A Duty of Honest Performance in Condominium Contracts

Management of contracts is an all-too-common task that condominium Boards face. The recent decision from our country’s highest court in CM Callow v Zollinger, is an important reminder that Boards must approach this task with care.

The important take away in this case is that condominiums have a duty to act honestly and in good faith when contracting for services. In practice this sounds straightforward, but in certain circumstances it may become complicated.

Here’s what happened in the Zollinger case. In 2012 a group of ten condominiums (“Baycrest”) entered into a two-year winter maintenance contract and a separate summer maintenance contract with CM Callow (“Callow”). The winter maintenance contract terms allowed Baycrest to terminate the contract for any reason upon giving 10 days written notice. In early 2013, Baycrest decided to terminate the winter contract but didn’t inform Callow of its decision at the time. The plan was to provide 10 days written notice prior to the end of the contract.

The catch in this case, though, is that Baycrest’s communications with the contractor throughout 2013 (i.e. after it had made the decision to terminate the contract) led Callow to believe the contract would be renewed. Relying on these communications and unaware that Baycrest had already decided to terminate the winter contract, Callow performed additional work under the summer contract at no cost in the hope that it would entice Baycrest to renew the winter contract (beyond the two-year term). Further, Callow didn’t look for additional winter work given that its time would be dedicated, in part, to Baycrest’s contract.

In September 2013 (nearly four months later), Baycrest informed Callow of its decision to terminate the winter contract, but complied with the 10 day notice period. Callow sued alleging that Baycrest’s failure to disclose its intention to terminate the contract amounted to deliberate deceit and constituted a breach of contract.

Ultimately, the Supreme Court of Canada held that by knowingly misleading Callow, Baycrest had wrongfully exercised the termination clause. While Baycrest had the right to terminate the contract upon 10 days’ notice, it was required to exercise that right in compliance with the duty to act honestly. By deliberately remaining silent despite knowing that Callow had drawn the mistaken inference that the winter contract was in good standing and would likely be renewed, the Court found that Baycrest had acted dishonestly. Baycrest was ordered to pay Callow $80,000 in damages for lost costs and profit because the contract was not renewed.

The Supreme Court said:

At the end of the day, 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.

The Zollinger case is an important reminder that parties, including condominiums, have a duty to honestly perform their obligations under a contract. While the duty of honest performance does not create a positive obligation of disclosure in all circumstances, parties must not lie or actively mislead each other when it comes to performance of the contract.