Damages for Breach of the Duty of Honest Performance in Callow v Zollinger: Distinguishing Expectation and Reliance in Contract and Tort
I. Introduction
In CM Callow Inc v Zollinger,[1] the Supreme Court further clarified the duty of honesty in contractual performance first recognized in Bhasin v Hrynew.[2] A central point of disagreement between the majority and concurrence in Callow concerns the appropriate measure of damages for breach of that duty. While the majority held that breach of the duty of honest performance should be compensated by the ordinary contractual measure of expectation damages,[3] the concurrence would have awarded damages on the reliance measure.[4]
This disagreement has sparked a lively discussion in the academic literature, most of which has supported the concurrence’s approach.[5] This article offers a new perspective on this debate by arguing that while the two approaches are functionally equivalent in outcome, the majority’s characterization of the proper measure of damages is preferable because it promotes coherence and reduces confusion in the law. In particular, the majority’s approach mitigates the risk of conflating expectation and reliance damages in contract with similarly named remedies in tort, which operate differently in subtle but important respects. As this conflation appears in both the majority and concurring opinions in Callow as well as a considerable portion of the literature, this article aims to reduce this conflation by clarifying the distinction between contractual and tortious conceptions of expectation and reliance damages.
This article begins in Part II with a brief overview of the facts in Callow and the disagreement on damages between the majority and concurring opinions. Part III explains why the approaches of the majority and concurrence are functionally equivalent in outcome but the majority’s characterization is preferable. Part IV concludes this article.
II. Callow and the Damages Debate Between the Majority and Concurrence
Callow concerned a two-year winter maintenance contract between Callow, a service provider, and Baycrest, a group of condominium corporations. The contract permitted Baycrest to terminate the agreement on ten days’ notice.[6] Near the end of the first winter, Baycrest decided to terminate the agreement but chose not to inform Callow at that time.[7] During the following spring and summer, Baycrest engaged in several interactions with Callow that led Callow to infer that the contract would not be terminated early.[8] As a result, Callow did not bid on other winter maintenance contracts for the upcoming season.[9] Baycrest was aware Callow had drawn this inference but did nothing to correct it.[10] By the time Baycrest gave notice of termination, it was too late for Callow to find replacement work for the upcoming winter.[11]
At the Supreme Court, both the majority and concurrence agreed that Baycrest breached the duty of honest performance.[12] They diverged, however, on the proper measure of damages for breaching this duty.
The majority followed Bhasin’s observation that damages for breach of the duty of honest performance should be granted according to the “ordinary contractual measure.”[13] The majority determined this to mean expectation damages, which would put the plaintiff in the position it would be in had the duty of honest performance been performed.[14] On the facts of Callow, had Baycrest acted honestly, Callow would have bid on other contracts for the upcoming winter. Baycrest was therefore liable for the profits Callow would have earned on a replacement contract, as well as Callow’s costs of leasing machinery for the Baycrest contract that it would not have leased had it known the contract would be terminated.[15]
The concurrence rejected this approach and proposed instead that damages be awarded according to the “reliance measure.”[16] On this approach, damages should be granted representing “the loss [the plaintiff] suffered in reliance on [the defendant’s] misleading representations.”[17] Although the concurrence reached the same quantum of damages on the Callow facts, it emphasized that its approach differed from the majority’s, even though the two measures may “often coincide” in practice.[18]
III. The Callow Majority’s Characterization is Preferable
In this part, I will argue that while the majority’s and concurrence’s measures of damages are functionally equivalent in result, the Callow majority’s characterization is preferable because it better aligns with established principles of contractual damages and avoids conflating contractual and tortious remedies.
My first observation is that while the majority and concurrence characterize their approaches differently, they are functionally equivalent in outcome. The duty of honest performance, as formulated in Bhasin, requires that contracting parties “not lie or otherwise knowingly mislead each other about matters directly linked to the performance of the contract.”[19] Therefore, the majority’s approach of putting the plaintiff in the position it would be in had the duty been performed means putting them in the position they would be in had the defendant not lied or otherwise knowingly misled. Because the only way a party can suffer loss from another’s misleading conduct is if that party relies on that conduct, there is no difference between putting the plaintiff in the position they would be in had the defendant not lied or otherwise knowingly misled and compensating the plaintiff for losses suffered in reliance on the defendant’s misleading representations.
Two questions follow. First, if the two approaches are functionally equivalent, why do both the majority and concurrence understate this by noting that the measures will be the same “often” or “in many if not most cases”?[20]Second, even if the approaches are functionally equivalent, which opinion’s characterization is preferable?
