Silence Isn’t Always Golden: Breaching the Contractual Duty of Good Faith

The Supreme Court of Canada recently ruled that in certain situations, remaining silent can breach the contractual duty of good faith in contract law. In the recent case C.M. Callow Inc. v. Zollinger. In particular, if a party to a contract has by its prior actions or words created a false impression in the mind of the other party to the contract and is aware that it has done so but doesn’t take any positive steps to correct this impression, the party in question may be liable for damages for breach of contract. All businesses entering into contractual obligations should be aware of this ruling when performing any contract.

Duty of Good Faith

It’s important to understand first what the duty of good faith in contract law is, given that it is a relatively recent development in Canadian common law, first formulated in 2014 in the decision Bhasin v. Hrynew. Essentially, all parties to a contract have a duty to act honestly in the fulfilment of the terms of a contract. It requires parties to not lie or knowingly mislead each other in matters which pertain to the performance of the contract. It is the latter consideration – one party knowingly misleading the other – which was the issue at hand in the recent Callow v. Zollinger case. In particular, the Supreme Court of Canada had to rule on whether a party to a contract could be considered to have knowingly misled the other by not saying anything at all.

Termination of Contract

The case concerned a condominium corporation that entered into a two‑year winter maintenance contract and into a separate summer maintenance contract with a maintenance firm, C.M. Callow Inc. (“Callow”). The contract provided that the condo corporation could unilaterally terminate the contract upon giving 10 days’ written notice to Callow. One year into the agreement the condo corporation decided to terminate the winter maintenance agreement but crucially chose not to inform Callow of its decision. Callow continued to have discussions with the condo corporation about the renewal of its contract through the subsequent summer, performing extra work on summer maintenance that went beyond the contractual obligations, only to be told after this extra work had been completed that the contract for winter maintenance would be terminated.

Callow sued for breach of contract on the basis that the condo corporation had breached its duty of good faith and honest performance and ultimately, the Supreme Court of Canada agreed with them. Notably, the Supreme Court ruled that while the condo corporation had the contractual right to unilaterally terminate the contract, “the right had to be exercised in keeping with the duty to act honestly”. The Supreme Court ruled that the condo corporation had breached this duty because its exercise of the termination clause was dishonest in light of its ongoing communications with Callow which created the false impression that the winter maintenance agreement was not only not going to be terminated early, but actually renewed.

Honesty in Contractual Performance

This should not be taken to say that businesses are obligated to disclose their intention to terminate a contract before actually doing so per the notice period in the contract. What they are obligated to do, however, is to refrain from misleading the terminated party in the exercise of that clause, which the Supreme Court ruled was the case here. The Supreme Court determined that if a party is led to believe by the party who has contracted with them that the latter are content with their work and thus that their ongoing contract is likely to be renewed, it is reasonable for the party to have the impression that the ongoing contract is at the very least, in good standing and certainly that it wouldn’t be terminated early.

In its decision, the Supreme Court clarified that when it comes to performing a contract honestly, “[w]hether or not a party has knowingly misled its counterparty is a highly fact‑specific determination and can include lies, half‑truths, omissions, and even silence, depending on the circumstances. One can mislead through action, by saying something directly to its counterparty, or through inaction, by failing to correct a misapprehension caused by one’s own misleading conduct.” [Emphasis added]

As such, when a business which is a party to a contract is aware that its own actions or words have led the other party to the contract to have a false impression in regards to the contract, the duty of honesty in Canadian contract law requires the business to correct that false impression – or risk being subject to a successful lawsuit against them. This means that businesses need to start turning their mind as to whether the contracted party they are executing a contract with is under a mistaken belief with respect to the execution of that contract, whether the execution refers to termination of the contract, or its renewal, bonus clauses, pricing terms, triggering mechanisms or any other material aspect of the contract. This is especially so since the Supreme Court made it clear that the duty correct a false impression (once a contracting party has created it) exists regardless of whether the “misleading” party to the contract intended or inadvertently created the false impression.

Parties will want to reduce exposure to possible liability through not only careful drafting of contractual terms related to performance but being mindful of their subsequent communications with that party. Based on the Supreme Court’s decision in the Callow v. Zollinger case, if a corporation has made an internal decision regarding a contract with another party (particularly related to termination or contract renewal) and the other party asks about it, they will have to think very carefully about what response it provides, including whether that response is silence. Obtaining legal advice in such circumstances is recommended.

The lawyers at Prudent Law in Mississauga are trusted advocates in any type of civil litigation, including contract disputes. We provide practical advice and passionate representation in both litigation and alternative dispute resolution options. If you are facing a legal dispute and you’d like to discuss it with one of our experienced litigation lawyers, please call us at 905-361-9789 or contact us online.

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