The seminal case of Bhasin v. Hyrnew, 2014 SCC 71, redefined contract law in Canada last decade. The unanimous decision of the Supreme Court, authored by Justice Thomas Cromwell, cemented the “organizing principle” of good faith underpinning contractual relations, and recognized specifically the common law duty of honest performance borne by parties to a contract towards each other. While good faith had percolated before, Bhasin opened the valve – some might say the floodgates – and has led us all to wonder how far it goes now and may go in the future.
In late 2019, a substantially revamped Supreme Court (featuring only 3 justices who took part in the Court’s decision in Bhasin), heard two appeals concerning the parameters of good faith as an organizing principle. The decision in the case of Wastech Services Ltd. v. Greater Vancouver Sewerage and Drainage District, 2021 SCC 7 – on appeal from the British Columbia Court of Appeal – was just released in February 2021. Expect Part 2 of this series to cover that decision, on the good faith exercise of contractual discretion, in the near future.
Alongside Wastech, the Supreme Court heard the case of C.M. Callow Inc. v. Zollinger, 2020 SCC 45, on appeal from the Ontario Court of Appeal (2018 ONCA 896). Callow is a case about deception, and the Supreme Court decision released late last year has now made it profoundly clear that actively deceiving or knowingly misleading a counterparty concerning exercise of contractual rights is a breach of contract and will entitle the deceived party to damages.
Facts
In 2010, a group of ten condo corporations in Ottawa (collectively “Baycrest”) managed by Condominium Management Group (“CMG”), entered into its first two-year winter maintenance agreement with C.M. Callow Inc. (“Callow”), owned and operated by Christopher Callow. Baycrest’s Joint Use Committee (“JUC”) was responsible for making decisions regarding shared assets, based on reporting and recommendations from CMG. CMG and the JUC oversaw the work by Callow, and in 2012 Baycrest entered into two new two-year agreements with Callow: a renewal of the winter maintenance contract (November 2012 to April 2014) and a separate summer maintenance contract (for 2013 and 2014). The key term in the winter maintenance agreement was Clause 9, which allowed termination without cause by Baycrest on just 10 days’ notice in writing.
Complaints arose regarding Callow’s 2012-2013 winter maintenance performance, but – as found by the trial judge – Callow’s performance was not below the required standard and the complaints were primarily caused by individual owners and tenants, and nevertheless were addressed by Callow including at a January 2013 JUC meeting. The evidence reflected Baycrest’s overall satisfaction with Callow’s performance. However, in Spring 2013, Baycrest/CMG appointed a new property manager, Tammy Zollinger, who immediately advised the JUC to terminate the winter maintenance agreement. In March or April 2013, the Baycrest JUC voted to terminate the winter maintenance agreement, but Baycrest decided not to disclose its decision to terminate at the time.
As Callow performed the summer maintenance agreement in 2013, it also pursued a further renewal of the winter maintenance agreement. Callow discussed potential renewal with several JUC members, and from those conversations came to the view that a further renewal of the winter agreement was likely. Callow did work “above and beyond” what was required under the summer maintenance agreement, described as “freebie” work, including the improvement of two condo gardens. In July 2013, JUC members corresponded about this work by Callow, acknowledging that it was being performed based on Callow’s expectation that he would be continuing the winter work. Baycrest still did not correct Callow’s misapprehension, hoping to keep Callow performing as a “back pocket option”, and Callow did not seek alternative contracts for the upcoming winter of 2013-2014.
On September 12, 2013, Baycrest finally communicated its notice of termination of the winter maintenance agreement, providing 10 days’ notice in accordance with Clause 9. Callow commenced an action against the Baycrest corporations, CMG, and Zollinger, claiming $81,383.68 for breach of contract, intentional interference with contractual relations, and negligent misrepresentation.
Lower Courts
At trial, Justice O’Bonsawin found Callow’s evidence credible, and found that the Baycrest witnesses “provided many exaggerations, over-statements” and “comments contrary to the written evidence”. Justice O’Bonsawin considered the specific conclusion in Bhasin that the duty of honest performance did not include a freestanding “duty to disclose” but did draw a distinction for what she referred to as “active deception” by Baycrest. She found that Baycrest did not meet a “minimum standard of honesty”, and intentionally withheld the information about its decision to terminate in bad faith. Justice O’Bonsawin awarded damages to Baycrest in the amount of $80,742.10, primarily comprised of an amount equal to the value of the winter maintenance agreement for one year.
On appeal to the ONCA, Baycrest argued that Justice O’Bonsawin (1) improperly expanded the duty of honest performance, and (2) erred in assessing damages. In a unanimous decision, the Court of Appeal panel of Justices Lauwers, Huscroft, and Trotter allowed the appeal. The ONCA highlighted Cromwell’s own characterization of the Bhasin decision as a “modest, incremental step”. The ONCA found “no unilateral duty to disclose information relevant to termination”. With Callow having admitted Clause 9 did not require more than 10 days’ notice to terminate, the ONCA found no breach of contract by Baycrest. In any event, the ONCA decided, the summer 2013 communications by JUC members to Callow related to a new potential contract under negotiation (an extension following the winter of 2013-2014), and not the existing one being performed.
