Good Faith Duty in Business Dealings

Developments in Contract Law

Contracts are part of everyday life. The more complicated the transaction, the more likely a lawyer may be involved to negotiate terms, draft the contract, or provide legal advice on proposed terms. Lawyers are also involved to bring or defend lawsuits where there are allegations of a breach of contract.

In the past, courts across Canada have identified certain contracts as requiring duties of good faith in the performance of the contract.

For example, long-term disability benefit plans are considered peace of mind contracts where the beneficiary is purchasing financial security and seeking peace of mind in the event of disability.

If the insurer or trust plan provider arbitrarily or wrongfully denies benefits, the financial and emotional consequences on the beneficiary may be devastating. Awarding past benefits alone does not address these additional losses.

In such cases, the court has awarded damages for mental distress or even punitive damages where the breach of contract was arbitrary and highhanded.

Across Canada, the duty of good faith was considered and expanded in other contracts depending on the nature of the contract and relationship between parties.

However, in a ground breaking decision by the Supreme Court of Canada in Bhasin v. Hrynew, 2014 SCC 71, the court has now clarified the common law to require good faith performance as a general doctrine of contract law that applies to all contracts.

The lawsuit concerned the breach of a commercial dealership agreement between a financial corporation and their retail dealers. The plaintiff was misled by the dealership and lost the value of his business.

In allowing the plaintiff’s appeal against the defendant financial corporation and awarding the value of the plaintiff’s lost business, the Supreme Court of Canada found:

[63]… parties generally must perform their contractual duties honestly and reasonably and not capriciously or arbitrarily.

[93]… 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.

Before you enter into your next contract, consider this duty of honest performance, and seek legal advice before agreeing to terms to ensure your interests are met and protected. Visit the Supreme Court of Canada website at scc-csc.lexum.com for full reasons.