The Supreme Court of Canada’s decision inC.M. Callow Inc. v. Zollingerprovides a modern expansion of the contractual duty of honest performance by clarifying when misleading conduct may breach that duty even when contractual rights are exercised lawfully. In this case, Baycrest condominium corporations lawfully terminated a winter maintenance agreement with Callow upon giving ten days’ notice. Yet, because Baycrest allowed Callow to believe the contract would continue through statements and omissions it was found to have knowingly misled Callow about matters directly linked to contract performance. The case sets a new benchmark for the duty of good faith in contract law.
Case Background and Facts
C.M. Callow Inc. operated a property maintenance business providing winter and summer services for a group of condominium corporations known as Baycrest. The winter contract included a clause allowing Baycrest to terminate for any reason by giving ten days’ written notice. In spring 2013, Baycrest decided not to renew the winter contract. Despite this, Baycrest permitted emails and meetings that led Callow to believe their performance was satisfactory and that renewal was likely. Callow even provided unpaid services to enhance goodwill, unaware that termination was imminent. In September 2013, Baycrest exercised the termination clause. Callow sued, claiming Baycrest engaged in dishonest conduct despite legally terminating the contract.
Procedural History
Trial Court
The Ontario Superior Court found Baycrest had actively misled Callow by creating a false impression regarding contract status, thus breaching the duty of honest performance. Damages were awarded for lost profits and gratuitous services.
Court of Appeal
The Ontario Court of Appeal overturned the trial decision, concluding that discussions about renewal referred to a future contract, not the existing winter contract, and therefore did not fall under the duty of honest performance.
Supreme Court of Canada
The Supreme Court allowed the appeal. The majority held that Baycrest breached the implied duty of honesty in contractual performance by knowingly misleading Callow about the exercise of the termination clause. The court clarified that silence, omissions, or halftruths can constitute active deception. Damages were awarded based on expectation interest to place Callow in the position where it would have been had Baycrest corrected the misapprehension earlier.: contentReference
Key Legal Principles
Duty of Honest Performance
Originating inBhasin v. Hrynew(2014), Canadian law imposes an organizing principle of good faith and a duty not to lie or knowingly mislead contracting parties about matters tied to contract performance. Importantly, this duty cannot be excluded by contract terms.: contentReference
Knowingly Mislead Expanded Scope
The Supreme Court emphasized that knowingly misleading behavior may include active lies, half-truths, omissions, and silence. Whether conduct is misleading is determined on the facts of each case. Silence alone is not enough but in combination with misleading statements, it can amount to dishonesty.: contentReference
Measure of Damages
The majority ruled expectation damages are appropriate for breaches of the duty of honest performance meaning compensation for what the plaintiff reasonably expected from the contract. This contrasts with reliance damages. A concurrence urged reliance-based damages instead, but in practice reached the same outcome.: contentReference
Implications and Takeaways
- Parties must avoid misleading conduct even while legally exercising contractual rights.
- Statements or behavior that create or permit misapprehensions must be corrected if the other party reasonably relies on them.
- Drafting and communications should consider not only what is said but what is left unsaid.
- Damages for dishonest conduct may exceed simple contractual entitlements and include lost opportunities.
- This decision reflects an increased emphasis on substantive fairness in contract performance.: contentReference
Legal Debate and Dissent
Justice Côté dissented, arguing that the majority overextended the duty of honest performance by imposing new obligations akin to fiduciary duties, and created uncertainty over what silence or omissions become impermissible. She emphasized that exercise of lawful contractual rights even termination clauses should not trigger additional disclosure obligations.: contentReference
Practical Considerations
Advice for Businesses
In negotiations and contract performance, parties should be mindful:
- Review all communications for statements or implications about contract status.
- Avoid allowing reasonable misapprehensions to persist uncorrected.
- Consider clear disclaimers where necessary to prevent misunderstanding.
- Train staff on context-sensitive contract communication and good faith obligations.
Future Litigation Trends
Lower courts will likely grapple with applying this expanded scope of honest performance. Contracting parties should anticipate detailed fact assessments on whether silence or omission amounts to misleading behavior. The forthcoming Wastech decision may further refine boundaries.: contentReference
InCallow v. Zollinger, the Supreme Court of Canada extended the duty of honest contractual performance beyond mere compliance with contract terms, holding that knowingly misleading whether by action or omission can breach the implied obligation of honesty. The decision imposes a heightened expectation of transparency and fairness during contractual performance, especially regarding the exercise of discretionary rights. For organizations and legal advisors, this case reinforces the need to consider both what is communicated and what is left unsaid, with significant consequences for honest but strategic silence.