Back in 2014, the Supreme Court of Canada’s landmark decision in Bhasin v Hrynew, 2014 SCC 71 (CanLII) (“Bhasin”) outlined the duty of honest performance in contract law. Generally, the duty of honest performance requires that the parties to a contract be “honest with each other in relation to the performance of their contractual obligations” (Bhasin at paragraph 93) and “not lie or otherwise knowingly mislead each other about matters directly linked to the performance of the contract” (Bhasin at paragraph 73). This is a mandatory duty which applies to all contracts.
Just over six years later in C.M. Callow Inc. v. Zollinger, 2020 SCC 45 (CanLII) (“C.M. Callow”), the Supreme Court once again addressed the duty of honest performance.
On November 1, 2012, a group of ten condominium corporations (collectively, “Baycrest”) entered into a winter maintenance contract and a separate summer maintenance contract with C.M. Callow Inc. (“Callow”). The winter maintenance contract had a two-winter term up to April 30, 2014. Clause 9 of the winter maintenance contract allowed Baycrest to terminate the contract upon providing 10 days written notice to Callow if (i) Callow failed to provide satisfactory services in accordance with the contract, or (ii) for any reason, Baycrest determined that Callow’s services were no longer needed.
In early 2013, Baycrest determined that it would be exercising clause 9 to terminate the winter maintenance contract. Although the decision to terminate the contract had been made at that time, Baycrest did not tell Callow until September 12, 2013.
Up until Callow was informed of the decision, it had performed its responsibilities under the winter maintenance contract. Discussions between Baycrest and Callow in the spring and summer of 2013 were positive and led Callow to believe that a renewal of the winter maintenance contract was likely. To incentivize Baycrest to renew the winter maintenance contract, Callow provided extra services above what was required under the separate summer maintenance contract at no charge to Baycrest during the summer of 2013.
Once Callow was informed of Baycrest’s decision to terminate the winter maintenance contract, Callow sued Baycrest for breach of contract. The allegations in the Statement of Claim included that Baycrest had breached a duty of honest performance owed to Callow.
Eight out of nine judges of the Supreme Court, including three writing concurring reasons, found that Baycrest had breached the duty of honest performance by knowingly misleading Callow to believe that the winter maintenance contract would not be terminated and, in fact, would likely be renewed.
The majority began by describing how a breach of the duty of honest performance “must be directly linked to the performance of the contract” (C.M. Callow at paragraph 51). The Ontario Court of Appeal had held that any dishonest conduct by Baycrest was related to the possibility of a renewal contract being entered into by the parties. As the dishonesty had nothing to do with the existing winter maintenance contract, the duty of honest performance did not apply.
Drawing on the Quebec civil law framework for abuse of rights cases (C.M. Callow at paragraphs 57-63, 68-74), the Supreme Court found that the direct link between Baycrest’s conduct and the performance of the winter maintenance contract was that Baycrest had terminated the contract in a manner which was dishonest and wrongful. Baycrest’s communications with Callow in the months following the decision to terminate the winter maintenance agreement had “deceived Callow into thinking it would leave the existing winter services agreement intact… and led [it] to believe that a renewal was likely” (C.M. Callow at paragraphs 94-99). Although the Supreme Court did not go so far as to say that a party to a contract must subordinate its own interests to perform a contract honestly, it was held that Baycrest needed to take steps to correct the false impression it created.
Comments from the Concurring and Dissenting Judges
The three concurring judges and the lone dissenting judge, Justice Côté, were critical of the majority’s approach of drawing from Quebec civil law. They noted that unnecessarily infusing principles of the abuse of rights framework from civil law into the common law would create uncertainty and have undesirable ramifications for contract law going forward. Justice Côté went as far as to say that “the unnecessary debate about comparative legal exercises may have diverted attention from the facts of this case as they are” (C.M. Callow at paragraph 192), stating that properly applying the existing common law would lead to the conclusion that Baycrest had not breached a duty of honest performance.
By Taylor Maxston