Supreme Court Of Canada Decision: When Silence Can Be Deceptive – Corporate/Commercial Law

Bizar Male

The Supreme Court of Canada recently clarified the duty of
honest contractual performance in C.M. Callow Inc. v. Zollinger. In a
nutshell, the Supreme Court has clarified that silence, omissions,
and half-truths can be deceptive and a breach of the duty of honest
contractual performance. The remedy to such a breach is damages
that place the injured party in the same position as if the breach
had not occurred.

While the duty of honesty is not a new concept in the realm of
contract law, this case helps to define the scope of that duty.

Callow builds on pre-existing case law that establishes
a duty of good faith in contractual performance and extends this
duty to circumstances where a party knowingly misleads a
counterparty or fails to correct the counterparty’s mistaken
assumptions. The leading case on this duty prior to Callow
was the Supreme Court decision in Bhasin v. Hrynew, which discussed an
organizing principle of good faith that parties must perform their
contractual duties honestly, and that a contracting party should
have appropriate regard to his counterparty’s legitimate
contractual interests.

C.M. Callow Inc. (“Callow”), the plaintiff, was a
contractor who had a contract with the defendants, a group of
condominium corporations (“Baycrest”). In 2010, Baycrest
entered into a two-year winter maintenance agreement with Callow
for snow removal and other winter services. This agreement was
renewed upon its conclusion with an additional summer maintenance
agreement, from November 1, 2012 to April 30, 2014.

Under the contract, Baycrest was allowed to terminate the
contract if Callow’s service was not satisfactory or if
Baycrest no longer required Callow’s service, on 10 days’
written notice.

In March or April of 2013, Baycrest decided that it would end
the contract with Callow, but did not tell Callow at the time that
the contract would be terminated. Callow thought there was a chance
that its contract would be renewed a further time, and discussed a
renewal with Baycrest. One of Baycrest’s chief board members
suggested that the contract was likely to be renewed. Callow went
above and beyond its summer maintenance obligations, even providing
some free summer maintenance to incentivize Baycrest to renew the
agreement.

On September 12, 2013, Baycrest told Callow that it would
terminate the contract within 10 days, the notice that was required
under the contract. Callow sued Baycrest for breach of contract,
arguing that Baycrest acted in bad faith by accepting what the
Supreme Court described as “freebies” when knowing that
Callow was offering these freebies to maintain their future
relationship.

Baycrest Acted Deceptively, Even Though It Did Not Lie to
Callow

Baycrest argued that it did not engage in “active
deception” by not telling Callow that it would be terminating
the contract. It argued that there was no duty to disclose this
fact to Callow. Indeed, both parties agreed that failing to
disclose a material fact, without more, would not breach the duty
of good faith performance of a contract.

While the Supreme Court noted that the contract, on its face,
did not impose a duty on Baycrest’s part to disclose its
intention to terminate the contract beyond the 10 day notice
requirement, Baycrest was prohibited by law from knowingly
misleading Callow.

Baycrest’s Two Active Deceptions

The Supreme Court accepted the findings of the trial judge that
Baycrest actively deceived Callow in the following two ways:

  1. After Baycrest had voted to terminate the contract, its
    representative spoke with Callow and led Callow to believe that the
    contract would be renewed.

  2. Baycrest accepted Callow’s free summer maintenance work,
    which Callow offered as an incentive for renewal of the
    contract.

One particularly damning email between Baycrest representatives
highlights Baycrest’s knowledge of the deception:

It’s nice he’s doing it but I am sure it’s an
attempt at us keeping him. Btw, I was talking to him last week as
well and he 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 [Mr. Callow]
thinks we’re keeping him for winter.

The Supreme Court held that Baycrest intentionally withheld
information, knowing that such silence, combined with its active
communications, had deceived Callow. Baycrest should have corrected
Callow’s misunderstanding. By failing to correct Callow’s
misunderstanding, Baycrest breached its contractual duty of honest
performance.

Consequences of this Decision

The Supreme Court also clarified that parties to a contract are
entitled to protect their interests, and that there was no
requirement for one party to subordinate its interests to another.
There is also no free-standing positive duty to disclose
information to a counterparty where nothing in the contractual
relationship brings a duty to do so. However, in some situations,
like in the Callow case, failure to speak out can be
actively deceiving. The Supreme Court noted that it is not always
obvious when silence can constitute “knowingly
misleading” a counterparty. Some examples can include:

  • Lies

  • Half-truths

  • Silence

  • Failing to correct a misapprehension caused by one’s own
    misleading conduct

This is not a closed list, and whether a party has
“knowingly misled” its counterparty is determined by the
specific facts. This case does create uncertainty about when
disclosure is required. It also means that contracting parties
should be very careful about communications (or silence) that could
mislead counterparties. Contracting parties should consider whether
counterparties have a mistaken belief about the contract, as there
may be a requirement to correct that misapprehension, particularly
if a party has already made a decision. Depending on the facts,
there will be a grey area where the duty to disclose is unclear and
in which future courts may set guidelines.

The Callow case will not be the final word on the duty
of good faith in contractual performance: the Supreme Court’s
upcoming decision in Wastech Services Ltd. v. Greater Vancouver
Sewerage and Drainage District
, which was heard at the same
time as Callow, is yet to be released.

Since there is not always a clear-cut answer, we would be happy
to discuss any questions you may have about your liability in
contractual negotiations, or to explore whether you may have a
claim against a counterparty for breach of the duty of honest
performance in contractual performance.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

Next Post

Some Trump supporters think he's about to declare martial law -- and they're excited.

“Nothing can stop this,” the account said in a message that had been seen by at least 185,000 people as of Tuesday morning. “They can no longer hide in the shadows,” it added half an hour later. Then, 20 minutes later: “Last hours.” It continued on like this. Around 10 […]