C.M. Callow Inc. v. Zollinger: Silence Results in a Breach of Contract

In the Supreme Court of Canada’s (“SCC”) recent decision, C.M. Callow Inc. v. Zollinger, 2020 SCC 45 [Callow SCC], the Court expanded their holding from Bhasin v. Hrynew, 2014 SCC 71 [Bhasin]. Bhasin clarified the principle of good faith in contract law and introduced the duty of honest performance — the requirement not to lie or mislead a counterparty regarding contractual performance. While the judgement in Bhasin didn’t create a duty to disclose, the Court in Callow ruled that silence that misleads a counterparty could breach the duty of honest performance.

Facts

Ten different condominium corporations were managed by Condominium Management Group (collectively “Baycrest”). Each was a respondent in this dispute. Tammy Zollinger, the named respondent, was the property manager at Condominium Management Group at the time of the dispute.

Baycrest and C.M. Callow Inc., the appellant (“Callow”) entered into a two-year winter maintenance agreement (the “Agreement”) in 2010 (Callow SCC, para 6). Callow and Baycrest subsequently renewed the Agreement for the period of November 1, 2012, to April 30, 2014 (Callow SCC, para 8). Clause 9 of the Agreement entitled Baycrest to terminate the Agreement with ten days’ notice if Callow failed to provide satisfactory service or services were no longer required (Callow SCC, para 8).

In the spring and summer of 2013, Callow and Baycrest discussed renewing the Agreement. Callow spoke with two of the condominium corporations’ board members. Following this conversation, Callow felt Baycrest would likely renew the Agreement. It also felt Baycrest was satisfied with its services (Callow SCC, para 11). Callow performed “work above and beyond [its] summer maintenance services contract” hoping that this would incentivize Baycrest to renew the Agreement (Callow SCC, para 12).

In an email dated July 17, 2013, Joseph Peixoto, a condominium corporation board member, wrote to another board member: “[Callow] is under the impression we’re keeping him for winter again. I didn’t say a word to him cuz I don’t wanna get involved but I did tell [Ms. Zollinger] that [Callow] thinks we’re keeping him for winter” (Callow SCC, para 13). Peixoto also noted in the email that Callow was providing additional services free of charge, likely in an attempt to encourage Baycrest to renew the Agreement for next season. However, condominium corporation board members had already agreed not to renew Baycrest’s Agreement with Callow (Callow SCC, para 10).

On September 12, 2013, Zollinger informed Callow via email that Baycrest no longer required Callow’s services for the 2013-2014 season (Callow SCC, para 14).

As a result, Callow claimed a breach of contract, alleging:

• Baycrest acted in bad faith by accepting its free services, knowing such services were to maintain future contractual relations;
• Baycrest knew or ought to have known that Callow would not look for other winter maintenance contracts in reliance that Callow’s satisfactory services meant Baycrest would not prematurely terminate the Agreement; and,
• Baycrest was unjustly enriched due to the free services that Callow provided in summer 2013.

Ontario Superior Court

At the Ontario Superior Court, Baycrest made two submissions (Callow SCC, para 18):

• Callow’s level of service was not satisfactory; and,
• Clause 9 clearly and unambiguously states that Baycrest could terminate without reason upon ten days’ notice.

The trial judge dismissed both arguments and found Callow’s work met the requisite standard (Callow SCC, para 19). Further, the judge found that this was “not a simple contractual interpretation case” (Callow SCC, para, 20). She noted that “contracting parties must be able to rely on a minimum standard of honesty” to ensure “that parties will have a fair opportunity to protect their interests if the contract does not work out” (Callow SCC, para 20).

The trial judge stated Baycrest “actively deceived” Callow and acted in bad faith by withholding information and continuing to indicate that the Agreement was not in danger. In her view, the minimum duty of honesty required Baycrest to address Callow’s performance issues, provide prompt notice, and refrain from representations in anticipation of the notice period (Callow SCC, Para 22).

Ontario Court of Appeals

At the Ontario Court of Appeals, Baycrest claimed the trial judge erred by expanding the duty of honest performance beyond the terms of the Agreement. The Court agreed that Bhasin asserted good faith is applied to avoid commercial uncertainty. As a result, the duty of honesty doesn’t impose a duty of loyalty or disclosure and doesn’t require a party to forgo its rights stemming from a contract. The Court of Appeal held that although the trial judge’s findings suggest a failure to act honourably, this failure didn’t give rise to a breach of honest performance (Callow SCC, para 27).

Supreme Court of Canada

Justice Kasirer, with Chief Justice Wagner and Justices Abella, Karakatsanis, and Martin concurring, penned the majority decision. The SCC allowed Callow’s appeal on the grounds that Baycrest breached its duty of honest performance.

Kasirer J found the Court of Appeal erred by concluding that the trial judge’s finding didn’t amount to a breach of duty of honest performance. Although this duty didn’t require Baycrest to disclose its intentions, it had a duty not to mislead. Kasirer J. found Baycrest liable to damages for breaching the duty of honest performance because:

• The dishonesty was directly linked to the performance of the contract; and,
• Baycrest’s conduct constituted dishonesty.

