Conduct Matters in Contracts: Beyond the Words of the Contract (4/4)
In this series of posts, we’ve considered minimum standards of behaviour, including the duty of honesty, duty of good faith and duty to be reasonable, when exercising contractual rights.
The duty of honesty requires that contracting parties operate without lying to or misleading their counterpart. The duty of good faith is more nuanced, but put simply, dictates that a contracting party consider the other party’s interests when exercising a contractual right. The duty to be reasonable requires that contracting parties be able to appropriately justify their actions so they aren’t judged to be taking advantage of the other party in a capricious or arbitrary way.
The SCC’s decision in Bhasin shows that, even if the contract provides clear rights, actions outside of the contract will be considered by a court when interpreting the scope of that right; what may seem like a clear black and white contractual right might not be so clear.
What The Cases Teach Us About Minimum Standards of Conduct
The cases teach us that Canadian courts have little patience for parties who improperly exercise their contractual rights and discretions. Contracting parties that lie, mislead or bully their contracting counterparts or act with complete disregard for the impact their actions have on those they have contracted with could end up in court. This is especially so where there is a power imbalance and a long-term business relationship. This was emphasized by the SCC in its 2014 decision in Bhasin.
Engage in anything short of acceptable conduct and the predictability of the written words in your contract flies out the window, with trouble likely to follow. Bhasin will be used against you, your business reputation will suffer, and your staff may be distracted by the grueling process of litigation. Once in court, not only may the court find that you’ve breached an implied duty of honesty, good faith or reasonableness, you also run the risk of having a limitation of liability provision ignored by the court which opens up the possibility of significant damages awarded against you.[i]
All this because you weren’t decent toward the other contracting party.
The message is clear: To stay out of legal trouble, business parties should follow the proverbial Golden Rule and treat their contracting partners the way they would want to be treated.
[i] See Tercon Contractors Ltd. v. British Columbia 2010 SCC 4 (CanLII). Courts are generally hostile towards defendants who try to hide behind an exclusion clause to avoid the effect of fraudulent or grossly negligent conduct that causes injury to the plaintiffs. See Roy v. 1216393 Ontario Inc. 2011 BCCA 500 (CanLII) and Solway v. Davis Moving & Storage Inc. 2002 CanLII 21736 (ONCA).