Nov 14, 2014

New Good-Faith Duty of Honesty in Contractual Performance Recognized by Supreme Court of Canada

Bhasin v. Hrynew, 2014 SCC 71 (CanLII)

A new duty of honest performance has been imposed on all Canadian contracts by the Supreme Court of Canada. The notion of a general and independent doctrine of good faith performance of contracts has historically been resisted in Anglo-Canadian common law. This has changed with the Supreme Court of Canada’s decision in Bhasin v Hrynew, 2014 SCC 71, in which the Court both: (1) recognized good faith contractual performance as a “general organizing principle of the common law of contract”; and (2) recognized a new duty of “honest performance”, which requires the parties to be honest with each other in relation to the performance of their contractual obligations.

At issue in the case was a contract between Canadian American Financial Corp. (Can-Am), a provider of education savings plan investments, and Mr. Bhasin, one of Can-Am’s retail dealers. The contract renewed automatically, unless notice of non-renewal was given six months prior to the end of the term. Can-Am terminated the contract, with the required notice, but had deceived Bhasin about its intention to do so. Had Can-Am been honest with Bhasin about its intention to terminate the contract, Bhasin could have transitioned and preserved his business to a greater extent than he was able to without such notice.

Writing for the unanimous Court, Justice Cromwell explained that “[t]he first step is to acknowledge that good faith contractual performance is a general organizing principle of the common law of contract which underpins and informs the various rules in which the common law, in various situations and types of relationships, recognizes obligations of good faith contractual performance.” (para. 33)

Justice Cromwell continued “[t]he second is to recognize, as a further manifestation of this organizing principle of good faith, that there is a common law duty which applies to all contracts to act honestly in the performance of contractual obligations.” (para. 33) Justice Cromwell detailed that a duty of honesty in contractual performance means that parties must not lie or otherwise knowingly mislead each other about matters directly linked to the performance of the contract. It does not impose a duty of loyalty or of disclosure or require a party to forego advantages flowing from the contract.

This duty of honesty is a general doctrine of contract law that imposes as a contractual duty a minimum standard of honest contractual performance. Justice Cromwell held that it operates irrespective of the intentions of the parties, although did not rule out a role for contractual modification of the duty, so long as the parties “respect its minimum core requirements”.

In the Court’s view, the recognition of a duty of honesty poses no risk to commercial certainty in the law of contract, and is clear and easy to apply. Justice Cromwell characterized this as a modest step, pointing to the experience in Quebec and the United States as cause for comfort. While the appellant had argued for adoption of a more expansive duty of good faith, the Court instead opted for an incremental change. The Court awarded damages accordingly.

In the years ahead, we expect, contrary to the Court’s hope, that there will be considerable uncertainty applying and developing the new general organizing principle of good faith and applying the new duty of honest performance. Experience has shown us that in the realm of complex commercial transactions, good faith arguments, and likely now the duty of honest performance, are and will be creatively used to gain an edge over counterparties. What may appear to otherwise be a straightforward contractual termination clause, as in this case, may not be so straightforward in practice. In the coming weeks and years parties will have to carefully consider what these new duties may entail. The extent that parties may contract around these new developments will also be a subject for consideration. The Court said somewhat enigmatically that parties should be free “in some contexts” to relax the requirements of the doctrine “so long as they respect its minimum core requirements.” Expect litigation on what those contexts and minimum core requirements are.