SCC Affirms Honesty Is The Best Policy In Exercising Contractual Rights

• Published date: 25 January 2021
• Subject Matter: Corporate/Commercial Law, Litigation, Mediation & Arbitration, Contracts and Commercial Law, Trials & Appeals & Compensation, Civil Law
• Law Firm: Stikeman Elliott LLP
• Author: Mr Michael Mestinsek, Joseph Wenig, Sakshi Sharma and Ben Muller

The Supreme Court of Canada recently clarified its view of the duty of honest performance, holding that parties to a contract cannot actively mislead their counterparties as to how they intend to exercise their contractual rights. This is the first major consideration of this issue by the Court since its landmark 2014 ruling in Bhasin v. Hrynew.

Introduction

C.M. Callow Inc. v. Zollinger, 2020 SCC 45 ("Callow"), released on December 18, 2020, is the latest from the Supreme Court of Canada ("SCC") on the subject of "good faith" in contractual performance. This area of the law has seen much attention and development since the 2014 decision in Bhasin v. Hrynew, 2014 SCC 71, in which the SCC recognized that good faith in contractual performance is a general organizing principle of contract law, and through this organizing principle, found that parties to a contract have a duty of honest contractual performance.

Since then, parties have sought to understand specifically what it means to contract in good faith and to honestly perform contracts, and subsequent cases have clarified the contours and limits of this new duty.

In Callow, the SCC provides guidance on the scope and operation of the duty of honest contractual performance and its practical implications for contracting parties. In particular, it confirms that:

• parties are under a duty to act honestly in exercising contractual rights, including unilateral "without cause" termination provisions;
• parties do not have to disclose a decision to terminate a contract, but they cannot "knowingly mislead" counterparties;
• whether certain conduct - such as lies, half-truths, omissions, or even silence - amounts to "knowingly misleading" a counterparty is a highly fact-specific determination;
• to qualify as a breach of the duty of honest performance, the dishonesty in question must be directly linked to the performance of the contract; and
• the remedy for a breach of the duty of honest performance involves putting the injured party in the position it would have been in had the duty not been breached (i.e., "expectation damages").

The five SCC judges who signed the majority opinion were joined by three others who issued separate concurring reasons. The only dissenting opinion was authored by Justice C'té.

Background

In 2012, a group of condo corporations in Ottawa ("Baycrest") entered into a pair of two-year maintenance services agreements with C.M. Callow Inc. ("Callow"). Both agreements - a winter agreement and a...