Supreme Court of Canada Clarifies Duty of Honesty

Supreme Court of Canada Clarifies Duty of Honesty

In the recent decision of C.M. Callow Inc. v. Zollinger, the Supreme Court of Canada has continued to develop the jurisprudence surrounding the general organizing principle of good faith in contract law.  In Callow, the majority found that the duty to act honestly in the performance of a contract precludes active deception.  If one party lies or knowingly misleads the other party this may be a breach of the duty of honesty.

The Respondent condominium corporations (collectively referred to as Baycrest) entered into a two-year maintenance agreement with the Appellant C.M. Callow Inc. (“Callow”).  Callow agreed to provide winter maintenance services, including snow removal.  It was an express term of the contract that Baycrest could terminate the contract unilaterally, without cause, upon providing ten days’ notice.

After the first year, the parties engaged in discussions regarding a renewal of the contract for the following winter.  During the spring and summer of 2013 Callow performed work “above and beyond” its summer maintenance contract at no charge (which it hoped would incentivize Baycrest to renew).  In September, Baycrest informed Callow that it was terminating the contract in accordance with the 10 days’ notice provision.

The trial judge held that Baycrest decided to terminate in April or March but chose not to inform Callow at that time.  The Trial Judge found that Baycrest actively deceived Callow by communicating in a way that misled Callow to believe that it was happy with the work and the contract would be renewed.  The Court of Appeal overturned the trial decision.

The majority of the Supreme Court found that although Baycrest had a right to terminate the contract on 10 days’ notice, the right had to be exercised in keeping with the duty of honesty. The majority noted that the duty of honesty does not require positive disclosure.  Nevertheless, Baycrest could not lie or otherwise knowingly mislead Callow about matters directly linked to the performance of the contract.

The majority found that determining whether a party knowingly misled its counterparty “is a highly fact-specific determination, and can include lies, half-truths, omissions, and even silence, depending on the circumstances.”  The majority accepted the trial judge’s findings of fact with respect to active deception and held that Baycrest’s deception was directly linked to the original contract (as opposed to the renewal contract which was not yet in existence).

The Supreme Court’s decision is a strong reminder that termination provisions must be exercised in an honest manner.  A party must be careful not to mislead its counterparty.  The issue of whether a party has been knowingly misled in the context of a contract renewal is bound to arise in a variety of contexts from employment agreements commercial leases.