Duty of Honesty and Good Faith; Supreme Court of Canada in Bhasin v. Hrynew 2014 SCC 71

The way in which the common law will look at contracts has changed dramatically with the decision of the Supreme Court of Canada in Bhasin v. Hrynew 2014 SCC 71.  The Honorable Justice Cromwell, concurred with by the Honourable Chief Justices McLachlin, Lebel, Abella, Rothstein, Karakatsanis, and Wagner, has found that the duty to perform a contract honestly and in good faith will now be implied as a term of contracts and will, subject to very careful drafting, not be precluded by an entire agreement clause.

 

What follows are quotes from this ground breaking case which will be a welcome relief to many contracting parties frustrated by what are alleged to be dishonest dealing motivated by male fides; two paragraphs, [33], [74] and [86], summarize the new obligations:

 

"[33] In my view, it is time to take two incremental steps in order to make the common law less unsettled and piecemeal, more coherent and more just. The first step is to acknowledge that good faith contractual performance is a general organizing principle of the common law of contract which underpins and informs the various rules in which the common law, in various situations and types of relationships, recognizes obligations of good faith contractual performance. The second is to recognize, as a further manifestation of this organizing principle of good faith, that there is a common law duty which applies to all contracts to act honestly in the performance of contractual obligations."   

 

“[74] There is a longstanding debate about whether the duty of good faith arises as a term implied as a matter of fact or a term implied by law: see Mesa Operating, at paras. 15_19. I do not have to resolve this debate fully, which, as I reviewed earlier, casts a shadow of uncertainty over a good deal of the jurisprudence.  I am at this point concerned only with a new duty of honest performance and, as I see it, this should not be thought of as an implied term, but a general doctrine of contract law that imposes as a contractual duty a minimum standard of honest contractual performance. It operates irrespective of the intentions of the parties, and is to this extent analogous to equitable doctrines which impose limits on the freedom of contract, such as the doctrine of unconscionability.”

 

“[86] The duty of honest performance that I propose 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."

 

Justice Cromwell reflected on three circumstances which historically have attracted the duty of good faith and unpin the manner in which the Court will impose this duty; at paragraph 47 and 48:

 

[47] “By way of example, Professor McCamus has identified three broad types of situations in which a duty of good faith performance of some kind has been found to exist: (1) where the parties must cooperate in order to achieve the objects of the contract; (2) where one party exercises a discretionary power under the contract; and (3) where one party seeks to evade contractual duties (pp. 840_56; CivicLife.com Inc. v. Canada (Attorney General) (2006), 215 O.A.C. 43, at paras. 49_50).

 

[48] While these types of cases overlap to some extent, they provide a useful analytical tool to appreciate the current state of the law on the duty of good faith."

 

Justice Cromwell then went on to make it clear that this obligation will apply to real estate contracts and will be applied to prevent contracting parties who regret a bargain from reneging on the bargain:

 

"[49] The first type of situation (contracts requiring the cooperation of the parties to achieve the objects of the contract) is reflected in the jurisprudence of this Court. In Dynamic Transport Ltd. v. O.K. Detailing Ltd., [1978] 2 S.C.R. 1072, the parties to a real estate transaction failed to specify in the purchase_sale agreement which party was to be responsible for obtaining planning permission for a subdivision of the property. By law, the vendor was the only party capable of obtaining such permission. The Court held that the vendor was under an obligation to use reasonable efforts to secure the permission, or as Dickson J. put it, “[t]he vendor is under a duty to act in good faith and to take all reasonable steps to complete the sale”: p. 1084."

