Thou Shalt Not Lie: SCC Recognizes New Duty of Honesty in Contract Law in Bhasin v. Hrynew

On November 13, 2014, the Supreme Court of Canada (SCC) effected a significant development in Canadian contract law by recognizing the following:

• Principle of good faith.  There is a general overarching principle of good faith performance within contract law that requires each contracting party to have “appropriate regard” for the other party’s legitimate contractual interests.  This principle is currently manifested in employment, insurance, franchise and other contracts that require honest and forthright contractual performance – but the list is not closed.
• New Duty of Honesty.  The general principle of good faith is the basis for a new duty of honesty in contractual performance that requires all contracting parties to act honestly toward each other in performing the contract.

In its unanimous decision in Bhasin v. Hrynew, 2014 SCC 71, the SCC decided that the recognition of the general principle of good faith and the new duty of honesty is an incremental development that will result in greater certainty, coherence and consistency in Canadian contract law. Based on the SCC’s decision, here are five important points that should be kept in mind:

1. What the duty of honesty is and is not.  The duty of honesty is a requirement that a party not lie to or mislead the other party about one’s contractual performance.  It is not a fiduciary duty that would impose a duty of loyalty to the other contracting party and require one party to put the other party’s interests ahead of its own.  Contracting parties remain free to act in their own self-interest and pursue whatever advantages may flow to them from the contract – as long as they do not lie or mislead the other party in doing so.
2. Affected contracts and parties.  The requirement for good faith performance is no longer confined to employment, insurance, franchise and tendering matters. The SCC’s decision will affect every contract governed by the laws of a Canadian Province or Territory (other than Québec, which has a similar duty based on its Civil Code), and all parties to such contracts.
3. Can’t contract out, but can limit scope.  The duty of honesty is a general doctrine applicable to all contracts, so parties can’t totally exclude it or contract out of it.  However, the SCC did allow for a limited ability on the part of contracting parties to “relax” the scope of the duty by adjusting the standard or degree of honesty required, as long as it does not eliminate the core requirement of honest conduct.
   
4. Don’t rely on “Entire Agreement” clauses.  An “Entire Agreement” clause in a contract which provides that no other term can be implied in the contract will not get around the duty of honesty because the duty is a general doctrine of contract law, not an implied term.
5. Communicate clearly.  Make sure that you are careful in how you communicate with another party to a contract.  While you are free to act in your own self-interest and don’t owe a duty of loyalty to the other party, you must be careful not to communicate in such a way that you mislead or undermine the other parties’ legitimate interests, whether intentionally or otherwise.

Read the SCC’s decision in Bhasin v. Hrynew, 2014 SCC 71.

Please contact your McInnes Cooper lawyer or any member of our McInnes Cooper Corporate and Business Team or our Litigation Team to discuss this topic or any other legal issue.

McInnes Cooper has prepared this document for information only; it is not intended to be legal advice.  You should consult McInnes Cooper about your unique circumstances before acting on this information. McInnes Cooper excludes all liability for anything contained in this document and any use you make of it.

© McInnes Cooper, 2014.  All rights reserved.  McInnes Cooper owns the copyright in this document. You may reproduce and distribute this document in its entirety as long as you do not alter the form or the content and you give McInnes Cooper credit for it.  You must obtain McInnes Cooper’s consent for any other form of reproduction or distribution. Email us at [email protected] to request our consent.