Late last week, the Supreme Court of Canada
("SCC") released the decision of
Bhasin v Hrynew. This decision is significant as the SCC
has found a new common law duty that applies to all contracts - a
duty of honest performance. This new common law duty requires all
parties to be honest with each other in relation to the performance
of their contractual obligations.
Bhasin v Hrynew marks the first time that the SCC has
expanded the application of "good faith" to apply to all
contracts. Although the concept of "good faith" as
applied to contract law is not new, it is generally only applied in
certain contractual situations or relationships such as:
an employer's duty not to engage in conduct that is
"unfair" or is in bad faith by being, for example,
untruthful, misleading or unduly insensitive when dismissing an
an insurer's duty to deal with its insured's claim
a company's duty to consider bids in accordance with its
The formal acknowledgment of "good faith contractual
performance" as a general organizing principle is designed to
bring greater certainty to Canadian contract law, and is, in the
opinion of the Court, an important step towards recognizing that
Canadian commercial parties, and their trading partners, expect a
"basic level of honest conduct" in their contractual
But what does that mean? The duty to act honestly does not
extend so far as to impose fiduciary-like duties of loyalty or
voluntary disclosure. Nor does it create any obligation to put a
contracting partner's interests before your own. It merely
requires the contracting parties not to lie or mislead one another
about matters directly related to the contract, or to undermine
their contractual counterparts' interests in bad faith.
Parties who do not conduct themselves honestly expose themselves
to liability for the damages flowing from the breach.
Put another way, all contracting parties must now show
"appropriate regard" for the legitimate contractual
interests of their contracting partner. What constitutes
"appropriate regard" will vary depending on the context
of each contract. For example, parties to contracts which
contemplate long-term cooperative relationships may be expected to
show higher regard for their contractual counterparts, than say,
parties to a one-time purchase and sale agreement.
Although parties cannot contract out of the duty to act
honestly, parties who, for example, are industry competitors, or
whose interests are inherently at odds, may choose to limit or
define the scope of their shared duties of honest performance by
express terms in their contract, so long as the doctrine's
minimum core requirements are met. Any attempt to do so must be in
explicit terms. A generically worded "entire agreement"
clause will not suffice.
Although the SCC described the new common law duty of honest
performance as "incremental steps" in relation to
understanding the concept of good faith in relation to performance
of contractual duties, it is likely to be interpreted by lawyers
and the Court as a rather significant change in the law, rather
than an "incremental" step.
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.
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