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CM Callow Inc. v. Zollinger, 2018 ONCA 896

CM Callow Inc. v. Zollinger is a 2018 Ontario Court of Appeal decision that provides valuable guidance into the scope of the duty of honest performance in contractual relations.

The facts of the case are straightforward. The plaintiff, CM Callow, provided both summer and winter maintenance services to the defendants, ten residential condominium corporations. The condominium corporations had formed a "Joint Use Committee" to make decisions regarding the joint and shared assets of the corporations.

The plaintiff provided services under two multi-year contracts, one covering summer maintenance and the other covering winter maintenance. The winter maintenance contract, which ran from November 1, 2012 to April 30, 2014, contained a provision allowing for early termination by the defendants upon 10 days’ notice (the "Winter Contract").

At the conclusion of the first term in the Winter Contract, in April 2013, the defendants held a meeting and voted to terminate the Winter Contract. The defendants’ evidence was that the decision to terminate the contract was due to the plaintiff’s sub-par performance. This decision was not shared with the plaintiff until September, 2013.

During the summer of 2013, the plaintiff, on its own initiative, performed extra "freebie" landscaping work with the hope that this would act as an incentive for the defendants to renew the Winter Contract. Members of the Joint Use Committee were aware that the plaintiff was under the impression that the contracts were likely to be renewed. In particular, over the summer of 2013, members of the Joint Use Committee discussed the "freebie" work and how the plaintiff was under the impression that they would work the upcoming winter. Further, an internal email between two members of the Joint Use Committee referenced keeping the plaintiff as a "back pocket option" regarding the Winter Contract. At trial, Justice O'Bonsawin found this conduct to be unsettling.

At trial, the defendants argued that this was a case of simple contractual interpretation, and that the contract allowed for termination, for any reason, with ten days’ notice. Justice O'Bonsawin disagreed, citing Bhasin v Hrynew, 2014 SCC 71, ("Bhasin") for the proposition that good faith performance is a general organizing principle of common law contract and that parties to a contract have a duty to act honestly in performing their contractual obligations.

Justice O'Bonsawin concluded that the defendants breached their duty of honest performance by:

  1. Withholding the fact that they intended to terminate the Winter Contract to ensure that the plaintiff performed the summer contract; and
  2. Continuing to make representations to the plaintiff that the winter contract was not in danger of non-renewal.

The trial judge held that meeting the minimum standard of honesty would have required the appellants to address the alleged performance issues with the respondent, provide prompt notice or refrain from any representations in anticipation of the notice period.

On appeal, the Ontario Court of Appeal accepted the argument of the condominium corporations that Justice O'Bonsawin erred by improperly expanding the duty of honest performance in a manner that went beyond the terms of the Winter Contract.

In allowing the appeal, the Court discussed the common law duty of good faith and honest performance, as articulated by the Supreme Court of Canada in Bhasin, emphasizing how the concept of good faith was not to be applied so as to undermine longstanding contract law principles, thereby creating commercial uncertainty. On this point, the Court cited paragraphs 70 and 73 of the Bhasin decision:

"The principle of good faith must be applied in a manner that is consistent with the fundamental commitments of the common law of contract which generally places great weight on the freedom of contracting parties to pursue their individual self-interest. In commerce, a party may sometimes cause loss to another — even intentionally — in the legitimate pursuit of economic self-interest: Bram Enterprises Ltd. v. A.I. Enterprises Ltd., 2014 SCC 12, [2014] 1 S.C.R. 177 (S.C.C.), at para. 31. Doing so is not necessarily contrary to good faith and in some cases has actually been encouraged by the courts on the basis of economic efficiency: Bank of America Canada v. Mutual Trust Co., 2002 SCC 43, [2002] 2 S.C.R. 601 (S.C.C.), at para. 31. The development of the principle of good faith must be clear not to veer into a form of ad hoc judicial moralism or "palm tree" justice. In particular, the organizing principle of good faith should not be used as a pretext for scrutinizing the motives of contracting parties." […]

In my view, we should. I would hold that there is a general duty of honesty in contractual performance. This means simply that parties must not lie or otherwise knowingly mislead each other about matters directly linked to the performance of the contract. This does not impose a duty of loyalty or of disclosure or require a party to forego advantages flowing from the contract; it is a simple requirement not to lie or mislead the other party about one's contractual performance…"

The Court held that the condominium corporations’ decision to accept the "freebie" work and not inform the respondent of their decision to terminate "may suggest a failure to act honourably", however that this conduct did not rise to the high level required to establish a breach of the duty of honest performance. The Court then emphasised that the condominium corporations were free to terminate the Winter Contract with CM Callow upon ten days’ notice, as this was all the parties bargained for, and were entitled to.

The Ontario Court of Appeal decision recognized that although the condominium corporations’ actions were unseemly, the principle of commercial certainty in contractual relations ran paramount, as a necessary force in commerce.