The Supreme Court has ruled that dishonesty in the performance of a contract doesn’t just mean telling lies and half-truths; it can sometimes mean misleading through silence, or failing to correct a misimpression.
The ruling, in a case in which a contractor sued a group of condominium corporations for ending his winter-maintenance agreement, clarifies and expands on the good-faith duties of those who enter into contracts.
The court’s decision has wide implications for businesses large and small because it sets out an obligation to be honest, and defines what honesty means in the exercise of any right in a contract, including termination.
Christopher Callow signed contracts in 2012 with 10 condominium buildings in Ottawa collectively known as Baycrest to do winter and summer maintenance for two years. On its face, the deal gave the condo corporations the unilateral right to terminate Mr. Callow’s contract with 10 days’ notice, even if his work was satisfactory. And Baycrest did give him 10 days’ notice.
Yet the Supreme Court still found it to have done wrong to Mr. Callow, and ordered it to pay him $80,000 in damages -- the value of the winter contract and about $15,000 for the lease of snow-clearing equipment -- plus costs.
The court found wilful deception, and a failure to correct Mr. Callow’s mistaken impression of where he stood. As the first year of the winter contract was ending, Baycrest hired a new property manager, who recommended terminating the contract. Evidence showed that in March or April, 2013, Baycrest’s board voted to do so. But board officials later entered into talks with Mr. Callow about signing another two-year deal. And during his summer contract, Mr. Callow did additional work for free to encourage Baycrest to sign him up for another two years. Then in September, 2013, it told him the contract was terminated. Mr. Callow sued, alleging dishonesty, and saying it was too late to find another contract for the winter. Baycrest said it was not required to actively disclose its decision to terminate the contract.
The trial judge found that Baycrest intentionally misled Mr. Callow, and awarded him $80,000 in damages. The Ontario Court of Appeal threw out that ruling, saying the duty of honesty does not require disclosure. It also said that any deception related to a new contract, not the existing one.
The Supreme Court disagreed by a count of 8 to 1. But the eight judges split into two groups, with five taking a somewhat broader view of the duty of good faith in contracts. The Supreme Court established the principle of good faith as overarching in, or central to, contract law in a 2014 case known as Bhasin v Hrynew.
“At the end of the day,” Justice Nicholas Kasirer wrote for the group of five judges in the Callow case, “whether 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.” He added: “Dishonesty or misleading conduct is not confined to direct lies.” And the duty to be honest applies to the exercise of every right in a contract, he wrote.
The court stopped short of requiring “active disclosure” of relevant facts (such as the decision to stop using Mr. Callow’s services) by the parties to a contract. The deception, not the lack of disclosure on its own, was the problem.
Mr. Callow said in an e-mail that the ruling vindicated him in his belief that he was treated dishonestly. “It’s an important victory from both a moral and a business perspective,” he said, adding, “I was deliberately deceived and that kind of behaviour should not be tolerated.”
His lawyer, Brandon Kain, said the ruling tells contracting parties “to think about not only whether you have directly lied . . . but also whether you have engaged in active conduct that you know has caused [the other party] to draw a false inference about something that’s important and material to their economic interests under the contract.”
Anne Tardif, a lawyer for the Baycrest condos, said her client was disappointed by the outcome.
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Sean Fine