Callow v Zollinger: Developments in the Duty of Honest Performance and Good Faith’s Uncertain Future

The Supreme Court of Canada in CM Callow Inc. v Zollinger (“Callow”) recently rendered a decision on the duty of honesty in contractual performance that builds on the 2014 decision of Bhasin v Hrynew, clarifying that the scope of dishonesty includes half-truths, omissions, and even silence, depending on the circumstances. However, the manner in which the majority of the Court reached its conclusion in Callow has generated uncertainty as to how good faith in Canadian common law will develop in future.

Background

The defendant condominium corporations (collectively, “Baycrest”), entered into two maintenance contracts with the plaintiff Callow (a contractor), one of which covered summer maintenance while the other covered winter maintenance. The winter contract contained a provision allowing for Baycrest to terminate that contract for any reason, so long as they provided 10 days’ written notice. In early 2013, Baycrest decided to terminate the winter contract, but did not provide Callow with notice of termination until September.

During the summer of 2013, Callow – unaware of Baycrest’s intention to terminate the contract – performed additional “freebie” landscaping work in the hope of incentivizing Baycrest to renew the winter contract. Baycrest were aware of the “freebie” services, and knew Callow was under the mistaken impression that a renewal was forthcoming, but did not disclose their intention to terminate. Instead, Baycrest indicated that they were happy with Callow’s services, and that the winter contract was likely to be renewed. When Baycrest ultimately terminated the winter contract, Callow sued for breach of contract.

Decisions of the Courts 

At trial, the court found that Baycrest had breached the duty of honest performance by withholding their intention to terminate the winter contract and in continuing to represent that the winter contract was likely to be renewed. The trial judge held that the duty of honest performance required Baycrest to address alleged performance issues with Callow, provide prompt notice, or refrain from any representations.

On appeal, the Court of Appeal for Ontario concluded that the facts as alleged would not establish a breach of the duty of honesty. The fact that Baycrest arguably deceived Callow as to its intentions, and accepted “freebie” services in the knowledge that those services were performed in the hope of a contract renewal, was merely dishonourable. Because the duty was directly tied to the performance of the contract, it did not affect Baycrest’s freedom concerning potential future contracts. Any communications between the parties that may have led Callow to conclude there would be a new contract were external to the contract, and did not preclude termination.

The Supreme Court’s Decision

The Supreme Court rendered three judgments, with a 5-judge majority and a 3-judge concurrence both finding that Baycrest had breached the duty of honest performance, with Côté J. writing in dissent that Baycrest had not breached the duty of honesty.

Writing for the majority, Kasirer J. reached several important general conclusions in support of the ultimate determination that Baycrest knowingly misled Callow in respect of the manner in which it exercised the termination clause, which wrongful exercise amounted to a breach of the duty of honest performance.

First, the majority noted that the duty of honest performance shares a common methodology with the duty to exercise contractual discretionary powers in good faith to the extent that a breach of the duty of honest performance must be tied to the exercise of a contractual right or the performance of an obligation, and should not be thought of in the abstract. As a result, the majority concluded that the breach of the duty in this case must be understood as linked to the exercise of the termination clause.

Second, and more abstractly, the majority observed that reliance upon Quebec’s civil law as to the abuse of rights would help focus the analysis of whether the duty of honest performance had been breached on the wrongful exercise of a contractual right. To that end, the majority engaged in a detailed review of the civil law on the abuse of rights in order to clarify the content of the duty of honesty.

Third, the majority concluded that to “knowingly mislead” a contractual counterparty could include – much like the law on misrepresentation in tort law – half-truths, misleading actions, or failing to correct a misrepresentation that the representing party thought was true at the time of the representation, but later learned was false. In the circumstances, Baycrest’s actions and statements led Callow to mistakenly believe that the winter contract would be renewed, which therefore constituted a breach of the duty of honesty.

Fourth, on the question of damages, the majority determined that Callow should be put in the position it would have been in had the duty not been breached (in other words, Callow should receive expectation damages). By contrast, the majority rejected the proposition that Callow’s damages should be measured according to the loss Callow suffered from relying on Baycrest’s dishonesty (i.e. reliance damages).

Writing for the concurrence, Brown J. agreed that to “knowingly mislead” could include half-truths, omissions, and even silence, depending on the circumstances, and that Baycrest had breached the duty of honesty. However, the concurrence disagreed with the majority with respect to 1) the use of Quebec civil law on abuse of rights as a means of developing the content of the duty of honesty, and 2) the proper measure of damages.

