In 2014, the Supreme Court of Canada in Bhasin v. Hrynew, 2014 SCC 71, recognized a new common law contractual duty: specifically, the duty of honest performance. The duty requires that parties not lie or otherwise knowingly mislead each other about matters directly linked to the performance of their contract.
Six years later, the Supreme Court has now issued a new decision, in C.M. Callow Inc. v. Zollinger, 2020 SCC 45, which expands the scope of that duty. Notably, the Supreme Court established that the duty of honest performance not only prohibits overt lies, but also can prohibit “half-truths, omissions, and even silence, depending on the circumstances”.
The case involved a dispute between the respondent, a group of condominium corporations (“Baycrest”), and the appellant, C.M. Callow Inc. (“Callow”), regarding a two-year winter maintenance contract (the “Contract”) and separate summer maintenance contract, both executed in 2012.The Contract stipulated that Baycrest was entitled to terminate the Contract if Callow failed to provide satisfactory service in accordance with its terms. The Contract also permitted Baycrest to terminate the Contract if Callow’s services were not required for any other reason upon 10 days’ written notice.
In early 2013, Baycrest made the decision to terminate the Contract, but chose not to contemporaneously inform Callow of its decision. Throughout the spring and summer of 2013, Callow and Baycrest discussed the renewal of the Contract in 2014.Those discussions left Callow with the impression that the Contract was likely to be renewed and that Baycrest was satisfied with its services.
In September 2013, shortly before Callow would have begun its winter work pursuant to the Contract, Baycrest informed Callow of its decision to terminate the Contract. Callow subsequently filed a claim for breach of contract, alleging that Baycrest exercised the termination clause in the Contract contrary to the requirements of good faith set forth in Bhasin, and in particular the duty to perform a contract honestly.
The trial judge determined that Baycrest actively deceived Callow from the time the decision to terminate was made and until September 2013, and that Baycrest acted in bad faith by withholding information to ensure Callow performed work pursuant to the summer maintenance contract. The Ontario Court of Appeal overturned this decision. The court disagreed with the trial judge’s decision to expand the duty of honest performance beyond the terms of the Contract, and found that any deception by Baycrest merely related to a new contract not yet in existence, namely a renewal of the Contract.
With only one dissent, the Supreme Court set aside the decision of the Ontario Court of Appeal and found that the duty to act honestly in performance of the contract precluded the active deception by Baycrest by which it knowingly misled Callow into believing that the Contract would not be terminated.
At the outset of its decision, the Supreme Court reiterated the general organizing principle of good faith established in Bhasin, which meant that “parties generally must perform their contractual duties honestly and reasonably and not capriciously or arbitrarily”.The Supreme Court also reiterated that the duty of honesty applies to all contracts as a matter of contractual doctrine, and means “simply that parties must not lie or otherwise knowingly mislead each other about matters directly linked to the performance of the contract.”
The Supreme Court thereafter noted that it disagreed with the Court of Appeal on two main points, namely, (1) whether the alleged dishonesty was related to the renewal of the Contract or the performance of the Contract (the Supreme Court determined that it was the latter) and (2) whether Baycrest’s actions amounted to a breach of the duty of honest performance (the Supreme Court determined that they did).
It is the latter subject that has the greatest impact on parties to a contract, and potential contract disputes, going forward. In its discussion of the subject, the Supreme Court commented that whether or a not a party has knowingly misled its counterparty requires a highly fact-specific determination, and that it can “include lies, half-truths, omissions, and even silence, depending on the circumstances.”
The Supreme Court agreed with the trial judge that Baycrest intentionally withheld information about its intent to terminate the Contract, and knew that such silence, when combined with its active communications over the prior months, left Callow under the false impression that Baycrest was satisfied with its performance and that it would likely renew the Contract. The Supreme Court ultimately found that Baycrest breached its contractual duty of honest performance by failing to correct Callow’s misapprehension thereafter.
The decision in Callow, and in particular its expansion of the duty of honest performance to prohibit half-truths, omissions, or silence, under certain circumstances, and not merely overt dishonesty, will require parties to a contract to tread very carefully when engaging with counterparties when termination, contract renewal, or other material matters, are at issue.
Although the contours of the duty will undoubtedly continue to be explored, until further clarification is offered by the courts, parties would do well to consider what misapprehensions might result from any and all discussions with counterparties about such topics.