As developed below, this article suggests that both opinions understate the extent of convergence because each exhibits some degree of conflation between reliance damages in contract and reliance damages in tort. The majority’s characterization is preferable precisely because it reduces the risk of such conflation by situating damages for breach of the duty of honest performance within the existing framework of contractual remedies, thereby advancing Bhasin’s objective of making the common law “less unsettled and piecemeal, more coherent and more just.”[21]
I will begin by explaining the concept of reliance damages in both contract and tort, and then do the same with expectation damages. In both contract and tort, reliance damages are backward-looking and seek to restore the plaintiff to a prior position.[22] As a contractual remedy, reliance damages aim to restore the plaintiff to the position they occupied immediately before entering into the contract.[23] In tort law, reliance damages aim to restore the plaintiff to the position they occupied immediately before the tort occurred.[24] It follows from these definitions that reliance damages in contract and tort are conceptually distinct, because a tort is a wrong, whereas a contract is not – only a breach of contract is a wrong.
By contrast, expectation damages are forward-looking and aim to give the plaintiff something they expected to receive.[25] In contract, expectation damages aim to put the plaintiff in the position as though the contract were performed.[26] Expectation damages are not available as a remedy in tort.[27] However, in the fraud and misrepresentation context, courts sometimes refer to expectation damages as a hypothetical remedy that, if it existed, would aim to put the plaintiff in the position as though the tortious representation were true.[28] These definitions demonstrate that expectation damages in contract and tort differ in kind, because expectation damages in contract vindicate expectations created by a contract (not a wrong), whereas expectation damages in tort would vindicate expectations created by a tort (a wrong).
For breach of contract, expectation damages are the ordinary measure of damages, but reliance damages are available as an alternative where expectation damages are not suitable.[29] In tort law, reliance damages are the ordinary measure of damages.[30]
Against this backdrop, it is now evident that the majority’s approach in Callow aligns with the ordinary contractual measure of expectation damages. The concurrence’s characterization, by contrast, treats the plaintiff as if they had brought a claim in tort, a tort constituted by the misleading representations. Although the concurrence’s approach awards reliance damages, those damages are not reliance damages in contract, because they do not aim to restore the plaintiff to the position they occupied immediately before entering into the contract. Rather, they aim to restore the plaintiff to the position they occupied immediately before the misleading representations occurred, consistent with the concept of reliance damages in tort.
As breach of the duty of honest performance is a claim in contract,[31] the Callow majority’s approach of granting the ordinary contractual measure is preferable. It is more straightforward, avoids a piecemeal remedial framework, and reduces the risk of conflating contractual and tortious damages.
This risk of conflation is observable in both the Callow opinions and their academic commentary. In apparent response to the concurrence’s reliance-based approach, the majority notes that there is “no basis to hold that a breach of the duty of honest performance should in general be compensated by way of reliance damages.”[32] However, the majority’s reasons for this conclusion address reliance damages in contract instead of the concurrence’s actual approach of reliance damages in tort.[33] For example, the majority’s reference to the “positive deterrent effect” of expectation damages quotes from Professor Waddams’ article that compares the deterrent effect of expectation and reliance damages awarded for breach of contract.[34] The majority therefore appears to conflate reliance damages in contract and tort.
Similarly, the concurrence begins by comparing the effects of expectation and reliance damages in contract, before pivoting to advocate for reliance damages in tort.[35] Because reliance damages in contract and tort are conceptually distinct, this comparison does not advance the concurrence’s position that reliance damages in tort should be granted. The inclusion of this comparison suggests that the concurrence assumes the measure it proposes is the same as the reliance damages in contract the comparison discusses.
As both opinions appear to conflate reliance damages in contract with those in tort, if the concurrence’s approach of reliance damages in tort were adopted, lower courts may mistakenly award reliance damages in contract. This conflation also explains why both opinions only recognize that the two approaches coincide in some cases, as the conceptual distinction between reliance and expectation damages in contract (looking forward or backward from the contract) means they cannot be equivalent.
Conflation between contractual and tortious damages also underlies much of the scholarly criticism of the majority. Several commentators argue that Bhasin did not truly grant expectation damages despite Bhasin’s pronouncement to the contrary. They contend that proper expectation damages would have placed the plaintiff in the position he would be in had the defendant’s representation been true, since that was what the defendant’s behaviour led the plaintiff to expect. But Bhasin did not do this because the court expressly declined to grant the plaintiff the value of a renewed contract, even though that was what the court found the defendant’s conduct encouraged the plaintiff to expect.[36] This criticism is misplaced because it essentially only observes that the remedy granted in Bhasin was not expectation damages for the misleading representation. What Bhasin did grant, however, was expectation damages for breach of contract,[37] the correct remedy for a contractual claim.
