In the recent decision of Bhasin v Hrynew, 2014 SCC 71, the Supreme Court of Canada recognized good faith as a general organizing principle in contractual performance and held that parties to a contract owe each other a duty to act honestly when performing their obligations or exercising their rights under contract.
Although Canadian common law has for many years imposed a duty to act honestly and in good faith in a piecemeal fashion and in select areas of law, this is the first time that the Supreme Court of Canada has imposed such a general duty for all contracts.
The court treated the organizing principle of good faith and the duty of honest performance as incremental steps that were made necessary to make the common law more coherent and more just.
The organizing principle of good faith exemplifies the notion that when a party is performing its obligations or exercising its rights under a contract that contracting party should have "appropriate regard" to the legitimate contractual interests of the contracting partner.
Indeed, the "appropriate regard" that will have to be shown for another party’s interests will vary depending on the contractual relationship, but whatever those interests are, they need not dominate.
The Supreme Court of Canada did not signal an end to one’s ability to act in their own self-interest, and the court did not require a party to disavow advantages that they would otherwise be entitled to under a contract.
In fact, the court recognized that, in commerce, a party may sometimes cause loss to another in the legitimate pursuit of economic self-interest and doing so is not necessarily contrary to good faith.
The duty of honest performance, which is derived from and is said to be a manifestation of the organizing principle of good faith, requires that parties act honestly in the performance of contractual obligations and rights.
Much like the organizing principle of good faith, the Supreme Court of Canada noted that the exact content of the obligation to honestly perform will vary with context.
That said, the Supreme Court of Canada noted that the imposition of this duty did not mean that it was imposing a duty of loyalty or disclosure.
Instead, it said that it was imposing an obligation on parties to not lie or otherwise knowingly mislead each other about matters directly linked to the performance of the contract. Interestingly, the Supreme Court of Canada also indicated that the parties may, in some contexts, be able to relax the requirements of the doctrine, so long as the (undefined) "core requirements" are respected.
It may be that contracting parties will be able to set criteria by which performance can be measured and to define the impact of any breach of the duty.
The decision in Bhasin v Hrynew was an attempt by the Supreme Court of Canada to provide coherency in the law; however, the case leaves a number of questions unanswered.
For example, it is not clear how subsequent courts will evaluate whether "appropriate regard" has been given to another contracting party’s "legitimate interests" or how the courts will evaluate whether a contracting party’s interest is or is not legitimate. Further, it is not clear how far parties will be able to relax or define the requirements of the doctrine of good faith, particularly because it is not entirely clear what the "core requirements" of the doctrine are. When disputes arise, it is expected that the duty of honest performance will be included in many claims and our courts will have to provide further guidance and clarity.
This article is provided for general information only and may not be relied upon as legal advice.
Matthew G. Swanson is a partner at Borden Ladner Gervais LLP (BLG) and practices in the area of commercial litigation with a particular emphasis on contract and construction disputes. Bill M. Woodhead is an associate lawyer at BLG and practices as a solicitor in the areas of corporate commercial law and construction law. Send comments or questions to editor@journalofcommerce.com.
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