A recent unanimous decision by the Supreme Court of Canada (Bhasin v. Hrynew, 2014 SCC 71) has created a contractual duty to act honestly in the performance of contractual obligations.  While this may seem obvious to most, it is now clear that a breach of this duty can result in liability for damages under the subject contract.

In an effort to make the common law “more coherent and more just”, Justice Cromwell took two incremental steps by (1) acknowledging “that good faith contractual performance is a general organizing principle of the common law of contract” and (2) recognizing that “there is a common law duty which applies to all contracts to act honestly in the performance of contractual obligations”

[paragraph 33].  This in Justice Cromell’s words “will put in place a duty that is just, accords with the reasonable expectations of commercial parties and that is sufficiently precise that it will enhance rather than detract from commercial certainty” [paragraph 34].

What does this mean for those parties subject to a contract?

It means:

  1. you should not lie or otherwise knowingly mislead the party to whom you have contracted with; and
  2. you should at all times maintain a minimum standard of honesty in contractual performance.

Does the duty apply to contractual negotiations? 

This new duty appears to only apply to the performance of contractual obligations so it would not likely apply to the contractual negotiations.  It does not appear to impose a duty of loyalty or of disclosure or require a party to forego advantages flowing from the contract or a duty to put the interests of the other contracting party first.  This essentially means you can negotiate the contract as you wish with the exception of the usual contractual no-nos like fraudulent or negligent misrepresentation and other good faith doctrines that already exist.

When drafting contracts in the M&A context I often negotiate an express duty to act in good faith during the negotiations of the definitive agreement (e.g. share purchase agreement or asset purchase agreement) by adding an express term that imposes a duty on both parties to act honestly and in good faith during the negotiations and during the performance of the contract.  This actually takes it one step further because most of the causes of action in an M&A transaction arise out of the definitive agreement and not from the performance of the agreement, so this provides a more thorough protection in conjunction with the new common law duty created by Bhashin v. Hrynew.

Click here for a more detailed analysis of this case prepared by Jordan Bank and Alex Kask of Guild Yule LLP.

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Peter Ferrari
Peter Ferrari is a senior corporate lawyer in Vancouver, British Columbia. He has over a billion dollars in M&A and commercial lending transaction experience.
Peter Ferrari

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2017-05-19T12:23:02+00:00