Even Silence May Breach the Duty of Honest Contractual Performance

In December 2020, the Supreme Court of Canada (SCC) decided in C.M. Callow Inc. v. Zollinger [1], refining and expanding the contractual duty of honest performance recognized in Bhasin v. Hrynew [2]. Callow considered the duty of honest performance in exercising an apparently unrestricted termination clause. The majority affirmed Bhasin's principle that a party to a contract must not knowingly mislead another party about matters directly linked to the contractual performance. Callow confirms that exercising a termination clause is a matter directly and sufficiently connected to the contract's performance to engage this duty of honest performance.

The SCC disagreed with the Ontario Court of Appeal. The Ontario court found that the dispute concerned pre-contractual negotiations relating to the renewal, not the contract's performance. The SCC, reversing, held although the duty of honest performance does not give rise to a positive duty to disclose material facts or circumstances to counterparties to that contract, a party must not mislead a counterparty. A party must correct any false impression attributable to that party's conduct.

Callow is yet to be cited in a British Columbia court's decision, although this is imminent. However, Callow has been in a decision of the Civil Resolution Tribunal [3]. Meanwhile, other courts across Canada have been quick on the uptake. In a recent decision of the Court of Queen's Bench of Alberta [4], the court, citing Callow, opined that: "Dishonesty includes the full range of misleading and dishonest behaviour, 'lies, half-truths, omissions, and even silence, depending on the circumstances'…"

Callow was heard with Wastech Services Ltd. v. Greater Vancouver Sewerage and Drainage District [5]. This case concerned the duty to exercise contractual discretion in good faith. Callow confirmed the notion from Bhasin that both this duty and the duty of honest performance manifest the same "organizing principle" of good faith. The first step in deciding a common-law good faith claim is to consider whether any established good faith doctrines apply. We will likely see the principles used concurrently as part of a more comprehensive legal framework on the doctrine of good faith, centred on the proposition that: "[p]arties who provide for discretionary power cannot contract out of the implied undertaking that the power will be exercised in good faith." [6]

At Ascendion Law, these recent two cases: Callow and Wastech – prompt us to review existing contract breach claims we prosecute to assess whether we ought to amend pleadings to include any claims that may touch on the organizing principle of good faith. As an example, one action contemplates a breach of contract based on a defendant's failure to exercise its discretion to extend deadlines for closing if we assert the defendant's conduct reasonably caused our client to believe closing conditions would be extended. While we initially pled only Bhasin's principles, we assess whether we ought to include directions in Callow and Wastech.

For the solicitors with whom we work, we advise not to apply caveat emptor or "buyer beware" strictly. This is no longer safe. The SCC, in Bhasin, elected not to imply a duty of good faith into every contract. The SCC also demurred from applying good faith principles to require parties to bargain in good faith. However, we expect that the common law's arc points towards the courts further restricting a party's exclusive ability to advance their interests within a contract.

[1] 2020 SCC 45
[2] 2014 SCC 71
[3] 2021 BCCRT 63
[4] Haack v. Secure Energy (Drilling Services) Inc, 2021 ABQB 82 at para. 446, citing Callow at para. 91
[5] 2021 SCC 7
[6] Wastech at para. 94