Written by Nick Noonan, JD, LLM
In the case of C.M. Callow Inc. v Zollinger, 2020 SCC 45 (CM Callow), the Supreme Court of Canada delved into the complex terrain of the duty of honesty in contractual performance, a principle that had been recognized six years earlier in Bhasin v. Hrynew, 2014 SCC 71 (Bhasin).
The case involved two seasonal property maintenance contracts between CM Callow Inc. (“Callow”) and a group of condo corporations (“Baycrest”): a winter contract and a summer contract. Baycrest had the right to terminate the winter contract for any reason with ten days’ notice. In early 2013, Baycrest decided to terminate the winter contract, but did not inform Callow until September 2013. Prior to this, Baycrest had led Callow to believe that the services were satisfactory and that the winter contracts were likely to be renewed. Callow even performed extra work for free to encourage renewal. When Baycrest terminated the contract, Callow sued, alleging a breach of the duty of honesty in contractual performance.
The trial judge found in favour of Callow, but the Court of Appeal for Ontario overturned the trial decision. The Supreme Court was then tasked with determining whether Baycrest’s exercise of the termination clause breached the duty of honesty in contractual performance.
The majority of the Supreme Court held that Baycrest had indeed breached this duty. The court found that Baycrest’s silence about its decision to terminate, coupled with “active communication” that deceived Callow, constituted a breach. The court scrutinized the conduct of Baycrest, including its silence, emails, conversations, and acceptance of extra-contractual work. The court found that these actions, taken together, constituted a breach of the duty of honesty. The court emphasized that Baycrest knew Callow was under a false impression and should have corrected it.
The Court’s analysis also delved into the nature of “knowingly misleading” conduct, recognizing that it can encompass lies, half-truths, omissions, and even silence, depending on the circumstances. The majority’s decision illustrates a broad interpretation of this concept, extending it beyond outright deception to include more subtle forms of misleading conduct. That is, the majority held that Baycrest knew that Callow was under a false impression and that Baycrest “intentionally withheld information in anticipation” of terminating the winter contract. Instead, when it realized that Callow “was under this false impression, Baycrest should have corrected the misapprehension; in the circumstances, its conduct misled Callow.”
The Court’s discussion on the appropriate measure of damages is also significant. The majority’s preference for “expectation” damages over “reliance” damages reflects a commitment to fully compensating the plaintiff (Callow) for the breach of the duty of honesty. The Court reasoned that protecting only the plaintiff’s reliance interest would fail to deter breaches where the defendant calculated the plaintiff’s provable losses were less than the cost of performance. The concurring justices, however, argued for a reliance-based measure of damages, focusing on the defendant’s dishonest extra-contractual misrepresentations on which the plaintiff detrimentally relied. This divergence in the court’s opinion highlights the complexity of the issue and the challenges in defining the proper measure of damages for a breach of the duty of honesty.
The decision in this case expanded the scope of the duty of honesty in contractual performance, holding that half-truths, omissions, and even silence can give rise to a breach of that duty. It clarified the scope of the duty and the proper measure of damages, emphasizing the importance of not knowingly misleading a counterparty.
This represents a significant development in Canadian contract law, particularly in the context of business relationships. It underscores the importance of transparency and honesty in contractual dealings, extending the duty of honesty to include not only outright lies but also half-truths, omissions, and silence. It also sends a clear message to businesses that they must be cautious in their communications and must not deliberately allow a counterparty to form a false impression about intentions regarding the performance of a contract. This may require parties to correct misapprehensions, even if they arise from silence or omissions. The decision thus adds a layer of complexity to contractual relationships, requiring parties to be more proactive in ensuring clarity and honesty. As well, the Court’s adoption of the “expectation” measure of damages signifies a robust approach to remedying breaches of the duty of honesty. This could lead to higher damages awards and may encourage parties to be more diligent in adhering to the duty of honesty.
The views and opinions expressed in the blogs and case reporter are the views of their authors, and do not represent the views of the Desautels Centre for Private Enterprise and the Law, the Faculty of Law, or the University of Manitoba. Academic Members of the University of Manitoba are entitled to academic freedom in the context of a respectful working and learning environment.