Conduct Matters in Contracts: The Duty to be Honest (1/4)
Courts in common law jurisdictions in Canada have historically been reluctant to impose certain minimum standards of conduct on commercial contracting parties out of a concern that doing so will “[inject] uncertainty and risk of arbitrary outcomes into the world of commercial agreements whose objective is the pursuit of predictability and certainty”.[i]
While there’s a general recognition that parties must act reasonably in the exercise their contractual rights, determining whether there was a general obligation to act in good faith has not always been clear. Only recently has the Supreme Court of Canada issued a decision that seeks to provide greater coherence and clarity on the duty of good faith in commercial contracts.
In Bhasin v. Hrynew[ii], the Supreme Court of Canada recognized an “organizing principle of good faith in contract law”, foreclosing arguments that parties to a commercial contract need not be concerned about how well or how poorly they treat counterparties when exercising their contractual rights. [iii]
This series of posts will look at minimum standards of conduct expected of contracting parties in Canadian common law jurisdictions and the impact Bhasin has had on this area of the law.
Duty to be Honest
In Bhasin, the SCC established a new common law duty of honesty in contractual performance. Justice Cromwell, who wrote the decision for the court, said:
“…This [new duty] means simply that 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…”. [iv]
As predicted by Geoffrey Hall in his book, Canadian Contractual Interpretation Law[v], since the Bhasin decision, litigants have often raised the organizing principle and the duty of honesty. Since Bhasin was released, over 50 reported decisions have considered allegations that defendants breached the duty of honesty but there are no cases that involve a thorough consideration of the duty of honesty in the context of a commercial contracting relationship.
In other contexts, courts have said the following about dishonest conduct:
- Dishonest conduct refers to conduct that ordinary decent people would feel is discreditable because it is at variance with straightforward or honourable dealings.[vi]
- In deciding whether the conduct is dishonest conduct, you must apply an objective test.[vii]
- Dishonesty includes acting with a clear intent to defraud.[viii]
- Dishonesty requires an intention to be dishonest.[ix]
- Dishonesty requires proof that the dishonest party used deceit, falsehood and that, on a balance of probabilities, there was an intention to defraud the other party.[x]
Honest conduct is a minimum expectation of contracting parties. The take away from Bhasin is not to lie or mislead your contracting partner about matters linked to the performance of the contract.
In considering this duty of honesty, parties should avoid acts they know or ought to know are contrary to straightforward and honourable dealings particularly if they are likely to mislead the other party. This includes being deceitful and creating falsehoods and could go so far as to include knowingly omitting key information in conversations with the intent to mislead; failing to answer pertinent questions asked by the other party; or avoiding a difficult conversation that the dishonest party knows, or ought to know, will result in the other party making mistaken assumptions about contractual performance.
In my next post I’ll look at the duty of good faith in commercial contracts both before and after Bhasin.
[i] Addison Chevrolet Buick GMC Limited et al. v General Motors of Canada Limited et al., 2015 ONSC 3404 (CanLII) at para.115; decision has been reversed on appeal but not on this point.
[ii] Bhasin v. Hrynew, 2014 SCC 71 (CanLII).
[iii] G.Hall in his text “Canadian Contractual Interpretation Law”, Third Edition at page 37 comments: “The next few years will likely involve significant developments in this area… Provincial appellate courts – which heretofore have been hostile to the concept of a duty of good faith in contractual performance – have to work out how far the principle extends.”
[iv] Bhasin, supra, at para. 73.
[v] Third Edition, at p.37.
[vi] The Real Canadian Superstore v. United Food and Commercial Workers Local 1400, 1998 CanLII (SKQB) at para 12
[vii] The Real Canadian Superstore, supra
[viii] The Real Canadian Superstore, supra, para 16
[ix] The Real Canadian Superstore, supra, para 18 citing Fisher v. Guardian Insurance Court of Canada (1995) 28 C.C.L.I. (2d) (BCCA)
[x] The Real Canadian Superstore supra, para.21