Supreme Court of Canada rules on the scope of the duty of honest contractual performance

Date Closed

December 17, 2020

Lead Office

Toronto

In C.M. Callow Inc. v. Zollinger, 2020 SCC 45, the Supreme Court of Canada held that it is a “deceptive contractual practice[]”, and a breach of the common law duty of honest performance, to deliberately remain silent and fail to correct a counterparty’s misapprehension that one knows has been caused by one’s own misleading conduct.

The contract at issue was for snow removal and other winter maintenance services at a number of condominium buildings in Ottawa. C.M. Callow Inc. had agreed to provide those services under a contract with a two-year term. The contract included a clause that permitted termination for convenience on 10 days’ notice. The condominium corporations decided in the spring of 2013 to terminate the contract early, but withheld that decision from Callow until months later. In the interim, members of the condominium corporations’ boards communicated with Callow and led it to believe that the contract was in no danger of termination, and might even be renewed. The condominium corporations subsequently gave the required 10 days’ notice and terminated the contract. Callow sued for breach. It succeeded at trial, then lost in the Court of Appeal for Ontario, before appealing successfully to the Supreme Court of Canada.

The Supreme Court of Canada held that:

1. Parties to a contract have a duty of honest performance, as the Court first recognized six years ago in Bhasin v. Hrynew, 2014 SCC 71. 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”. 

2. 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”.

3. 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”.

4. 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.

McCarthy Tétrault acted for the successful appellant, C.M. Callow Inc., in the Supreme Court of Canada, with a team led by Brandon Kain that included Adam Goldenberg and Emily Leduc Gagné.

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