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Supreme Court of Canada Recognizes a General Principle of Good Faith in Contractual Performance

The Supreme Court of Canada has released a precedent-setting judgment in the area of contract law. In Bhasin v. Hrynew, 2014 SCC 71, the Court recognized for the first time that there is a general organizing principle of good faith in the performance of contracts throughout Canada. The appeal was successfully argued by Neil Finkelstein and Brandon Kain of McCarthy Tétrault’s Toronto litigation group.

The Bhasin case will now become very important for Canadian businesses. All contracts throughout Canada are now subject to the duty of, at a bare minimum, honest performance, which the Court held cannot be excluded by the terms of an agreement. Businesses will need to consider whether they are discharging this duty when carrying out a contract. If a given course of action could be construed as deceptive, businesses should avoid pursuing it unless they are willing to assume the risk of litigation. Businesses should also be aware that under the general principle of good faith, new obligations beyond the duty of honest performance could be recognized in the future.

In a unanimous judgment written by Justice Cromwell, the Court held that good faith contractual performance is an overarching organizing principle of the common law of contract that underpins and informs the various rules in which the common law currently recognizes obligations of good faith. The organizing principle means that parties must perform their contractual duties honestly and reasonably and not capriciously or arbitrarily, and they must have appropriate regard to the legitimate contractual interests of the contracting partner. Although the principle currently manifests itself through existing doctrines under which the law requires parties to be honest, candid and forthright or to deliver reasonable contractual performance, the principle is not limited to these doctrines, but can also apply to novel contexts in which it is appropriate to develop the common law incrementally.

As a specific manifestation of this organizing principle of good faith, the Court recognized a new common law duty that applies to all contracts to act honestly in the performance of contractual obligations. This duty of honest performance does not impose a duty of loyalty or disclosure, but it prohibits parties from lying or otherwise knowingly misleading each other about matters directly linked to the performance of the contract. In Bhasin, the corporate defendant was found to have breached the duty of honest performance and was therefore held liable in damages to the plaintiff.