Supreme Court of Canada Creates New Contract Law Duty: Duty of Honest Performance

March 2015

In another recent decision of the SCC, Bhasin v Hrynew, 2014 SCC 71, the Court recognized a new common law contractual duty: the duty of honest performance. The duty requires that parties be honest with each other in relation to the performance of their contractual obligations and not lie or mislead the other party about one’s contractual performance. Although the case arose outside of the employment context, the legal principles will apply to employment contracts.

Facts

This case involved a commercial dealership agreement between the appellant, Bhasin, and the respondent, Can-Am. Can-Am was in the business of marketing education savings plans to investors through retail dealers known as enrollment directors. Both Bhasin and Hyrnew, the other respondent, were enrollment directors. Bhasin and Hrynew were competitors.

Hyrnew wanted to merge operations with Bhasin, which Bhasin refused. Hyrnew subsequently pressured Can-Am not to renew its agreement with Bhasin. In addition, Can-Am appointed Hrynew as a provincial trading officer to review and audit its directors for compliance with security laws. Bhasin objected to Hyrnew, his competitor, reviewing his confidential business records and refused to grant him access. Can- Am, encouraged by Hrynew, issued a notice of non-renewal to Bhasin.

The trial judge found Can-Am liable for breaching the implied term of good faith performance, Hrynew liable for intentionally inducing breach of contract, and both respondents liable for civil conspiracy. The Alberta Court of Appeal overturned this decision. The court disagreed that there was an implied term of good faith “in the context of an unambiguous contract containing an entire agreement clause”.

Decision

In a unanimous decision, the SCC found that the Canadian common law in relation to good faith performance of contracts was unsettled, unclear, and uncertain. In the Court’s view, “two incremental steps” were needed to advance the common law of contracts: the recognition of an organizing principle of good faith and the creation of a new duty of honest performance.

The Organizing Principle

The organizing principle of good faith is a standard that parties must perform their contractual duties honestly and reasonably, and not capriciously or arbitrarily. This principle of good faith is the notion that a contracting party should have regard to the legitimate contractual interests of their contracting partner and not seek to undermine those interests in bad faith. However, unlike a fiduciary duty, it does not require loyalty to the other party or a duty to put their interests first.

Duty of Honest Performance

The duty of honest performance applies to all contracts as a manifestation of the organizing principle of good faith. This duty requires that parties to a contract be honest with each other in relation to the performance of their contractual obligations. This means parties must not lie to each other or mislead each other.

The Court clarified the scope of the duty by emphasizing the difference between the failure to disclose a material fact and intentionally misleading the other party. The SCC also emphasized that the duty of honest performance should not be confused with a duty of disclosure or a fiduciary duty (at para. 86):

The duty of honest performance… should not be confused with a duty of disclosure or of fiduciary loyalty. A party to a contract has no general duty to subordinate his or her interest to that of the other party. However, contracting parties must be able to rely on a minimum standard of honesty from their contracting partner in relation to performing the contract as a reassurance that if the contract does not work out, they will have a fair opportunity to protect their interests…

Applying the principles to the case, the SCC found Can-Am liable for breach of the duty of honest performance. Hrynew was not liable for breaching the new duty, as he was not a party to the enrollment director’s agreement that governed the relationship between Can-Am and Bhasin. Can-Am was liable for $87,000 in damages, representing the value of Bhasin’s business at the time of renewal.

Takeaways from the Decision

Though this case did not arise in the employment context, employment contracts will now be subject to the duty of honest performance. Prior to this case, employees already owed their employer a duty of fidelity and honesty, and employers owed their employees a duty of good faith in the manner of termination. Though it will arguably have little impact on employees’ obligations, this case expands the obligation of honest contractual performance for employers beyond the manner of termination.

In particular, we expect that employees may now claim additional damages for breach of the duty of honest performance in relation to all aspects of the employment relationship, including, for instance, an employer’s reasons for termination, performance management decisions, reorganization and restructuring decisions, and compensation negotiations.