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In 2020 – Is honesty still the best policy while performing a contract?


By Gurpreet Chandok, Articled Clerk

At the inception of any relation, a business owner is commonly advised to set the terms expressly in writing. The relation can be anything - employment, purchase/sale of services/good/ real estate, construction contracts, investment, insurance, purchase of another business, venture capital, innovations and even marriage. In addition to the expressed terms, there are implied terms which run with the contract without any specific mention. Performing the contract in good faith and honesty is such an implied term. As much as it sounds obvious, performing a contract in good faith was not a precedented law in Canada until 2014. As we enter 2020, the Supreme Court of Canada is again deliberating this essential of Contract law.

Introduction

In 2014, the Supreme Court of Canada (SCC) in Bhasin v. Hrynew (“Bhasin”) recognized the "duty of honest performance" as a new common law duty that applies to all contracts. Simply put, a party to a contract has a duty not to lie or knowingly mislead its contractual counterpart. SCC further stated that the duty of honest performance is an expression to explain the actual principle involved- the principle of good faith. Identifying good faith in contractual performance as a universal duty strengthened the element of trust in commercial relationships. That said, the framework of honest performance and good faith, as provided in Bhasin, is broad.

In the past five years, Bhasin is widely cited, leaving litigators in Canada with diverse interpretations of the “duty of good faith.” Although the SCC categorically clarified that the duty of disclosure and loyalty is excluded, the interpretation of the duty of good faith and honesty while performing a contract is still largely dependent on individual perceptions.

In December 2019, the SCC heard two appeals, namely, Wastech Services Ltd. v. Greater Vancouver Sewerage and Drainage District (“Wastech”) and C.M. Callow Inc. v. Tammy Zollinger, et al. (“Callow”) , which is now seen as an opportunity to curb and further clarify the duty of good faith and scope of the honest performance as settled in Bhasin.

Wastech and Callow

Each of the cases under appeal deals with circumstances beyond those addressed by the Supreme Court in Bhasin and raises important practical issues.

In Wastech, the respondent, while leveraging its contractual discretion, changed the location for waste disposal for its own benefit but knowingly causing loss to the appellant. The contract here was the cost-revenue sharing basis. The issue in law is - whether a party exercising the contractual discretionary power breaches the duty of good faith if it knowingly substantially deprives its contractual partner of their contractual benefit.

In Callow, it is argued that a condominium corporation withheld information about their decision to terminate the contract at its end, knowing that their contractor believes that it would be renewed instead. It is also a factual finding that the acts of the condominium corporation contributed to building the belief of the renewal of the contract. Therefore, the questions involved in this appeal are - is it a breach of duty of good faith and honest performance if a party deliberately withhold information from their contracting partner? Would a willful silence and conduct can mislead a party about future possibilities of contractual performance?

Implications

In Bhasin, the SCC observed the duty of good faith and honest performance as a universal organizing principle for the performance of contracts by the parties already bound by the contract. Further, the SCC allowed parties to secure their interest in the contract first and excluded duty to disclosure from the duty of good faith.

It is interesting that in Wastech and Callow, both these points are raised against the appellants. However, in these appeals, both securing self-interest and withholding information respectively were done knowingly, such that the other party of the contract would be at a loss.

None of the parties in the above-discussed appeals have questioned the principles laid down in Bhasin. Therefore, it is likely that going forward, honesty would continue to be the best policy in contractual relations. However, it is anticipated that the SCC may clarify the guiding principles to interpret the duty of good faith and honest performance in 2020.

This article is intended for information purposes only and is not intended to be legal advice.  We suggest you contact a legal professional for advice on your particular business and circumstance.

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