New Duty of Honest Performance

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 employee;
  • an insurer's duty to deal with its insured's claim fairly; and
  • a company's duty to consider bids in accordance with its tendering processes.

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 dealings.

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.

If you have questions about how this new duty to act honestly may change your existing contractual relations, or influence the terms of future agreements, contact Graham McLennan, or any other member of the McLennan Ross Commercial Litigation Practice Group. In the meantime, careful, honest communication is the best way to minimize potential liability.