Supreme Court Ruling Establishes a Duty of Honesty on Parties to a Contract

Published November 14th, 2014

Bhasin v Hrynew 2014 SCC 71

In contractual relationships, a duty of good faith has typically been restricted to certain types of relationships, such as those engaged by insurance contracts, employment contracts and franchise agreements or to certain particular rules and doctrines, such as unconscionability. The law in this area developed in a piecemeal fashion and was unsettled and unclear.

In Bhasin v Hrynew 2014 SCC 71, the Supreme Court of Canada expressly recognized a duty of honest performance in contractual relationships based on an organizing principle of good faith.

The Court held that the organizing principle of good faith “exemplifies the notion that, in carrying out his or her own performance of the contract, a contracting party should have appropriate regard to the legitimate contractual interests of the contracting partner”. According to the Court, this organizing principle is manifested in the existing types of situations in which good faith has been recognized, such as employment contracts. However, the Court explicitly recognizes that this list of relationships is not closed. Where the law fails to achieve a result in keeping with the organizing principle of good faith, it should be developed incrementally “in a way that is consistent with the structure of the common law of contract and gives due weight to the importance of private ordering and certainty in commercial affairs”.

A duty of honest performance was recognized as one such incremental development. According to the Court, “This means simply that parties must not lie or otherwise knowingly mislead each other about matters directly linked to the performance of the contract”.

The Court provided guidance on how the duty of honest performance would function in practice. For instance, the duty of honest performance does not include a duty of full disclosure, similar to that of an insurance contract. Nor does it require a party to subordinate its interests to those of the other party, as can be the case in a fiduciary relationship. Further, the principle of good faith must be applied in a manner that recognizes the common law’s promotion of freedom of contract, which allows a party to cause loss to another in pursuit of economic self-interest, sometimes intentionally. The Court cautioned that the development of this principle “must be clear not to veer into a form of ad hoc judicial moralism or ‘palm tree justice”.

The Court specified that the duty of honest performance is not an implied term, but a general doctrine which operates irrespective of the intentions of the parties and is analogous to equitable doctrines which impose limits on the freedom of contract (such as unconscionability). Because the duty of honest performance is not an implied term, an entire agreement clause is not an impediment to the duty in all cases. Nevertheless, the Court recognized that parties may, through express terms, “relax the requirements of the doctrine so long as they respect its minimum core requirements”.

A body of case law will be needed before it can be assessed whether this ruling results in further incremental development of the duty or leads to ad hoc moralism.

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