Previously (see my article on the 2014 precedent-setting case of Bhasin v. Hrynew) the Supreme Court of Canada unanimously confirmed the duty of parties to a contract to act honestly in the performance of their respective contractual obligations (the “Honest Performance Duty”).

Now, in the December 2020 decision (not unanimous) of the Supreme Court of Canada in the Callow case, we have further clarification on the Honest Performance Duty.

The Facts

In Callow, 10 condominium corporations through their representative (“Baycrest”) entered into a separate winter and summer maintenance contracts with C.M. Callow Inc. (“Callow”).

Pursuant to the winter contract, Baycrest could terminate that agreement without cause upon giving written notice. In early 2013, Baycrest decided to terminate it, but did not inform Callow.

Throughout the spring and summer of 2013, Callow had discussions with Baycrest regarding a renewal of the winter agreement notwithstanding. Following those discussions, Callow thought that it was likely to get a renewal and that Baycrest was satisfied with its services.

In the summer of 2013, Callow performed work above and beyond the summer agreement at no charge, which it hoped would act as an incentive for Baycrest to renew the winter agreement. Baycrest knew about Callow’s wrong impression on renewal but said nothing to rectify it.

In September 2013, Baycrest advised Callow of its decision to terminate the winter agreement.

Callow sued for breach of contract, alleging that Baycrest acted in bad faith.

Lower Court Decisions

The trial judge held that Baycrest breached the Honest Performance Duty since Baycrest actively deceived Callow from the time the termination decision was made to September 2013.

The judge found that Baycrest acted in bad faith by withholding that information to ensure Callow performed the summer maintenance contract and by continuing to represent that the contract was not in danger despite knowing that Callow was taking on extra tasks to bolster the chances of the winter contract being renewed. Callow was awarded damages in order to place it in the same position as if the breach had not occurred (i.e. the amount Callow would have received if the winter agreement had not been terminated).

Baycrest appealed and the Ontario Court of Appeal reversed the decision holding that the trial judge erred by improperly expanding the duty of honest performance beyond the terms of the winter maintenance agreement. It held that Baycrest’s conduct may have been less than honourable but was not of the “high level required to establish a breach of the duty of honest performance.”

Further, any deception in the communications during the summer of 2013 related to a new contract not yet in existence, namely the renewal that Callow hoped to negotiate, and therefore was not directly linked to the performance of the winter contract.

Callow appealed to the Supreme Court of Canada.

Decision:

The Supreme Court of Canada found for Callow (but not unanimously). The Court affirmed the damages judgement against Baycrest on the basis that if Callow had known its winter agreement would not be renewed it could have secured another winter contract with someone else.

Reasons:

The majority of the Supreme Court held that Baycrest knowingly misled Callow in the manner in which it exercised its termination right in the winter agreement and this wrongful conduct amounted to a breach of contract. In reaching that decision the Court stated:

– Baycrest did not have an obligation to disclose its intention to terminate, but it did have an obligation to refrain from misleading Callow in the exercise of that termination right. If someone is led to believe that their counterparty is content with their work and their ongoing contract is likely to be renewed, it is reasonable for that person to infer that the ongoing contract is in good standing and will not be terminated early. Baycrest failed to correct Callow’s misapprehension that arose due to these false representations, so it breached its duty of good faith.

– The Honest Performance Duty:

* must be exercised and performed honestly and reasonably and not capriciously or arbitrarily;

* applies to all contracts and requires that parties must not lie or otherwise knowingly mislead each other about matters “directly linked” to the performance of the contract. While that does not equate to a positive obligation of disclosure, in circumstances where a contracting party lies to or knowingly misleads another, there is an obligation to correct a false impression created through that party’s own actions;

* rests on a requirement of justice that a contracting party have appropriate regard to the legitimate contractual interests of their counterparty but that regard does not mean that party must subvert their own interests to those of the counterparty by acting as a fiduciary or in a selfless manner;

* attracts damages for a breach of the duty where the manner in which the right was exercised was dishonest. This focus on how the termination right was exercised is distinct from whether the right could be exercised. No contractual right, including a termination right, can be exercised dishonestly. The damages should put the injured party in the position that it would have been in had the duty been performed. Baycrest performed the contract, but in that performance it also caused Callow loss by making dishonest extra‑contractual misrepresentations concerning that performance, upon which Callow relied to its detriment;

* is a highly fact‑specific determination, and can include lies, half‑truths, omissions, and even silence, depending on the circumstances. One can mislead through action, by saying something directly to its counterparty, or through inaction, by failing to correct a misapprehension caused by one’s own misleading conduct.

– The breach must be “directly linked” to the performance (in this case the termination right). No contractual right may be exercised dishonestly which is contrary to the requirements of good faith. The direct link exists when the party performs its obligation or exercises its right under the contract dishonestly.

– Interestingly, and worthy noting is that the dissenting Court opinion was that there were no outright lies by Baycrest, and although it knew of Callow’s mistaken belief, Baycrest never gave up its right to terminate on notice without cause (and not for unsatisfactory service) so there was no belief that Baycrest had to correct and the appeal should be dismissed.

Lessons

1. How you exercise your contractual rights is as important as whether you have the right to exercise them.
2. You have an obligation to correct a false or misleading impression created through your own action or inaction that is “directly linked” to the exercise of the right or the performance of an obligation. Baycrest did not have to disclose its intention to terminate but its acts created a false impression of possible renewal where non-existed.
3. You do not however, have a duty of disclosure unless your act or omission is within point 1 above. A mistaken belief by a party does not require you to correct it so long as your act or omission did not cause that belief.
4. Make sure no-one (such as your property manager) communicates misleading information to another party about a decision that has already been made internally which will have an adverse effect on another party.
5. Correct your representations that are subsequently rendered false, or which you later discover were erroneous. That may eliminate or at least reduce damages.
6. Motive or intent to deceive is not necessary for a breach to be found and the determination of whether a breach has occurred is highly fact specific
7. Manage the expectations of the other party(ies) where the exercise of unilateral rights like termination, could have material adverse effects on the other party(ies).
8. Pre-contractual lies or representations are not caught by the Honest Performance Duty but other legal doctrines may result in liability.

Disclaimer: This article is for general information purposes only and not intended as or to be relied upon for legal advice. Consult with a lawyer for your unique situation.

*If there is a general real estate or leasing related question you would like to see addressed in a future article in “The Legal Corner”, please contact me directly by e-mail at dgold@robapp.com with your suggestion. Not all requests can be accommodated.