Professor Maharaj advances a more nuanced critique, arguing that expectation damages can only vindicate expectations of things we specifically expect should happen, and not things we generally expect should not happen. According to Professor Maharaj, if expectation damages can uphold expectations of things we generally expect should not happen, then all reliance damages in tort can potentially be characterized as expectation damages, as that is what reliance damages in tort always do. This result would erase all distinction between expectation and reliance damages, which cannot stand as expectation and reliance damages are conceptually different. It follows that expectation damages cannot be granted to uphold the expectation that another will not lie or otherwise knowingly mislead, as that is something we generally expect should not happen.[38]
This argument, however, rests on the same conflation. Even if all reliance damages in tort could potentially be framed as expectation damages in contract, that would not dissolve all distinction between reliance and expectation damages. This is because the conceptual separateness between expectation and reliance damages applies only to alternative remedies for the same cause of action, as only remedies for the same cause of action share a common baseline from which one looks backward or forward. There is thus no principled reason why expectation damages for breach of contract cannot converge with reliance damages in tort.
One example of such convergence is the English decision of Esso Petroleum Co v Mardon.[39] There, the lessee of a petrol station entered into the lease on the faith of the lessor’s assurance that a sales forecast of the station had been carefully prepared. The forecast was in fact negligently prepared and grossly overestimated the sales, leading to the lessee’s business failure. The court held that the breach of the assurance constituted a breach of contract and that the forecast constituted a negligent misrepresentation. On a contractual theory, expectation damages would put the lessee in the position as if the forecast had been carefully prepared. It was found that had this happened, the lessee would not have entered into the contract. On a tortious theory, reliance damages would undo the consequence of the negligent misrepresentation, which was that it induced the lessee to enter into the contract. Under either claim, the remedy was the same: putting the lessee in the position he would be in if he had never entered into the contract.
Lastly, I will address the concurrence’s reasons for rejecting the majority’s approach. According to the concurrence, the majority’s approach is wrong because the complaint in a breach of the duty of honest performance case is not that “the defendant has failed to perform the contract, thereby defeating the plaintiff’s expectations.”[40] Rather, the issue is that “the defendant has performed the contract, but has also caused the plaintiff loss by making dishonest extra-contractual misrepresentations concerning that performance.”[41]
This reasoning sits uneasily with Bhasin, which recognized that breach of the duty of honest performance gives rise to breach of contract.[42] A party that breaches a contract cannot be said to have fully performed it.
Some commentators suggest that Bhasin erred in characterizing breach of the duty of honest performance as breach of contract, because Bhasin simultaneously held that the duty of honest performance “operates irrespective of the intentions of the parties.”[43] In their view, an obligation that is completely independent of party intentions must be extra-contractual.[44]
However, obligations that cannot be displaced by party intention but nonetheless form part of a contract are not unprecedented in Canadian law.[45] For example, some statutes impose terms into contracts that cannot be excluded by agreement.[46] If statutes can impose mandatory terms into contracts, there is no principled reason why the common law cannot do the same.
IV. Conclusion
The Callow judgments and surrounding literature underscore the need to avoid conflating expectation and reliance damages in contract with similarly named remedies in tort. The Callow majority’s approach towards damages for breach of the duty of honest performance advances this goal by situating the remedy within the established framework of contractual damages. It is hoped that this article contributes to the same objective.
Going forward, courts should consider linking discussions of expectation and reliance damages more closely to the causes of action they remedy. The Supreme Court may also wish to revisit these issues in a future case to clarify the distinction between the four measures of damages discussed in this article.
Notes
[1] 2020 SCC 45 [Callow].
[2] 2014 SCC 71 [Bhasin].
[3] Callow, supra note 1 at paras 106–07.
[4] Ibid at para 140.
