CM Callow Inc. v. Zollinger: The Relevance of Good Faith in Terminating Construction Contracts

The Ontario Court of Appeal in CM Callow Inc. v Zollinger (“Callow”) recently rendered a decision that could have important consequences for parties seeking to terminate commercial agreements. Specifically, Callow may have significant ramifications for the law of good faith in Ontario, and in particular with respect to the duty of honest performance first recognized in Bhasin v Hrynew.

The Facts

In Callow, the defendant condominium corporations entered into two separate two-year maintenance contracts with the plaintiff Callow (a landscaping and property maintenance contractor). One contract covered summer maintenance, while the other covered winter maintenance. The winter contract contained a provision allowing for early termination by the defendants on 10 days’ notice. In early 2013, the defendants ultimately decided to terminate the winter contract, but did not provide Callow with notice of termination until September of that year.

During the summer of 2013, Callow – unaware of the defendants’ intention to terminate the contract – performed additional “freebie” landscaping work in the hope of incentivizing the defendants to enter into additional maintenance contracts. The defendants were aware of the “freebie” services, and knew Callow was under the mistaken impression that additional contracts were forthcoming, but did not disclose their intention to terminate. After the defendants ultimately gave notice of termination, Callow sued for breach of contract. The dispute centred on the defendants’ delay in informing Callow of the decision to terminate.

At trial, the court found that the defendants had breached the contractual duty of honest performance by withholding their intention to terminate the winter contract and in continuing to represent that the parties’ contractual relationship was not in danger of coming to an end. The trial judge held that the standard of honesty required the defendants to address alleged performance issues with Callow, provide prompt notice, or refrain from any representations in anticipation of the notice period.

The Court of Appeal’s Decision

On appeal, the defendants argued that the trial judge erred by improperly expanding the duty of honest performance in a manner that went beyond the terms of the contract. They further argued that the trial judge erred in calculating damages.

The Court of Appeal began by stressing that the Supreme Court was clear in Bhasin v Hrynew that the organizing principle of good faith and the duty of honesty in contractual performance are to be applied in a manner consistent with longstanding contract law principles, so as to avoid creating commercial uncertainty.

With that in mind, the Court concluded that even taking the plaintiff’s case at its highest, the facts as alleged would not rise to the level required to establish a breach of the duty of honest performance. The fact that the defendants, arguably, actively deceived the plaintiff as to their intentions, and accepted the “freebie” services in the knowledge that these services were performed in the hope of being awarded additional contracts, was merely dishonourable.

The Court again cited to Bhasin to conclude that there is no unilateral duty to disclose information relevant to termination; in the circumstances of this case, the defendants were free to terminate the winter contract provided only that they informed the plaintiff of their intention and gave the required notice. Because the duty of honest performance was directly tied to the performance of the contract, it did not affect the defendants’ freedom concerning potential future contracts that had not yet been entered into. Any communications between the parties that may have led the plaintiff to conclude there would be a new contract were external to the contract, and did not preclude the termination of the winter contract.

The plaintiff sought leave to appeal to the Supreme Court of Canada, which was recently granted. The appeal will be heard together with another good faith case from British Columbia, Greater Vancouver Sewerage and Drainage District v. Wastech Services Ltd.

Analysis

This case is yet another reminder that superior and intermediate appellate courts will interpret and apply the findings of Bhasin narrowly. Notwithstanding that the parties’ communications regarding the “freebie” work and the possibility of a new contract were related to the parties’ existing contract, the Court of Appeal nevertheless found that those communications were external to the contract and therefore did not have any bearing on the issue of termination. Further, it is noteworthy that the defendants’ arguable “failure to act honourably”, and potential active deceit, was not enough to establish dishonesty or a lack of good faith. Based on the Court’s reasoning, it appears that a finding of dishonesty would have to be grounded in a positive misrepresentation – for example, an express lie or equivocation, as occurred in Bhasin v Hrynew – rather than a mere omission (as was the case in Callow). Callow therefore raises an interesting question as to what precisely will convert merely dishonourable behaviour into actionable misconduct.

Second, it is noteworthy that the Court drew a distinction between the circumstances of this case and its prior decision in Mohamed v Information Systems Architects Inc., in which the Court found that the manner in which an employer exercised a contractual discretion to terminate an employment contract was inconsistent with its obligation to perform the contract in good faith. This reiterates that the Court in Callow took pains to emphasize that the question at issue was in essence only a question of honesty in performance, and not of the manner in which the contract was terminated.

However, this reasoning appears open to interpretation, given that the termination provision in Callow was exercised at the defendants’ discretion. On the one hand, this distinction is logical based on how the Court of Appeal framed the issues – namely, in establishing that the facts here were external to the performance of the contract. On the other hand, it is arguable that this distinction is artificial, insofar as the termination in this case took place within the context of a contractual right to terminate the winter contract early. Accordingly, it will be interesting to see if this issue is raised and addressed on appeal.

Callow has established that the application of the general principle of good faith and the duty of honesty in contractual performance are to be narrowly understood. At least for the time being, parties would be well advised to plead any breach of the duty of honest performance carefully, ensuring that the facts as pleaded, if supported by the fact pattern, are consistent with a positive misrepresentation by the defendant. It remains to be seen to what extent, if at all, this advice will hold true once the Supreme Court renders judgment on appeal.

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