January 17, 2017

Good faith and the duty of honesty in contracts


Rob Kennaley A number of issues ago, we wrote about a Supreme Court of Canada decision, Hryniak v. Mauldin, 2014 SCC 7, which drastically altered the way the our Courts will approach litigation in the future. The Court called for a ‘culture shift’ in the way litigation is undertaken and embraced resolution of litigation before trial, through the increased use of ‘summary judgment’ motion procedures.
Another 2014 Supreme Court of Canada decision appears equally likely to impact those of who enter into contracts for the supply of services or materials (which, of course, is virtually every CNLA member). In Bhasin v. Hrynew, 2014 SCC 71, the Court dealt with the extent to which a party to a contract owes the other(s) any duties or obligations of good faith or honesty. In addressing the issue, the Court embarked on a new and expanded approach which will most certainly affect anyone who contracts in the construction and maintenance industries. 

In Bhasin, the Supreme Court unanimously held that our common law has recognized a “general organizing principle” of good faith. In addition, the Court held that contracting parties have a duty to act honestly in performing their contractual obligations. The facts of the case involved Bhasin, who sold investment products under an agreement that automatically renewed for successive three-year terms, unless either party gave notice of its intention not to renew. (We note that these clauses are very common in winter maintenance contracts, which often call for automatic renewals, particularly in the context of surety agreements that will only provide bonding on a year-to-year basis).

To make a long and sordid history short, Bhasin was an investment dealer for Can-Am.  Hyrnew, one of Bhasin’s competitors, had proposed a merger with Bhasin, but Bhasin had rejected the overture. Hyrnew pressured Can-Am to push Bhasin to agree, but Bhasin continued to resist. At around the same time, Can-Am was required to appoint an auditor to audit the books of its dealers (a process required by the Alberta Securities Commission). Curiously, Can-Am appointed Hyrnew. When Bhasin complained about conflict of interest, Can-Am insisted that Hyrnew have access to Bhasin’s books. Bhasin refused and Can-Am then gave notice that it would not renew Bhasin’s contract. 

The Supreme Court determined the notice of non-renewal was made for clandestine reasons completely unrelated to Bhasin’s performance under the contract. It concluded Can-Am acted dishonestly toward Bhasin in exercising the non-renewal clause, misleading Bhasin about its proposed agency restructuring and Hrynew’s role as auditor. It held that Can-Am’s dishonesty was directly connected to the performance of the agreement and its exercise of the non-renewal provision. Accordingly, the Court found that Can-Am breached the dealer agreement. In doing so, the Court ultimately held Can-Am had also breached its duty to perform the agreement honestly.

In assessing the matters at issue, the Court first considered the extent to which a duty of good faith should be inferred into all contracts. The Court fell short of recognizing an independent, standalone, duty of good faith, however. Rather, the Court determined a general organizing principle of good faith should be considered when applying other, already established standards of conduct. One of these previously established standards, the Court found, was the duty of honesty — which requires honest, candid, forthright, and reasonable conduct in the performance of a contract. In this regard, the Court stated the reasonable expectations of the parties to a contract include honesty in contractual dealings, and that a duty of minimum honesty should be inferred into all contracts. The duty was held, for example, to preclude parties from lying or knowingly misleading each other about matters directly linked to the performance of the contract. 

So what does this all mean? Well, it doesn’t mean we can accuse the other side of breaching an obligation of good faith under a contract (unless the contract expressly provides for such an obligation). Rather, it means a Court will consider (in the event a dispute gets litigious) the principle of good faith in deciding whether or not a party breached its other obligations, including the duty of honesty. The principle of good faith could be taken into consideration in making decisions of contractual interpretation, for example, in deciding whether or not a party can rely on a technical notice requirement under the contract as a way to avoid an obligation to pay, or perform. 

The case also means parties are now clearly held to a standard of honesty, one which many did not believe previously existed. If a party lies or knowingly misleads the other side about a matter arising under or in relation to the contract, that party can be found directly liable for a breach of the duty of honesty. 
In construction, the case can and will no doubt have significant impacts. In addition to interpretation in relation to notice provisions and the basis upon which renewable contracts are not renewed, the case should have a role to play in the tender process. Clearly, it appears, those who put contracts out to tender will have to consider the extent to which their decisions and motives, in awarding or not awarding a contract, fit within the principle of good faith and the duty of honesty. We will accordingly be watching how the courts apply Bhasin with a fair degree of interest. 
Robert Kennaley is a former landscape design/build contractor and an Honorary Member of Landscape Ontario, who now practices construction law in Toronto and Simcoe, Ont. He can be reached at 416-368-2522 or at kennaley@mclauchlin.ca. This material is for information purposes and is not intended to provide legal advice.  Readers who have concerns about any particular circumstance are encouraged to seek independent legal advice in that regard.