Wednesday, November 26, 2014

New duty of good faith in the performance of contracts.

In a decision released earlier this month, the Supreme Court of Canada has imposed a new duty of good faith in the performance of contractual obligations.

The decision is Bhasin v. Hrynew, 2014 SCC 71, and the link to the full decision is here:

The court summarized the new requirement as follows:

     "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.

     Under this new general duty of honesty in contractual performance, parties
     must not lie or otherwise knowingly mislead each other about matters directly
     linked to the performance of the contract.  This does not impose a duty of
     loyalty or of disclosure or require a party to forego advantages flowing from
     the contract; it is a simple requirement not to lie or mislead the other party
     about one’s contractual performance.  Recognizing a duty of honest
     performance flowing directly from the common law organizing principle of good
     faith is a modest, incremental step."  [Emphasis added - AK.]

To put this into context, the usual rule in contract law used to be that the parties did not owe each other any duty of good faith when it comes to negotiating the terms of contracts (formation), nor in performing their obligations under the contract (performance).  That certainly didn't (and still doesn’t) mean that a contracting party was free to lie to, mislead, blackmail, or cheat the other contracting party, but equally a contracting party was entitled (and expected) to act in its own best interests first and foremost.  Thus, until this decision, generally there was no higher or elevated duty of good faith owed by contracting parties to each other with respect to either the formation or the performance of “regular” contracts.  (There are certain types of contracts which require utmost good faith by the parties, with respect to both formation and performance.  One example of a contract of utmost good faith is a life insurance contract.)

This recent Supreme Court of Canada decision now means that the parties to a “regular” contract owe each other a duty of honest performance.

This decision does not change the existing obligations owed by contracting parties to each other with respect to the formation of contracts.  There are plenty of legal rules which protect contracting parties in situations involving duress, undue influence, and misrepresentation, among other things.  But, as yet, there is no general duty of good faith owed by contracting parties to each other with respect to the formation of contracts.

In the world of contract law, this is a Big Deal.  This new rule gives the court another way to protect an innocent contract party who has been lied to or cheated by the other contracting party with respect to that other party's performance of the contract.


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