Baycrest’s Dishonesty was Directly Linked to Performance of the Contract

The duty of honest performance “requires the parties to be honest with each other in relation to the performance of their contractual obligations” (Bhasin, para 93; Callow SCC, para 42). In Bhasin, Cromwell J. wrote that “parties will rarely expect that their contracts permit dishonest performance of their obligations” (Bhasin, para 76). It follows that the duty of honest performance applied despite Baycrest’s termination rights in clause 9 (Callow SCC, para 48). The court held that the duty of honesty attracts damages when a right is exercised in a dishonest manner (Callow SCC, para 53).

Callow referred to provincial law, “observ[ing] that the requirement not to abuse contractual rights is recognized as a feature of good faith in Quebec” (Callow SCC, para 56). Kasirer J. agreed that Quebec law was useful, and drew on Quebec’s good faith contract performance framework to better understand the common law duty of honest performance (Callow SCC, para 56). Kasirer J. concluded “[t]his does not mean the appropriate use of these sources is limited to cases where there is a gap in the law of the jurisdiction in which the appeal originates, in the sense that there is no answer to the legal problem in that law, or where a court contemplates modifying an existing rule” (Callow SCC, para 59).

Baycrest’s Conduct Constituted Dishonesty

Although Baycrest was not bound to disclose its intentions, except for the ten-day notice stipulated in the Agreement, Kasirer J. agreed with the trial judge that Baycrest had deceived Callow throughout the course of their communications (Callow SCC, para 94).

Kasirer J. found a duty to act honestly didn’t impose a duty of loyalty or require Baycrest to forego its contractual advantage (Callow SCC, para 80). However, Baycrest’s failure to correct a “misapprehension” resulted in a contractual breach according to the duty found in Bhasin.

There were no outright lies present in this case. However, the duty of honest performance goes beyond prohibiting outright lies. For example, if a party makes a statement it believes to be true but finds out later that statement is not true, the party is obligated to correct the misrepresentation (Callow SCC, para 90). Whether a party has “knowingly misled” the counterparty is highly fact-specific, and deference must be shown to the trial judge who weighs the evidence (Callow SCC, para 91).

Concurring Reasons

Justice Brown, with Justices Moldaver and Rowe, concurred with the majority on the issue relating to the duty of honest performance. However, they didn’t agree with the majority’s use of Quebec civil law in understanding the application of Bhasin to the appeal (Callow SCC, para 122).

Brown J. wrote that the majority’s resort to civil law in paragraph 60 was inappropriate because Kasirer J. acknowledged that the issue was fully resolved by Bhasin. Additionally, Brown J. wrote that this use of civil law undermines the “independent character of the various common law good faith duties” (Callow SCC, para 154). This use of civil law departs from the Court’s usual practice of comparative legal analysis and risks “subsuming the common law’s already-established and distinct conception of good faith into the civil law’s conception” (Callow SCC, para 156).

Brown J. further argued that seeking external sources when it is unnecessary may complicate straightforward subjects and introduce uncertainty (Callow SCC, para 160). He concluded the majority’s digression into civil law creates “practical difficulties … by making the common law governing contractual relationships less comprehensible and therefore less accessible to those who need to know it” (Callow SCC, para 170).

Dissenting reasons

Justice Côté dissented on the majority’s findings regarding the duty of honest performance. In her dissent, Côté J. stated that the case came down to whether Baycrest lied or otherwise misled Callow into thinking there was no risk of terminating the Agreement for any other reason than unsatisfactory services. She stated that the common law, as it stands, doesn’t include a duty of honest performance as iterated by the majority (Callow SCC, para 192).

Côté J. noted in Bhasin the Court found the duty of honest performance was a “simple requirement” not to lie or knowingly mislead, and it shouldn’t be confused with a duty to disclose (Callow SCC, para 195 – 196). Côté J. concluded that the majority’s ruling would create confusion. A contracting party wouldn’t know when “permissible silence could turn into non-permissible silence that may constitute a breach of contract” (Callow SCC, para 197). Côté J. concluded that Baycrest was not required to correct Callow’s mistaken belief (Callow SCC, para 234), on the basis that, absent a duty of disclosure, a party shouldn’t have an “obligation to dissuade his counterparty from persisting in mistaken belief” (Callow SCC, para 207).

Silence Can Constitute a Breach of Contract

The majority’s decision expands the duty of honest performance originally articulated in Bhasin. Parties to a contract can now breach the duty of honest performance by knowingly misleading a counterparty, even if the misleading action is silence.

Bhasin held that there is no obligation to disclose information unless the contract required it. However, due to the holding in Callow SCC, it’s unclear where the line will be drawn between honest performance and disclosure in the future.

This case also has implications for comparative law. The majority felt it was appropriate to use Quebec law in this case despite the Court’s ability to come to the same conclusion using the common law precedent set in Bhasin. Although the concurring decision and dissent disagreed on this point, it is possible that this debate could come up again in future decisions.