In C.M. Callow Inc. v. Zollinger[1], the Supreme Court of Canada clarified the scope of the duty of honest performance in connection with the exercise of a seemingly unrestricted termination clause in a contract. In doing so, the Court affirms and expands upon the contractual duties previously recognized in the Court’s decision in Bhasin v. Hrynew.[2]

Factual background

The respondents, collectively referred to as “Baycrest,” include ten condominium corporations which established a Joint Use Committee (“JUC”) to make decisions regarding the corporations’ joint and shared assets. The condominium corporations entered into two two-year agreements with C.M. Callow Inc. (“Callow”), owned and operated by Mr. Callow; one was a winter maintenance contract, and the other was a summer maintenance services contract.

At issue in this appeal was a clause in the winter maintenance agreement which provided that the condo corporations were entitled to terminate said agreement unilaterally and without cause as long as it provided Callow with ten days’ notice.

In the spring of 2013, after only one winter of the two-winter term had been completed, Baycrest decided to terminate the winter maintenance agreement. Baycrest did not tell Callow of its decision to terminate the contract.

Callow soon thereafter began discussions with Baycrest regarding a renewal of the agreement. Following conversations with two of the condo corporations’ board members, Mr. Callow believed that he was likely to get a renewal and that Baycrest was satisfied with his service. Callow also continued to fulfill its obligations under both the winter and summer contracts, even performing “freebie” work above and beyond that which the summer maintenance contract called for in the hopes that this would be an incentive for Baycrest to renew the winter maintenance contract.

Baycrest did not tell Callow about its decision to terminate the contract until September 2013, at which time it gave the required ten days’ notice of termination.

Callow sued Baycrest for breach of contract, arguing that even though the required ten days’ notice was given pursuant to the contract, Baycrest’s failure to exercise the termination right in accordance with the required duty of honest performance amounted to a breach.

The Ontario Superior Court found that Baycrest withheld the information that the contract was to be terminated, and knowingly declined to correct the false impression that it had created based on its representations that the contract was likely to be renewed. This dishonesty by Baycrest resulted in Callow foregoing the chance to bid on other contracts, and thus Callow was entitled to damages.

The Ontario Court of Appeal reversed the trial judge’s decision, agreeing with Baycrest that its silence did not amount to dishonesty, and that any alleged dishonesty was in relation to the possibility of a future contract, not the contract in existence at the time.

Decision and analysis

At the Supreme Court of Canada, Justice Kasirer, writing for the majority, allowed the appeal and restored the judgement of the Ontario Superior Court. Justice Kasirer held that Baycrest breached its duty to act honestly in the performance of the contract by “knowingly misleading Callow into believing the winter maintenance agreement would not be terminated.”[3] The majority further held that the dishonest exercise of the termination clause was a matter directly linked to the performance of the contract, notwithstanding that the ten day notice requirement was met.

The majority affirmed the principle articulated in Bhasin that the duty to act honestly means that a party to a contract may not lie or otherwise knowingly mislead another party about matters that are directly linked to the performance of the contract. While the Court of Appeal framed the issue as being about the renewal of a contract such that any dishonesty was related to pre-contractual negotiations, the majority of the Supreme Court disagreed, finding that the dishonesty was related to the manner of termination of the existing contact rather than any future one.

The majority of the Supreme Court also confirmed that while the duty of honest performance does not amount to a positive duty to disclose, it does include an obligation to refrain from misleading a party in the exercise of the termination clause, and to correct any false impressions created by that party’s own actions.

Justice Kasirer wrote that Baycrest engaged in two forms of active communications that led Callow to believe that the contract would not be terminated early: the first was the statements made to Callow in discussions with members of the JUC, and the second was Baycrest’s acceptance of the “freebie” work that Callow performed which Baycrest understood was an incentive for the renewal of the agreement. Considering this conduct on the part of Baycrest, it was reasonable for Mr. Callow to believe that Baycrest had decided not to terminate the ongoing agreement; Baycrest knew that Mr. Callow was under this false impression, but did not correct him. This silence in the face of its misleading active communications was a breach of the duty of honest performance.

This decision is important as it clarifies that both action, in the form of direct communications, as well as inaction, in the form of omissions or silence, can form the basis of a breach of the duty of honest contractual performance, depending on the circumstances. When considering terminating a contract, please reach out to Miller Thomson’s commercial litigation team for advice on how to comply with your legal obligations in this regard.

Key takeaways

  • The manner in which a party to a contract exercises a termination clause is a matter directly linked to the performance of a contract such that the duty to act honestly is engaged, regardless of how absolute the termination right might appear to be on its face.
  • The duty of honest performance does not impose a positive obligation on parties to disclose information against their self interest – it does, however, require parties to refrain from misleading a party about the contract, and to correct any false impressions that have resulted from the party’s own conduct.
  • Thus, a breach of the duty of honest performance can occur both where a party actively lies to another party, and due to a party’s failure to act to correct misleading impressions caused by that party’s representations or actions.