What You Need To Know About the New Duty of Good Faith In Contracts
Contractual relationships often lead to lawsuits when parties to the contract disagree over their contractual obligations and rights. Traditionally, courts have held parties to the strict written terms of their contract, even in cases where the terms seemed unfair. In 2014, the Supreme Court of Canada released a ground-breaking decision that imposed a mutual obligation of good faith and honest performance on the parties to a contract. This case has broad implications for businesses as they negotiate contracts with consumers, suppliers, and vendors, as lawsuits involving contract disputes will now be viewed by the courts in this context. Here’s what you need to know.
1) Courts Recognize That Parties To A Contract Will Be Self-Interested
Commercial certainty has always been a fundamental tenet of the law of contracts. Traditionally the common law has recognized that contracts usually involve a commercial transaction between two entities that are fundamentally self-interested. With this principle in mind, courts have been reluctant to interfere in, or impose their own judicial values or morals into contractual arrangements between parties.
2) Traditionally Courts Would Focus On The Words Of The Contract
The primacy of the contract reigned over any contextual interpretation such that the courts role would be to uphold the written words within the contract. Parties were to be bound by the words of the document they signed. However, a number of court decisions over time have recognized, in a piecemeal fashion, that business relationships are becoming more complex and can no longer be ruled on by the courts, with traditional views about contract law and business transactions. Many modern contractual business relationships are long term, complex arrangements in which many possible outcomes are not foreseen or covered in the contractual terms which were agreed to, at the outset, by the parties.
3) A Duty Of Good Faith Was Previously Restricted To Certain Contractual Relationships
Through the years a duty of good faith has already been established by the courts in specific types of contractual relationships such as, employment relationships, insurance contracts, franchise contracts, and tendering contracts. These are situations where courts recognized the good faith duty was necessary to address a significant power imbalance between the parties.
4) In 2014, The Supreme Court Of Canada Recognized A General Duty of Good Faith And Honesty In All Contracts
In 2014, the Supreme Court of Canada, taking into consideration Quebec Civil law and developments in U.S. law, released a ground-breaking decision in Bhasin v. Hrynew. In this case, they recognized a mutual obligation of good faith and honest performance in all contractual obligations, as a general organizing principle of the common law surrounding contracts. The case will likely also influence judicial consideration over the process of contract negotiations.
The Court also held that parties cannot contract out of this overarching contractual principle, however the principle does not go as far as to create a duty to consider the interests of the other party ahead of one’s own, as in a fiduciary relationship. As the contracting parties will still be considered at arms-length and contracting with their own best interests in mind.
The Court recognized that the general duty of good faith was a principle that would assist the courts and parties alike as a contextual tool in commercial transactions because it strengthens the courts ability to analyse any dispute based on reasonable expectations of the parties.
5) Parties To A Contract Cannot Mislead Or Behave Dishonestly In The Performance Of Their Contractual Obligations
In this Supreme Court case, the Court was required to consider a situation where Mr. Bhasin had a contractual sales relationship with Canadian American Financial Corp (CAF) to sell education savings plans. Mr. Bhasin’s sales team performed exceptionally well within a niche market that Mr. Bhasin took ten years to develop. CAF engaged with a direct competitor of Mr. Bhasin, Mr. Hyrnew, to acquire the sales leads and clients of Mr. Bhasin. An attempt was made to provide Mr. Hyrnew access to Mr. Bhasin’s client list under the pretense that Mr. Hyrnew was appointed by CAF to conduct a mandatory securities audit. CAF held out to Mr. Bhasin that Mr. Hyrnew’s appointment meant that Mr. Hyrnew was bound by confidentiality to protect the client list. When Mr. Bhasin refused to submit to the audit, on the basis that Mr. Hyrnew was a competitor after Mr. Bhasin’s business, CAF declined to renew their sales contract with Mr. Bhasin. Mr. Bhasin lost his business and, as a result, his sales force joined Mr. Bhasin’s competitor, Mr. Hyrnew.
The Court held that although CAF had not actually breached any terms of the written contract, since they had a right to decline the renewal of the contract, it was clear from the evidence that CAF had mislead Mr. Bhasin, particularly in relation to their relationship with Mr. Hyrnew and the audit.
The Court recognized that a basic level of honest conduct is necessary to the proper functioning of commerce and that misleading or deceitful conduct will fly in the face of the expectations of the parties.
6) What Does This All Mean?
Don’t get involved in a contract unless you intend to perform the contract honestly and in good faith. Contractual relationships cannot be used to bind another party to commitments if there is no true intention to perform your own contractual commitments honestly. A court will not likely support a contractual position based on ulterior motives, as they will look to the reasonable expectations of the parties as expressed by the contract in determining their rights and obligations.
Are you involved in a contract dispute? Contact us to see if we can help.