Bhasin v. Hrynew
The recent Supreme Court of Canada decision in Bhasin v. Hrynew clarifies Canadian common law with respect to the doctrine of good faith in contractual relationships. The court held that good faith is a general organizing principle of the law of contracts and gives rise to a duty to act honestly in the performance of contractual obligations and in the exercise of contractual rights. How will this decision affect the day-to-day performance of construction contracts throughout common law provinces?
Justice Cromwell wrote the unanimous decision and explained that the duty to perform honestly accords with the reasonable expectations of commercial parties. In other words, the moral obligation to perform contractual obligations honestly has always existed, but it is now recognized as an enforceable duty in Canadian common law jurisdictions. The failure to act honestly in the performance of contractual obligations or in the exercise of contractual rights now amounts to a breach of contract. This duty will most likely take an increasing part in the litigation and the resolution of contractual disputes. Until the Supreme Court released the Bhasin decision, when a party suspected dishonest conduct on the part of their contracting party, they could allege fraud, misrepresentation, or malice but ran the risk of very serious adverse cost consequences if they were unable to prove the stand-alone causes of action at trial. In the future, we can expect a number of court decisions applying the "new" duty to a growing range of fact situations and identifying specific types of behaviours from which bad faith and failure to perform honestly can be inferred. This article briefly reviews the principle of good faith in Quebec, its application, and resulting duties in recent Quebec Court of Appeal decisions involving construction disputes. This review may provide a few clues on possible developments resulting from Bhasin and may also raise a few cautionary flags for the construction industry. The obligation to act in good faith was expressly codified in Quebec for the first time in articles 6, 7, and 1375 of the Civil Code of Quebec, which read as follows:
6. Every person is bound to exercise his civil rights in good faith.
7. 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.
OBLIGATIONS IN GENERAL
1375. The parties shall conduct themselves in good faith both at the time the obligation arises and at the time it is performed or extinguished.
Justice LeBel has identified a fundamental difference in contract law between Quebec and common law provinces in a conference he gave in 2011 at McGill University. In Quebec, contract law does not just flow from the pure meeting of the minds and contractual freedom as it does at common law. Instead, it is founded on the principle of contractual justice, because a free and equitable society requires a legal system that does not condone a "law of the strongest" but instead supports the principle that no one should benefit from their own wrongdoing. On this point, Justice LeBel quoted an article by late former Justice Gonthier:
The current version of the Civil Code of Quebec was enacted in 1991 and came into force in 1994, but starting in the late 1970s, the Civil Code Revision Office and the courts were already considering the idea of an overarching principle of good faith in Quebec. In 1990, the Supreme Court of Canada rendered a decision of critical importance, Houle c. Canadian National Bank, which recognized the doctrine of abuse of contractual rights and held that proof of malice is not necessary to establish abuse of rights. Instead, the parties' conduct is measured against the standard of the prudent and reasonable individual. The Supreme Court took the next incremental step in the application of good faith in contracts in Quebec, with the Bank of Montréal v. Bail ltée decision in 1992, when it held that a duty to inform arises from the obligation of good faith in the performance of contracts. This duty includes both the duty to inform and the duty not to give false information. The court held that there are three unique factors to construction contracts with high risks and high stakes, which affect the implied duty to inform:
- the allocation of risks (The party assuming the risk (e.g., during tenders) must inform itself, but the other party must not mislead it by its action or inaction.)
- the relative expertise of the parties (The party who designed the plans and specifications (or obtained them from their own designer) is more informed and has more expertise; its obligation to inform increases accordingly.)
- continuous disclosure of information (The continuing contract formation during the lengthy performance of most construction contracts, with often numerous changes and extras, requires continuous disclosure of information to ensure continued meeting of the minds.)
