The case of Callow v. Zollinger[1] saw the Supreme Court of Canada (“SCC”) pass judgment on the conduct of parties to a contract and how they must act with honesty even if they are complying with the provisions contained therein.

Callow, the Plaintiff, entered into two seasonal contracts (one summer contract and one winter contract) with a group of condo corporations named “Baycrest”. These contracts contained a termination clause that allowed Baycrest to terminate, without just cause, with just 10 days written notice.

Early the following year, Baycrest made the decision that they were going to terminate the next winter contract with Callow but avoided informing Callow because they thought it may have an impact on the performance of the upcoming summer contract. Baycrest continued to communicate with Callow throughout the period, received some free work and suggested that they would be continuing to use Callow’s services through winter. Baycrest continued to withhold the information until September, when they conveyed this to Callow.

Callow then brought the claim for breach of contract, stating that Baycrest had acted in bad faith and as a result of their misleading actions were unable to bid on other contracts for the period. The majority of the SCC held that Baycrest had breached the contract by exercising the termination clause dishonestly and had breached the duty of honest performance.

The concept of good faith and duty of honest contractual performance, formulated in Bhasin v. Hrynew[2], requires that parties must not lie or otherwise knowingly mislead each other about matters directly linked to performance of the contract. Baycrest actively misled Callow because they had made him aware they were happy with his work and made no indication that the contract would end.

Key Points

• Contracting parties have a duty of good faith and honesty.
• You can still be liable for breaching the duties of good faith and honesty, even if you have strictly complied with a contractual termination clause.
• Knowingly misleading another party can occur through active communication, or omission or inaction.
• Legal disputes about the duty of honesty are fact-specific.

[1] https://decisions.scc-csc.ca/scc-csc/scc-csc/en/item/18613/index.do

[2] https://scc-csc.lexum.com/scc-csc/scc-csc/en/item/14438/index.do