On November 13, 2014, the Supreme Court of Canada released yet
another decision dealing with its apparent re-consideration of the
law of contract in Canada.
During the summer, the court released a decision in which it
re-defined the standard to be applied when reviewing a lower
court's interpretation of a contract (Sattva Capital Corp
v. Creston Moly Corp). Now the court has released a decision
in Bhasin v. Hrynew which addresses the question:
"What standard of conduct applies when a party is performing a
A New Direction
Until now, some courts suggested that there was a general duty
of good faith (though this may not have applied to all types of
contracts); other courts were of the view that there was no general
duty of good faith. Writing for the court, Justice Cromwell has
made it clear that the test needs to be clarified.
"Good faith" is recognized as an "organizing
principle" of modern contract law, however the application of
that doctrine has been "piecemeal, unsettled and unclear"
[para 59], leading to results that the court referred to as
"ad hoc judicial moralism or 'palm tree'
justice" [para 70].
The comments by the Supreme Court certainly accord with our
experience: anyone who has debated "good faith / bad
faith" with opposing counsel or the court will know that the
law was murky in the way that it was perceived and applied.
The court steers away from the good faith concept by imposing a
new standard of performance: a party to a contract has "a duty
to act honestly in the performance of contractual
obligations." The court will inquire whether a party has acted
with "a minimal standard of honesty" in performing the
contract, as elaborated by the following passage [para 86],
"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
The court makes it clear that this is a new duty [para
72-73], and that the duty applies to all contracts.
What Does This Mean?
The court describes this decision as an "incremental
step," and focuses on the basic proposition that a party
should not "lie to" or mislead another in performing a
contract (since this was the factual basis of the case before it).
It is also clear from the decision that the court is not creating
obligations that are akin to fiduciary obligations, or new
It is our view that this decision is likely to have far-reaching
consequences in the way that trial courts deal with contract
Until these consequences are known, caution is advisable. Any
party to a contract must take care to consider its actions in light
of this new duty – particularly if it is faced with a
"discretionary" decision, such as the decision to extend
a contract into a renewal term or to terminate in the event of a
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