Knowingly misleading a counterparty can include half-truths, omissions, and even silence, depending on the circumstances: The SCC expands the duty of honest performance in contract

In C.M. Callow Inc. v. Zollinger, 2020 SCC 45, Justice Kasirer, writing for the majority, revisits the common law duty of honest contractual performance six years after the SCC’s seminal decision in Bhasin v. Hrynew, 2014 SCC 71 (“Bhasin”). The decision clarifies what constitutes a breach of the duty of honesty in certain circumstances where one party does not correct the other’s mistaken belief.

Background

C.M. Callow Inc. (“Callow”) provided maintenance services to a group of condominium corporations (“Baycrest”) under two contracts: a winter contract, and a summer contract. The winter contract was set to expire in April 2014 and included a termination clause that if, for any reason, Callow’s services were no longer required, Baycrest could terminate the contract by providing ten (10) days’ written notice. In early 2013, Baycrest decided to terminate the winter contract, but chose not it inform Callow of its decision at the time. Instead, Baycrest opted to wait until September 2013, months after its decision to end the contract, to provide notice of termination, after Callow had completed its obligations under the summer contract.

During the performance of the summer contract of 2013, Callow performed additional “freebie” landscaping work, outside of the scope of the summer contract, in the hope that this would entice Baycrest to renew the winter contract when it expired in 2014.

Callow sued for breach of contract, alleging that Baycrest acted in bad faith by accepting the “freebie” services while knowing Callow was providing them in the hopes of securing future contracts. Callow also alleged that it did not source other winter contracts because Baycrest led it to believe the winter contract would not be terminated. Callow argued that even though the required ten days’ notice was given pursuant to the contract, Baycrest’s failure to exercise the termination right in accordance with the required duty of honest performance amounted to a breach.

Lower Court Decisions

The Ontario Superior Court found that Baycrest withheld the information that the contract was to be terminated, and knowingly declined to correct the false impression it had created based on its representation that the contract was likely to be renewed. This dishonest conduct resulted in Callow foregoing the opportunity to bid on alternate winter contract, and held Callow was entitled to damages.

The Ontario Court of Appeal reversed the trial judge’s decision, holding that, because there is “no unilateral duty to disclose information relevant to termination”, Baycrest was free to terminate the winter contract in accordance with the terms of the contract (giving ten days’ written notice of termination). Although Baycrest may not have acted honourably, the Court of Appeal held that any deception was not directly linked to performance of the winter contract, but rather was related to the renewal of a future agreement Callow hoped to negotiate.

The SCC Decision

A five-member majority of the Supreme Court along with three judges in concurrence—ruled that the duty of honest performance precludes active deception—and found Baycrest to have breached this duty by knowingly misleading Callow into believing that the winter contract would not be terminated. The majority said the dishonesty was about the current contract, not future contracts, because Baycrest acted dishonestly in putting an end to it.

The Court observed that the requirement of honesty within contractual performance can and does go further than prohibiting outright lies. The majority and minority agreed that “knowingly misleading” a counterparty can include “half-truths, omissions, and even silence, depending on the circumstances”.

The majority held that the duty of honest performance does not mean one side has to sacrifice their interests for the other—or tell Callow it would end the contract early. However, it did mean Baycrest couldn’t mislead Callow about it. They couldn’t pretend it would be renewed once they knew it would be ended. Accordingly, Baycrest’s failure to correct Callow’s false impression amounted to a breach of its duty of honest performance.

Contracts are agreements that give people rights against each other. The majority stipulated that no one is allowed to exercise a right under a contract in a dishonest way.

Key Takeaways

1. The duty of honest contractual performance goes beyond lying to include knowingly misleading a counterparty;
2. The manner in which a party to a contract exercises a termination clause is a matter directly linked to the performance of a contract such that the duty to act honestly is engaged;
3. The duty of honest performance does not impose a positive obligation on parties to disclose information against their self-interest; however, it does require parties to refrain from misleading another party relative to the contract, and to correct false representations that have resulted from the party’s own conduct;
4. When determining whether a party has lied or knowingly misled another party relative to the contract, the entire context, including the nature of the relationship, is to be considered; and
5. A breach of the duty of honest performance under a contract may result in a claim for damages to put the innocent party in the same position as if the contract had been performed.

Companies considering terminating or engaging in maintenance or other commercial contracts should speak with legal counsel in order to understand their rights and obligations in the given circumstances.