Supreme Court of Canada Comments on the Duty to be Honest in Contract Dealings

A recent Supreme Court of Canada decision, C.M. Callow Inc. v. Zollinger 2020 SCC 45, found that it was a breach of the contractual duty of honest performance to deliberately remain silent and not correct another party’s misapprehension regarding a state of affairs it knew was caused by its own misleading conduct.

Facts

In 2012, a group of condominium corporations (“Baycrest”) entered into a two-year winter maintenance contract, in addition to a summer maintenance contract, with CM Callow Inc. (“Callow”). Under the contract, Baycrest was entitled to terminate the contract with Callow for unsatisfactory service, or for any other reason with the provision of 10 days’ written notice.

In early 2013, Baycrest decided that it would terminate the contract, but did not inform Callow at that time. In fact, the evidence demonstrated that Baycrest misled Callow into believing the contract would in fact be renewed. As a result, Callow performed many additional services for Baycrest during the summer of 2013 with the hope that by doing so it would encourage Baycrest to renew the contract.

In September 2013, Baycrest informed Callow of the decision to terminate the winter maintenance contract, with the 10 days’ notice required by the contract. Callow then brought an action for breach of contract, arguing Baycrest had acted in bad faith and failed in its contractual duty of honest performance.

Trial and Court of Appeal

At trial, the judge ruled in favour of Callow finding that Baycrest had actively deceived Callow, and had acted in bad faith by withholding the information and making misrepresentations about the status of the contract.

The Court of Appeal subsequently set aside the trial judgment, holding that the trial judge had improperly expanded the duty of honest performance beyond the terms of the winter maintenance contract. The Court of Appeal held that any deception was in regard to the new contract that did not yet exist at the time of the alleged breach, and  that as such there was no nexus with the original winter maintenance contract that was terminated by Baycrest.

The SCC decision

The SCC reversed the Court of Appeal’s decision and adopted the trial judge’s reasoning. The SCC found that “Baycrest’s alleged deception was directly linked to this contract because its exercise of the termination clause in the contract was dishonest”. The SCC held that if a party is being led to believe that the other party is content with their job performance and that the existing contract is likely to be renewed, it is reasonable for that party to assume that the existing contract is in good standing and will not be terminated prematurely. The SCC further held that Baycrest was not obligated to inform Callow of its intention to terminate the contract prior to the 10-day notice period as stipulated in the agreement, but it did have an obligation to abstain from making misrepresentations to Callow regarding its exercise of the clause, and thus had an obligation to correct the misrepresentation it made to Callow.

Implications for employers

The SCC’s decision provides interesting guidance with respect to the application of the duty of good faith and honest performance.  The SCC’s decision makes it clear that parties cannot deliberately deceive each other. As such, this case reinforces the idea that employers should exercise caution when making promises to their employees or otherwise giving them reason to believe their employment is secured if it is not.

This update was authored by Neal Parker. Looking for more information regarding similar situations? Contact Neal at [email protected] or anyone else listed on the authors page.