The Supreme Court of Canada Clarifies the Duty of Honest Contractual Performance
On December 18, 2020, the Supreme Court of Canada gave judgment in C.M. Callow Inc. v. Zollinger. The decision offers important guidance about how parties to contracts must conduct themselves in good faith when carrying out or terminating a contract.
What You Need to Know
In Callow, the Supreme Court of Canada held that:
- Parties to a contract have a duty of honest performance, as the Court first recognized six years ago in Bhasin v. Hrynew. This duty “applies to the performance of all contracts and, by extension, to all contractual obligations and rights”. Further, parties are “not free to exclude” this duty altogether, including by “agree[ing] to a term that provides for an apparently unfettered right to terminate the contract for convenience”.
- The duty of honest performance means that “parties must not lie or otherwise knowingly mislead each other about matters directly linked to the performance of the contract”. This prohibits not only overt lies but also “half-truths, omissions, and even silence, depending on the circumstances”, about “the exercise of a particular right under a particular contract”.
- In this case, the defendants breached the duty of honest performance in the exercise of their without cause termination right, because (i) they led the plaintiff to reasonably infer that the contract at issue would not be terminated early, by actively communicating that the contract would be renewed when its term expired, (ii) they knew the plaintiff was operating under the mistaken belief that the contract would not be prematurely terminated, and (iii) they deliberately failed to “correct the misapprehension”.
- For the defendants’ breach of the duty of honest performance, the plaintiff is entitled to “expectation damages”, that is, “damages [that] … put [the plaintiff] in the position that it would have been in had the duty been performed”. Here, “the least onerous means of performance … would have been to correct the misrepresentation once [the defendants] knew [the plaintiff] had drawn a false inference. Had it done so, [the plaintiff] would have had the opportunity to secure another contract”. Accordingly, the plaintiff was awarded damages representing: (i) the profits it could have earned on other contracts, had it not forgone the opportunity to bid on them due to its mistaken belief the existing contract with the defendants would not be terminated, and (ii) the expenses it incurred because of its mistaken belief that the existing contract would remain in force.
Here are our top three takeaways from the Supreme Court of Canada’s judgment in Callow:
- Strict compliance with a contractual termination clause is not sufficient to avoid liability. There was no dispute in Callow that the defendants had provided the plaintiff with the required 10 days’ notice under the contract’s termination clause. The defendants were liable nonetheless because they had acted dishonestly in exercising their right to terminate the contract – they knew the plaintiff had been misled by their own acts, and deliberately chose not to correct his mistaken belief.
- Facts matter in disputes about the duty of honest contractual performance. The Court emphasized in Callow that whether one party to a contract has “knowingly misle[d]” another “depend[s] on the circumstances”. An important piece of evidence in the Callow litigation was an e-mail between two of the defendants’ board members that confirmed: (i) the defendants knew that the plaintiff mistakenly believed that the contract would not be terminated, even though the defendants had already decided to terminate it; and (ii) the defendants made a deliberate decision not to contradict the plaintiff’s mistaken belief. The Court also held that a trial judge’s findings about whether dishonesty occurred will be only be subject to limited appellate review for “palpable and overriding error”.
- Bijuralism is an important consideration in private law appeals. A majority of the Court in Callow looked to the civil law of Quebec, and specifically to the doctrine of abuse of rights, to understand the scope of the common law duty of honest contractual performance. This speaks to the importance of comparative law analysis in private law appeals, particularly in the Supreme Court of Canada.
McCarthy Tétrault can help. Our National Appellate Litigation Group successfully represented the appellants in both Bhasin and Callow before the Supreme Court of Canada. If you have questions about Callow, good faith, or our appellate litigation practice, please contact Brandon Kain or Adam Goldenberg.
Brandon Kain is a partner in McCarthy Tétrault’s Litigation Department and the co-founder of the firm’s National Appellate Litigation Group. Adam Goldenberg is an associate in McCarthy Tétrault’s Litigation Department and a member of the firm’s National Appellate Litigation Group. Brandon and Adam successfully represented C.M. Callow Inc. in its appeal to the Supreme Court of Canada, and Brandon successfully represented Harish Bhasin in his appeal to the Supreme Court of Canada.