The Supreme Court of Canada’s decision inC.M. Callow Inc. v. Zollinger(2020 SCC 45) significantly clarifies the commonlaw duty of honest performance of contracts. It builds on the organizing principle established inBhasin v Hrynew(2014) by recognizing active deception including misleading silence as a breach of that duty when it affects contract performance. The case has farreaching implications for contract law, contractual termination, and damages, anchoring honesty as a real, enforceable obligation in routine commercial dealings rather than a merely theoretical concept.
Background and Facts of the Case
C.M. Callow Inc. (Callow) operated a property maintenance business under two separate contracts with Baycrest condominium corporations. One was a winter maintenance contract (twoyear term) and the other a summer contract. The winter contract allowed termination by Baycrest for any reason upon ten days’ written notice. In early 2013, Baycrest decided to terminate the winter contract but did not inform Callow until September 12. Throughout that summer, Baycrest continued to assure Callow that performance was satisfactory and that renewal was likely. Callow even provided extra unpaid services to encourage renewal. Only in September did Baycrest issue formal notice of termination, triggering a lawsuit for breach of contract.
Court Proceedings and Key Findings
Trial Court
The trial judge found that Baycrest had actively deceived Callow. The reasons included: continuing affirmations of satisfaction, initiating renewal discussions, and exploiting Callow’s misunderstanding to obtain extra performance. The judge awarded damages for lost winter profits and costs incurred during the summer.
Court of Appeal
The Ontario Court of Appeal overturned the decision. It held that the duty of honest performance did not require disclosure or loyalty beyond the specific contract rights. Deception regarding renewal of a future contract did not relate directly to performance of the existing contract thus no breach.
The Supreme Court’s Decision
A majority of eight judges (with one dissent) allowed Callow’s appeal, holding that Baycrest breached its duty of honest performance by knowingly misleading Callow about the winter contract. The Court stated that even though Baycrest had contractual termination rights, it could not exercise them dishonestly. Silence or misleading conduct about a contract right, once the other party is unaware of the true situation, may violate the duty of honest performance.
Duty of Honest Performance Expanded
Building on the duty recognized inBhasin, the Court affirmed that dishonesty includes active deception, omissions, halftruths, and misleading silence. Importantly, the Court agreed that Baycrest’s conduct directly linked to the performance of the winter contract they terminated dishonestly, creating a false impression that performance would continue.
Damages
The Court awarded expectation damages based on profits Callow would have made had Baycrest informed him earlier. This was significantly greater than the minimal notice period agreed. The Court emphasized that correcting misapprehensions early allows the other party to mitigate harm by pursuing alternatives.
Dissenting View
Justice Côté dissented, expressing concern that the majority extended the duty of honest performance beyond whatBhasinintended. She argued that telling lies or misleading about the prospect of renewal of a future contract should not engage the duty tied to the present contract’s performance. She warned that ambiguity about when silence becomes dishonest could create uncertainty in commercial law.
Dialogue with Civil Law Doctrine
The majority’s reasoning drew on principles from Quebec civil law specifically the abuse of rights doctrine under the Civil Code of Québec. Quebec jurisprudence holds that exercising a contractual right in an abusive or misleading manner may breach good faith. While not binding for common law, the Court used this comparative doctrine to interpret when misrepresentation about exercising a contract right relates to performance.
Civil vs. Common Law Debate
Some justices welcomed comparative reasoning; others (including Justice Brown in a separate concurring opinion) cautioned against importing unfamiliar civil law principles into common law. They warned of confusion and of undermining longstanding objective contract interpretation.
Implications for Contracting Parties
- Parties must now avoid not only active lies, but also misleading conduct or continuing silence when the other party operates under a belief one knows is false.
- Businesses should reassess termination clauses and communication protocols to avoid appearing deceptive.
- Contracting parties may face significant expectation damages even when termination rights are exercised lawfully in form.
- Precise drafting express exclusions or clarifications of disclosure obligations may mitigate risk, although courts may still imply the duty where necessary.
Ongoing Developments
The Court foreshadowed further refinement in related cases, notablyWastech Services Ltd. v Greater Vancouver Sewerage and Drainage District. That case, dealing with discretion and good faith, may clarify boundaries around misleading conduct and dishonesty in contract performance. Meanwhile, practitioners must navigate legal uncertainty carefully, documenting communications and avoiding misleading silence.
Callow v Zollingermarks a pivotal step in Canadian contract law. It transforms the duty of honest performance from a conceptual principle into a concrete expectation in business practice. Silence or misleading conduct, even when not legally required to speak, may now breach the duty. The decision signals a shift toward greater accountability and fairness, with financial consequences for nondisclosure. For lawyers and businesses, it demands careful communication, transparency, and proactive correction of misunderstandings. As followon cases clarify the doctrine,Callowwill remain a landmark case anchoring honesty as essential in contract execution.
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