Unfettered (but Honest) Termination Of Contracts: SCC Issues New Decision On The Duty Of Honesty In Contractual Performance (Part 1/2) – Corporate/Commercial Law

Bizar Male

Part 1 – Unfettered (but Honest) Termination of Contracts: SCC
Issues New Decision on the Duty of Honesty in Contractual
Performance

Series Overview

In recent months, the Supreme Court of Canada
(“SCC“) has released two decisions which
have provided guidance on the organizing principle of good faith
performance of contracts. Back in 2014, we provided you with an overview of the OG case that started it all
by confirming the existence of the organizing principle of good
faith: Bhasin v. Hrynew
(“Bhasin“). In this
two-part series, we’re breaking down the SCC’s new
decisions and giving you an update (and some much-needed
clarification) on this organizing principle.

In this Part 1 of the series, we’ve provided an overview of
C.M. Callow Inc. v. Zollinger, 2020 SCC
45
(“C.M. Callow“) – a case
which confirmed that honesty really is the best policy when
exercising contractual rights – and in Part 2,
an overview of Wastech Services Ltd. v. Greater Vancouver
Sewerage and Drainage District
, 2021 SCC 7
, which focuses
on the duty of good faith in respect of a contracting party’s
exercise of contractual discretion.

In Bhasin, the SCC confirmed that an organizing
principle of good faith in contracts exists and requires parties to
perform their contractual rights and obligations honestly and in
good faith. However, depending on the nature of those rights and
obligations, acting in good faith can mean different things. As we
will explain in this series, specific duties arise under the broad
umbrella of the organizing principle of good faith, including the
duty of honest performance of contractual rights and obligations
and the duty to exercise contractual discretion in good faith.

C.M. Callow Overview

On December 18, 2020, the Supreme Court of Canada issued a new
decision in C.M. Callow on the
organizing principle of good faith and duty of honest performance
of contracts. This is the first decision out of the SCC on good
faith and honest performance since the SCC confirmed the existence
of the organizing principle of good faith and duty of honest
performance in its landmark decision in Bhasin. According to the SCC
in Bhasin, the duty of honest performance is a contract
law doctrine that “requires the parties to be honest with each
other in relation to the performance of their contractual
obligations” [93]. Parties mustn’t subvert their own
interests to those of their counterparty, however they must have
“appropriate regard” for the legitimate contractual
interests of their counterparty. This duty applies equally to the
performance of contractual obligations and the exercise of
contractual rights.

In C.M. Callow, the SCC restored the trial judge’s
decision that a contracting party breached the duty of honest
performance when it exercised its right to terminate a contract
several months after having made the decision to terminate and
after leading its counterparty on to believe that the contract
would not be terminated. The SCC held that this was intentionally
misleading and rose to the level of breaching the duty of honest
performance. Further, the SCC clarified that, depending on the
circumstances, parties can mislead one another, in bad faith, via
“lies, half-truths, omissions, and even silence”:
[91].

Facts

In 2012, a group of condominium corporations (collectively,
Baycrest“) entered into a two-year
winter maintenance contract with C.M. Callow Inc.
(“Callow“) whereby Callow agreed to
provide certain maintenance services, including snow removal. Under
the contract, Baycrest was entitled to terminate for any reason
upon giving 10 days’ written notice to Callow. In March or
April of 2013, Baycrest decided to terminate the contract but chose
to withhold that information from Callow until September 2013.

In the interim, in the summer of 2013, Callow raised the
possibility of renewing the contract for a subsequent two-year term
with Baycrest and, based on those discussions, Callow thought it
was likely that the contract would be renewed and that Baycrest was
satisfied with its services. Accordingly, Callow chose to forego
opportunities to bid on other winter maintenance contracts.
Further, to better its chances of receiving a contract renewal,
Callow provided additional services to Baycrest during the summer
of 2013 without charge.

In September 2013, Baycrest provided 10 days’ notice to
Callow of its intention to terminate the contract, and Callow filed
a statement of claim for breach of contract, claiming that Baycrest
terminated in bad faith.

