Canada: Supreme Court Of Canada Establishes Duty Of Honesty In Contractual Performance: Bhasin v Hrynew

In a landmark decision released on November 13, 2014, the Supreme Court of Canada (SCC) recognized for the first time in Canada a general organizing principle of good faith in the common law of contract and a more specific duty of honesty in the performance of contracts between parties. The decision has important implications for Canadian businesses. It creates a new liability for parties to any commercial contract. It also reinforces the need for careful communication between contracting parties and in internal communications within businesses regarding issues of contractual performance.

The case involved a dispute between Harish Bhasin, a retailer of education savings plans, and Canadian American Financial Corp. (CAF), the wholesaler of the plans. In a series of rather convoluted events, CAF worked with Mr. Hrynew, a retailer and competitor of Mr. Bhasin, to mislead and pressure Mr. Bhasin into merging his sales operation with that of Mr. Hrynew. When Mr. Bhasin resisted, CAF gave notice that it would not be renewing his contract, which resulted in Mr. Bhasin losing the value in his business. Mr. Bhasin commenced an action against CAF and Mr. Hrynew, claiming conspiracy and CAF's failure to act in good faith.

The trial judge found that CAF knowingly misled Mr. Bhasin throughout the events leading up to the non-renewal of his contract. In doing so, she held that CAF had breached an implied duty of good faith. The Alberta Court of Appeal overturned the trial judge's decision on the basis that the contract renewal terms were unambiguous and no duty of good faith had been provided for in the contract.

The issue that the SCC was asked to decide on appeal was a narrow one: Does Canadian common law impose a duty on parties to perform their contractual obligations honestly? In a unanimous decision, Justice Cromwell held that it does. According to Justice Cromwell, the "general organizing principle" of the duty of good faith that underpins all contract law carries with it a duty of honesty that requires parties not to lie or otherwise knowingly mislead each other about matters directly linked to the performance of the contract.

There are several reasons why Canadian businesses should be mindful of the SCC's decision. If you have a commercial contract with someone and are dishonest in matters directly related to the performance of the contract, then you may be held liable for damages. The amount of damages will be assessed on a contractual basis – that is, expectancy damages – enough money to place you in the position you would have been in if the contract had been performed. For example, in the case in question, the SCC held that the counterparty would have been able to retain the value of his business had the dishonest conduct not occurred, and the Court awarded the counterparty what was accepted as the value of the business at the relevant time.

The SCC elaborated that this duty of honesty means that the parties must not lie or otherwise knowingly mislead each other about matters directly linked to the performance of the contract; but the Court also stated that this does not create a duty of loyalty, duty of disclosure or the requirement to forgo advantages flowing from the contract. It is not to be considered an implied term of the contract, and it operates irrespective of the parties' intentions. And, while parties cannot contract out of the duty of honesty, they can modify its scope by determining the standards by which performance of the obligation is to be measured if such standards respect the duty's minimum core requirements.

In addition to creating this specific and new basis for contractual liability (the duty of honesty), the SCC also provided its permission for the creation of additional new bases for contractual liability over time. The SCC determined that commercial parties reasonably expect a basic level of honesty and good faith in their contractual dealings and clearly held that good faith contractual performance is a general organizing principle of the common law of contract. In other words, as a general principle (and not a free-standing rule), parties generally must perform their contractual duties honestly and reasonably and not capriciously or arbitrarily, and a party cannot seek to undermine the legitimate contractual interests of the other party in bad faith. The SCC then stated that the application of such an organizing principle to particular situations should be developed incrementally with due weight given to the importance of private ordering and certainty in commercial affairs.

It is this latter aspect of the SCC's decision that has very likely created the dawn of a new era in commercial contract litigation. There will be no shortage of attempts to characterize future commercial claims on the basis that damages were suffered as a result of a party not acting in good faith in the context of the overall commercial relationship, even if the specific act may be technically permitted under the terms, as drafted, of the particular contract in question. Accordingly, businesses will need to be mindful of this duty in their communications with contracting parties and even in their own internal communications that discuss matters directly related to the performance of contractual obligations. Conduct that can be construed as deceptive may increase the risk of litigation.

It is noteworthy that the obligation to act in good faith has been part of Québec's civil law since the 1990s. The Québec Civil Code provides that "every person is bound to exercise his civil rights in good faith", and that "no right may be exercised with the intent of injuring another or in an excessive and unreasonable manner, and therefore contrary to the requirements of good faith". In ascertaining the scope and extent of the obligation of good faith, Québec case law will likely provide guidance.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
Borden Ladner Gervais LLP
Singleton Urquhart Reynolds Vogel LLP
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Borden Ladner Gervais LLP
Singleton Urquhart Reynolds Vogel LLP
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions