The Supreme Court of Canada (“SCC”) recently released its highly-anticipated reasons for judgment in the case of C.M. Callow Inc. v. Zollinger¹C.M. Callow Inc. v. Zollinger, 2020 SCC 45 [“Callow”]. (“Callow”), a case that builds upon the court’s recognition of the general organizing principle of good faith and the duty of honest performance in contract law, originally set out by Justice Cromwell in the 2014 SCC case of Bhasin v. Hrynew²Bhasin v. Hrynew, 2014 SCC 71 [“Bhasin”]. (“Bhasin”).

In Callow, the SCC was tasked with examining the manner in which the Respondent exercised its unilateral termination right under its services agreement with the Appellant (the “Contract”), and whether that manner of termination was a violation of the Respondent’s duty of honesty in contractual performance. In Bhasin, the Court explained that the duty of honest performance requires contracting parties to be honest with each other in relation to the performance of their contractual obligations.^{3Bhasin at para 93.}

In Part One of this blog, we will discuss the Court’s reasoning based on its interpretation of the duty of honest contractual performance. Part Two will examine the Court’s general discussion of the interpretation and expansion of existing good faith doctrines at law, including the dissenting opinions in Callow.

CAN SILENCE VIOLATE THE DUTY OF HONEST CONTRACTUAL PERFORMANCE?

The Contract at issue was a winter maintenance agreement between the Appellant as service provider and the Respondent (a group that included ten condo corporations managed by a condo management group and a property manager). Under the termination provision of the Contract, the Respondent was permitted to unilaterally terminate the Contract, without cause, upon giving the Appellant 10 days’ notice.

Despite giving the Appellant 10 days’ notice of termination, the Appellant argued that the Respondent’s termination of the Contract violated the contractual requirements of good faith and the duty of honest performance due to the Respondent’s withholding of information from the Appellant and its misleading statements to the Appellant prior to exercising its right to terminate the contract.

A majority of the SCC agreed with the Appellant, holding that the duty to act honestly in the performance of a contract precludes active deception, and that the Respondent breached its duty by knowingly misleading the Appellant.^{4Callow at para 5.}

NOT KNOWINGLY MISLEADING OR DECEIVING ANOTHER PARTY

Although the Respondent argued that its silence did not constitute dishonesty^{5Callow at para 4.}, the Court disagreed, and found that the Respondent’s dishonesty in its contractual performance and actively misleading/deceiving of the Appellant included:

• choosing not to inform the Appellant of its decision to terminate the Contract at the time it voted to terminate in March or April of 2013;
• engaging the Respondent in discussions throughout the spring and summer of 2013 regarding a renewal of the Contract (after it had already decided to terminate the Contract);
• specific conversations between condo board members and the Appellant (after the decision to terminate the Contract was already made), where representations were made that “they were satisfied with his services”;
• allowing the Appellant to do various jobs as “freebie work” as an incentive for the Respondent to renew the Contract after the decision to terminate the Contract had already been made;
• failing to correct the Appellant’s mistaken impression that the Contract would be renewed; and
• not informing the Appellant about the decision to terminate the Contract until September 12, 2013.

WHAT CONSTITUTES A BREACH OF THE DUTY OF HONEST PERFORMANCE?

In Callow, the SCC offers further insight into the legal requirements of the duty of honest performance in contract law, and specifically what is required of contracting parties in honestly performing the exercise of a contractual right such as a termination right.

As Justice Cromwell elucidated in Bhasin, there are certain legal principles and doctrines that apply to all contracts in the common law, starting with a general unifying principle of good faith. These principles include:

• the duty of honest performance applies to all contracts as a matter of contractual doctrine;
• parties must not lie or otherwise knowingly mislead each other about matters directly linked to the performance of a contract;
• the duty of honest performance is not a duty to disclose;
• the duty of honest performance does not impose a duty of loyalty akin to that of a fiduciary; and
• the duty of honest performance does not require a contracting party to subvert its own interests to that of its counterparty.

THE DUTY OF HONESTY MUST BE CONNECTED TO THE EXERCISE OF A RIGHT OR PERFORMANCE OF AN OBLIGATION UNDER THE CONTRACT

The SCC expands upon these general propositions in Callow, explaining that the relevant question in examining the duty of honest performance is whether a right under a contract was exercised, or an obligation under a contract was performed, dishonestly.^{6Callow at para 37.}

The duty of honest performance requires that the matter at issue be directly linked to the performance of a contract, such as the exercise of a right under the contract or the performance of an obligation under the contract.

Ultimately, the SCC held that the Respondent’s deception was directly linked to the Contract because its exercise of the termination clause in the Contract was dishonest. Although the Respondent did not have a free-standing obligation to disclose its intention to terminate the Contract before the 10 days’ notice contained in the Contract, it did have an obligation to refrain from misleading the Appellant in exercising its termination right.^{7Callow at para 38.}

IMPORTANT LEGAL PRINCIPLES SET OUT IN CALLOW

The SCC’s Callow judgment makes clear that silence can constitute dishonesty in the performance of a contract, irrespective of a party’s motive and irrespective of whether contractual requirements (such as a notice period) are satisfied.

According to the Court, if a party’s silence involves actively and knowingly misleading or deceiving the other party, or failing to correct a false impression that it created through its own actions, such actions will be considered to be dishonest. The lack of a positive obligation to disclose information between contracting parties, therefore, does not preclude an obligation to correct a false impression created through its own actions.^{8Callow at para 38.}

Despite not imposing a positive obligation of disclosure on a contracting party, the duty of honest performance also requires that a contracting party cannot undermine its counterparty’s contractual interests in bad faith.^{9Callow at para 39.}

The dishonest conduct of a contracting party can include such conduct as:

• outright lies;
• silence;
• omissions and half-truths; and
• the failure to correct an active dishonesty or misapprehension.

The SCC stressed that the above conduct is not a closed list, and the question of whether a contracting party has “knowingly misled” its counterparty is a highly fact-specific determination that will depend on the circumstances of each case.^{10Callow at para 91.} Further, because the duty of honesty is imposed as a matter of contractual doctrine, parties can’t contract out of the duty.^{11Callow at para 84.}

The Court also found that the Respondent’s dishonest actions and violation of its duty of honesty were dispositive of the appeal and it was unnecessary to answer the Appellant’s argument that the Respondent breached its duty to exercise a discretionary power in good faith. The Court also found it was unnecessary to extend Bhasin to recognize a new duty of good faith relating to “active non-disclosure” of information germane to performance under a contract.^{12Callow at para 40.}

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• 1
  C.M. Callow Inc. v. Zollinger, 2020 SCC 45 [“Callow”].
• 2
  Bhasin v. Hrynew, 2014 SCC 71 [“Bhasin”].
• 3
  Bhasin at para 93.
• 4
  Callow at para 5.
• 5
  Callow at para 4.
• 6
  Callow at para 37.
• 7
  Callow at para 38.
• 8
  Callow at para 38.
• 9
  Callow at para 39.
• 10
  Callow at para 91.
• 11
  Callow at para 84.
• 12
  Callow at para 40.