The Supreme Court of Canada (SCC) recently issued a decision expanding the duty of honest performance, which applies to parties to all contracts, by holding that they cannot knowingly deceive one another about matters directly linked to performance of the contract.  The dispute in C.M. Callow Inc. v. Zollinger, 2020 SCC 45 (Callow) concerned a clause in a commercial winter maintenance agreement that allowed a contractor’s clients to terminate unilaterally the contract without cause upon providing 10 days’ written notice.  The issue before the court was not whether the required notice was given (it was), but whether the clause was exercised in good faith, in accordance with the requirements the SCC established in Bhasin v. Hrynew, 2014 SCC 71. 

The SCC in Callow clarified that if a party to a contract by its conduct or its words causes a counterparty to have a false impression about such a matter, the party must promptly correct the counterparty’s false impression.  Remaining silent once aware of a counterparty’s misapprehension creates exposure for liability in damages for breach of the duty of honest performance. This case has significant implications for how Canadian employers must conduct themselves in the performance of employment agreements and other contracts.  

Background

In 2012, a group of 10 condominium corporations (Baycrest) renewed a winter maintenance contract (Winter Contract) with Callow, a maintenance service corporation, and added a separate summer maintenance services contract (Summer Contract).  The term of the Winter Contract was from November 1, 2012 to April 30, 2014.  Pursuant to clause 9 of the Winter Contract, Baycrest could terminate for any reason upon giving 10 days’ written notice.

In March/April of 2013, Baycrest decided to terminate the Winter Contract prior to the end of its term but chose not to inform Callow that this decision was made.  Following subsequent exchanges between Callow’s principal and two Baycrest board members, the principal thought the Winter Contract would not be terminated early and was likely to be renewed.  During the summer of 2013, Callow performed work above and beyond its Summer Contract for free hoping it would incentivize renewal of the Winter Contract.  In July 2013, a board member of Baycrest advised its property manager that Callow’s principal thought the Winter Contract would be renewed. In September 2013, the property manager sent an email to Callow advising that its services would not be required for the 2013/2014 season. 

Callow filed a Statement of Claim for breach of contract, alleging:

• Baycrest acted in bad faith by accepting free services while knowing Callow was offering those services to maintain their future contractual relationship;

• Baycrest knew or ought to have known that Callow would not seek other winter maintenance contracts in reliance on the representations that Callow was providing satisfactory service and the Winter Contract would not be prematurely terminated;

• As a result of these misrepresentations and/or bad-faith conduct, Callow did not bid on other tenders for winter maintenance contracts, and Baycrest was now liable for Callow’s damages for loss of opportunity; and

• Baycrest was unjustly enriched by the free services.

Callow sought:

• $81,383.68 in damages for breach of contract (equivalent to the one year remaining on the Winter Contract);

• Damages for intentional interference with contractual relations, inducing breach of contract, and negligent misrepresentation; and

• $5,000 in damages for unjust enrichment (equivalent to the free work performed).      

Decision of the Ontario Superior Court of Justice

The trial judge concluded that: (i) the organizing principle of good-faith performance and the duty of honest performance were engaged in this matter; and (ii) the duty of honest performance should not be confused with a duty of disclosure.  Unless there is active deception, there is no unilateral duty to disclose information before the notice period.  The trial judge decided Baycrest “actively deceived” Callow from the time the decision was made to terminate the Winter Contract to the time when notice was given.  Baycrest acted in bad faith by: (i) intentionally withholding the information to ensure Callow performed the Summer Contract; and (ii) continuing to represent that the Winter Contract was not in danger despite Baycrest’s knowledge that Callow was taking on extra work to improve the chances of renewing the Winter Contract. 

The trial judge awarded the following damages to Callow to place it in the same position as if the breach had not occurred:  (i) $64,306 for the value of the Winter Contract for one year, less expenses Callow would typically incur;  and (ii) $14,835 for the value of one year of a lease of equipment Callow would not have leased if it had known the Winter Contract was going to be terminated.

