In December 2020, the Supreme Court of Canada has released a much-anticipated decision on the contractual duty of honest performance, which principle the SCC recognized as a “new” good faith doctrine, formulated in its previous decision Bhasin v. Hyrnew. In Callow, the SCC was divided in its views on the duty of honest performance, with a five-judge panel rendering the majority decision, three judges concurring and one strongly dissenting.
The SCC majority determined that actively or knowingly misleading or deceiving a contracting party will amount to breach of honest performance, even if one exercises seemingly unfettered rights under the contract, such as unconditional termination clauses. However, in expanding the list of what constitutes misleading actions, and by leaving the list open-ended, Callow will likely generate more litigation as contracting parties are left pondering how they ought to conduct themselves when exercising their contractual rights, particularly when deciding to terminate a contractual relationship.
In 2012 a consortium of condominium corporations, collectively referred to as “Baycrest”, entered into a two-year winter services contract with C.M. Callow (“Callow”) from November 2012 to April 2014 and a summer services contract from May 2012 to October 31, 2013. Over the course of spring and summer 2013, Callow had numerous discussions with Baycrest regarding the renewal of the winter services contract. Callow was led to believe that Baycrest was satisfied with its performance and that it would get a renewal of the winter contract for another two years. During the summer of 2013, Callow performed work at no cost, over and above the summer services contract, hoping to incentivize Baycrest to renew the winter contract for another two years.
Unbeknown to Callow, in March 2013, Baycrest’s Board of Directors decided to terminate Callow’s contract as a result of complaints regarding its winter services. Baycrest did not inform Callow of its decision to terminate the contract until six months later in September 2013, at which time Baycrest relied on clause 9 of the winter services contract which permitted Baycrest to exercise its discretionary powers and terminate for unsatisfactory services, without cause or any other reason, with 10-days’ notice. Callow sued Baycrest for breach of contract alleging that while Baycrest was entitled to terminate the winter services contract pursuant to the termination clause, Baycrest breached the duty of honest performance by engaging in deceitful conduct prior to the exercise of Baycrest’s discretion to terminate by not telling Callow there were performance issues that jeopardized the existing contract. Callow criticized the dishonesty that preceded Baycrest’s exercise of its discretionary right to terminate. Callow claimed damages for lost profits that it would have earned during the second winter season of the contract.
Baycrest argued that its discussions with Callow after March 2013 were pre-contractual negotiations related to the renewal of the winter services contract, which was a “new” contract, to which the duty of honest performance did not apply.