Bhasin v. Hrynew: Good Faith in Contractual Performance

Until last month, there was no one conclusive decision in Canadian case law as to whether or not there was a common law duty of good faith in the performance of contractual obligations.  The Supreme Court of Canada’s decision in Bhasin v. Hrynew, 2014 SCC 71 last month changed that.  This case stands for the proposition that the common law does indeed impose a duty on parties to perform contractual obligations honestly based on a general organizing principle of good faith contractual performance.

The following is a summary of some of the highlights from this decision:

  1. At paragraph 33 of the decision, the Supreme Court of Canada concluded that it was time to take two incremental steps in order to make the common law less unsettled and piecemeal, more coherent and more just:
    • The first step is to acknowledge that good faith contractual performance is a general organizing principle of the common law of contract which underpins and informs the various rules in which the common law, in various situations and types of relationships, recognizes obligations of good faith contractual performance.
    • The second step is to recognize, as a further manifestation of this organizing principle of good faith, that there is a common law duty of honesty which applies to all contracts to act honestly in the performance of contractual obligations.
  2. According to Mr. Justice Cromwell, writing for the majority, these two steps “will put in place a duty that is just, that accords with the reasonable expectations of commercial parties and that is sufficiently precise that it will enhance rather than detract from commercial certainty.”
  3. The organizing principle of good faith exemplifies the notion that, in carrying out his or her own performance of the contract, a contracting party should have appropriate regard to the legitimate contractual interests of the contracting partner.
  4. At paragraph 60, Mr. Justice Cromwell states, “Commercial parties reasonably expect a basic level of honesty and good faith in contractual dealings.  While they remain at arm’s length and are not subject to the duties of a fiduciary, a basic level of honest conduct is necessary to the proper functioning of commerce.  The growth of longer term, relational contracts that depend on an element of trust and cooperation clearly call for a basic element of honesty in performance, but even in transactional exchanges, misleading or deceitful conduct will fly in the face of the expectations of the parties.”
  5. Since the duty of honesty in contractual performance is a general doctrine of contract law that applies to all contracts, parties are not free to exclude it.

One of the questions raised by this decision is, “How does this affect employment law?”  The simple answer is that it does not.  As noted by Mr. Justice Cromwell at paragraph 54, the above-noted principles are entirely consistent with the Supreme Court of Canada’s earlier decisions in Honda Canada Inc. v. Keays, 2008 SCC 39 and Wallace v. United Grain Growers, 1997 CanLII 332 that all employment contracts have an implied term of good faith in the manner of dismissal.  This decision merely serves to reinforce what we already knew about the employer’s duty of good faith and fair dealing – which is one of the things that the Supreme Court of Canada was looking to achieve with this decision.

This article is intended only to provide general information and does not constitute legal advice. Should you require advice specific to your situation, please feel free to contact me to discuss the matter further.