In a precedent-setting decision released on November 13, 2014, the Supreme Court of Canada recognized a new common law duty: 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” (para. 73). 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” (para. 63).

The Court’s view is that the principle of good faith contractual performance is grounded in the reasonable expectations of commercial parties, whom the Court  finds “expect a basic level of honesty and good faith in contractual dealings”, despite remaining at arm’s length. The Court was careful to note that this principle must be applied in a manner that is consistent with the common law of contracts, including the freedom of parties to act in their own self-interest.

As an “organizing principle”, good faith contractual performance is not a free-standing legal rule, but rather a standard that will inform more specific legal doctrines – such as, for example, the new duty of honest performance.

The new duty of honest performance applies to all contracts. While parties to a contract cannot contract out of “honest performance”, the Court allows 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”.

What does this mean for you?

Bhasin v. Hrynew will have far-reaching implications for parties to Canadian contracts. Parties will need to consider whether they are discharging the new duty of “honest performance” when performing a contract. If  a given course of action may be construed as actively dishonest or misleading, businesses should avoid pursuing it unless prepared to accept the risk of litigation. We expect that the decision will lead to new litigation alleging breach of the duty of “honest performance”.

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), Bhasin 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. It may be that a duty of honesty in contractual negotiations would be imposed in circumstances where parties are bound by an existing agreement. It is important to reiterate that the new duty of honest performance does not impose a positive duty of disclosure, which presumably would include parties’ negotiating positions. The decision is clear however that “active dishonesty” would not be permitted  if the duty of honesty were to be imposed in the context of contractual  negotiations.