 

"[51] This Court’s decision in Mason v. Freedman, [1958] S.C.R. 483, falls in the third type of situation in which a duty of good faith arises (where a contractual power is used to evade a contractual duty). In that case, the vendor in a real estate transaction regretted the bargain he had made. He then sought to repudiate the contract by failing to convey title in fee simple because he claimed his wife would not provide a bar of dower. The issue was whether he could take advantage of a clause permitting him to repudiate the transaction in the event that he was “unable or unwilling” to remove this defect in title even though he had made no efforts to do so by trying to obtain the bar of dower.  Judson J. held that the clause did not “enable a person to repudiate a contract for a cause which he himself has brought about” or permit “a capricious or arbitrary repudiation”: p. 486. On the contrary, “[a] vendor who seeks to take advantage of the clause must exercise his right reasonably and in good faith and not in a capricious or arbitrary manner”: p. 487."

 

Justice Cromwell makes it clear that commercial parties reasonably expect what he referred to as a basic level of honesty and good faith in their commercial dealings:

 

"[60] Commercial parties reasonably expect a basic level of honesty and good faith in contractual dealings. While they remain at arm’s length and are not subject to the duties of a fiduciary, a basic level of honest conduct is necessary to the proper functioning of commerce. The growth of longer term, relational contracts that depend on an element of trust and cooperation clearly call for a basic element of honesty in performance, but, even in transactional exchanges, misleading or deceitful conduct will fly in the face of the expectations of the parties: see Swan and Adamski, at §1.24." 

 

Justice Cromwell also suggests that the duty of honesty and good faith leads to the conclusion that contracting parties should have “appropriate regard” for their contracting parties “legitimate contractual interests and makes it clear that this duty is distinct from a fiduciary duty.  Justice Cromwell makes it clear that it is not okay to lie or mislead contracting parties but such obligation does not create a duty of disclosure:

 

“[65] The organizing principle of good faith exemplifies the notion that, in carrying out his or her own performance of the contract, a contracting party should have appropriate regard to the legitimate contractual interests of the contracting partner. While “appropriate regard” for the other party’s interests will vary depending on the context of the contractual relationship, it does not require acting to serve those interests in all cases. It merely requires that a party not seek to undermine those interests in bad faith. This general principle has strong conceptual differences from the much higher obligations of a fiduciary.  Unlike fiduciary duties, 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.”

 

“[73] In my view, we should. I would hold that there is a general duty of honesty in contractual performance. This 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. Recognizing a duty of honest performance flowing directly from the common law organizing principle of good faith is a modest, incremental step. The requirement to act honestly is one of the most widely recognized aspects of the organizing principle of good faith.”

 

The Bhasin case will have far reaching implications.  It will be interesting to see how creative lawyers try to limit the scope of the duty of good faith without suggesting that dishonesty is contemplated by the contracting parties.  I query if much of the attempt to exculpate such obligations may simply be unenforceable as against public policy in light of Bhasin.  More significantly litigating parties and their litigators will add this to their pleadings and it will create potential liability even in the face of the well drafted contracts often foisted upon less powerful contracting parties.

When contracting parties do not honor a contract; controlling the dispute by controlling your evidence

I have been practicing law since I graduated from the Faculty of Law at the University of Alberta in 1992.  During these years I have seen many contractual agreements result in a dispute between the contracting parties.  Most of my clients would say that this is unavoidable.  No matter how tight your contract is some contracting parties will try and find a way to avoid honoring their contractual obligation.  This blog is about some sensible business practice which will help position you as a contracting party to deal with a defaulting contracting party.

The most important thing is to ensure that ALL of your contractual relationships are reduced to writing.  Without them being in writing you are implicitly inviting the worst behavior in persons to be displayed.  As an example, the DSM V, a tool used by the psychiatric community, describes a person who suffers from antisocial personality disorder as possessing, without limitation, the following personality traits:

Pathological personality traits in the following domains:
1.  Antagonism, characterized by:
a.  Manipulativeness: Frequent use of subterfuge to influence or control others; use of seduction, charm, glibness, or ingratiation to achieve one‘s ends.
b.  Deceitfulness: Dishonesty and fraudulence; misrepresentation of self; embellishment or fabrication when relating events.
c.  Callousness: Lack of concern for feelings or problems of others; lack of guilt or remorse about the negative or harmful effects of one‘s actions on others; aggression; sadism.
d.  Hostility: Persistent or frequent angry feelings; anger or irritability in response to minor slights and insults; mean, nasty, or vengeful behavior.

