Supreme Court Decision Sets New Duty Of Good Faith And Honesty

A recent Supreme Court decision which was released on November 13, 2014 (Bhasin v. Hrynew 2014 SCC 71) set a new duty for parties to a contract to perform their obligations in good faith and in an honest manner. Prior to the recent Supreme Court Decision businesses in Canada did not have a legal duty

to act in good faith with companies and with people with whom they had contacted. The reason that the courts had not previously implemented a duty of good faith was because they were reluctant to get in the way of business with rules that may impede commerce.

In the past, contracts required specific language to ensure that the parties acted and communicated honestly. Bhasin v. Hrynew was the first time the courts, subject to certain exceptions, recognized a “duty of honest performance, which requires the parties to be honest with each other in relation to the performance of their contractual obligation.”

The question the Supreme Court posed was “Does Canadian common law impose a duty on parties to perform their contractual obligations honestly?”, to which they ruled in the affirmative. Supreme Court Justice Thomas Cromwell wrote in the decision that “It is a simple requirement not to lie or mislead the party about one’s contractual performance”. The new doctrine was set out as follows:

a.) The first step is to acknowledge that good faith contractual performance is a general organizing principle of the common law of contract which underpins and informs the various rules in which the common law, in various situations and types of relationships, recognizes obligations of good faith contractual performance; and

b.) The second step is to recognize, as a further manifestation of this organizing principle of good faith, that there is a common law duty which applies to all contracts to act honestly in the performance of contractual obligations.

With this ruling the Supreme Court has made it easier to ensure that businesses are held accountable when they have acted in bad faith in commercial relationships. If you have any questions regarding the foregoing please do not hesitate to contact us.