The decision of the Supreme Court of Canada in Bhasin  v. Hrynew illustrates a paradox. In saying that there is  now a general organizing principle by which or under  which parties to a contract must perform in good faith,  the way in which the bulk of contracts are performed will  not change. Almost every contracting party performs its  contractual obligations honestly and decently. On the  other hand, the few who lie or seek to deceive the other  party to a contract may now be held to account.

Even with the small number of people who do not  perform their contracts honestly, not much may actually  have changed. What the Supreme Court has done is  less to change the law than it is to gather together  several different constraints on bad behaviour and bring  them with one general organizing principle.

From the point of view of the development of the  Canadian law of contracts, the importance of Bhasin  v. Hrynew lies in the way in which Cromwell J., giving  the reasons of the unanimous court, both justifies and  explains what he has done: the reasons are well-crafted  and careful to deal with the obvious arguments against  and consequences of the creation or imposition of a  duty of good faith performance.

One consistent objection over the years has been  that the imposition of an obligation of good faith  performance would do two bad things. One is that it  would make the law uncertain. Cromwell J. refers to this  argument at para. 39 and deals with it by observing that  the current law, i.e., the law absent a duty of good faith  performance, is actually uncertain because (para. 41) it  lacks coherence and fails to build on the experience of  both Quebec and the United States. In Quebec, under  the Civil Code, Arts. 6, 7, & 1375, and in the United  States under the Uniform Commercial Code (UCC), §§1- 304, 1-305 and §1-201(b)(202), and the Restatement,  §205, obligations of good faith performance have been  imposed for years without anyone complaining that  contracts were somehow made uncertain.

The second objection is that the imposition of such an  obligation would be something external to the contract  and to the obligations the parties freely assumed; it  would be something imposed by a court. Cromwell J.  dismisses this objection and holds, para. 45, that such  an obligation “inheres in the parties’ relation.”

This last point does more than identify where the  obligation comes from; it deals with the very dangerous  argument that a standard “integration” or “entire  agreement” clause can exclude the duty of good faith  or, perhaps, evidence of one party’s bad faith. If the  obligation of good faith performance inheres in or  simply arises more or less automatically out of the  simple fact that the parties have made or are in a  contractual relation, then it is not something external  that can be excluded by the terms of the usual clauses  mentioned. The Alberta Court of Appeal when it dealt  with the case seemed to suggest, 2013 ABCA 98,  paras. 30 and 32, that both the evidence and the  obligation were excluded by the rules it postulated for  governing the parties’ relation.

Cromwell J. deals with the obvious question: can  parties, by the terms of their agreement, exclude any  obligation to perform in good faith? He said: (para. 75)

… Because the duty of honesty in  contractual performance is a general  doctrine of contract law that applies to all  contracts, like unconscionability, the parties  are not free to exclude it.…

He does, however, and relying on the UCC, suggest  that the parties may modify the “scope of honest  performance.” He said: (para. 77)

… I would not rule out any role for the  agreement of the parties in influencing the  scope of honest performance in a particular  context. The precise content of honest  performance will vary with context and the  parties should be free in some contexts  to relax the requirements of the doctrine  so long as they respect its minimum core  requirements. The approach I outline here  is similar in principle to that in §1-302(b) of  the UCC (2012):

The obligations of good faith,  diligence, reasonableness and care …  may not be disclaimed by agreement.  The parties, by agreement, may  determine the standards by which the  performance of those obligations is to  be measured if those standards are  not manifestly unreasonable.

The importance of Bhasin v. Hrynew lies in the fact  that it is characterized as an “organizing principle.”  The development of the Anglo-Canadian common law  of contracts has had too few of these principles. The  compensation principle as a basis for awarding damages  for breach of contract has been accepted for many  years, but for a long time there was hardly any other  organizing or general principle. The “bargain principle”  as a basis for identifying those contracts that would be  enforced was a largely useless principle because it was  subject to so many exceptions — promissory estoppel  being a large and obvious one — and to the frequent  enforcement of promises by courts determined to do  so, i.e., by looking hard for and “finding” consideration.  There is no principle behind the rules of offer and acceptance, mistake or frustration. At best the courts  struggled (and usually succeeded) in doing what they  saw as proper and necessary to do.

There was, however, one very important organizing  principle that Canadian courts had adopted, one that  comprehends the one developed by Cromwell J. This  principle sees the goal of the law of contracts — and  particularly that of the process of interpretation — as  being to protect the reasonable expectations of the  parties. In many cases in the Supreme Court (see, e.g.,  BCE Inc. v. 1976 Debentureholders, 2008 SCC 69, at  para. 62), this goal, this principle, had been accepted  as governing the courts’ approach to interpretation.

To that organizing principle can now be added another  instance of it: the organizing principle from Bhasin v.  Hrynew. Cromwell J. summarized the principle: (para.  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 identification of this principle and the careful way  in which Cromwell J. justifies and describes its origin,  scope and relation to the general law of contracts has  set the law in an exciting direction. It will now no longer  be necessary to search for some particular instance  where an obligation very like an obligation to perform  in good faith existed to make the protection of the  parties’ reasonable expectations a reality in Canadian  law.