Supreme Court Clarifies the Duty of Honest Contractual Performance

In the recent decision of C.M. Callow Inc. v. Zollinger, 2020 SCC 45 (“Callow”), the Supreme Court of Canada reaffirmed the principles relating to the duty of honest contractual performance, as set out in Bhasin v. Hrynew, 2014 SCC 71 (“Bhasin”). This duty requires contracting parties to be honest with each other in performing their contractual obligations, and to not lie or knowingly mislead each other about matters directly linked to the performance of the contract. Although contracting parties have no duty to disclose material information, the Supreme Court in Callow confirmed that knowingly misleading another party is not confined to direct lies and can include silence in some circumstances.

Summary of the Case

The plaintiff in Callow entered into two seasonal maintenance contracts with the defendant condominium corporations: a winter maintenance contract and a summer maintenance contract. The winter maintenance contract covered the period from November 2012 to April 2014. One of the provisions of the winter maintenance contract permitted the defendants to terminate the contract for any reason by providing ten days’ written notice. The defendants made the decision to terminate the winter maintenance contract during the spring of 2013, but decided not to notify the plaintiff of this decision until September 2013. In the meantime, the defendants engaged in discussions with the plaintiff regarding the renewal of the winter maintenance contract and led the plaintiff to believe that they were satisfied with the plaintiff’s services and that the contract was likely to be renewed. As a result, during the summer of 2013, the plaintiff performed extra work related to the summer maintenance contract, hoping that it would act as an incentive for the defendants to renew the winter maintenance contract.

After notice of the termination was given, the plaintiff sued the defendants alleging that they had acted in bad faith and had breached the duty of honest contractual performance. The trial judge found that the defendants had “actively deceived” the plaintiff between the time the termination decision was made in the spring of 2013 and the time when notice was given in September 2013. The Court of Appeal reversed the trial judge’s decision and concluded that the trial judge had improperly expanded the duty of honest contractual performance beyond the terms of the winter maintenance contract. The plaintiff appealed to the Supreme Court of Canada.

The majority of the Supreme Court held that the defendants knowingly misled the plaintiff in the manner in which it exercised the termination clause in the winter maintenance contract, which amounted to a breach of the duty of honest contractual performance. In reaching this conclusion, the Court confirmed that the question of whether or not a party has “knowingly misled” another party is a highly fact-specific determination, and can include lies, half-truths, omissions and even silence, depending on the circumstances. Although the defendants had a right to terminate the winter maintenance contract, that right had to be exercised honestly and in good faith. Through its actions, the defendants gave the plaintiff the false impression that the winter maintenance contract would be renewed. Upon realizing that the plaintiff was under this false impression, the defendants had an obligation to correct the misapprehension. By deliberately choosing to remain silent, the Court found that the defendants breached the duty to act honestly.

Key Takeaways

 Although the facts of Callow make it quite clear that the defendants knowingly and intentionally misled the plaintiff, in other circumstances it might be more difficult to assess on the facts whether the duty of honest contractual performance has been breached. As a result, Callow appears to inject some commercial uncertainty into the area of contract law because it may be difficult for a party to know when another party is under a mistaken impression, and when it is obliged to take proactive steps to correct a misapprehension. Accordingly, the Supreme Court’s decision makes it imperative that parties to a contract act honestly.