Supreme Court Creates Duty of Honest Performance

Caveat emptor (buyer beware) or ubberima fides (utmost good faith)? What is a contracting party to do?

The Supreme Court of Canada released a decision this week in Bhasin v. Hrynew which revamps the understanding of how representations made during contractual negotiations are adhered to. The unanimous Court created an “incremental step” in developing a duty of honest performance, which was described as follows:

[93] …

(1) There is a general organizing principle of good faith that underlies many facets of contract law.

(2) In general, the particular implications of the broad principle for particular cases are determined by resorting to the body of doctrine that has developed which gives effect to aspects of that principle in particular types of situations and relationships.

 (3) It is appropriate to recognize a new common law duty that applies to all contracts as a manifestation of the general organizing principle of good faith: a duty of honest performance, which requires the parties to be honest with each other in relation to the performance of their contractual obligations.

The facts giving rise to the ruling was an independent education savings plan dealer, whose contract was terminated by the other party without disclosing their business dealings with his competitor.

The Court found it necessary to create this new duty in order to address what described in the 1987 Law Commission of Ontario Report on amendment of the law of contract as,

[32] …an “unsettled and incoherent body of law” that has developed “piecemeal” and which is “difficult to analyze”…

The changes are intended to bring certainty and coherency to contract law in order to bring it into line with reasonable commercial expectations.

The Court was clear in distinguishing the duty of honesty from other duties found in contract law,

[86] The duty of honest performance that I propose should not be confused with a duty of disclosure or of fiduciary loyalty. A party to a contract has no general duty to subordinate his or her interest to that of the other party. However, contracting parties must be able to rely on a minimum standard of honesty from their contracting partner in relation to performing the contract as a reassurance that if the contract does not work out, they will have a fair opportunity to protect their interests.

The way this duty would operate is that the parties should not lie or otherwise knowingly mislead the other parties about contractual performance. This does not create a duty of disclosure, but only a requirement to remain honest in regards to matters which are directly linked to the performance of the contract. Rather than operating as an implied term of the contract, this would be a a minimum standard of contractual performance irrespective of the intention of the parties.

The duty of honest performance is connected to the principle of good faith in contract law. Although the standard of utmost good faith, used in insurance law, is not required, there is already a standard of good faith imported into contracts of many areas of law due to statutes, such as in franchise, employment, and labour law. The Court distinguished a failure to disclose a material fact from active dishonesty.

This new duty would not appear to put an end to the concept of economic breach in contract law. Good faith does not look at the content of the intentions of contracting parties,

[70] The principle of good faith must be applied in a manner that is consistent with the fundamental commitments of the common law of contract which generally places great weight on the freedom of contracting parties to pursue their individual self-interest. In commerce, a party may sometimes cause loss to another — even intentionally — in the legitimate pursuit of economic self-interest: A.I. Enterprises Ltd. v. Bram Enterprises Ltd., 2014 SCC 12, [2014] 1 S.C.R. 177, at para. 31. Doing so is not necessarily contrary to good faith and in some cases has actually been encouraged by the courts on the basis of economic efficiency: Bank of America Canada v. Mutual Trust Co., 2002 SCC 43, [2002] 2 S.C.R. 601, at para. 31. The development of the principle of good faith must be clear not to veer into a form of ad hoc judicial moralism or “palm treeˮ justice. In particular, the organizing principle of good faith should not be used as a pretext for scrutinizing the motives of contracting parties.

The Court indicated that the duty should be clear and easy to apply. An expectation that the other party to a contract will not act dishonestly about their performance is one which is reasonable and will not crate any risk to commercial certainty. Freedom of contract will still be upheld, and parties will still be able to maintain self-interests without actively misleading the other party.

Comments

  1. I take issue with the first and second paragraphs: this case is not about representations during negotiation and does not alter, I would suggest, the law of buyer beware. For now we don’t have reason to think this decision will have such an effect (and I note that the term does not appear in the judgment).

    The law of buyer beware already reflects the organizing principle of good faith. Buyer beware applies only to patent defects – defects which could be discovered on a reasonable inspection by a buyer. There is an obligation, on the other hand, on sellers to disclose latent defects that could not be discovered so easily. The reasoning is that a failure to disclose a patent defect is not dishonesty – the seller relies on the buyer’s inspection to her satisfaction. Failure to disclose a latent defect on the other hand is dishonesty through omission.

    Make what one will of the distinction, “good faith” is already at play as an organizing principle. The law relating to patent and latent defects would belong to “the body of doctrine that has developed which gives effect to aspects of that principle in particular types of situations and relationships”: para 93.

  2. John,
    I agree – the dichotomy characterized in the first paragraph is one which is teased out quite extensively in the decision, with the Court recognizing these principles already have deep roots.

    The description of this being an incremental step is one which is employed in the decision itself. The Court is quite clear, as I note here, that the practical significances of this duty for almost all commercial transactions will be negligible.

  3. The decision, for which I claim some credit (after only 30 years!), has nothing to do with the obligations that govern negotiations — and there are such obligations: consider, for example, the obligations to black-line changes to draft contracts and not to take advantage of someone’s mistake. It may now only be a short step to recognize what Bhasin v. Hrynew did for good faith in performance and do the same for an obligation to negotiate in good faith.

    I agree with Mr. Koziar that the decision won’t change much. It has always been the law that being a scumbag is a bad practice. All that the decision has done is to reinforce this view. It was, of course, never the law that scumbags could count on getting away with their scumbaggery; until Bhasin v. Hrynew it was just necessary to find a peg on which to hang an argument to get bad behaviour. An obvious example of such a rule, though never described (except by me) as an instance of good faith, is promissory estoppel and the effect of a waiver of a time of the essence clause: you can’t suck and blow — a transcendent principle of good faith!

    The importance of the decision — and it’s a really important decision — is that it recognizes as an important “organizing principle”, the obligation to perform in good faith. It has the same organizing power as the idea that the purpose of the law of contracts is the protection of the parties’ reasonable expectations. It brings together a number of separate instances and permits the development of the law in useful ways.

    It is also very important that Cromwell J. carefully distinguishes the principle he has identified as being separate from the principles applicable in, for example, fiduciary relations. Courts had previously confused obligations of good faith with fiduciary duties.

    The more the law of contracts is understood in terms of principles, particularly organizing principles, or of its goals, the more certainty is provided to the law and the better able solicitors are to give advice that can be relied on.