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Callow and the Duty of Honest Contractual Performance: What You Need to Know

Callow and the Duty of Honest Contractual Performance: What You Need to Know
January 4, 2021
In C.M. Callow Inc. v. Zollinger, the Supreme Court of Canada (SCC) held that a group of condominium corporations was liable for breaching their duty of honest contractual performance when they knowingly misled a maintenance contractor into believing a two-year agreement would not be terminated early. This bulletin summarizes the SCC’s decision, explains the types of conduct that create significant risks of violating the duty of honest contractual performance, and provides some practical tips to guide your business.

WHAT DID THE SCC HOLD?

The SCC re-affirmed that contractual parties cannot lie or knowingly mislead one another about matters directly linked to the performance of the contract. The duty of honest performance of contracts applies to all types of contractual obligations and rights, and the parties are not free to exclude the duty entirely from their contracts. In Callow, the SCC confirmed that in at least some circumstances, half-truths, silence, or conduct may be “knowingly misleading” even when it falls short of an outright lie. Breach of the duty of honest contractual performance can lead to a separate claim for damages. However, it will not prevent a party from relying on the contractual rights for which it bargained.

WHAT TYPES OF CONDUCT WILL VIOLATE THE DUTY OF HONEST CONTRACTUAL PERFORMANCE?
 
Conduct   Breach of Duty of Honest Performance?
Lies about exercise of contractual right or performance of contractual duty (“performance of the contract”) Yes, even if you did not intend the counterparty to rely on the false statement
Failure to disclose matter relevant to contract No, unless there is a separate duty to disclose
“Half-truth”: partial disclosure of facts relevant to performance of the contract Yes, if omission is misleading
Failure to correct counterparty’s mistaken belief about performance of the contract Only if your conduct has caused the mistaken belief, e.g., if you made a statement that you later found out to be untrue or that later became untrue and failed to correct it
Unintentional or unknowing misstatement about contract No, but could lead to liability under other doctrines
Lies or misleading conduct prior to contract formation No, though could lead to liability under other doctrines
Lies or misleading conduct while performing a contract, but not directly linked to its performance No, the knowingly misleading conduct must be directly linked to the performance of obligations under the contract, or exercise of a right under the contract – a temporal connection is not enough

WHAT HAPPENED IN CALLOW?  

In 2012, C.M. Callow Inc. (Callow) entered a two-year winter maintenance agreement and a one-year summer maintenance agreement with a group of condominium corporations (Baycrest). The winter agreement allowed Baycrest to terminate for any reason on 10 days’ notice.

By early 2013, Baycrest had decided to terminate the winter agreement early, but it did not tell Callow immediately. Despite Baycrest’s decision, throughout 2013, Callow and one of Baycrest’s board members discussed renewing the winter agreement after the initial two-year term. That summer, Baycrest also silently accepted gratuitous extra services that Callow performed under the summer agreement, which were intended to incentivize it to renew the winter agreement. Because of this conduct, Callow believed that a renewal of the winter agreement was likely and that the current agreement would not be terminated early – a mistake Baycrest was aware of and did not correct. Given that Callow believed the contract was in good standing for its second year, it did not bid on other winter contracts for the upcoming year.

Baycrest terminated the winter agreement in September 2013 by giving the required 10 days notice and Callow sued for breach of contract. The SCC held that Baycrest breached its duty of honest contractual performance and awarded Callow damages. The SCC reasoned that if Baycrest had been honest, Callow would have had a chance to bid on a replacement contract for the upcoming winter season, which would at least have provided equivalent profits to its agreement with Baycrest.

DOES THIS MEAN THAT IF MY BUSINESS HAS DECIDED TO TERMINATE A CONTRACT, WE MUST TELL OUR COUNTERPARTY IMMEDIATELY?

No. The SCC was clear that the duty of honest contractual performance is not a duty of disclosure. While you do not have to immediately disclose that the contract is going to be terminated, your organization should avoid making misrepresentations about the future of your relationship or otherwise misleading your counterparty.

For example, telling your counterparty that the contract will not be terminated, or will likely be extended, is misleading. This conduct may violate the duty of honest performance.

You should also be careful about what conclusions your counterparty may draw from your conduct. For example, if you discuss the terms of a potential renewal of the contract, your counterparty may incorrectly infer that the contract is likely to continue. In those circumstances, you may need to consider whether you have a duty to correct the counterparty’s mistake.

WHAT ARE SOME PRACTICAL TIPS TO AVOID BREACHING THE DUTY OF HONEST PERFORMANCE?

Although Callow underscored the fact-specific nature of a breach of the duty of honest performance, some best practices to consider are:
  • Everyone in your organization should be on the same page about matters relevant to the contract. It is important that communications with contractual counterparties be coordinated. If your business has decided to terminate a contract with a counterparty, but someone within your organization tells the counterparty that the contract is likely to continue, that may risk a breach of the duty of honest performance. In Callow, for example, a majority of the SCC decided that Baycrest violated its duty of honest contractual performance after deciding to terminate the contract, because one of its directors told Callow that the contract was likely to be extended.
  • Carefully consider any communications about the future of the contractual relationship if termination is under consideration. You are not required to disclose to your counterparty that you are considering terminating the contractual relationship, nor are you required to answer their questions on the topic. However, if your business is considering terminating a contract, consider whether it is preferable to avoid any discussion about the future of the relationship until a decision is made.
  • If your organization’s words or conduct have misled your counterparty about the contractual relationship, correct the mistake as soon as possible. A prompt correction could also reduce or eliminate any damages that could flow from the breach of the duty of honest performance.
The SCC heard the Callow appeal jointly with another case, Wastech Services Ltd. v. Greater Vancouver Sewerage and Drainage District, which is still under reserve. That case may provide another opportunity for the SCC to refine the law on honest contractual performance and the broader organizing principle of good faith performance of contracts.

Blakes lawyers Catherine Beagan Flood, Nicole Henderson and Christopher DiMatteo acted for the intervener, Canadian Federation of Independent Business, in this matter.

For further information, please contact:

Christopher DiMatteo                            416-863-3342
Nicole Henderson                                  416-863-2399
Catherine Beagan Flood                        416-863-2269

or any other member of our Litigation & Dispute Resolution group.