When placed in context of a contractual dispute with a party or person with these traits, and perhaps possessing little or nothing economically (hence having nothing to lose), you may find it difficult to manage the dispute because a disputing contracting party with these traits may act in a manipulative and deceitful manner.  Prudent business persons can guard against this by, among other things, drafting a robust written contract.  This written contract should contain, amongst many other things, an entire agreement clause and waiver and amendment clause.  For example the following:

Entire Agreement Clause:

"This agreement constitutes and expresses the whole agreement of the parties hereto with reference to the relationship between the parties and with reference to any of the matters or things herein provided for or here before discussed or mentioned.  All promises, representations and undertakings made prior to the signing of the agreement by the parties are merged herein and all  parties hereto agree that they may not subsequent to the signing of this agreement assert or allege that any statement made prior to the signing of this agreement induced the party to enter into this agreement."

Waiver and Amendment:

"The parties hereto agree that no amendments to this agreement shall be valid or binding unless they are set forth in writing and duly executed by both of the parties hereto.  Moreover the parties hereto agree that no waiver of any breach of any term or provision of this agreement shall be effective or binding unless such waiver is made in writing and signed by the party purporting to make such waiver and, unless otherwise provided in the written waiver, such waiver shall be limited to the specific breach waived."

The point here is: he/she who has the paper is more likely to win in a Court proceeding.  A contracting party does not ever want to be in a position whereby they have a dispute with a person who suffers from this type of personality disorder or exhibits these traits without a written agreement.  Any dispute which ends up in Court will be best received by the Court if a contracting party has a well crafted and drafted written agreement.  In this regard, one of the core principals of interpretation is that "the document speaks for itself" and that a disputing contracting party is generally not permitted to make reference to evidence outside of the written agreement.  This should prevent most manipulation and deceitfulness from entering the dispute.  But this is only 1/2 of the picture; the other 1/2 occurs after the contract is written and the dispute is developing or has developed.

A person who exhibits these traits may continue to be manipulative and deceitful as the dispute emereges and after the dispute and Court proceedings have commenced.  There is a saying which is applicable in this regard: "fool my once, shame on you; fool me twice, shame on me".  This is applicable because the decision to enter into a contract was when you were fooled once.  You do not want to allow the disputing contracting party to be able to suceed in the dispute by being manipulative and deceitful.  Some persons with these attributes are very charming and you may have a moment of weakness where you think that you can work out a fair deal with the disputing contracting party.  From my experience this is not the case.  What you think you have negotiated may then be manipulated in a deceitful manner by the disputing contract party.  Your reaction will be that this was not what was agreed to but it may be to late and you will have been fooled twice.  The shame will be on you unless you act proactively to protect against this type of conduct.

A way in which a contracting party can protect against being fooled twice is to not conduct conversations or communication with the disputing contracting party unless the disputing contracting party agrees in writing that any conversations or communication are personal and confidential and without prejudice to the larger dispute.  Moreover, it must be made clear in writing that any settlement/resolution of the dispute which is negotiated will be conditional upon your lawyer confirming that the settlement/resolution of the dispute is agreeable in that lawyer's sole and unfettored discretion.  Moreover, after obtaining written confirmation from the disputing contracting party in writing that any conversations or communication are personal and confidential and without prejudice to the larger dispute you should not engage in a one-on-one conversation either on the telephone or in person with the disputing contracting party.  Consider meeting with the disputing contracting party in the presence of your lawyer or at least meet face-to-face with a witness.  This will then give you the best evidientiary basis from which to defend against the disputing contracting party.

By following these suggestions a prudent business person will minimize the negative interactions which can result and avoid the concomitant frustration which may result in dealing with persons who possess these types of traits or who suffer from this type of personality disorder.