Businesses should be aware of the Supreme Court of Canada’s ground-breaking decision in Bhasin v. Hrynew, 2014 SCC 71, where two steps were taken to fundamentally change contract law in Canada. First, the Supreme Court recognized that the principle of good faith underpins contractual performance. Second, and of greater practical consequence, the Supreme Court imposed a duty on parties to perform their contractual obligations honestly.

The facts in Bhasin illustrate the significance of the change. Harish Bhasin sold investment products for Can-Am under a dealership agreement that automatically renewed unless either party gave notice. Larry Hrynew, another Can-Am dealer, was Bhasin’s competitor, and with Can-Am’s support, wanted to take over Bhasin’s business. At the same time, Can-Am was required by its regulator to appoint an individual to audit its dealers’ businesses. Can-Am appointed Hrynew. Bhasin objected to his competitor auditing his business. Can-Am misled Bhasin by telling him that Hrynew had to keep Bhasin’s business information confidential and that Can-Am had tried to appoint someone else to perform the audits. Bhasin continued to object and Can-Am terminated his agreement.

Can-Am’s termination of Bhasin’s agreement was in accordance with the express terms of the agreement but the Supreme Court concluded that Can-Am had been dishonest with Bhasin and had exercised the non-renewal clause for an ulterior motive. Can-Am therefore breached its duty to perform the agreement honestly.

The pursuit of self-interest typifies commercial dealings but a contracting party must now have “appropriate regard” for the interests of its contracting partner. What “appropriate regard” means in a particular context will vary. The shift in focus from the express terms of an agreement to its spirit or a party’s expectations produces uncertainty in contractual interpretation. With the result that litigation over good faith and the duty of honest performance in commercial agreements has increased and will continue to increase. The bottom line for businesses is that they should be aware that their obligations to a contracting party now go beyond the express terms of a contract and their conduct in commercial dealings can more easily be called into question.