The Duty of Honest Performance

In the precedent setting case of Bhasin v. Hrynew, 2014 SCC 71, the Supreme Court of Canada (“SCC”) unanimously confirmed the duty of parties to a contract to act honestly in the performance of their respective contractual obligations.

The SCC stated that the duty of honest performance requires that contracting parties “must not lie or knowingly mislead each other about matters directly linked to the performance of the contract”,[1] and found that this duty applies to all contractual relationships and cannot be contracted out of.

In CM Callow Inc v Zollinger, et al., 2020 SCC 45 (“Callow v Zollinger”), the SCC recently considered and clarified the duty and its application.

In Callow v Zollinger, a group of condominium corporations (“Baycrest”) and CM Callow Inc. (“Callow”), entered into two separate maintenance contracts in 2012, whereby Callow offered to provide winter maintenance to Baycrest for a two-year term (the “Winter Contract”) and summer maintenance (the “Summer Contract”). The Winter Contract contained a termination clause that permitted Baycrest to terminate the contract upon 10 days’ notice if Baycrest determined Callow’s services were no longer required.

In early 2013, Baycrest decided it no longer required Callow’s winter maintenance services but did not tell Callow at the time. Throughout the spring and summer of 2013, Callow and Baycrest had discussions regarding a two-year renewal of the Winter Contract. Baycrest did not indicate that there was a possibility the Winter Contract would not be renewed and in fact, Callow was led to believe that Baycrest was satisfied with its services and that the Winter Contract would likely be renewed. On this basis, Callow continued performing its obligations under the Winter Contract and “performed work above and beyond” its obligations under the Summer Contract.

In September 2013, Baycrest provided Callow with 10 days’ notice that it would no longer require winter maintenance services, effectively terminating the Winter Contract.

Callow subsequently brought an action for breach of contract alleging that Baycrest accepted free services and knew or ought to have known that Callow would not seek out other winter maintenance contracts.

A majority of the SCC found that although Baycrest was permitted to terminate the contract pursuant to the terms of the Winter Contract, Baycrest knowingly misled Callow, failed to correct Callow’s mistaken belief and was therefore in breach of the duty. The SCC confirmed that while there is no positive obligation to disclose, parties must not actively deceive one another. While Baycrest need not have disclosed its intention to terminate, it should not have led Callow to believe the Winter Contract would be renewed and in any event, upon realization that Callow was under the impression the Winter Contract was to be renewed, Baycrest should have corrected the false impression.

Damages were calculated based on Baycrest’s failure to correct the mistaken belief that the Winter Contract would be renewed, which ultimately deprived Callow of an opportunity to obtain alternate work.

The SCC concluded that although the duty does not impose a positive obligation of disclosure, where one party lies or knowingly misleads another, “a lack of positive obligation of disclosure does not preclude an obligation to correct a false impression created through that party’s own actions.” In other words, the duty of honest performance is breached where one party is aware that another has been misled and does nothing to correct the false impression created. In Callow v Zollinger, the breaching party complied with the terms of the contract but did so in a way that was knowingly misleading and failed to correct the other party’s mistaken belief. As such, mere compliance with contractual terms may still result in a breach of contract.

Ultimately, contracting parties should be mindful of the duty of honest performance when performing obligations or exercising a right under a contract. A breach of the duty is a breach of the contract and can result in damages. Dishonesty can include overt “lies, half-truths, omissions, and even silence, depending on the circumstances”.[2]

[1] Bhasin v. Hrynew, 2014 SCC 71.

[2] CM Callow Inc. v Zollinger, 2020 SCC 45.

This article is not intended to serve as a comprehensive treatment of the topic and is not legal advice. All legal matters are dealt with pursuant to their specific facts and circumstance. Nothing replaces retaining a qualified, competent lawyer.