New Contractual Duty of Good Faith

Recently, a unanimous Supreme Court of Canada (SCC) recently created a new common law duty of good faith between contractual parties in Canada. This new extension of the common law will certainly affect business in Canada, but just how far the duty will extend is yet to be known.

In Bhasin v. Hrynew the SCC created two new common law principles that will apply to all contracts in Canada: a new “general organizing principle of good faith contractual performance” and a duty “to act honestly in the performance of contractual obligations”.

A review of several areas of contract law where the concepts of good faith, fairness, and honesty have protected contracting parties was instrumental in the Court’s extension of the common law in these regards. These areas included the doctrine of unconscionability, the implied term of good faith in employment contracts, the reciprocal duties of good faith in insurance contracts between the insurer and the insured, the implied duty of good faith/ fair dealing in tendering, the doctrine of estoppel, and the civil fraud cause of action.

At paragraph 73 the Court noted that the new duty:
“means simply that parties must not lie or otherwise knowingly mislead each other about matters directly linked to the performance of the contract. This does not impose a duty of loyalty or of disclosure or require a party to forego advantages flowing from the contract; it is a simple requirement not to lie or mislead the other party about one's contractual performance.”

The SCC seemed to downplay the extension of the common law that they created.

At paragraph 76 the Court noted "the duty of honest performance interferes very little with freedom of contract, since parties will rarely expect that their contracts permit dishonest performance of their obligations". What is clear is that the new duty of good faith in contractual dealings will be a highly context-specific analysis in order to give appropriate consideration to the legitimate interests of all contracting parties.