Duty of honest performance in termination of commercial contracts – the Supreme Court of Canada elaborates in Callow v. Zollinger, 2020 SCC 45
In late December 2020, the Supreme Court of Canada (“SCC”) issued a key decision elaborating on the duty of honesty in relation to termination of a commercial contract.
This duty was primarily established in the SCC’s 2014 decision in Bhasin v. Hrynew.
The facts of the Callow case are quite simple and involve very typical commercial contracts. The claimant, Callow, provided certain winter and summer maintenance services for various Baycrest condominiums in the Ottawa area. Callow and Baycrest had separate contracts for the winter services (e.g. snowplowing) and the summer services (e.g. gardening). The winter services contract was the main one at issue in the proceedings.
The winter services contract ran from November 1, 2012 to April 30, 2014, and therefore covered two winters of work.
However, the contract provided Baycrest with the right to terminate at any time, for any reason (or without reason) by providing ten days’ notice.
Callow was not in breach of the contract, but Baycrest decided at the end of the first winter, in March 2013, that it would later terminate the winter services contract, though it did not notify Callow of this decision until six months later in September 2013. The decision to delay provision of notice was made by Baycrest deliberately, to ensure that Callow’s summer maintenance services would not be jeopardized, and that certain damage from the preceding winter work would be fixed.
Soon after receiving the notice of termination, Callow sued for damages. He was successful at trial, was overturned by the Ontario Court of Appeal, but again triumphed before the SCC.
The SCC majority found that while Baycrest effectively remained silent over the summer months about its decision to terminate the winter services for 2013-2014, and that the contract imposed no express obligation to disclose its decision other than ten days’ notice, Baycrest had nonetheless deceived Callow through a series of “active communications”.
These communications consisted, firstly, of statements from Baycrest personnel, informal in nature (including by email), suggesting that a termination was unlikely.
Other communications related to certain “freebie” summer gardening work, above and beyond Callow’s summer contractual obligations, which Baycrest accepted, and which Baycrest was aware that Callow was providing with hopes of pleasing Baycrest and maintaining the winter services work. Callow was advised by Baycrest personnel that the Baycrest board members would be informed about the provision of this “freebie” work. But such personnel were also aware that Callow was under a false impression that his services would still be required for the upcoming winter.
As a result of these communications, by mid-summer of 2013 Callow was under the false impression that Baycrest would not be terminating the winter services, even though Baycrest had decided to terminate back in March. The SCC majority stated:
“…Baycrest intentionally withheld information in anticipation of exercising clause 9 [to terminate early], knowing that such silence, when combined with its active communications, had deceived Callow. By failing to correct Mr. Callow’s misapprehension thereafter, Baycrest breached its contractual duty of honest performance.”
The Court ruled that had Baycrest been honest, Callow would have had the opportunity to obtain alternative winter work, which he did not do under the mistaken impression that he would not be terminated. Therefore Callow was awarded the profit he would have earned had he carried out the winter maintenance work which had been dishonestly terminated. This award was much more than merely the ten day notice period under the contract’s termination clause.
The SCC also wrote at length in an attempt to clarify the scope of the duty of honest performance in this situation, and held as follows:
- The duty should interfere very little with the freedom of contract, but the parties should expect that a contract can be performed without lies or deception;
- The duty is not a positive obligation to disclose – but is an obligation to refrain from being misleading in exercising a contractual right;
- A failure to speak out (i.e. silence) may be active dishonesty which would be a breach of contract; and
- The duty cannot be excluded by contract.
(A lone dissenting SCC judge held that silence cannot be considered dishonest unless there is a positive obligation to speak, and that such an obligation does not arise simply because a party to a contract realizes that the other party is operating under a mistaken belief.)
One of the most immediate questions from this decision is how a commercial party which decides to terminate at a future date, weeks or months away, can address any query from, or potential misunderstanding of, the other party about such termination. The terminating party may have genuine concerns about a deteriorating relationship, including for the balance of any contract term, if the notice of termination is provided too early. But faced with any such query or misunderstanding, the terminating party will face risk if they remain silent or mislead.
While the parties cannot “contract out” of the duty of honesty, parties may nonetheless wish to consider very explicit termination clauses which provide broad discretion, state that decisions to terminate need not be communicated early, and state that no party can rely on any representations of any form, other than the formal notices under the express terms of the contract.
This article is provided for general information only. If you have any questions about the above, please contact a member of our Commercial Transactions/Agreements group.