Decision of the Ontario Court of Appeal

Baycrest appealed the trial judge’s decision to the Ontario Court of Appeal (OCA), which decided the trial judge erred when she improperly expanded the duty of honest performance beyond the terms of the Winter Contract.  There was no unilateral duty to disclose information relevant to termination.  Baycrest could terminate the Winter Contract as long as it informed Callow of its intention to do so and gave the required notice.  The OCA concluded that although the trial judge’s findings may have suggested a failure to act honourably, her findings “do not rise to the high level required to establish a breach of the duty of honest performance” (para. 16).  In any event, any deception in the communication was not directly linked to performance of the Winter Contract but rather to the renewal that Callow hoped to negotiate.

Decision of the Supreme Court of Canada

The SCC set aside the decision of the OCA and reinstated the decision of the trial judge.  Justice Kasirer wrote a decision on behalf of a five-member majority, while three members concurred, and another dissented.

Justice Kasirer acknowledged that Baycrest had an unfettered right to terminate the Winter Contract on 10 days’ notice.  He held that although Baycrest was not required to subvert its legitimate contractual interests to that of Callow in respect of the Winter Contract, it could not undermine Callow’s interest in bad faith by representing that the Winter Contract was not in danger after a decision to terminate the contract had been made.  In failing to correct Callow’s misapprehension, Baycrest breached the duty of honest performance, which, as formulated in Bhasin, requires the parties to be honest with each other in relation to matters directly linked to the performance of their contractual obligations.  Here this duty was directly linked to the exercise of clause 9; because Baycrest failed to exercise the clause honestly, it acted contrary to the requirements of good faith, committing a breach of contract, which attracted damages.   

Justice Kasirer emphasized that dishonesty or misleading conduct is not restricted to direct lies, “and can include lies, half-truths, omissions, and even silence, depending on the circumstances.  I stress this list is not closed; it merely exemplifies that dishonesty or misleading conduct is not confined to direct lies.” (para. 91) Although Baycrest did not have a duty to disclose to Callow its intention to terminate the Winter Contract (except for the 10-day notice requirement), it had a duty to refrain from deceiving Callow through “active communications” that it knew would cause Callow to draw an incorrect inference, such as: (i) the statements made by  members of Baycrest’s board to the principal of Callow in conversation and via email suggesting that renewal of the Winter Contract was likely; and (ii) Baycrest’s acceptance of Callow’s free work, which it was aware was performed as an incentive for renewal of the Winter Contract, and the statement made by a Baycrest board member to Callow’s principal that he would tell other board members about this work.  Upon realizing Callow’s principal was under a false impression, Baycrest had a duty to correct that impression.  Instead, Baycrest intentionally withheld information. 

Justice Kasirer decided that, accordingly, Callow was entitled to “expectation damages,” which would put it in the position it would have been in if the Winter Contract was renewed.  Had Baycrest promptly corrected Callow’s misapprehension, Callow would have had an opportunity to secure another contract.  The SCC held Baycrest liable to Callow for damages representing: (i) the profits it would have earned on another contract, had it not decided to forego bidding on other contracts because of its false impression that the Winter Contract would be renewed; and (ii) the expenses Callow incurred based on that false impression.

Bottom Line for Employers

In Callow, the SCC stated that the duty of honesty in the performance of a contract prevents a party to the contract from remaining silent upon becoming aware that a counterparty has developed a false impression caused by the party’s misleading conduct.  The expansion of this duty has significant implications for employers in relation to their employment agreements and other contracts.  For example, after an employer decides to end an employee’s employment without cause, the employer does not have a duty to disclose immediately this decision to the employee.  However, once a termination decision is made, an employer should not deliberately mislead the employee through “active communications” that reassure the employee that their future employment is not in danger.  Employers should ensure that once a decision is made to terminate employment, they refrain from discussion with the employee about employment security and the future of their employment, and from making false representations.  If it is too late, and the employee has been reassured that their future employment is not in danger, the employee’s false impression should be corrected without delay.   

While Callow is a decision based in contract, the tort of negligent misrepresentation (with its own requirements) may also be applicable to the specific facts of a case. 

The SCC heard Callow v. Zollinger together with Wastech Services Ltd. v. Greater Vancouver Sewage and Drainage District, which also addressed good faith in contractual performance.  The SCC’s decision in Westech Services has been reserved.  We will report on this decision once it is released.