November 26, 2014

By Brian Babcock

Most people know what it means to tell the truth. Therefore, “A reasonable commercial person would expect, at least, that the other party to a contract would not be dishonest about his or her performance.”

This concept is at the core of a recent Supreme Court of Canada decision which recognizes a new doctrine in Canadian law, the duty to behave honestly in the performance of a contract.

The Court says: “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.”

This newly formulated duty is an extension of a duty of good faith which has been developing in specific situations in Canadian law for decades, but which has not been well-defined as a general concept.

The Court still declined to fully draw boundaries around the broad concept of “good faith”. Instead, they expressed the new duty of honest performance as a defined sub-set of the still evolving duty of good faith. The duty of good faith is broader, and means different things in different context. For example, as the quote notes, a “fiduciary” or a person in a position of trust, owes a duty to protect the interests of the vulnerable person, even if that means in some cases, that the fiduciary suffers a loss.

The new duty of honest performance is narrower.

The Court summarizes their decision as follows:

  1. There is a general organizing principle of good faith that underlies many facets of contract law.
  2. In general, the particular implications of the broad principle for particular cases are determined by resorting to the body of doctrine that has developed which gives effect to aspects of that principle in particular types of situations and relationships.
  3. It is appropriate to recognize a new common law duty that applies to all contracts as a manifestation of the general organizing principle of good faith: a duty of honest performance, which requires the parties to be honest with each other in relation to the performance of their contractual obligations.

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.

Don’t lie. Pretty simple.  Or, as the Supreme Court says: “The duty is also clear and easy to apply.”

This new duty makes Canadian law similar to the law in Quebec and most of the United States, so people and businesses doing business in other jurisdictions should find more consistency and predictability in the rules being applied to their dealings. In fact, most of the major countries with legal systems based on British law have similar rules. Canada is just playing catch up.

The particular case before the Supreme Court dealt with a business agreement, and does not explicitly say whether or not it applies to consumer contracts or personal dealings. Most consumer contracts are subject to consumer protection legislation. In Thunder Bay, that means Ontario’s Consumer Protection Act. That Act contains provisions about good faith, or false and deceptive practices, but interestingly, the word “honest” or “honesty” is not found in the Act.

For private personal dealings, the Supreme Court has not told Charlie Brown whether he can sue Lucy for pulling the football away AGAIN, but this quote might give Charlie a clue: “Because the duty of honesty in contractual performance is a general doctrine of contract law that applies to all contracts, like unconscionability, the parties are not free to exclude it.”

Somehow, though, I fear that poor Charlie Brown will still not have a clue.

You might wonder why the issue of contracting out came up. In the contract in front of the Court, there was a standard “entire agreement” clause, which said that there are no implied duties. The Court has said that THIS implied duty of honest performance exists in every contract. They did leave the door ajar for a contract to EXPRESSLY exclude the duty, though they noted: “It will surely be rare that parties would wish to agree that they may be dishonest with each other in performing their contractual obligations.”

Although the new duty is clear, exactly how it will affect remedies available on specific facts is going to be an interesting topic for future cases.