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SCC finds new contractual duty of honest performance

The Supreme Court of Canada has confirmed a new common law duty to act honestly in the performance of contractual obligations.

The case involved a commercial dealership agreement. The defendant was in the business of marketing education savings plans through individual dealers. The plaintiff was among the dealers and in effect, a small business owner. Although the contract between the parties automatically renewed every three years, it contained a termination clause permitting either party to terminate upon providing 6 months’ notice. The contract also contained an entire agreement clause. When the defendant ultimately terminated the contract, it misled the plaintiff about its intentions. As a result, the plaintiff lost the value of his business. The plaintiff commenced an action alleging, among other things, bad faith on part of the defendants.

At trial, the Alberta Court of Queen’s Bench found that the defendants owed the plaintiff a duty of good faith and that this duty was breached by the defendants. This decision was overturned on appeal to the Alberta Court of Appeal. Of particular note, the Court of Appeal held that the trial court erred in implying a term of good faith in to a commercial contract, particularly one that included an entire agreement clause. The matter was then appealed to the SCC.

The SCC overturned the decision of the Court of Appeal and, in so doing, expressly established a new common law duty of honest performance. The Court clarified that the duty of honesty in contractual performance “means simply that parties must not lie or otherwise knowingly mislead each other about matters directly linked to the performance of the contract.” In this case, the defendant was dishonest in deciding not to renew the contract and as such, breached the duty of honesty owed to the plaintiff. The plaintiff was awarded $87,000 plus interest, the value of the business at the time of non-renewal.

Although the common law previously provided for an implied duty of good faith in respect of specific classes of contracts (including employment contracts), this new implied duty of honesty represents a significant change in the law of contract with respect to commercial agreements.

Bhasin v. Hrynew, 2014 SCC 71

By Nicole Toye (MacLeod), Harris and Company LLP

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