Supreme Court of Canada Revisits Duty of Good Faith in Contract Performance

In its 2014 decision in Bhasin v. Hyrnew, the Supreme Court of Canada unanimously recognized that good faith contractual performance is an organizing principle of the Canadian common law of contracts, and that there is a common law duty applicable to all contracts to act honestly in the performance of contractual obligations. The Supreme Court recently released its decision in C.M. Callow Inc. v. Zollinger, which further addresses the duty of honesty in contractual performance.

Background

The central issue in Callow v. Zollinger was whether a group of condominium corporations (“Baycrest”) had breached their maintenance contract with C.M. Callow Inc. that was owned and operated by Christopher Callow (“Callow”).

Baycrest entered into two, two-year maintenance contracts with Callow in 2012: one contract covered summer maintenance and the other covered winter maintenance. The winter maintenance contract contained a provision allowing Baycrest to terminate the contract on 10 days’ notice. In March or April 2013, Baycrest decided to exercise its termination right in respect of the winter maintenance contract, but did not tell Callow at that time. In the spring and summer of 2013, Callow began discussions with Baycrest about renewing the winter maintenance contract. In addition, Callow performed “freebie” landscaping work hoping to incentivize Baycrest to renew the contract. During this period, Callow thought it was likely he would secure a renewal of the winter maintenance contract. In September 2013, Baycrest informed Callow that it would be terminating the winter maintenance contract on 10 days’ notice. Callow sued.
 
Decisions Below

The trial judge determined that Baycrest breached the contractual duty of honest performance articulated in Bhasin v. Hyrnew by (a) withholding its intention to terminate to ensure that Callow performed the summer maintenance contract and (b) representing that the winter maintenance contract was not in jeopardy. According to the trial judge, Baycrest’s dishonesty was tied to the way it delayed invoking the contractual 10-day notice period while actively deceiving Callow that the contract was not at risk. Baycrest was ordered to pay damages to place Callow in the position he would have been in if the duty of honest performance had not been breached.

The Ontario Court of Appeal overturned the trial judge’s decision, holding that while the trial judge’s findings “may well suggest a failure to act honourably”, those findings “do not rise to the high level required to establish a breach of honest performance.” In coming to this conclusion, the Court of Appeal reasoned there was no unilateral duty to disclose information relevant to termination and that Baycrest was free to terminate the winter maintenance contract with Callow, provided only that they informed him of their intention to do so and provided the required notice.

Supreme Court of Canada Decision

A majority of the Supreme Court overturned the Court of Appeal’s decision and restored the judgment of the trial judge. Justice Kasirer wrote the majority decision (with four other judges), while Justice Brown wrote a decision concurring in the result (with two others). Justice Côté dissented and would have dismissed the appeal.

In its decision in Callow v. Zollinger, the Supreme Court addressed the duty of honest performance, how to determine when dishonesty is connected to an alleged breach of that duty, and the appropriate measure of damages for breach of the duty of honest performance. In addition, the majority and concurring judges engaged in a lengthy debate about the appropriateness of consulting Quebec civil law when interpreting the common law. The Supreme Court declined to decide whether there had been a breach of the duty to exercise a discretionary power in good faith.

The Duty of Honest Performance

The duty of honest performance expounded in Bhasin v. Hyrnew requires contracting parties to refrain from lying to or knowingly misleading each other about matters directly linked to the performance of the contract. However, the Supreme Court in Callow v. Zollinger recognized that this duty generally does not impose a positive obligation on contracting parties to disclose material facts. Accordingly, as Justice Brown stated in his concurring opinion, “[t]he dividing line between (1) actively misleading conduct, and (2) permissible non"‘disclosure, is the central issue in this appeal.”

The majority in Callow v. Zollinger determined that the manner in which Baycrest exercised its termination right in the winter maintenance contract breached the duty of honest performance it owed to Callow. In coming to this conclusion, the majority held that the duty of good faith applies to all contractual rights and obligations; even seemingly “unfettered” contractual rights must be exercised in accordance with the duty to act honestly. When determining whether the duty of honest performance has been breached, the relevant question is generally whether a right or obligation under the parties’ contract was exercised or performed dishonestly. With this in mind, Justice Kasirer held there was no error in the trial judge’s conclusion that the duty of honest performance required Baycrest to refrain from knowingly misleading Callow in the exercise of the termination right through a series of active communications in which Baycrest accepted “freebie” services and suggested that a renewal of the winter maintenance contract was likely. These deceptions by Baycrest, made in anticipation of exercising its termination right, were uncorrected despite knowing Callow was under a false impression. This conduct, Justice Kasirer held, provided the necessary link between dishonesty and contractual performance required to establish a breach of Baycrest’s contractual duty of honest performance.

The concurring judges took a somewhat similar approach when determining that Baycrest breached the duty of honest performance. Rather than focus on the manner in which Baycrest exercised the contractual termination right, Justice Brown focused on Baycrest’s conduct preceding the exercise of that right, which kept Callow in the dark despite Baycrest knowing its representations were misleading. Under this approach, the concurring judges determined that the duty of honest performance required Baycrest to correct Callow’s misapprehension before he detrimentally relied on the misleading representations about the status of the winter maintenance contract.

In her dissenting judgment, Justice Côté wrote that contracting parties should only be required to correct their counterparty’s mistaken beliefs where they materially contributed to those beliefs. On the facts in Callow v. Zollinger, Justice Côté was satisfied that Baycrest was under no such requirement as it had not materially contributed to Callow’s misapprehension about the status of the winter maintenance contract.

The Appropriate Measure of Damages

The majority and concurring judges came to different conclusions on the appropriate measure of damages for breach of the duty of honest performance, although in this case both measures yielded the same amount of monetary damages. The majority held that expectation damages – that is, damages that put the injured party in the position that it would have been in had the duty been performed – should be awarded. In doing so, the majority noted that an award of expectation damages may deter parties from acting dishonestly when their counterparty’s provable losses are less than the cost of performance.

In contrast, the concurring judges suggested that the duty of honest performance ought to attract an award of reliance damages – that is, damages that compensate the injured party for losses sustained in reliance on the dishonest misrepresentations concerning contractual performance. According to Justice Brown, it would be appropriate to depart from the ordinary measure of expectation damages because the duty of honest performance is concerned with reliance on dishonest misrepresentations rather than expectations about contractual performance.

Concluding Remarks

In Callow v. Zollinger, the Supreme Court demonstrated its commitment to ensuring honesty in contractual performance. It made clear that inaction will not shield contracting parties from liability where they knowingly mislead each other about matters directly linked to the performance of the contract itself.

The Supreme Court has yet to release its judgment in another case concerning the duty of good faith, Wastech Services Ltd. v. Greater Vancouver Sewerage and Drainage District, which was heard concurrently with Callow v. Zollinger. That case will provide another opportunity for the Supreme Court to clarify the duty of honest contractual performance.

For more information concerning Callow v. Zollinger, please contact any member of our Dispute Resolution Group.

The authors would like to Rachel Oster, Articling Student-at-Law, for her assistance in preparing this Update.