10 Aug Bhasin v. Hrynew 2014 SCC
The Supreme Court of Canada held that good faith contractual performance is a general organizing principle of the common law of contract and that there is a common law duty of good faith contractual performance. This decision is significant for all parties to commercial contracts in Canada and is the first time the Supreme Court has addressed the duty of good faith in contractual performance between parties.
This case arose as a result of Hyrnew’s attempt to capture the niche market of Bhasin, his competitor. First, Hyrnew suggested a merger, which Bhasin rejected. Hrynew then pressured Can-Am to force a merger with Bhasin, all the while denying to Bhasin that any such plans had been made. In the end, Can-Am did not renew its dealership agreement with Bhasin, Bhasin lost of the value in his business and most of Bhasin’s sales agents were solicited by Hrynew. Bhasin sued both parties claiming conspiracy and a failure to act in good faith.
In a unanimous decision the Supreme Court of Canada established a new good faith doctrine and a duty of honesty between contracting parties.
The Supreme Court held that a basic level of honest conduct between commercial parties is necessary to the proper functioning of commerce. A general 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. Parties must be able to rely on a minimum standard of honesty from their contracting partner in relation to performing the contract as a reassurance that if the contract does not work out, they will have a fair opportunity to protect their interests.
The Court emphasized that a rule of honest performance would promote certainty in commercial dealings. However, good faith as an organizing principle is a “highly context-specific” standard and will be applied differently to each situation. It is not a free-standing rule wherein a breach would be enforceable in and of itself. As a general doctrine, parties are not able to contract out of honest performance, however the Court recognized that parties should be free to relax the standards by which the performance is measured provided they meet the minimum requirements of the duty of good faith.