Extending the Duty of Honesty in Contractual Performance: C.M. Callow Inc. v. Zollinger
March 2022 - 2 min read
In 2020 and 2021, C.M. Callow Inc. v. Zollinger, 2020 SCC 45 and Wastech Services Ltd. v Greater Vancouver Sewerage and Drainage District, 2021 SCC 7, two significant Supreme Court of Canada cases, clarified and confirmed the duty of good faith and honest contract performance. These cases have since been followed several times in Alberta and Canada to confirm, clarify, or extend the duty of good faith and honest performance. Understanding the evolution of the law following Callow and Wastech is essential for all individuals and entities with contractual duties and rights.
This article aims to provide an update on how appellate courts have applied the concepts of good faith and honest contractual performance, following Callow and Wastech.
In Callow, the SCC extended the general duty of honesty in contractual performance to the exercise of discretionary decisions, even where the decision-maker has an absolute right by contract.
Callow ran a property maintenance business. In 2010, his company concluded a contract with some condo corporations. The company made a new contract with the condo corporations in 2012, which was supposed to last for two more winters. If the condo corporations weren't happy, the contract said they could end it for any reason upon ten days' notice. In 2012, Callow attended a meeting to discuss some residents' issues about his services. The meeting went well, and he thought the problems were resolved. Callow's discussions with the condo corporations led him to believe that his contract would be renewed for the winter season. He continued to work throughout his summer contract, completing extra work free of charge to solidify the renewal of his winter contract. In September, the condo corporations terminated his contract, and Callow sued.
The majority of judges at the SCC said the condo corporations breached the contract. The condo corporations had a duty to act honestly toward Callow, but they were dishonest in how they dealt with putting an end to the contract. They actively misled Callow to believe they were happy with his work and that the contract would not be ended early.
The duty of honest performance does not mean one side has to sacrifice their interests for the other. It did not mean the condo corporations had to tell Callow that they were going to end the contract early, but they could not pretend the contract would be renewed once they knew it would be terminated.
The requirements of honesty in performance can go further than prohibiting outright lies. Whether or not a party has knowingly misled its counterparty is a fact‑specific determination and can include lies, half‑truths, omissions, and even silence, depending on the circumstances. One can mislead through action, by saying something directly to its counterparty, or through inaction, by failing to correct a misapprehension caused by one's misleading conduct.
The duty of honest performance attracts damages according to the ordinary contractual measure. Damages should put the injured party in the position it would have expected to be in had the duty been performed. Although reliance damages (the ordinary measure of damages in tort) and expectation damages will be the same in most cases, they are conceptually distinct. There is no basis for a breach of the duty of honest performance to be compensated through reliance damages.