Supreme Court – Majority Decision
The majority opinion of the Court was authored by its newest member, Justice Nicholas Kasirer, and for it he was joined by Chief Justice Wagner and Justices Abella and Karakatsanis (the three of Bhasin experience), along with fellow newcomer Justice Martin. The majority disagreed with the ONCA’s analysis and found in favour of Callow. As Justice Kasirer wrote, the ONCA was incorrect in finding that the misleading communications by Baycrest concerned only negotiation for an extension. In framing this inquiry Justice Kasirer stated:
"In determining whether dishonesty is connected to a given contract, the relevant question is generally whether a right under that contract was exercised, or an obligation under that contract was performed, dishonestly."
At trial Justice O’Bonsawin found the dishonesty was related to the termination of the agreement then in-effect, not negotiation for an extension (but more on this below). Unlike the ONCA, the Supreme Court relied heavily on this determination, and Justice Kasirer found no error in the trial judge’s findings.
Justice Kasirer found Baycrest’s conduct amounted to a breach of the duty of honest performance – Baycrest had an obligation to refrain from misleading Callow in exercise of the termination clause and had “an obligation to correct the false impression created through its own actions”. Justice Kasirer repeated the finding at trial that this amounted to “active deception” and found that Baycrest “knowingly misled” Callow in the manner in which it exercised Clause 9. Considering Baycrest’s conduct as a whole, they were aware of Callow’s misapprehension and should have corrected it.
In obiter, Justice Kasirer noted:
- Baycrest was entitled to end the contract as and when it did (there was no argument of unconscionability), but the dishonesty surrounding the exercise of that right was the breach entitling Callow to damages;
- The duty of honest performance remains distinct from civil fraud and estoppel, and does not require an intention that the representation or false statement be relied upon; and
- It is “useful” to consider Quebec case law surrounding good faith and other commentary in applying the common law duty of honest performance recognized under Bhasin.
The majority awarded Callow its expectation damages, as flowing from a breach of contract.
Concurring and Dissenting Opinions
Justice Brown wrote a concurring opinion, joined by Justices Moldaver and Rowe, which agreed in the finding of a breach of the duty of honest performance, but disagreed in two notable respects with the majority opinion. First, there was disagreement with Justice Kasirer’s discussion of the doctrine of abuse of right under Quebec law, finding that doing so “will only inject uncertainty and confusion” into understanding and applying the common law duty. Second, the concurring justices found that “the justification for awarding expectation damages does not apply to breach of the duty of honest performance” as the wrong in this case, like Bhasin, was extra-contractual misrepresentations upon which the plaintiff relied, and therefore reliance damages should be the proper measure.
In her dissenting opinion, Justice Côté also criticized the majority’s and Justice Kasirer’s observations on the role of external legal concepts: “an unnecessary comparative exercise … under the pretext of dialogue”. The seed of Justice Côté’s substantive disagreement was that, in her view, Bhasin found that all obligations flowing from the duty of honest performance are negative, not positive. Justice Côté explained: “silence cannot be considered dishonest within the meaning of Bhasin unless there is a positive obligation to speak.” In her view, there was no obligation to correct a counterparty’s mistaken belief unless the party “materially contributed to it”. She would have found that neither Baycrest’s vague comments relating to potential renewal nor its purported satisfaction with services materially contributed to Callow’s mistaken belief that the winter maintenance agreement would continue.
Where do we go from here?
The implications of the Callow decision are significant. While the Supreme Court stressed – like in Bhasin – that the duty of honest performance does not imply a duty of loyalty or to forgo advantages, and nor does it revise the contractual bargain to imply additional notice requirements for termination, the decision does clearly stand for the proposition that an undisclosed decision to exercise a contractual right can amount to a breach in certain circumstances. The rights of a party to take particular actions at particular times of its choosing might traditionally have been considered to be an unfettered discretion, but that is now clearly not the case and exercise of contractual rights in the face of “active deception” or having “knowingly misled” a counterparty is a breach of the duty of honesty and will entitle a counterparty to damages.
The inquiry of whether the dishonesty is connected to performance of the contract is fact-specific, but did the facts in this case support the outcome? It is obvious from Justice O’Bonsawin’s trial decision that she preferred Callow’s evidence to that of the defendants’ witnesses. The written evidence was similarly favourable to Callow concerning the quality of his performance but was curiously thin on the arguably central question of whether Baycrest contributed to Callow’s misapprehension about future years of winter maintenance work. The determination boiled down to emails between two board members, Mr. Peixoto and Mr. Campbell, on July 17, 2013. Those emails acknowledged that the “freebie” work was being performed by Callow as an incentive for Baycrest to renew the winter maintenance contract, but they do not appear to go so far as to suggest Baycrest confirmed renewal or continuation of the contract was likely as a result. Is awareness of a misapprehension sufficient cause to require disclosure to correct that misapprehension, even if a party did not contribute to it? The Supreme Court appears to have decided yes.
It remains to be seen how significantly the decisions in Callow and Wastech will impact honesty in contractual performance and good faith exercise of contractual discretion going forward. Based on Callow specifically, parties to contracts should be mindful of misapprehension by their counterparties, and absolutely avoid any active deception surrounding performance of their contracts. The extent of a party’s duty or obligation to disclose may hinge on the specific facts of the case, but perhaps the old adage will again become the appropriate advice: “honesty is the best policy.”