exercising contractual rights, including unilateral "without cause" termination provisions;
- parties do not have to disclose a decision to terminate a contract, but they cannot "knowingly mislead" counterparties;
- whether certain conduct – such as lies, half-truths, omissions, or even silence – amounts to "knowingly misleading" a counterparty is a highly fact-specific determination;
- to qualify as a breach of the duty of honest performance, the dishonesty in question must be directly linked to the performance of the contract; and
- the remedy for a breach of the duty of honest performance involves putting the injured party in the position it would have been in had the duty not been breached (i.e., "expectation damages").
The five SCC judges who signed the majority opinion were joined by three others who issued separate concurring reasons. The only dissenting opinion was authored by Justice Côté.
In 2012, a group of condo corporations in Ottawa ("Baycrest") entered into a pair of two-year maintenance services agreements with C.M. Callow Inc. ("Callow"). Both agreements – a winter agreement and a summer agreement – had expiry dates in April 2014. The winter agreement permitted Baycrest to terminate unilaterally, for any reason, upon giving 10 days' written notice.
In March or April 2013, Baycrest decided to terminate the winter agreement early but, importantly, did not inform Callow about its decision at that time. Instead, Baycrest representatives discussed with Callow the possibility of extending the winter agreement (which was, at that point, half-way through its two-year term). These discussions led Callow to believe that the winter agreement was in good standing and a renewal was likely.
Throughout the spring and summer of 2013, Callow performed "freebie" work for Baycrest, hoping it would encourage Baycrest to renew the winter agreement. It wasn't until September 2013 that Baycrest told Callow it was terminating the winter agreement.
In response, Callow claimed approximately $85,000 in damages from Baycrest. The claim was for breach of contract, among other things, and alleged Baycrest acted in bad faith by accepting Callow's free work over the summer despite knowing Callow was doing it to maintain the contractual relationship and to encourage a renewal. Callow also alleged that because Baycrest led Callow to believe that the work was satisfactory and the winter agreement was likely to be renewed, Baycrest knew or ought to have known Callow would not seek alternative contracts.
The trial judge found in favour of Callow, holding that Baycrest breached its duty to act honestly in performing its contractual obligations. The trial judge found that Baycrest's statements and conduct actively deceived Callow and led Callow to believe the winter agreement would be renewed. The trial judge emphasized that Baycrest's duty of honest performance did not amount to a duty of disclosure but did require a minimum degree of honesty to give the parties a fair opportunity to protect their interests. By engaging in active deception, Baycrest failed to meet this minimum standard.
The Ontario Court of Appeal reversed the trial decision, holding that while Baycrest may have acted dishonourably, it had not breached its duty of honest performance. The Court of Appeal emphasized that the principle of good faith must not be allowed to undermine other contract law principles and create commercial uncertainty. Accordingly, the duty of honest performance cannot amount to a duty of loyalty or disclosure, nor can it require a party to forego advantages flowing from the contract.
Requiring Baycrest to inform Callow of its decision to terminate would amount to a duty of disclosure, and was therefore, in the Court of Appeal's view, beyond the scope of the duty of honesty. All that Baycrest had to do was comply with the contractual termination provision by giving Callow 10 days' written notice. Further, the Court of Appeal noted that Baycrest's misleading suggestions – that the winter agreement would be renewed – related to potential future contracts and were, therefore, not "directly linked to the performance of the contract."
Supreme Court of Canada Decision
The majority of the SCC upheld the trial judge's decision that Baycrest had breached the duty of honest performance by knowingly misleading Callow into believing that the winter agreement would not be terminated.
Justice Kasirer, writing for the majority, disagreed with the Court of Appeal on two main issues: (i) whether Baycrest's deceitful conduct concerned matters directly linked to the performance of the winter agreement; and (ii) whether Baycrest's conduct amounted to dishonesty within the meaning of the duty of honest performance.
Issue 1: "Directly linked"
The majority of the SCC agreed with the Court of Appeal that only dishonesty directly linked to the performance of the contract would constitute a breach of the duty of honest performance. Unlike the Court of Appeal, however, the majority thought there was a direct link between Baycrest's dishonesty and the performance of the existing winter agreement. In the majority's view, Baycrest's active deception of Callow about its intention to exercise the termination provision created a sufficient nexus between the dishonesty and contractual performance to constitute a breach of the duty of honesty.
In reaching this conclusion, the majority agreed with counsel for Callow that the SCC's ruling in Bhasin had established that judicial consideration of the common law duty of honest performance should be informed by Québec civil law jurisprudence relating to the doctrine of abuse of contractual rights. Some of the initial academic commentary on Callow has centered on the broader implications of this aspect of the ruling, which was specifically rejected by the three concurring justices, who were of the view that the duty of honest performance could be developed more conventionally out of the existing common law concept of fraudulent misrepresentation.
Issue 2: Dishonesty within the meaning of the duty of honest performance
The SCC then tackled the issue of what standard of honesty was expected of Baycrest in its exercise of the termination provision in the winter agreement.
The SCC confirmed the duty of honesty does not amount to a duty of disclosure or of loyalty, meaning Baycrest didn't need to provide additional information relevant to the termination or forgo the advantage the agreement conferred upon it (i.e., the right to unilaterally terminate the agreement with 10 days' notice).
Further, the SCC acknowledged Baycrest did not "outright lie," since it didn't actually tell Callow the winter agreement would be renewed. But the SCC did think Baycrest deceived Callow through a series of "active communications": first, Baycrest representatives said things that led Callow to believe Baycrest was happy with the work and the winter agreement was likely to be renewed; and second, Baycrest accepted "freebie" work from Callow, knowing that work was done by Callow to incentivize a contract renewal, and in acknowledging this extra work, suggested to Callow there was hope for a renewal.
The SCC's decision on this point makes it clear that a breach of the duty of honesty can consist of something less than an "outright lie". While the determination is highly fact-specific and dependent on the circumstances, "half-truths, omissions, and even silence" can amount to a breach of the duty of honest contractual performance.
Based on the facts of this case – in which Baycrest stayed silent about its termination decision, while knowing Callow had drawn a mistaken inference from its conduct – the SCC held that Baycrest breached the duty of honest performance and that Callow should be compensated on an "expectation damages" basis; i.e. that it should be put in the position it would have been in had the duty been performed. While the three concurring justices favoured a more modest award of "reliance damages", the majority decided to reinstate the trial judge's expectations-based award of approximately $80,000.
Another potentially significant case on good faith in contracts, Greater Vancouver Sewerage and Drainage District v. Wastech Ltd, 2019 BCCA 66, was argued before the SCC along with Callow. When it is released, the SCC's decision in that case may add additional detail to the doctrine.
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.