Lower Court Decisions

The trial judge held that Baycrest had acted in bad faith by
“actively deceiving” Callow from the time that the
decision to terminate was made until September 2013 and also by
accepting the additional services knowing that Callow was providing
them in an effort to ensure the contract would be renewed.

The Court of Appeal overturned the trial judge’s decision,
holding that the trial judge had improperly expanded the duty of
honest performance and that Baycrest’s deception related to the
renewal of the contract, which technically pertained to the
negotiation of a contract not yet in existence and therefore did
not trigger the duty of honest performance.

SCC’s Decision

The SCC allowed Callow’s appeal and reinstated the trial
judge’s decision. A majority of the Court found that the duty
of honest performance of the contract precluded the active
deception by Baycrest by which it knowingly misled Callow into
believing that the winter maintenance contract would not be
terminated. Even though Baycrest:

(i) was entitled to terminate for
convenience (i.e. for any reason);

(ii) satisfied its contractual
obligation to provide 10 days’ notice of termination to Callow;
and

(iii) made no express
representations as to its intention to continue the contract,

the Court held that Baycrest’s exercise of its termination
right was dishonest because Baycrest was deliberately silent and
misleading as to its intention to terminate. Further, Baycrest knew
that Callow was under the false impression that the contract would
continue and may even be renewed, and therefore Baycrest had an
obligation to correct Callow’s false impression in order to
avoid a finding of breach of the duty of honest performance.

The SCC was careful to note that the duty of honest performance
does not mean that parties have a positive obligation of
disclosure. However, lying or knowingly misleading another party
through express statements, omissions or even silence, will
constitute a breach of the duty of honest performance. The court
also noted that this duty does not constrain a party’s right to
terminate. Rather, it will attract an award of damages if the
manner in which the right is exercised is dishonest. In
other words, a dishonest termination will remain legally valid, but
damages will follow.

Ultimately, the SCC ordered that Baycrest pay Callow
“expectation damages” (not “reliance
damages”), meaning Callow was awarded damages that would put
it back in the position it would have been had Baycrest not
breached its obligation to behave honestly in the exercise of the
termination right. The SCC determined that, had Baycrest corrected
the misrepresentations it made to Callow once it recognized that
Callow had drawn a false inference as to the longevity of the
contract, Callow would have had the opportunity to secure a
replacement winter maintenance contract, and therefore awarded
Callow an amount equal to the profit that Callow would have made
over the remainder of the term of the winter maintenance
contract.

Practical Implications for Contracting Parties

Following C.M. Callow, parties should exercise
diligence and caution when terminating agreements, even when
terminating pursuant to a unilateral and seemingly unfettered right
to terminate for convenience. If a party decides that it is going
to terminate an agreement sometime in the future, that party does
not have to notify its counterparty of its intention to terminate
earlier than the contract stipulates (i.e. the party must only
provide notice in accordance with the notice provision in the
contract); however, the terminating party cannot knowingly mislead
its counterparty as to its intentions between the time the decision
to terminate is made and the notice of termination is issued.

Depending on the circumstances, deception (and therefore bad
faith) can extend to deliberately remaining silent in the face of
questions or attempted discussions about the contractual
arrangement. At a minimum, a party terminating a contract must
refrain from making false representations (express or implied) in
anticipation of the notice period and may have a positive
obligation to correct any misapprehensions that arise.

Want More?

Check
out Part 2 of this series on the SCC’s recent decision in
Wastech
, which will provide guidance on the duty to
exercise contractual discretion in good faith.

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

Retired Franklin County Circuit Judge Clyde Perdue dies at 66 | Local News

Support Local Journalism Your subscription makes our reporting possible. featured_button_text Franklin County Commonwealth’s Attorney A.J. Dudley echoed Boitnott’s impressions of Perdue’s approach to the parties that came before him. “One of [his] most consistent qualities was his ability to make each person in the courtroom feel at ease, and that […]