Supreme Court Says Parties to Contracts Must Act in Good Faith

( Disponible en anglais seulement )

décembre 30, 2014 | Nicole K. D’Aoust

The Supreme Court of Canada recently held in Bhasin v. Hrynew that parties to a contract must perform their duties under that contract in “good faith”. The Court held “good faith” to generally mean in a manner that is honest and reasonable, not capricious or arbitrary. Prior to the release of the Court’s decision on November 13, 2014, Canadian courts had recognized that an obligation to act in good faith was implied only in specific types of contractual relationships, such as between parties to a real estate transaction, an employment contract, or a commercial bid to acquire a project. Following this decision, good faith will now be an established principle of contract law that will require parties to respect a minimum standard of honest contractual performance. Charities and not-for-profit organizations should be aware that this new duty to act in good faith applies to all of their dealings, regardless of the types of contracts they may enter into (i.e. contracts with staff, agents, suppliers, and other third-parties).

The case before the Supreme Court involved a contract between a director who sold education savings plans (“ESPs”), Mr. Bhasin, and a company called Canadian-American Financial Corporation (“Can-Am”) that marketed the ESPs sold by Mr. Bhasin. Per the terms of the contract entered into between the parties, Mr. Bhasin was required to sell Can-Am investment products and Can-Am was responsible for branding and implementing central policies. The contract provided that the agreement was for three years and would be automatically renewed unless one of the parties gave notice to the contrary at least six months before the end of the term.

In the Court’s view, the evidence at trial suggested that Can-Am had acted dishonestly with Mr. Bhasin throughout the period leading up to the company’s decision not to renew the contract beyond three years. More specifically, the evidence showed that Can-Am had been considering entering into other arrangements, including a merger arrangement, for quite some time but had not said anything to Mr. Bhasin. In fact, the trial judge found that Can-Am had repeatedly lied and misrepresented its intentions to further contract with Mr. Bhasin, who, as a result, ultimately lost the value of his ESP business.

In its reasons for judgment against Can-Am, the Supreme Court explained that the company had breached its duty to honestly perform its contractual responsibilities and awarded damages to Mr. Bhasin on the basis of what Mr. Bhasin’s economic position would have been had Can-Am effectively fulfilled its duty. The Court also stated that it would be appropriate to add a duty of honest contractual performance to all contracts “as a manifestation of the […] principle of good faith.” However, as the Court noted, the principle of good faith should not be interpreted to mean that parties have an obligation to disclose all information to each other. The requirement to act in good faith, in the Court’s view, only means that parties cannot actively mislead or deceive each other in relation to the specific terms of their contract. For example, in the case of Mr. Bhasin and Can-Am, Can-Am’s dishonest behaviour was in relation to the term in the contract that dealt with the company’s responsibility to give proper notice to Mr. Bhasin should it decide not to renew the contract for another term. In other words, the scope of the duty to act in good faith will depend on the expectations of parties as expressed in a particular contract.

The Supreme Court’s decision in this case is helpful since other Canadian courts and academics have often debated the issue of whether there should be a stand-alone duty of good faith in the performance of contracts. Practically speaking, this decision should assist charities and not-for-profit organizations apply the same basic standard of honesty and good faith in all of their dealings and expect the same treatment from the entities with which they contract.

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