In C.M. Callow Inc. v Zollinger, 2020 SCC 45 (CM Callow), the Supreme Court of Canada expanded on the scope of the duty of honesty in contractual performance (widely known as the duty of good faith), which it recognized six years earlier in Bhasin v. Hrynew, 2014 SCC 71 (Bhasin). The Supreme Court held that half-truths, omissions, and silence can give rise to a breach of that duty. The majority’s decision also clarifies the scope of the duty and the proper measure of damages once a breach of that duty is established. Businesses should consider the impact of this case on their contractual relationships, particularly if and when they seek to terminate an existing contract.
Background
The plaintiff, CM Callow Inc. (“Callow”), operated a property maintenance business that entered into two seasonal property maintenance contracts with a group of condo corporations (“Baycrest”): a winter contract and a summer contract. The winter contract provided that Baycrest could terminate for any reason on ten days’ notice.
In early 2013, Baycrest decided that it would terminate the winter contract but did not notify Callow until September 2013. The notice of termination complied with the winter contract’s termination clause. But – and this an important but – in 2013, prior to receiving notice of termination, Baycrest led Callow to believe that the property maintenance services were satisfactory and that the winter contracts were likely to be renewed. Callow performed extra-contractual work for free during the summer months because he wanted to encourage Baycrest to renew the winter contract.
When Baycrest terminated the winter contract in September 2013, Callow sued Baycrest, alleging that it had breached the duty of honesty in contractual performance, which is part of the duty of good faith. The trial judge held that Baycrest actively misled Callow into thinking that the winter contract would likely be renewed. The Court of Appeal for Ontario overturned that decision, holding that Baycrest had not been dishonest and that, in any event, any communications concerned the next year’s winter contract – not the existing contract. There was no duty of honest performance for a contract that did not yet exist.
The question for the Supreme Court was whether the manner in which Baycrest exercised the termination clause breached the duty of honesty in contractual performance.[1] In Bhasin, the Supreme Court recognized a general organizing principle of good faith applicable to every contract, which includes the duty of honesty in contractual performance. The duty of honesty means “simply that parties must not lie or otherwise knowingly mislead each other about matters directly linked to the performance of the contract” (at para. 73). The analysis thus turned on whether Baycrest lied or otherwise knowingly misled Callow respecting the exercise of the winter contract’s termination clause.
To “knowingly mislead” a counterparty
The majority held that “whether or not a party has ‘knowingly misled’ its counterparty is a highly fact-specific determination, and can include lies, half-truths, omissions, and even silence, depending on the circumstances” (at para. 91).
In this case, Baycrest remained silent about its decision to terminate Callow’s winter contract, which only required ten days’ notice of termination. The majority of the Supreme Court held that Baycrest breached the duty of honesty in contractual performance. Although silence alone would generally not be enough to establish a breach of the duty of honesty, here, the majority found two forms of “active communication” that deceived Callow: (1) emails and conversations between Baycrest and Callow suggested to Callow that the winter contracts were likely to be renewed; and (2) Callow offered extra-contractual work in the summer of 2013 to encourage Baycrest to renew the winter contract, which Baycrest accepted. Callow therefore reasonably believed that the winter contract would be renewed.
Importantly, the majority held that Baycrest knew that Callow was under this false impression and that Baycrest “intentionally withheld information in anticipation” of terminating the winter contract. Instead, when it realized that Callow “was under this false impression, Baycrest should have corrected the misapprehension; in the circumstances, its conduct misled Callow” (at paras 100-101).
These findings should lead businesses to consider carefully whether their conduct may be construed as “knowingly misleading” its counterparty to the contract. This decision suggests that in certain circumstances, a party may be required to correct the misapprehensions of its counterparty.
Expectation is the measure of damages
The Supreme Court’s decision is also significant because of its discussion of the appropriate measure of damages for a breach of the duty of honesty in contractual performance. While eight of the nine Supreme Court justices agreed that Baycrest had breached its duty of honesty, the Supreme Court was split as to the appropriate measure of damages: the majority’s five justices held that damages should be measured based on “expectation” damages, whereas the concurring three justices held damages should be measured based on “reliance” damages.
The majority held that the standard approach is to award contractual damages based on the plaintiff’s expectation interest, i.e., to put Callow in the position it would have been in had the contract, including the duty of honesty, been performed, and that this should apply where there is a breach of the duty of honesty. Protecting only the plaintiff’s reliance interest would fail to deter breaches in cases where the defendant calculated the plaintiff’s provable losses were less than the cost of performance.
In contrast, the concurring justices held that the measure of damages for a breach of the duty of honesty should be based on the plaintiff’s reliance interest. They reasoned that the issue was not that the defendant failed to perform the contract thereby defeating the plaintiff’s expectations, but that the defendant made dishonest extra-contractual misrepresentations concerning its performance on which the plaintiff detrimentally relied.
Key takeaways
It remains to be seen how the duty of honesty will develop in future cases as the decision in CM Callow is applied to new fact patterns. Despite the Supreme Court’s clarification of this duty in CM Callow, it may still be difficult for a business to know precisely whether the counterparty to a contract has a misapprehension and may therefore be misled by silence on a matter of contractual performance. In the meantime, however, businesses should keep in mind the following takeaways:
- The duty of honesty in contractual performance may include half-truths, omissions, and silence in determining whether the defendant’s conduct “knowingly misled” the plaintiff.In this case, “active communications” and “silence” together constituted a breach of the duty of honesty in contractual performance. Here, Baycrest intentionally withheld information from Callow in anticipation of terminating the winter contract and Baycrest should have corrected Callow’s false impression that the winter contract would be renewed. In this highly fact-specific inquiry, litigants must consider carefully whether they have allowed their counterparty to form a false impression about its intentions respecting the performance of the contract.
- The appropriate measure of damages corresponds to the plaintiff’s expectation interests. CM Callow confirms that the measure of damages for breach of the duty of honesty will be the plaintiff’s expectation damages. Here, the majority held that Baycrest should have corrected Callow’s false impression once they were aware of it. Had Baycrest done so, Callow could have sought an alternative winter contract. Callow was thus awarded damages for (1) lost profits it could have earned on other contracts it would have pursued but for Baycrest’s omissions; and (2) the expenses incurred in reliance on its false impression caused by Baycrest’s omissions. This is important as the expectation measure of damages is often greater than the plaintiff’s reliance interest.
[1] Notably, in 2019, the Supreme Court heard another appeal on the issue of the duty of good faith in Wastech Services Ltd. v. Greater Vancouver Sewerage and Drainage District (British Columbia) and that decision is expected to be released this year.
