C.M. Callow Inc. v. Zollinger: 3 Tips to Honestly Exercise Contract Rights
January 18, 2021
By Chris MacIntyre, Partner at McInnes Cooper,
Andrew Kinley, Lawyer at McInnes Cooper
The Supreme Court of Canada, in the 2014 case of Bhasin v. Hrynew, recognized a general organizing principle of good faith performance in contract law, and that this principle forms the basis of a duty of honesty between contracting parties. In December 2020, in the case of C.M. Callow Inc. v. Zollinger, the Court applied the reasoning in Bhasin and considered whether a contracting party breached its duty of honesty in the way it exercised a contractual right of termination – and found it did.
Callow entered into two contracts with a group of condominium corporations (Baycrest). The first contract contained a clause entitling Baycrest to terminate the contract for any reason upon giving Callow 10 days’ written notice if Callow’s services weren’t required. Baycrest decided to terminate the first contract, as it was entitled, based on Callow’s performance under it. However, Baycrest didn’t immediately inform Callow of its decision. Instead, it gave Callow the impression that the renewal of the contract at the end of its term was likely. Further, Baycrest allowed Callow to perform additional services under the second contract that weren’t required, which it knew Callow was providing in order to secure renewal of the first contract. Baycrest ultimately gave Callow the 10 days’ termination notice the contract required. Callow sued Baycrest, alleging Baycrest breached its duty of honesty in its performance of the contract. On appeal, the Supreme Court of Canada agreed. The majority of the Court decided that Baycrest had knowingly misled Callow in the manner in which it exercised its right of termination. This constituted a breach by Baycrest of the duty of honesty it owed to Callow.
The decision reinforces and builds on the Court’s reasoning in Bhasin v. Hyrnew with respect to the principle of good faith and the duty of honesty in contract law. As a party to a contract considering how to exercise your rights and perform your obligations in an honest manner, bear these three key tips in mind:
1. Be careful how you exercise rights. It’s not enough that a contracting party exercises its rights or performs its obligations as the contract provides. After all, Baycrest did that much by giving 10 days’ notice of termination, as it had the right to do under the contract. Beyond that, rather, it’s important to be attentive to how you exercise rights or perform obligations. For example, don’t do anything to mislead your counterparty, whether through active deceit or by omitting to say or do something.
2. Correct misunderstandings you create. It’s not your responsibility to clear up every misunderstanding or misapprehension your counterparty may have about a contract, but you must do so where you have caused the misunderstanding or misapprehension. If you’ve given a wrong impression, don’t knowingly let your counterparty continue to act under it.
3. Resist the urge to take advantage. There’s nothing wrong with contracting parties taking full advantage of their rights under a contract. However, when it comes to the exercise of contractual rights, it’s important not to engage in misleading behavior in order to secure an advantage for yourself. Baycrest did this by deferring the exercise of its termination right and stringing Callow along, while at the same time taking advantage of additional services that Callow performed beyond what was required. And that, the Court said, did not adhere to the duty of honesty.
Please contact your McInnes Cooper lawyer or any member of the Corporate & Business Law Team @ McInnes Cooper to discuss this topic or any other legal issue.
McInnes Cooper has prepared this document for information only; it is not intended to be legal advice. You should consult McInnes Cooper about your unique circumstances before acting on this information. McInnes Cooper excludes all liability for anything contained in this document and any use you make of it.
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