Twenty years later, the implied obligations imposed on contracting parties in Quebec go as far as a positive obligation to cooperate. In the last two years, the Quebec Court of Appeal rendered three important decisions for the construction industry. In all three cases, Birdair inc. c. Danny's Construction Company Inc., Hydro-Québec c. Construction Kiewit Cie., and Dawco Electric inc. c. Hydro-Québec, the dispute arose from a familiar succession of events: the plaintiff contractor or subcontractor had to perform substantial changes in the contract or subcontract for additional work or unforeseen work and as a result incurred escalating costs, delays, and damages for which it claimed against the owner or general contractor. In a recent presentation at the 25th Construction Superconference in Montreal, Quebec, counsel John Murphy concluded from his review of these decisions that the obligation to cooperate includes, among others, the following:
- acknowledgment of the facts specific to the project (delays and changes)
- the diligent exchange of information before and throughout the project
- cooperation between the parties before the start of the project or the start of work on any change in scope the protection of the parties' reasonable expectations
- the intensification of the obligation relative to the project size (in scope, time and price) and to any inequalities between the parties.
In Bhasin, the court clearly set the general duty to perform honestly in common law provinces apart from the duty to cooperate in Quebec:
This means simply that parties must not lie or otherwise knowingly mislead each other about matters directly linked to the performance of the contract. This does not impose a duty of loyalty or of disclosure or require a party to forego advantages flowing from the contract. I am at this point concerned only with a new duty of honest performance and, as I see it, this should not be thought of as an implied term, but a general doctrine of contract law that imposes as a contractual duty a minimum standard of honest contractual performance.
This distinction between a positive "duty of disclosure" and the duty "not to knowingly mislead" may not remain as clear, depending on the fact situations brought before the courts in the future. As the Supreme Court noted in Houle, both withholding relevant information and providing false or misleading information generally represent two sides of the same coin.
The distinction between a duty to act honestly and the Quebec duty of loyalty may be a difference only in semantics. For example, in Kiewit, the contractor relied on the owner's representations regarding additional compensation for changes in the scope of work. Kiewit relied on these representations and continued to perform the additional work. The court held that Hydro-Québec could not, in good faith, rely on the four corners of the contract to avoid paying Kiewit, as doing so would represent a breach of its duty of loyalty.
Let us consider a similar situation in Ontario: unexpected conditions surface in the course of the project, an error in the initial design causes substantial changes in the scope of work, or the project is delayed for reasons outside of the control of the plaintiff contractor. The contractor can prove that the owner acknowledged that it would satisfy a claim for additional compensation but then refused to pay (disputing quantum or hourly rates, for example). A court would not find that the owner breached its duty of loyalty, because there is no such duty in Ontario. The court's reasoning, however, will likely be that there was a meeting of the minds between owner and contractor at the time, because the owner's only alternative was to watch the project come to a grinding halt, that the owner misled the contractor so the contractor would complete and finance the work. The court would then probably conclude that the contractor is entitled to just compensation and that the owner cannot benefit from its own wrongdoing.
Justice Cromwell carefully acknowledged that good faith contractual performance is a general organizing principle of the common law of contracts and merely imposes a new duty to perform honestly. He also repeatedly qualified this change as an "incremental change", suggesting that further applications of the principle of good faith may come in time and must be incremental. The evolution of the obligation of good faith and resulting duties in Quebec was also an incremental one, from the 1991 enactment of the Civil Code of Quebec until now. It would be prudent for owners, contractors, and subcontractors (or their lawyers) to consider some of the features of the duty to cooperate that John Murphy identified and start adjusting their contractual practices. For example, once an owner acknowledges legitimate delays and scope changes, that owner should make regular payments for those changes and delay costs rather than force the contractor to finance them in the expectation that "there may be back-charges" for deficiencies, contractor delays, or billing disputes. A practical and conservative approach would dictate that any act or omission that has the effect of giving party A to the contract an unfair advantage over party B and/or preventing party B from meeting its reasonable contractual expectations will be closely examined against the new duty to act honestly.
Supreme Court of Canada
McLachlin C.J.C., LeBel, Abella, Rothstein,
Karakatsanis, Wagner JJ.
November 13, 2014
Originally published in Construction Law Letter Volume 31, No. 4
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.