Exploring the impact on Canadian mergers and acquisitions of the Supreme Court of Canada’s recent recognition of a new common law duty of honest performance

There’s been a lot of buzz surrounding the Supreme Court of Canada’s recent precedent-setting judgement, Bhasin v. Hrynew, 2014 SCC 71, in which the Court recognized, for the first time, a new common law duty that applies to the performance of contracts throughout Canada. The new common law duty is a duty of honest performance, and is a manifestation of the general organizing principle of good faith. The implication is that parties must perform their contractual duties honestly and reasonably, and that they must have appropriate regard to the legitimate contractual interests of the other parties to the contract. For an overview of the Bhasin decision, click here.

Curious about the potential impact of the Bhasin case on M&A, I recently attended a presentation on the case given by Neil FinkelsteinGeoff Hall and Brandon Kain of McCarthy Tétrault’s Toronto litigation group. Here are my top 5 takeaways for those who are interested in the relevance of the case in the context of Canadian M&A:

  1. The decision does not apply in the context of negotiation, but rather only in the context of theperformance of contractual obligations.
  2. The application of the general organizing principle of good faith must be applied contextually and therefore likely has different implications in the context of a long-term contract than it would in the context of a transaction. However, even in transactional exchanges like an agreement for the purchase and sale of a business, the principle is expected to apply, and of course there are long-term contracts that may be relevant in the context of M&A, like transition services agreements.
  3. The duty of honest performance does not equate to a duty of fiduciary loyalty. Therefore the duty does not require a contracting party to put the interests of another contracting party ahead of its own interests.
  4. The duty of honest performance does not equate to a duty of disclosure. Of course, disclosure of certain information to another party in the context of an M&A deal both at the time of entering into an agreement for the purchase and sale of a business and on the closing of the transaction is central to any M&A transaction and is typically dealt with directly in the purchase agreement (for example in the reps and warranties), so will remain relevant.
  5. The court did not rule out the ability of contracting parties to influence the scope of honest performance in a particular context. Therefore contracting parties may, by agreement, continue to determine the standards by which the performance of their obligations are to be measured as long as they respect the minimum core requirements of honest performance and any modification of the duty of honest performance is dealt with in express terms. According to the Court, a generically worded “entire agreement” clause would not constitute an indication of the intention of the parties to depart from the basic tenets of honest performance. As noted by the Court, the duty of honest performance likely doesn’t do much in the way of interfering with freedom of contract since contracting parties rarely expect that their contracts permit dishonest performance of obligations.

Like any other decision of the Court, the application of the Bhasin case – including these top 5 takeaways – will vary depending on a variety of factors. This should be kept in mind when thinking about the implications of the Bhasin case in the context of your next M&A deal.