Revisiting Misleading Silence in C.M. Callow Inc v Zollinger : Did the Supreme Court Make the Right Decision?
In 2020, the Supreme Court of Canada expanded the common law doctrine of good faith established in Bhasin v Hrynew, 2014 SCC 71 [Bhasin], by holding that misleading silence can breach the duty to perform one’s contractual obligations honestly. An account of C.M. Callow Inc v Zollinger, 2020 SCC 15 [Callow] was previously reported on by TheCourt.ca. However, this commentary will explore how the applicability of the concept of “misleading silence” from Callow has numerous issues.
Facts of the Case
Baycrest, a group comprising of ten condominium corporations, entered into a two-year maintenance agreement with C.M. Callow Inc. (“Callow”) in 2010, which would provide winter services for the condominiums, such as snow removal. Callow was owned and operated by Christopher Callow (“Mr. Callow”). The contract was later renewed for another two-year term from 2012-2014. The issue in this appeal lies within clause 9 of their contract, which enabled Baycrest to terminate the contract “if for any other reason [Callow’s] services are no longer required for the whole or part of the property covered by this Agreement, then the [condominium corporations] may terminate this contract upon giving ten (10) days’ notice in writing to [Callow]” [Callow, para 8].
Sometime during the first year of the renewed maintenance agreement, Tammy Zollinger became a property manager and about after three weeks in this role, she advised the Joint Use Committee (JUC), comprised of the condominium boards of directors making decisions about their joint and shared assets, that Callow’s contract should be terminated due to “poor workmanship during the 2012-13 winter” [Callow, para 10]. The JUC put the issue to a vote and agreed to terminate the winter contract but did not inform Mr. Callow.
During the spring and summer of 2013, Callow had begun discussing the renewal of the winter maintenance contract in exchanges with Joseph Peixoto (“Mr. Peixoto”), a condominium corporation board member. In this exchange, Mr. Callow’s mind was imprinted with the idea that his two-year winter maintenance contract would be renewed after 2014 as his services were satisfactory. Mr. Callow continued to provide his services in 2013 and even provided “freebie” work as an incentive to renew his contract [Callow, para 12]. While this was occurring, Mr. Peixoto, in a conversation with another condominium corporation board member, acknowledged that he was aware that Mr. Callow mistakenly believes that the contract will be renewed and chose not to correct Mr. Callow’s misguided assumption in their conversations.
On September 12, 2013, Baycrest informed Mr. Callow through email that his services were no longer required and that the termination only required ten days’ notice as per clause 9 of the winter maintenance agreement. Callow claimed Baycrest acted in bad faith and filed a statement of claim for damages.
Justice O’Bonsawin at the Ontario Superior Court of Justice (“ONSC”) found that Callow had not fallen below the standard of requisite work and that Baycrest had actively deceived Callow. Justice O’Bonsawin found that in particular, Baycrest had withheld information and misleadingly claimed that the contract was not at risk of termination. This constituted bad faith, as she wrote 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, para 20].
The Ontario Court of Appeal (“ONCA”) agreed with Baycrest that the trial judge erred in expanding the performance of the contractual obligation in good faith beyond the terms of the winter maintenance agreement, hence overturning the ONSC’s decision. The rationale behind the ONCA decision was to ensure the doctrine of good faith continues to avoid commercial uncertainty, therefore they did not impose a duty of loyalty or disclosure. The ONCA also wrote that the deception by Mr. Peixoto was related to a contract that was not in existence and subject to negotiation.
The Problem with Silence
The main issue at the Supreme Court of Canada (“SCC”) was: “whether Baycrest failed to satisfy its duty not to lie or knowingly deceive Callow about matters directly linked to the performance of the winter maintenance agreement, specifically by exercising the termination clause as it did.” In finding that Baycrest acted in bad faith, the SCC majority forgets that a common law approach to contracting requires parties’ will to manifest in the agreement and is only concerned with external behaviour since the parties conceptualize each other as ‘reasonable individuals.’ This is exemplified in the foundational case of Smith v Hughes (1871) LR 6 QB 597, from the English court where the seller of oates does not have to worry about the buyer’s private assumptions of whether they are ‘old oates’. This case can be analogized with Mr. Callow’s assumption that after the conversation with Mr. Peixoto, the winter maintenance agreement is in good standing. Baycrest and its representative do not have to worry about what Mr. Callow believes, nor be required to correct them because they should expect Mr. Callow is a reasonable contracting party. To allow silence as constituting bad faith is to change the foundation of Canadian contract law from an objective approach to a subjective one.
The dissent by Justice Côté attempts to halt the majority’s over-stretching of the duty to not knowingly lie or mislead contracting parties. Particularly, Justice Côté points that bad faith through silence creates a duty to disclose since a party cannot discern when “permissible silence could turn into non-permissible silence that may constitute a breach of contract” [Callow, para 197]. The result is that there is a presumption that unambiguous language or misperceived interactions are cast in a negative light of ‘free-riding’ for a benefit that was not conferred on a party. The onus then rests on the party to disclose their benefits and intentions to correct the other party’s subjective thoughts. We must question whether the majority has imposed a quasi-fiduciary duty, which Justice Cromwell in Bhasin specifically rejected [Bhasin, para 60].
Finally, an economical approach to contracting requires that the transaction costs in drafting, forming, and communicating a contract be minimal. This principle rests on the idea that no one would enter into a contract if the benefit conferred from the contract is lower than actually entering into it. Bad faith through silence creates a higher cost as parties will now attempt to ensure that gaps or potential moments of silence are explained orally and in writing with thorough detail. The other option is to ‘relax’ the duty of good faith with express language, which inadvertently makes the doctrine worthless.
Misleading Silence: Good or Bad?
The decision in Callow adds further confusion and hardship to contracting parties. The doctrine of good faith is already a broad and general contract concept that lacks a precise definition. Contracting parties continue to struggle with this uncertain concept. For this reason, the SCC’s attempts to tease out its specifics results in a doctrine that is further detached from the foundations of Canadian contract law, such as the objective approach to contracting established in Smith v Hughes. One must ask themselves if the SCC’s decision does more harm than good by altering how contracting parties treat one another. Inadvertently, Callow sows the seeds of confusion as contracting parties will now question whether every silence or gap will constitute bad faith. This decision could signal that the law is moving towards expanding the good faith duty to negotiations rather than limiting it to performance. However, for now, all we know is that misleading silence presents another peril for contracting parties.