The Duty of Honest Contractual Performance with Marco P. Falco

[Introduction]

The Supreme Court of Canada has made major changes to the law of contract, of which all lawyers in Ontario ought to be aware.  In the recent decision, Bhasin v. Hrynew, 2014 SCC 71, the Court recognized the principle of good faith governing all contracts, while introducing a new duty of honest contractual performance.  These changes can summarized by the Court in a few principles.

[PRINCIPLE # 1: Good Faith is a General Organizing Principle]

The Court in Bhasin has now held that “good faith” is in fact an “organizing principle”.  That is, the concept of good faith is not a free-standing rule, but a standard or philosophy that manifests itself in specific legal doctrines.

[PRINCIPLE # 2: It is time to recognize a general duty of honesty in contractual performance]

Under the duty of honest contractual performance, the Court held that parties to a contract cannot lie or otherwise knowingly mislead each other about matters directly linked to the performance of the contract.  In the words of the Court, “it is a simple requirement not to lie of mislead the other party about one’s contractual performance”.

[PRINCIPLE # 3: The duty of honest contractual performance is not an implied term in the contract]

The duty of honest contractual performance is a general doctrine of contract law that imposes a duty to act honestly, regardless of the parties’ intentions.  It is not a duty that is implied in a contract, but one that is imposed by the Courts.

[PRINCIPLE # 4: Parties cannot contract out of the duty of honest contractual performance, but they can relax its requirements]

Parties are not entitled to exclude the duty of honest contractual performance by stating so in a contract.  However, parties can relax the requirements of the duty so long as they respect its core requirements.  Any relaxation of the duty needs to be in express and specific language. 

[CONCLUSION]

The decision in Bhasin v. Hrynew has significant implications for contract law across the country.  While the Supreme Court of Canada has already recognized an implied duty of good faith in certain types of contracts, such as employment or insurance, the Court’s analysis has now changed.  It is very important for lawyers in Canada to understand the scope of this new duty of honest contractual performance and its effect on almost every practice area dealing with contracts.