At the end of 2020, the Supreme Court of Canada (“SCC”) released its decision in CM Callow Inc. v Zollinger, which greatly expanded upon what it means to “knowingly mislead” the other party in the honest performance of a contract. Since its release, this decision has sparked debate about how parties to a contract are going to accurately and appropriately uphold this newly expanded upon duty in the performance of contracts.
A group of condominium companies, collectively referred to as Baycrest, had hired CM Callow Inc. (“Callow”) to perform regular seasonal maintenance work at various condominium properties. Baycrest had a summer maintenance contract and a winter maintenance contract with Callow. The winter maintenance contract provided that Baycrest may terminate the contract at any time on 10 days’ notice.
Throughout the summer months, Callow performed work under the terms of the summer maintenance agreement and when September hit, Baycrest exercised its right to terminate the winter maintenance agreement on 10 days’ notice.
However, Baycrest had made the decision to terminate the winter maintenance agreement months prior to September but had also indicated to Callow that it was pleased with Callow’s work.
While Baycrest made the decision to terminate the agreement in accordance with its terms, the issue before the SCC was whether Baycrest allowing Callow to continue with performance of the summer maintenance agreement with the knowledge that it was planning on terminating the relationship was a breach of the duty of good faith and honest performance in contractual dealings.
The SCC determined that it was.
The duty of good faith and honesty
At no point in the proceedings was the enforceability or fairness of the termination clause at issue. None of the parties disputed that the termination had been done in accordance with the terms of the agreement, but Callow argued that it had been knowingly misled during the summer months by Baycrest and Baycrest had therefore breached its duty of good faith and honesty when it terminated the contract.
The duty of good faith and honest performance in contract was first affirmed by the SCC in the seminal case of Bhasin v Hrynew, 2014 SCC 71. Since then, courts have grappled with the parameters of good faith and honest performance.
However, what courts have been consistent on, and which the SCC confirmed in CM Callow Inc. v Zollinger, is that the parties to a contract cannot knowingly mislead or lie to each other in the performance of their contractual duties. They also cannot act capriciously, unreasonably, or arbitrarily when performing their obligations under the contract.
An expansion of the law
In CM Callow Inc. v Zollinger, the SCC expanded on these requirements by clarifying that the duty to act honestly does not just mean that parties cannot lie or actively mislead in the performance of their contractual duties. The SCC stated that knowingly misleading the other party to a contract may include “lies, half-truths, omissions, and even silence.” Parties can mislead both through action and inaction. If a party has created a misunderstanding through its conduct and does not take any steps to correct that misunderstanding, it may have breached its duty to act honestly in the performance of a contract.
In order for a breach of contract to be found on this basis, the failure to act honestly must be attached to the terms of the contract or the performance of a specific term in some way.
In this case, Baycrest breached its duty of honest performance because its “deception” in terminating the agreement was directly linked to the termination clause in the winter maintenance agreement. More specifically, Callow had been led to believe that Baycrest was content with their work and their ongoing contract would likely continue.
The SCC found that a reasonable person would infer the ongoing contract would remain in good standing and would not be terminated early. When Baycrest failed to correct Callow’s misunderstanding about the quality of its performance, this amounted to a breach of Baycrest’s duty to act honestly and in good faith.
The damages that flowed from this breach were damages for the lost opportunity to obtain replacement work as Callow would have started looking for a new contract if it had known that its winter maintenance agreement was likely to be terminated.
The effects of this decision
What does this decision mean for the performance of contracts going forward?
The main concern is that this decision has created a positive obligation for parties to a contract to ensure that the other party is not being misled in some way – even if the resulting misunderstanding is unspoken. If any misunderstandings have arisen that go to the performance of the contract itself or to a specific term of the contract, the parties have an obligation to clear up that misunderstanding as failure to do so may amount to a breach of the contract on the basis of honest performance and good faith.
For example, if Party A has created a false impression about Party B’s performance of the contract, and Party A does not correct that false impression, which then leads to damages to Party B; Party A could be liable for breach of the duty of honest performance.
This new expansion of the duty to act honestly has the potential to complicate contractual relations and creates some uncertainty regarding how the actions (or inactions) of parties to a contract may lead to a breach on the basis of good faith or honest performance.
The SCC also heard Wastech Services Ltd. v Greater Vancouver Sewerage and Drainage District at the same time it heard CM Callow Inc. v Zollinger. The SCC has not yet released a decision in Wastech Services Ltd. but perhaps we may see further clarification from the SCC on the parameters of this newly expanded duty of honest performance.
The determination of whether there has been a breach of the duty of good faith or honest performance is highly fact-specific. It is not yet possible to determine how lower courts will interpret and apply the SCC’s decision in CM Callow Inc. v Zollinger, but it will be important for contracting parties to be mindful of their obligations to be honest and to act in situations where they may have created misunderstanding or misapprehension in relation to the performance of a contract.