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Deception + the Honest Performance of Contracts

In 2014 the Supreme Court pronounced that good faith contractual performance is a general principle in the common law of contracts and that there is a common law duty applicable to all contracts to act honestly in the performance of obligations; Bhasin v. Hrynew, 2014 SCC 71.

Generally, Bhasin imposed a duty of honest performance of contractual obligations. In Bhasin, the duty of honest performance included refraining from misleading or lying to the other party with respect to the performance of the contract. That obligation did not require that the parties be absolutely loyal to the other party, to act as a fiduciary to the other party, nor did it impose an obligation of full disclosure, and it did not mean that a party would have to subvert its interests to that of the other party. The result or goal of this new duty was to ensure that the other party would have a chance to protect their interests if the contract did not work out.

Bhasin acknowledged that good faith and honest performance would be a fact-based inquiry—leaving open the possibility that this new common law doctrine created by the Supreme Court would be further developed. And they have now issued another decision on this topic.

Background

Fast forward six years, and the Supreme Court was asked to examine this duty in C.M. Callow v. Zollinger et al2020 SCC 45. C.M. Callow involved a contract for maintenance services provided by Callow to the Defendants, a group of condominium corporations (Baycrest). Formed in April 2012, the contract covered winter maintenance services from November 1, 2012 to April 30, 2014. Callow and Baycrest also had a summer maintenance contract, which, combined with the winter contract, provided Callow with year-round work for Baycrest. 

Callow performed the winter maintenance duties for the 2012/2013 winter season and began work under the following summer contract. While doing his 2013 summer maintenance work, Callow decided to put in a little extra time/effort and money (“freebies”) for Baycrest’s benefit. He thought the freebies would incentivize Baycrest to renew his winter maintenance contract for a further two years upon expiry of the winter maintenance contract in April 2014.  

The winter maintenance contract stipulated that Baycrest could terminate the agreement with ten days’ written notice. In March/April 2013, Baycrest decided internally to end the winter contract but did not give Callow notice of termination of the contract because they wanted to ensure that he fully performed the summer contract. After Baycrest decided to terminate the contract, they noticed Callow’s extra efforts but did not advise Callow that his efforts were for naught and that they were going to terminate the winter contract. Baycrest terminated the winter contract with ten days’ contractual written notice in September 2013—approximately one month before Callow’s work was to begin for the last winter season of the current winter contract. Callow sued for unjust enrichment for the freebies he provided during the summer, the cost of the subcontracts he entered into in reliance on the winter contract continuing, and his expected profits.

Trial Court

The trial court made a finding of fact that Baycrest actively deceived Callow from March/April 2013 when they decided not to terminate the winter contract until September 2013. By giving him notice of the termination in part, they had continued to represent that the current winter contract was not in danger of being terminated. The trial court held that Baycrest violated the principle of good faith and the duty of honest performance.

Ontario Court of Appeal

The Ontario Court of Appeal held that the trial court erred in expanding the duty of honest performance beyond the terms of the contract. The duty of honest performance required that the parties be honest with each other concerning matters “directly linked to the performance of the contract”. That is, linked to the winter contract then in effect. The rationale for this was, despite the communications between the parties regarding whether there was to be a future winter contract, those discussions were not linked to the current winter contract, which Baycrest had a right to terminate on 10-days’ notice.

The Ontario Court of Appeal stated the purpose of the duty of honesty introduced in Bhasin was to be applied to avoid commercial uncertainty and did not impose a duty of loyalty or disclosure or require a party to forego the advantages flowing from the contract (Callow, at para 26).

Supreme Court of Canada

Callow appealed to the Supreme Court of Canada on the following basis:

  1. Baycrest misled him about his performance and the prospect of a renewed winter maintenance agreement—that in doing so, the Defendants’ exercise of the termination clause was wrongful, even if the required 10-days’ notice was given (Callow, at para 32);
  2. there was a free-standing duty to exercise contractual discretionary powers in good faith, which was breached by Baycrest(Callow at para. 33); and 
  3. in the alternative to the above, there should be a new duty of good faith, which would prohibit “active non-disclosure”; (Callow at para. 33). 

