In Bhasin v Hrynew released in November 2014, the Supreme Court of Canada recognized a new duty for contracting parties: the “honest performance” of contractual obligations. Pursuant to this new duty, “parties must not lie or otherwise knowingly mislead each other about matters directly linked to the performance of a contract”. The Court does not see this as imposing a positive duty of disclosure: it distinguishes between “active dishonesty”, which is not permitted, and failure to disclose a material fact, which appears to be.
The Court also recognized for the first time in Canadian common law that there is a “general organizing principle” of good faith contractual performance. Pursuant to this principle, “parties generally must perform their contractual duties honestly and reasonably and not capriciously or arbitrarily”.
While parties to a contract cannot contract out of “honest performance”, the Court held that the content of the duty and standards for satisfying it may be defined in an agreement, as long as the parties respect the duty’s “minimum core requirements”.
While the decision was an attempt to provide some certainty and predictability in an area which has to date been inconsistent and unclear in Canada (outside of Québec), the decision leaves a number of questions open: How will the new duty of honest performance be measured? What are its “minimum core requirements”? Is it a free-standing cause of action? How will damages be assessed? Will other new duties be recognized under the newly-recognized organizing principle of good faith performance? Another open question is how the decision will be applied to pre-contractual dealings, such as negotiations.
With “honest performance” comes a new area of litigation and now businesses must actively consider whether they are discharging the new duty when performing under a contract. If a given course of action may be construed as actively dishonest, misleading, or not forthright, businesses should avoid pursuing such course of action unless they are prepared to accept the risks and consequences of litigation. As claims for breaches continue to grow in Canadian courts, all businesses should be aware of their duty of good faith in the performance of their contractual obligations.