Supreme Court Creates New Duty of Good Faith/Honesty Between Parties to a Contract

In November 2014, the Supreme Court of Canada released a very significant decision in relation to contract law, which will affect all contracts under Canadian law.  This decision applies to a broad range of commercial contracts and technology/intellectual property agreements.

The Supreme Court found that there is an implied term in all contracts that they will be performed with good faith and, in particular, that parties to a contract must not lie or mislead the other party about their contractual performance or other matters directly linked to the performance of the contract. The Supreme Court ruled that there is now in Canada Canada a new duty of good faith performance of contracts.

In practical terms this means that a party to a contract can ask the other party questions about how the performance of the contract is progressing, or in relation to its renewal or any other questions arising from its legitimate interests under the contract. An honest, and non-misleading answer must be given, even where the parties did not include in the original contract a requirement that answers be provided to such questions.

In the decision, Bhasin v. Hrynew, the Defendant had lied to the Plaintiff about whether a third party competitor of the Plaintiff had an obligation to keep certain information (business records) of the Plaintiff’s confidential.  The Defendant also mislead the Plaintiff as to whether a decision had been made about renewing the contract at the end of its term.

The Supreme Court found that an expectation of honesty was a paradigm example of a general norm which underlies almost all contractual relations. Commercial parties expect a basic level of honesty and good faith in contractual dealings – this is necessary for the proper functioning of commerce. A party to a contract should have appropriate regard to the legitimate contractual interests of the other party(ies) to the contract – regardless of the parties’ intentions. This implied duty of good faith/honest performance will not be displaced by general contract clauses, such as an entire agreement clause. The Supreme Court made it clear that honest performance is only a part of the duty of good faith – future cases will define the further boundaries of this new duty which is now applicable to Canadian contracts.

You can find the full text at: https://scc-csc.lexum.com/scc-csc/scc-csc/en/item/14438/index.do