Last week, in its landmark decision in Bhasin v Hrynew, the Supreme Court of Canada (the Court) faced the issue of whether Canadian common law imposes a duty on parties to perform their contractual obligations honestly. In that case, the Court clearly established: (1) a general obligation of good faith in the performance of contracts; and (2) a new duty of “honest performance”, which applies to all contracts and requires parties to act honestly with one another in relation to the performance of their contractual obligations.

The case considered a contractual dispute between an Alberta financial company, Canadian American Financial Corp. (now known as Heritage Education Funds) (CAFC), a provider of education savings plan investments, and Mr. Bhasin, one of CAFC’s retailers. Mr. Bhasin alleged that CAFC had “acted dishonestly,” “misled” and withheld information about its reasons for terminating a renewable contract with Mr. Bhasin in 2001. While CAFC followed the correct procedure for terminating the contract, its alleged dishonesty amounted to a loss of Mr. Bhasin’s business, which he would have been able to retain to a greater extent had CAFC performed the contract honestly.

The absence of a specific clause in the contract between the parties requiring honest performance meant that a specific issue in this case was whether a general duty of honest performance existed at common law. Having found such a duty, the Court determined that Mr. Bhasin was able to recover his losses.

The Court’s decision in Bhasin v. Hrynew provides needed clarity and certainty in contractual expectations and contracts that fail to clearly speak to a duty of good faith in performance. It also resolves issues with inconsistent language in contracts that do require a duty of good faith.

However, the decision leaves much to consider in terms of the contexts in which the duty of honesty will apply and what its minimum requirements are. The Court did point out that it was a simple duty “not to lie or mislead each other about matters directly linked to the performance of a contract.” It went on to distinguish the duty of honest performance from a duty of loyalty or disclosure, such as a duty to disclose a material fact in an insurance contract. To be clear, the duty of honest performance is focused on active dishonesty and deceit in the performance of contractual obligations. In this way, the Court likened it to the common law’s recognition of fraud and estoppel, except that its application is not dependent on whether a claimant relied on the dishonest statement or not. Again, while the Court was of the opinion that the duty simply crystallizes a simple principle that most contractual parties are presumed to intend when forming a contract, among other things, it will clearly require parties to be more thoughtful in how they communicate with other parties to a contract.