Bhasin v. Hrynew and its “Incremental” Changes to the Law of Good Faith in Contractual Performance

In Canada, the role of good faith in the context of commercial contracts has always been a tricky concept resulting in much head-scratching around its scope and application. Is a duty of good faith a fundamental principle of contract law applicable to all agreements? Or is including a claim for breach of a duty of good faith in a commercial contract case simply the last alternative argument available in the litigation arsenal?

While recognized in certain jurisdictions (for example, Quebec and the United States) and in the context of certain types of agreements (for example, employment contracts and franchise agreements), there has been no unifying view from Canadian courts on the inclusion of a stand-alone duty of good faith in all commercial agreements. According to the Supreme Court of Canada, the Canadian common law in relation to good faith performance of contracts was “piecemeal, unsettled and unclear”.

That is, until last week.

In a decision released November 13, 2014, which has quickly become the subject of much water cooler speculation (and concern) among lawyers, the Supreme Court of Canada in Bhasin v. Hrynew, 2014 SCC 71 (“Bhasin”), held that it was time to introduce two incremental steps aimed at addressing the “piecemeal” state of the common law. The first step is to acknowledge good faith contractual performance as a general organizing principle of the common law of contract. The second step is to recognize that, as part of that organizing principle of good faith, there is a common law duty applicable to all contracts to act honestly in the performance of contractual obligations.

Although it is still early days, given that the Court’s statement applies to all contracts, the decision will likely affect the way in which commercial agreements are understood, interpreted and performed. This may not be so incremental.

The organizing principle of good faith exemplifies itself in the notion that in carrying out performance of a contract, a contracting party should have appropriate regard to the legitimate contractual interests of the contracting partner. There are limitations. According to the Court, good faith performance does not engage duties of loyalty to the other contracting party or a duty to put the interests of the other contracting party first. However, the general duty of honesty in contractual performance does mean that parties must not lie or otherwise knowingly mislead each other about matters directly linked to the performance of the contract.

The Court stated that its purpose in introducing incremental change was to “bring a measure of coherence and predictability to the law” which “will bring the law closer to what reasonable commercial parties would expect it to be”. While there may now be a level of certainty and clarity in some aspects of the common law, the decision will not permanently settle issues concerning good faith performance. Instead, Bhasin opens up a whole new avenue for litigating commercial agreements.

Given the highly contextual nature of contract interpretation, much will depend on the language of the agreement at issue and the contracting parties. This was implicitly recognized by the Court:

Good faith may be invoked in widely varying contexts and this calls for a highly context-specific understanding of what honesty and reasonableness in performance require so as to give appropriate consideration to the legitimate interests of both contracting parties. For example, the general organizing principle of good faith would likely have different implications in the context of a long-term contract of mutual cooperation than it would in a more transactional exchange.

In light of this highly contextualized environment in which each agreement must be considered, it will be the lower courts who struggle in subsequent jurisprudence to wrestle with the scope and application of this decision. The Supreme Court of Canada may have sought clarity, but good faith jurisprudence in relation to commercial agreements is likely to experience a period of considerable growth. Bhasin v. Hrynew has done more than incrementally move the law with respect to good faith- for commercial agreements it may give good faith a far more prominent role in the litigation arsenal.

Joelle Walker practices in the area of corporate/commercial litigation and dispute resolution. Her experience includes shareholder disputes, securities litigation, contract disputes, regulatory enforcement matters, real estate disputes, arbitration and mediation. Joelle also provides strategic advice on issues relating to corporate governance. Joelle previously spent seven years in the litigation group at McCarthy Tetrault.