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Update

Tuesday, January 19, 2021

On December 18, 2020, the Supreme Court of Canada (the “SCC”) released its judgement in C.M. Callow Inc. v Zollinger (“Callow”). The Callow decision affirmed and expanded the duty of good faith and honesty in contractual relationships, a general organizing principle of common law introduced in 2014 by the SCC in Bhasin v Hrynew (“Bhasin”). Please refer to our previous update for a summary of the Bhasin case.

What You Need to Know About Callow

1. The SCC expanded the duty of honest contractual performance beyond a mere obligation not to lie. Pursuant to Callow, parties to a contract may not knowingly mislead their counterparties. “Knowingly misleading” may include half-truths, omissions and even silence depending on the context. Such a determination is highly fact specific.

2. The SCC reaffirmed that the duty of honest contractual performance is not a duty of disclosure. While parties to a contract may not be required to disclose material facts (i.e., an intention to terminate an agreement), they must take active steps to not mislead or misrepresent future contractual relationships to their counterparties.

3. Strict compliance with a contractual provision is not sufficient to avoid liability.

Summary of Callow

C.M. Callow Inc. (“C.M.”) entered into a two-year winter maintenance service contract with a group of condominium corporations (“Baycrest”). Pursuant to the contract, Baycrest had the right to terminate the agreement without cause upon 10 days’ notice. Baycrest decided it would terminate the agreement prior to the end of its term. Despite this decision, Baycrest continued to accept gratuitous extra services from C.M., which were performed to incentivize the renewal of the agreement. In addition, members of the Baycrest board of directors exchanged emails with C.M. discussing the renewal of the agreement. These emails and discussions took place after Baycrest’s internal decision to terminate the agreement. Given these events, C.M. was under the impression the contract was in good standing and would be renewed for an additional term. This misapprehension of C.M. resulted in C.M. not bidding on other winter contracts.

Baycrest terminated the agreement in September 2013, providing C.M. the required 10 days’ notice. C.M. sued for breach of contract and alleged Baycrest acted in bad faith and contrary to its obligation of honest contractual performance. The SCC agreed. The Court determined that Baycrest had breached its duty by knowingly misleading C.M. into believing the agreement would be renewed.

Key Takeaways

Baycrest did not violate the terms of the agreement. Nonetheless, Baycrest was liable to C.M. because it knowingly misled C.M. about its decision to terminate the agreement. Baycrest knew its actions misled C.M.’s belief of honest contractual performance and deliberately chose not to correct this mistaken belief. While no positive duty to disclose exists, Callow recognized the duty to not knowingly mislead. Additionally, the case highlights the factual analysis necessary to determine breaches of the duty of good faith and honesty in contractual relationships. The SCC emphasized that determining whether a party “knowingly misled” a counterparty is circumstantial. This fact-specific determination requires observations of the parties’ actions or inactions, including half-truths, omissions, or silence.

Parties to commercial agreements should take note of Callow and need now put themselves in the shoes of their counterparties. They must determine whether their actions may be construed as a misapprehension related to contractual performance.

Callow may not be the SCC’s last opportunity to speak to the duty of good faith. The SCC again dealt with the principle of the duty of good faith in the performance of contracts in Wastech Services Ltd. v Greater Vancouver Sewage and Drainage District. This decision will be released later this year.

If you have any questions with respect to the matters discussed above, please contact Sanjeev Patel (spatel@wildlaw.ca), Nick Robelek (nrobelek@wildlaw.ca) or any other member of Wildeboer Dellelce LLP.

This update is intended as a summary only and should not be regarded or relied upon as advice to any specific client or regarding any specific situation.

If you would like further information regarding the issues discussed in this update or if you wish to discuss any aspect of this commentary, please feel free to contact us.

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