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Commercial Contracts Include Implied Duty to Act in Good Faith says Canada’s Top Court

A seven justice panel of the Supreme Court of Canada released a unanimous decision that contract law implies a duty of good faith that requires parties to perform their contractual obligations honestly.  In so finding, the Court stated that “Finding that there is a duty to perform contracts honestly will make the law more certain, more just and more in tune with reasonable commercial expectations.”

In the case of Bhasin v. Hrynew, 2014 SCC 71, Bhasin was an enrolment director, a retail dealer for education savings plans marketed by a company called “Can-Am”.  Bhasin and Can-Am were party to a contract with a three year term that would renew automatically unless either party gave written notice to the contrary with at least six months’ notice.  Hrynew operated another enrolment director in competition with Can-Am.  In effect, the Court found that Hrynew pressured Can-Am to act in a dishonest manner with Bhasin in order to try to capture Bhasin’s market.  Can-Am hired Hrynew to act as a provincial trading officer (“PTO”) giving it access to Bhasin’s confidential business information.  Eventually, under pressure from Hrynew, Can-Am gave notice that it would terminate its contract with Bhasin, and Hrynew used its information to poach Bhasin’s employees and force Bhasin to seek less profitable work.

While this sort of conduct was not technically in breach of the contract between Can-Am and Bhasin, the Court implied a duty of good faith as applicable to that, and indeed all contracts.  The Court described the duty of good faith in the following terms:

 … 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.

The duty of good faith has been implied in employment law contexts for some time now, as employers are required to act in good faith when terminating employment contracts, in that they cannot be untruthful, misleading, or unduly insensitive when dismissing an employee.  This latest decision from Canada’s top court confirms that the duty extends to all commercial contracts, which will include independent contractors and sub-contractors, with whom there was no such implied duty since they are not “employees”.

Accordingly, businesses will be well advised to ensure they act in good faith with not only their own employees, but also those other parties with whom they contract for goods or services.  What duties may arise from this new good faith obligation will remain to be seen, and the counsel at CCPartners will be keeping an eye on developments to properly advise clients.