Baycrest argued that:

  1. the future contract was not directly related to the performance of the winter contract then in force;
  2. they had the unqualified right to terminate with notice;
  3. Callow was seeking to have them subvert their contractual interests for his; and 
  4. they could use their discretion to terminate as provided in the contract (Callow, at para 34).

Applying Bhasin

The majority allowed the appeal on the sole basis of Baycrest’s duty to act honestly (as enunciated in Bhasin) in its exercise of the termination clause. At paragraph 54, the Supreme Court restated Callow’s identification of the legal principle at question:

Stated simply, no contractual right can be exercised dishonestly because, pursuant to Bhasin, that would be contrary to an imperative requirement of good faith, i.e. not to lie or knowingly deceive one’s counterparty in a matter directly linked to the performance of the contract.

This clarified with certainty that the issue was not whether Baycrest had the right to exercise the termination clause but whether the manner in which the right was exercised ran afoul of the duty to act honestly.

The second issue tackled was whether or not Baycrest’s conduct constituted dishonesty. The Supreme Court was quick to restate Bhasin and that the duty to act honestly does not impose a duty of loyalty, disclosure, or to forgo the advantages of the contract, but that the parties must refrain from lying or knowingly misleading their counterparty (Callow, at para 86, citing Bhasin, at para 73). 

The Supreme Court did not disturb the trial courts findings of fact on this issue when it characterized the Baycrest’s “active communications,” which they knew had the effect of deceiving Callow about the prospect of a renewed winter contract. Callow reasonably believed that the contract would be renewed, and as a result, the current winter contract would not be terminated. At para 99, the Court stated:

The Court of Appeal did not interfere with these findings, nor has Baycrest argued that the trial judge made any palpable and overriding errors. Accordingly, in light of the trial judge’s findings of fact, I agree that Baycrest intentionally withheld information in anticipation of exercising clause 9 [the termination clause], knowing that such silence, when combined with its active communications, had deceived Callow. By failing to correct Callow’s misapprehension thereafter, Baycrest breached its contractual duty of honest performance.

The minority, in coming to the same conclusion that Baycrest breach the duty of honest performance, looked at the actions (or inaction) of Baycrest through a lens of misrepresentation when analyzing whether the duty of honest performance had been breached.

Damages

Regarding damages, the majority restated the trial courts’ decision - a breach of the duty of honest performance is a breach of contract and results in expectation damages. However, the valuation of damages was somewhat nuanced. What expectations would a party reasonably have if the other party terminated the contract in an “honest” manner?  

The Supreme Court took issue with the trial courts’ rationale of expectation damages as applied to a breach of the duty of honesty in performance. It stated that the expectation damages could not be calculated based on the contract being performed fully, but rather on Callow’s lost opportunity to obtain and perform other contracts had Baycrest acted honestly in exercising their right to terminate the contract and given notice of termination when they decided in April/March 2013 rather than September 2013, the value of which would be equal to or similar to the value of the remainder of the contractual value to Callow. 

The Supreme Court did not disturb the trial courts’ assessment of the costs unnecessarily incurred in leasing equipment for his anticipated performance under the contract. Callow was not hired for another contract because he was precluded from bidding on one and therefore did not have to undertake all the expenses associated with fulfilling the contract.

Take Aways

  • Bhasin remains undisturbed – a duty of honest performance of contractual obligations is live and well.
  • Anything you do that might cause misapprehension by the other party about performance of the contract might create an obligation for you to correct their misapprehension.
  • It is a fact-based inquiry whether a breach of honest performance may have occurred.

If you have a situation where duty of honesty performance may apply, please reach out to Rob Rakochey, Jason Wolcott, or any member of our Litigation team.