Canada: Honesty Is The Best Policy

Last Updated: February 11 2019
Article by Laura M. Gill, Leanne Desbarats and Ashley M. White

In the 2014 Bhasin v Hrynew case, the Supreme Court of Canada clarified the law and recognized a legal principle that imposes general duties of good faith and honest performance on all parties to a contract.2 These duties exist in addition to any obligations set out in the express terms of an agreement and cannot be contracted out of. This article provides an overview of the basic principles of the duty of honest performance and sets out examples of how it can apply in the context of due diligence performed as part of a land deal.

THE DUTY OF GOOD FAITH

Lawyers often refer to "the duty of good faith" to describe the principles set out by the Supreme Court in Bhasin. However, in the Bhasin decision the Supreme Court actu- ally set out two separate concepts: a general organizing principle of good faith, which underlays specific situations where good faith duties were already recognized by the law, and a narrower duty of honest performance of contrac- tual obligations. The duty of honest performance is most relevant for the purposes of land deals and is discussed in this article.

THE DUTY OF HONEST PERFORMANCE

The following are the key elements of the duty of honest performance of contractual obligations:

  1. The duty of honest performance provides that parties to a contract have an obligation not to lie or know- ingly lie or mislead one another in the performance of their contractual obligations.3
  2. The duty of honest performance only applies where there is a valid and binding contract already in place.

    It has no application during the negotiating period prior to the contract being executed.4
  3. The duty of honest performance is not relevant to the interpretation of contractual terms. It only deals with performance.5
  4. The duty of good faith does not allow the court to rewrite the express terms of a contract or require parties to make decisions contrary to their own self-interest."6

THE DUTY OF HONEST PERFORMANCE IN THE CONTEXT OF LAND DEALS

As noted above, the duty of honest performance is only relevant after an agreement is executed and it does not apply to actions taken by the parties during negotiations. In a land deal, a claim for breach of the duty of honest performance often arises in relation to the satisfaction of any obligations under the agreement after the parties have signed the purchase and sale agreement but prior to closing. For example, there may be claims relating to due diligence after execution but prior to closing, the issuance of rights of

first refusal notices, and a party's obligation to obtain regu- latory approvals. This article focuses on claims that may arise during the diligence process. The following are examples outside of the oil and gas context that illustrate the types of claims that can arise on the basis of alleged breaches of the duty of honest performance in the context of purchase and sale agreements:

  • Rolin Resources Inc v CB Supplies Ltd, 2018 BCSC 2018: The plaintiff purchased a property pursuant to a shot-gun clause in an existing agreement between the plaintiff and the defendant. After the sale, the plaintiff discovered that there was significant environmental contamination on the property. The plaintiff brought a claim to recover the cleanup costs from the vendor, and argued that the vendor had breached the duty of good faith because the vendor was dishonest in concealing the contamination. The Court rejected this argument, noting that the plaintiff had not asked for any environmental representations as part of the deal and that there was no evidence that the defendant "lied" or "misled" the plaintiff.
  • Telsec Developments Ltd v Abstak Holdings Inc, 2017 ABQB 801: As part of a transaction for the purchase of land, the vendor was required to obtain a devel- opment permit. The plaintiff claimed that the defendant breached the duty of honest performance by failing to make sufficient efforts to obtain the permit. The Alberta Court of Queen's Bench held that the defendant misled the plaintiff about its efforts in obtaining the permit and in doing so breached the duty of honest performance.
  • Empire Communities Ltd v HMQ, 2015 ONSC 4355: The plaintiff purchased assets from the defendant. After closing, the plaintiff discovered that there was a lawsuit relating to the assets and sued on the basis that the defendant's failure to disclose the lawsuit to the plaintiff during the due diligence period constituted a breach of the duty of honest performance. The Ontario Superior Court rejected this argument, finding that the agree- ment itself did not require the defendant to disclose the information and that there was no evidence that the defendant was dishonest or fraudulent in concealing the information.
  • Macera v Abcon Media Canada Inc, 2017 CanLII 45939 (Ont Sup Ct J (Sm Cl Div): The plaintiff alleged that the defendant breached the duty of honest performance by concealing information about a lease associated with the transaction. The Court rejected the claim, finding that the plaintiff could have done additional due diligence to discover the information at issue and holding that there was no evidence of dishonesty on the part of the defendant in failing to disclose the information.

IMPLICATIONS

The above cases demonstrate that a successful claim for breach of the duty of honest performance requires proof of some sort of dishonesty or fraud on the part of the defendant. Parties are not required to proactively disclose information to one another, however, failure by a vendor to respond to inquiries from the purchaser during due diligence could form the basis for a claim. From the vendor's perspective, the key is ensuring that no false or misleading information is provided to the purchaser during the due diligence process. The best practice is to have a strict communications protocol in place to ensure that the company has control over information provided to the purchaser, and that the vendor provides the purchaser with all information required by the agreement. From the purchaser's perspective, the key is ensuring that appropriate questions are asked and docu- mented during due diligence to ensure that the purchaser is fully aware of all relevant information associated with the property, and that the purchaser has a basis to make a claim for any surprises discovered after the transaction closes. 

Footnotes

1. Laura Gill is a partner and Leanne Desbarats and Ashley White are associates in the Calgary office of Bennett Jones LLP.

2. Bhasin v Hrynew, 2014 SCC 71 [Bhasin].

3. Bhasin at para 70.

4. Styles v Alberta Investment Management Corporation, 2017 ABCA 1 [Styles] at para 50.

5. Styles at para 53.

6. Styles at para 64.

Originally published in The Negotiator Magazine (February 2019)

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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