[5] For authors supporting the concurrence, see Bruce MacDougall, Misrepresentation (Toronto: LexisNexis, 2016) at 64–66; Krish Maharaj, “Callow in More Ways Than One: The Supreme Court Causes More Confusion in Contract” (2021) 53:1 Ottawa L Rev 71 at 81–87 [Maharaj, “Callow in More Ways Than One”]; Krish Maharaj, “Good Faith Not Good for Consistency: Irreconcilable Results in Wastech and Callow” (2022) 55:2 UBC L Rev 511 at 521–24 [Maharaj, “Good Faith Not Good for Consistency”]; Krish Maharaj, “How Do Limitation Clauses, Damages, and Good Faith Duties Align?” (2025) 103:2 Can Bar Rev 432 at 440–42 [Maharaj, “How Do Limitation Clauses”]; Marcus Moore, “Developments in Contract Law: The 2020–2021 Term – Appeals to Fairness” (2022) 106 SCLR (2d) 3 at 27–29; Anna SP Wong, “Duty of Honest Performance: A Tort Dressed in Contract Clothing” (2022) 100:1 Can Bar Rev 95 at 105–11; Humphrey Yuan Jheng, “An Old Bottle for the New Wine: Understanding the Duty of Honest Performance under the Objective Theory” (2024) 47:1 Dal LJ 311 at 342–45. For authors supporting the majority, see Brandon Kain, “A Matter of Faith: The Treatment of Bhasin v. Hrynew by Appellate Courts (Part II)” (2021) 52:1 Advoc Q 1 at 66–69; John D McCamus, “The Canadian Doctrine of Good Faith Contractual Performance: Further Clarification” (2022) 38:1 J Contract L 1 at 18–23 [McCamus, “Further Clarification”].
[6] Callow, supra note 1 at para 8.
[7] Ibid at para 10.
[8] Ibid at paras 11–13, 37.
[9] Ibid at para 116.
[10] Ibid at para 13.
[11] Ibid at para 149.
[12] Ibid at paras 5, 121.
[13] Ibid at para 106.
[14] Ibid at para 107.
[15] Ibid at paras 114–19.
[16] Ibid at para 140.
[17] Ibid at para 139.
[18] Ibid.
[19] Bhasin, supra note 2 at para 73.
[20] Callow, supra note 1 at paras 108, 139.
[21] Bhasin, supra note 2 at para 33.
[22] Jamie Cassels & Elizabeth Adjin-Tettey, Remedies: The Law of Damages, 3rd ed (Toronto: Irwin Law, 2014) at 50.
[23] PreMD Inc v Ogilvy Renault LLP, 2013 ONCA 412 at para 66 [PreMD]; Cassels & Adjin-Tettey, supra note 22 at 50; John D McCamus, The Law of Contracts, 3rd ed (Toronto: Irwin Law, 2020) at 973–74, 984–85 [McCamus, The Law of Contracts]; LL Fuller & William R Perdue, Jr, “The Reliance Interest in Contract Damages: 1” (1936) 46:1 Yale LJ 52 at 54.
[24] PreMD, supra note 23 at para 65; Cassels & Adjin-Tettey, supra note 22 at 50–51.
[25] Cassels & Adjin-Tettey, supra note 22 at 18.
[26] Fidler v Sun Life Assurance Co of Canada, 2006 SCC 30 at para 44; PreMD, supra note 23 at para 65; Fuller & Perdue, supra note 23 at 54.
[27] Cassels & Adjin-Tettey, supra note 22 at 60.
[28] McLenaghan v Beaver Lumber Co Ltd, 1982 CanLII 2452 (SKCA) at para 19; Xerex Exploration v Petro-Canada, 2005 ABCA 224 at para 95.
[29] PreMD, supra note 23 at paras 65–66; Cassels & Adjin-Tettey, supra note 22 at 50–51.
[30] PreMD, supra note 23 at para 65; Cassels & Adjin-Tettey, supra note 22 at 50.
[31] Bhasin, supra note 2 at paras 74–75, 103, 106, 108.
[32] Callow, supra note 1 at para 109.
[33] Ibid.
[34] Ibid; SM Waddams, “Breach of Contract and the Concept of Wrongdoing” (2000) 12 SCLR (2d) 1 at 18–19.
[35] Callow, supra note 1 at paras 141–42.
[36] Krish Maharaj, “An Action on the Equities: Re-Characterizing Bhasin as Equitable Estoppel” (2017) 55:1 Alta L Rev 199 at 215; Maharaj, “Callow in More Ways Than One”, supra note 5 at 84–85; Moore, supra note 5 at 28–29; Wong, supra note 5 at 108–09.
[37] Bhasin, supra note 2 at paras 108–11.
[38] Maharaj, “Callow in More Ways Than One”, supra note 5 at 85–87; Maharaj, “Good Faith Not Good for Consistency”, supra note 5 at 523.
[39] [1976] EWCA Civ 4.
[40] Callow, supra note 1 at para 142.
[41] Ibid.
[42] Bhasin, supra note 2 at paras 103, 106, 108.
[43] Ibid at para 74.
[44] Maharaj, “How Do Limitation Clauses”, supra note 5 at 440–41; Wong, supra note 5 at 102–05.
[45] McCamus, “Further Clarification”, supra note 5 at 21–22.
[46] McCamus, The Law of Contracts, supra note 23 at 852. See e.g., Consumer Protection Act, 2002, SO 2002, c 30, Schedule A, s 9.