As children, we are taught (hopefully) that honesty is the best policy. All these years later it turns out that the childhood lesson is also solid legal advice. In C.M. Callow Inc. v Zollinger (https://decisions.scc-csc.ca/scc-csc/scc-csc/en/item/18613/index.do), a December 18, 2020 decision of the Supreme Court of Canada, our nation’s highest court provided the condominium industry with valuable lessons when terminating contracts. The facts are as follows:
Ten (10) Carleton condominium corporations formed a Joint Use Committee (“JUC”) to make decisions relating to their shared assets. C.M. Callow Inc. (“Callow”) and the condominium corporations entered into distinct summer and winter maintenance contracts. The winter maintenance contract provided for ten (10) days’ written notice. In early 2013, JUC decided to terminate the winter contract, but chose not to inform Callow of its decision at that time. Throughout the spring and summer of 2013, Callow had discussions with the JUC regarding a renewal of the winter maintenance agreement. Following those discussions, Callow thought that it was likely to get a two‑year renewal of the winter maintenance contract and that the JUC was satisfied with its services. During the summer of 2013, Callow performed work above and beyond the summer maintenance contract at no charge, which it hoped would act as an incentive to renew the winter maintenance agreement. Nevertheless, in September of 2013, the JUC terminated the winter maintenance contract on notice and Callow sued for breach of contract.
The trial judge found that the JUC breached the contractual duty of honest performance. The Ontario Court of Appeal allowed the appeal on the basis that the JUC had the contractual right to terminate the contract and the trial judge went beyond what the duty of good faith in contract requires. The Supreme Court of Canada allowed the appeal and reinstated the judgment of the trial judge.
The court held that the duty to act honestly in the performance of the contract precluded the JUC’s active deception by which it knowingly misled Callow into believing that the winter maintenance agreement would not be terminated. By exercising the termination clause dishonestly, the court found that the JUC 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. The court noted that the requirements of honesty in performance can go further than prohibiting outright lies provided the dishonesty is directly linked to the performance of the contract.
The court found that the JUC knowingly misled Callow in the manner in which it exercised the termination clause of the winter maintenance agreement and this wrongful exercise of the termination clause amounted to a breach of contract. Even though the JUC had the right to terminate the winter maintenance agreement on 10 days’ notice, the right had to be exercised in keeping with the duty to act honestly. It may not have had a free‑standing obligation to disclose its intention to terminate, but it nonetheless had an obligation to refrain from misleading Callow in the exercise of that clause. If someone is led to believe that their counterparty is content with their work and their ongoing contract is likely to be renewed, it is reasonable for that person to infer that the ongoing contract is in good standing and will not be terminated early. Having failed to correct Callow’s misapprehension that arose due to these false representations, the JUC breached its duty of good faith in the exercise of its right of termination.
A fulsome treatment of the decision is beyond the scope of this blog post; however, the principles outlined above are important reminders when condominium corporations are considering terminating service providers.