Nov 17, 2014

Supreme Court Creates Duty of Honest Performance

Bhasin v. Hrynew, 2014 SCC 71 (CanLII)

Caveat emptor (buyer beware) or ubberima fides (utmost good faith)? What is a contracting party to do?

The Supreme Court of Canada released a decision this week in Bhasin v. Hrynew which revamps the understanding of how representations made during contractual negotiations are adhered to.

The unanimous Court created an "incremental step" in developing a duty of honest performance, which was described as follows:

[93] ...

(1) There is a general organizing principle of good faith that underlies many facets of contract law.

(2) In general, the particular implications of the broad principle for particular cases are determined by resorting to the body of doctrine that has developed which gives effect to aspects of that principle in particular types of situations and relationships.

(3) It is appropriate to recognize a new common law duty that applies to all contracts as a manifestation of the general organizing principle of good faith: a duty of honest performance, which requires the parties to be honest with each other in relation to the performance of their contractual obligations.

The facts giving rise to the ruling was an independent education savings plan dealer, whose contract was terminated by the other party without disclosing their business dealings with his competitor.

The Court found it necessary to create this new duty in order to address what described in the 1987 Law Commission of Ontario Report on amendment of the law of contract as,

[32] “unsettled and incoherent body of law” that has developed “piecemeal” and which is “difficult to analyze”...

The changes are intended to bring certainty and coherency to contract law in order to bring it into line with reasonable commercial expectations.

The Court was clear in distinguishing the duty of honesty from other duties found in contract law,

[86] The duty of honest performance that I propose should not be confused with a duty of disclosure or of fiduciary loyalty. A party to a contract has no general duty to subordinate his or her interest to that of the other party. However, contracting parties must be able to rely on a minimum standard of honesty from their contracting partner in relation to performing the contract as a reassurance that if the contract does not work out, they will have a fair opportunity to protect their interests.

The way this duty would operate is that the parties should not lie or otherwise knowingly mislead the other parties about contractual performance. This does not create a duty of disclosure, but only a requirement to remain honest in regards to matters which are directly linked to the performance of the contract. Rather than operating as an implied term of the contract, this would be a a minimum standard of contractual performance irrespective of the intention of the parties.

The duty of honest performance is connected to the principle of good faith in contract law. Although the standard of utmost good faith, used in insurance law, is not required, there is already a standard of good faith imported into contracts of many areas of law due to statutes, such as in franchise, employment, and labour law. The Court distinguished a failure to disclose a material fact from active dishonesty.

This new duty would not appear to put an end to the concept of economic breach in contract law. Good faith does not look at the content of the intentions of contracting parties,

[70] The principle of good faith must be applied in a manner that is consistent with the fundamental commitments of the common law of contract which generally places great weight on the freedom of contracting parties to pursue their individual self-interest. In commerce, a party may sometimes cause loss to another — even intentionally — in the legitimate pursuit of economic self-interest: A.I. Enterprises Ltd. v. Bram Enterprises Ltd., 2014 SCC 12, [2014] 1 S.C.R. 177, at para. 31. Doing so is not necessarily contrary to good faith and in some cases has actually been encouraged by the courts on the basis of economic efficiency: Bank of America Canada v. Mutual Trust Co., 2002 SCC 43, [2002] 2 S.C.R. 601, at para. 31. The development of the principle of good faith must be clear not to veer into a form of ad hoc judicial moralism or “palm treeˮ justice. In particular, the organizing principle of good faith should not be used as a pretext for scrutinizing the motives of contracting parties.

The Court indicated that the duty should be clear and easy to apply. An expectation that the other party to a contract will not act dishonestly about their performance is one which is reasonable and will not crate any risk to commercial certainty.

Freedom of contract will still be upheld, and parties will still be able to maintain self-interests without actively misleading the other party.