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MISREPRESENTATION - Silence - Good faith

Friday, December 18, 2020 @ 3:05 PM  

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Appeal by CM Callow Inc. (Callow) from a judgment of the Ontario Court of Appeal that set aside a trial judgment in Callow’s favour. In 2012, the respondent group of condominium corporations (Baycrest) entered into a two-year winter maintenance contract and a separate summer maintenance contract with Callow. The winter maintenance agreement entitled Baycrest to terminate the agreement on 10 days’ written notice. In early 2013, Baycrest decided to terminate the winter maintenance agreement but chose not to inform Callow of its decision. During the spring and summer of 2013, Callow and Baycrest discussed the renewal of the winter maintenance agreement. Callow believed it was likely to obtain the renewal and that Baycrest was satisfied with its services. In the summer of 2013, Callow performed extra work beyond the summer maintenance contract at no charge, as an incentive for Baycrest to renew the winter maintenance agreement. Baycrest gave Callow 10 days’ notice of its decision to terminate the winter maintenance agreement in September 2013. The trial judge allowed Callow’s claim for breach of contract. She found Baycrest breached the winter maintenance agreement by acting in bad faith by actively deceiving Callow. She awarded damages of $80,742 to place Callow in the same position as if the breach had not occurred, which included lost profits, wasted expenditures and an unpaid invoice. The Court of Appeal found the trial judge erred by improperly expanding the duty of honest performance beyond the terms of the winter maintenance agreement and any deception related to a new contract not yet in existence.

HELD: Appeal allowed. The organizing principle of good faith recognized in Bhasin v. Hrynew was not a free‑standing rule, but manifested itself through existing good faith doctrines. The duty of honest performance in contract applied to all contracts and required that parties must not lie or otherwise knowingly mislead each other about matters directly linked to the performance of the contract. In determining whether dishonesty was connected to a contract, the relevant question was whether a right under that contract was exercised, or an obligation under the contract was performed, dishonestly. The Court of Appeal erred in concluding Baycrest’s dishonesty was only about a future contract. The trial judge did not deny the existence of Baycrest’s termination right but fixed on the wrongful manner in which it was exercised. The duty of honest performance precluded Baycrest’s active deception by which it knowingly misled Callow into believing the winter maintenance agreement would not be terminated. By exercising the termination clause dishonestly, Baycrest breached the duty of honesty on a matter directly linked to the performance of the contract, even if the 10-day notice period was satisfied. There was no basis to disturb the trial judge’s conclusions. The trial judge correctly proceeded on the premise Callow was entitled to be placed in the same position as if the breach had not occurred. If Baycrest’s dishonesty had not deprived Callow of the opportunity to bid on other contracts, then Callow would have made an amount at least equal to the profit lost under the winter maintenance agreement. As awarded by the trial judge, Callow was entitled to damages for the lease of machinery in addition to the lost profit. Concurring and dissenting reasons were provided.

C.M. Callow Inc. v. Zollinger, [2020] S.C.J. No. 45, Supreme Court of Canada, R. Wagner C.J. and R.S. Abella, M.J. Moldaver, A. Karakatsanis, S. Côté, R. Brown, M. Rowe, S.L. Martin and N. Kasirer JJ., December 18, 2020. Digest No. TLD-December142020011-SCC