On the first issue, the concurrence observed that the injection of civil law into a common law topic would create confusion for common law lawyers and clients. In this regard, the concurrence noted that this problem had arisen in the 1970s in relation to the law of unjust enrichment, where the Supreme Court had introduced civil law terminology to explain a common law concept and in so doing, created confusion that persisted for decades and ultimately created a significant substantive change in the law.

More specifically, the concurrence expressed the concern that introducing “abuse of rights” into good faith could ultimately result in creating a duty of disclosure, contrary to the explicit statements in Bhasin. In addition, the concurrence observed that the majority’s requirement that the dishonesty be tied to the exercise of a specific right (in this case, the termination clause) unnecessarily conflated the two distinct doctrines of the duty of honest performance and the duty to exercise a contractual discretion in good faith. As the concurrence observed, there was no real benefit to focusing the analysis on the exercise of Baycrest’s contractual right, since the duty of honesty is meant to apply more generally to the performance of contracts.

On the second issue, the concurrence concluded that a careful reading of Bhasin in fact suggests that the framework developed in Bhasin contemplated damages measured by the loss suffered by the plaintiff as a result of reliance on the defendant’s dishonesty. This is because the issue is not that the defendant failed to perform the contract, but rather that the defendant performed the contract and caused the plaintiff loss by making dishonest misrepresentations concerning that performance, upon which the plaintiff relied to its detriment.

Writing in dissent, Côté J. expressed agreement with the concurrence’s conclusions with respect to the use of civil law, but would have held on the facts that Baycrest had not lied or otherwise knowingly mislead Callow, such that a breach of the duty of honesty had not occurred.

Analysis

Callow is welcome for its clarification of what constitutes “knowingly misleading” a contractual counterparty, which clarification is conceptually consistent with the law of misrepresentation in tort and will therefore be familiar to common law lawyers.

From a practical perspective, however, the devil is in the factual details. In practice, it will be difficult to know with certainty whether an action has given rise to a misapprehension by a counterparty, and whether this misapprehension must be corrected. Lawyers and clients will need to be mindful of their conduct on a day-to-day basis, and carefully consider the potential effects of any actions or statements made to counterparties. That being said, it is important to consider the requirement that a party knowingly mislead their counterparty. Where such conduct is inadvertent, or the party is unaware that their counterparty is labouring under a misapprehension, then it is less likely that the duty of honesty will be engaged. At the same time, the difficulty of proving such knowledge must be kept in mind as it is potentially challenging from a practical perspective.

Conversely, we are respectfully of the same view as the concurrence that the majority’s introduction of the civil law concept of abuse of rights risks the introduction of an element of uncertainty into common law good faith, and raises the spectre of future litigation over whether an active duty of disclosure could exist in certain circumstances.

In addition, an unfortunate effect of Callow is – as the concurrence observed – that the overall scheme of good faith in common law is more uncertain. First, it is worth observing that the court in Bhasin identified the duty of honesty as being related to “matters directly linked to the performance of the contract”, which concept is broader than the exercise of a contractual right or the performance of a contractual obligation.

As the concurrence observed, the critical question with respect to the duty of honesty is whether a party made dishonest representations concerning contractual performance that caused its counterparty to suffer a loss. There should be no requirement that such misrepresentations be tied to a specific right or obligation. By contrast, the majority’s approach requires that the dishonesty be tied to a specific term of the contract. Consider, for example, a scenario where Baycrest did not hold a right to terminate the contract, but had made the same dishonest representations to Callow to his detriment. On the majority’s analysis, this would arguably not amount to a breach of the duty. Accordingly, the scope of the duty of honesty is now arguably narrower than the holding in Bhasin, as the majority decision suggests that the dishonesty was not a wrong in and of itself.

Second, the majority’s approach of tying the duty of honesty to the exercise of a contractual right (and potentially the performance of an obligation), rather than tying it to matters linked to performance more generally, has the unfortunate effect of creating a thin (and arguably illusory) boundary between the duty of honesty in the exercise of a contractual right versus the duty of good faith in the exercise of a discretionary right. This is particularly problematic in light of the fact that the majority expressly declined to consider the question of whether a right to terminate the contract is itself a contractual discretion.

Bearing all of the foregoing in mind, Callow’s companion case, Wastech Services Ltd. v. Greater Vancouver Sewerage and Drainage District, will be an important case to watch for in 2021, and will hopefully deliver greater clarity on outstanding issues in Canadian common law good faith.

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