Supreme Court of Canada Expands Duty of Good Faith

By Andrew Crabtree

Parties to an agreement are now required to “honestly and reasonably perform their contractual obligations”.

The decision of the Supreme Court of Canada in Bhasin v. Hrynew, released on Thursday, recognizes a new duty of good faith which will impact all commercial agreements. While the courts have previously recognized duties of good faith in certain types of relationships, including employment, franchise and certain other relationships where there was an imbalance of power, this decision expands the concept of good faith to all commercial relationships, the impacts of which are discussed below.

Facts

The plaintiff sold registered education savings plans pursuant to a contract with the respondent, HEF Inc. The respondent, Hrynew, also sold such plans, was a competitor of the plaintiff, and had made a number of bids for the plaintiff’s business, all of which were rejected.

Hrynew had a number of discussions with HEF Inc. in an attempt to force a merger with the plaintiff. HEF Inc. ultimately appointed Hrynew to act as a provincial trading, officer providing him access to the plaintiff’s confidential business records. The plaintiff objected to this arrangement, refusing to hand over his records which included client lists.

During this time, HEF Inc. was considering restructuring its business which included having the plaintiff working for Hrynew. On a number of occasions HEF Inc. misled the plaintiff about its intentions and Hrynew’s new role and/or failed to disclose material information. After the plaintiff refused to give Hrynew access to his records, HEF Inc. gave notice of non-renewal for his contract. Following this, the majority of the plaintiff’s sales agents were solicited to work for Hrynew’s agency.

Decision

A unanimous court concluded that it was time to make the law regarding good faith “less unsettled and piecemeal, more coherent and more just”. In doing so, the Court acknowledged that good faith contractual performance is a “general organizing principle of the common law of contract” which underlies and informs various rules in the common law, and that parties to a contract would now be subject to a common law duty to “act honestly in the performance of contractual obligations”.

The implications flowing from this principle of good faith may differ depending on the type of relationship at issue. For example, the Court noted that different implications could result from a long-term contract of mutual cooperation rather than a transactional exchange. However, the core requirements restrict parties from lying or knowingly misleading each other about matters directly linked to the performance of the contract. This does not impose duties akin to a fiduciary duty but simply requires that parties be honest with one another in performing their contractual obligations.

The Court concluded that HEF Inc. had acted dishonestly during the performance of the contract leading up to its decision not to renew the contract. HEF Inc. was liable for damages on the basis of what the plaintiff’s economic position would have been had it fulfilled its duty.

Implications

The Bhasin decision will impact commercial contracts in a number of ways. First, this duty is now a general doctrine of contract law and operates irrespective of the parties’ intentions. Because of this, the Court concluded that it is applicable to all contracts and cannot be excluded from a contract.

The Court did note that parties could potentially expressly agree to limit or shape the scope of honest performance so long as the core requirements were maintained. Therefore, a general entire agreement clause would not be sufficient to evidence an intention to depart from the basic tenets of honest performance.

A party will need to consider how this duty could impact their intended performance of their contractual obligations and to determine what modifications, if any, to this duty should be negotiated with the other party. Any modifications will need to be expressly reflected in the agreement but must include the core requirements of the duty: honest and reasonable performance of contractual obligations.

Second, parties are now expressly required to perform their contractual obligations honestly and reasonably. While courts previously imposed such obligations through, for example, the imposition of implied terms, parties will now have another basis to sue for breach of contract. Parties will want to examine their intended method of performing their contractual obligations to ensure that they are being done reasonably and with appropriate regard for the other party’s interests.

* * *

For more information on this decision please contact any member of the Cooper Litigation team.

Bob Cooper – 778.383.7275
Sandra Foweraker – 604.639.3669
Andrew Crabtree – 778.383.3377
Joelle Walker – 778.383.7274