In the decision of C.M. Callow Inc. v. Zollinger, 2020 SCC 45, the Supreme Court of Canada (SCC) expands on the scope of the duty of honest performance in contractual relationships, previously established by the SCC ruling in Bhasin v. Hrynew, 2014 SCC 71,  3 S.C.R. 494.
Our firm previously blogged about the Court of Appeal Ruling in this case. See the previous blog here.
The case concerns a breach of contract claim made by the Plaintiff. The Plaintiff is a company that provides maintenance services to condominium communities. The Defendants, a group of condominium corporations, had winter and summer maintenance contracts with the Plaintiff that renewed every two years.
The contracts originated in 2012 and ran to 2014. In March or April of 2013, the Defendants decided to terminate the winter contract but they did not provide notice of their intention to terminate until September of 2013. The Defendants delayed providing notice on the basis that they did not want to interfere with the Plaintiff’s performance of the summer maintenance contract for the summer of 2013.
The Plaintiff argued that in failing to advise the Plaintiff about their intention to terminate the contract when they made the decision in March or April of 2013, the Defendants acted dishonestly, and deprived the Plaintiff of the opportunity to bid for other winter maintenance contracts.
Over the course of the summer months of 2013 the Plaintiff engaged in various communications with the Defendants and was under the impression that the winter maintenance contract would be renewed. Based on this impression the Plaintiff performed above and beyond his obligations under the summer maintenance contract which he hoped would incentivize the renewal of the winter maintenance contract.
Internal communications revealed that the Defendants were aware that the Plaintiff had formulated this impression and remained silent.
The Trial Decision
The trial judge ruled that the Defendants in remaining silent had engaged in active deception and withheld the information in bad faith and therefore breached their duty of honest performance in the contractual relationship. The Plaintiff was awarded damages based on what the Plaintiff would have earned as profit had the winter contract been renewed, as well as, losses on expenses incurred in anticipation of the renewal.
The Court of Appeal Decision
The Court of Appeal overturned the trial judge’s ruling, holding that the trial judge erred in improperly expanding the duty of honest performance beyond the terms of the winter agreement. More particularly, the Court of Appeal ruled that any deceptive communications related to a new contact not yet in existence. The Court of Appeal acknowledged that while the Defendants’ conduct was less than honourable, it did not rise to a level sufficient to establish a breach of the duty of honest performance.
The Supreme Court of Canada Decision
The Supreme Court of Canada (SCC) saw this as an opportunity to clarify what constitutes a breach of the duty of honest performance. The SCC clarified that the narrow question in issue deals only with the manner in which the Defendants decided to exercise their right to terminate the contract. There was no issue as to whether that right existed or was appropriate.
The SCC, in it’s majority decision written by the Honourable Justice Kasirer, disagreed with the Court of Appeal ruling on two main points. First, in the majority ruling, the SCC disagreed that the deceptive communications related to a new contract not yet in existence. The SCC held that the deceptive communications related directly to the exercise of a right under the current contract, a right of termination or renewal. The SCC held that the dishonesty related directly to the exercise of the termination clause of the existing contract.
Second, in the majority ruling, the SCC clarified that this was a case where the duty of honest performance in contractual relations was engaged. The SCC held that while the duty of honest performance does not equate to a positive obligation of disclosure, it does include an obligation to refrain from misleading the other party and a duty to correct a false impression created through its own actions.
The SCC clarified that the duty of honest performance is restricted in that it must be linked directly to the performance of the contract. It does not require one party to act as a fiduciary with regard to the interest of the counterparty, but rather, requires a contracting party to have “appropriate regard” to the legitimate contractual interests of their counterparty.
The lawyers at Gilbertson Davis LLP have experience with commercial litigation, including contract disputes, contract termination and the duty of honest performance. Please contact us for an initial consultation.
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