Recently, the Supreme Court of Canada issued a landmark decision in the case of Bhasin vs. Hrynew. The case brought to light the importance of honesty in contractually-bound situations. As a result, the way businesses adhere to commercial contracts in Canada will be significantly impacted. The court has recognized that under contract, it is your duty to not lie or knowingly mislead the other party in regard to matters related directly to the performance of the obligations outlined in the contract. This is referred to as the Duty of Honest Performance.

Why did this new Duty come about? Some background:

The importance of contractual honesty has been brought to light in recent months, most notably when it made headlines in the case of Bhasin vs. Hrynew.

The Plaintiff, Mr. Bhasin, was an investment dealer who sold Can-Am products. One of Bhasin's top competitors, Mr. Hrynew (another Can-Am dealer), had proposed a merger with Bhasin's business. Bhasin had rejected Hrynew's proposals on multiple occasions. Can-Am assisted Hrynew in effecting a merger, and they also appointed Hrynew as an internal company auditor whose role was to audit all investment dealers' businesses, including Bhasin's. Bhasin was, understandably, very much opposed to having Hrynew audit his business.

The Court found that Can-Am breached its duty of honest performance by making misleading and untrue statements to Bhasin about Hrynew's role as auditor. Can-Am also misled Bhasin about the proposed restructuring of his business under Hrynew's. The Court found Can-Am breached its obligations by exercising the non-renewal clause contained in its agreement with Bhasin in response to Bhasin's refusal to allow Hrynew to audit his business.

The Court now recognizes two key concepts

The Supreme Court of Canada made two key findings in the Bhasin decision:

• A general organizing principle of good faith was recognized.
  • The Court observed that a "basic level of honest conduct is necessary to the proper functioning of commerce." The general organizing principle of good faith requires that parties act reasonably and honestly, and not capriciously or arbitrarily.
• A duty of honesty in contractual performance now exists.
  • The new duty requires that parties refrain from lying or otherwise knowingly misleading each other about matters directly linked to the performance of the contract.

Top 5 takeaways on the new Duty of Honest Performance:

1. At its core, the new duty of honest performance prevents parties from lying or otherwise knowingly misleading one another about matters directly linked to the performance of a contract.
2. The duty of honest performance applies to all commercial contracts regardless of the parties' intentions, and contracting parties cannot leave it out.
3. The duty can be limited or relaxed in certain contexts by the use of clear and explicit contractual terms, so long as those terms respect the minimum core requirements of the duty.
4. Contracting parties are still entitled to pursue their legitimate business objectives. Causing loss to another party as a result of self-interested commercial conduct is not necessarily contrary to a party's good faith obligations.
5. The context of the duty will vary based on the different factors of each case. For example, parties with long-term relationships with mutually cooperative contracts will owe each other something more than parties involved in a one-time, isolated transactional exchange.

Final Comments

It is important to acknowledge that the new duty does not constitute a stand-alone "duty of good faith." Instead, think of the organizing principle of good faith as the broader concept under which more specific common law good faith obligations exist - the newest of which is the duty of honest performance.

Katherine Reilly

Katherine Reilly is a Principal in the Advocacy & Litigation group at McMillan LLP. Katherine practices out of the firm’s Vancouver office, and has experience handling a wide range of complex business disputes, including employment law matters. Katherine is an experienced trial lawyer who has appeared at all levels of court in British Columbia, and as trial counsel on a number of Supreme Court trials. Katherine is well regarded for her practical, results-oriented approach, as well as her attention to detail and negotiation skills. She has successfully resolved numerous disputes on behalf of clients outside the court system using mediation and other forms of alternative dispute resolution.

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A cautionary note:

The foregoing provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained.