Note to Employers: The Duty of Good Faith Extends to More than Employment Contracts

honestEmployment lawyers (and hopefully, their employer clients) are well familiar with the good faith concept in the employment context. In 2008, the Supreme Court of Canada confirmed that there is an implied term of good faith in all employment contracts governing the manner of termination. Specifically, when dismissing an employee, an employer should not engage in conduct that is “unfair or is in bad faith by being, for example, untruthful, misleading or unduly insensitive”. The Court explained further that good faith in this context does not extend to the employer’s reasons for terminating the contract of employment, because this would undermine the right of an employer to determine the composition of its workforce.

In 2014, in the case of Bhasin v. Hrynew, the SCC went further and ruled that good faith contractual performance is a “general organizing principle of the common law of contract” in Canada, such that a party to any contract (not just an employment one) must perform his contractual obligations honestly. The Court explained that the duty of honesty is a manifestation of this good faith principle.

So, if we step outside the sphere of employment and consider the wider context of commercial relations as a whole, what does it mean to act honestly when performing your contractual obligations? While we expect that Canadian courts will soon have the opportunity to answer this question many times over, for now, here are some points for you to keep in mind when doing business:

  • The general duty of honesty means that parties must not lie or otherwise knowingly mislead each other about matters directly linked to the performance of the contract.
  • This does not impose a duty of loyalty or of disclosure or require a party to forego advantages flowing from the contract.
  • What amounts to honest performance will depend on the circumstances. For example, “good faith” would likely have different implications in the context of a long-term contract of mutual cooperation than it would in a more transactional exchange.
  • Contracting parties must continue to have freedom to pursue their individual self-interest. In commerce, a party may sometimes cause loss to another, even intentionally, in the legitimate pursuit of economic self-interest. In the words of the SCC, doing so is not necessarily contrary to good faith.

Ultimately, while much has been made of the the Bhasin decision – Bhasin’s legal counsel himself was quoted as saying it was “the most important contract case in 20 years” – arguably, the SCC has merely articulated the expectations of most parties who engage in commerce. As Justice Cromwell himself points out:

    The duty of honest performance interferes very little with freedom of contract, since parties will rarely expect that their contracts permit dishonest performance of their obligations.

Have a question about your contractual obligations? Contact us!

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