Canadian Underwriter

What Supreme Court says about liability risk for contract breach

January 11, 2021   by Greg Meckbach

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A recent Supreme Court of Canada ruling in favour of a property maintenance firm has several liability risk management takeaways when it comes to contracting for commercial clients.

C.M. Callow Inc. had property maintenance contracts in 2012-14 for a group of 10 condo corporations located at the Baycrest Gardens complex in Ottawa. On Sept. 12, 2013, that condominium management group gave Callow 10 days’ notice it was cancelling Callow’s winter maintenance contract early, instead of letting the contract run through March of 2014.

Although the contract gave the condo corporations the right to early termination, with 10 days’ notice, Callow sued the condo management group for breach of contract. Callow was awarded nearly $81,000 in damages as a result of C.M. Callow Inc. v. Tammy Zollinger, et al. released Dec. 18 by the Supreme Court of Canada, which restored a 2017 Ontario court decision.

Key to the ruling was the 2014 Supreme Court of Canada ruling in Bhasin v. Hrynew, which says parties to contracts have a duty to act honestly in the performance of contractual obligations.

“I think the big takeaway from Callow, if it wasn’t already clear from Bhasin v. Hrynew, is that if you are going to be exercising any contractual right, including a termination right, you had better ensure that you are not actively — or by omission or silence — creating an impression, in your contractual counter-party, that the opposite is true,” said commercial litigation expert Michael Mestinsek, a Calgary-based partner with law firm Stikeman Elliott, in a recent interview.

In other words, your client could be in trouble if it decides to terminate a contract but somehow the counter-party is led to believe the contract will not be terminated.

Not all judges hearing the Callow case agreed that the condo management group breached its contract.

Originally, in 2017. Justice Michelle O’Bonsawin of the Ontario Superior Court of Justice ruled against the condominium management group. Her ruling was reversed on appeal in 2018 but restored in 2020 in by the Supreme Court of Canada in its divided decision.

In 2018, the Court of Appeal for Ontario said Justice O’Bonsawin’s finding may suggest that the condo management group failed to act honourably, but those findings do not rise to the “high level required to establish a breach of the duty of honest performance.”

The decision to terminate the Callow’s contract was made in April of 2013, by a vote of a “joint-use-committee” for the Baycrest complex, which is comprised of one rep each from the 10 condominium boards.

Justice O’Bonsawin found there were communications between Callow and individual members of Baycrest condo boards — between April and September of 2013 — which led Callow to erroneously believe he was likely to get a two-year renewal of his winter maintenance services contract and that the condo boards were satisfied with his services.

This amounted to active deception on the part of the defendants, Justice O’Bonsawin found in 2017.

What got the condo management group in trouble was not the fact that it exercised its termination right, Mestinsek said in an interview. Instead, it was the fact that the management group decided in March of 2013 to terminate Callow’s winter contract for the winter of 2013-14 but they did not communicate that decision until September of 2013 to the contractor.

“In between the time, they had people in the organization who had communication with Callow that led him to believe that the contract would be renewed. So Callow then doesn’t look for any new deals for the next winter … and then when they terminate the contract within their 10-day right to terminate, they have led him to believe, through their actions, that the contract was not at threat of non-renewal,” Mestinek said.

“One of the practical takeaways of this decision is organizations need to be careful on how they communicate the status of a contract,” said Winston Gee, a Torys LLP lawyer who represented the Canadian Chamber of Commerce as an intervenor in the Callow case.

If a party to a contract becomes aware that their counter-party is under a mistaken belief about how certain contractual rights or obligations will be exercised, then they could be under a duty to correct those misapprehensions, Gee said in an interview. “Selective disclosure of the kind that went on in Callow can lead to liability.”

It does lead to some practical questions for risk managers.

“The question is, how do you know when your contractual counter-party is under some kind of belief that is mistaken? And how do you know whether what you have done has contributed to that?” Mestinek said.

“It’s an easy principle to articulate [the duty of honest performance] and it sounds just, but practically, for people trying to conduct commercial activity, what does it mean? I still think that there is some uncertainty about that.”

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