Good faith and honesty contractual obligations says Supreme Court: Bhasin v. Hrynew

The Supreme Court released a landmark decision earlier this week in the case Bhasin v. Hrynew, 2014 SCC 71. The case is a very important one for all lawyers involved in negotiating, advising on, and enforcing contracts. This includes IT lawyers who are regularly engaged in complex tech transactions.

The decision establishes two new common principles that will apply to all contracts. First, there is a new “general organizing principle of good faith contractual performance”. Second, as a manifestation of this principle, there is a further common law duty of parties to a contract “to act honestly in the performance of contractual obligations”.

These new doctrines are open ended and can be applied to new contractual situations and relationships. While the development of the law to recognize these two new duties may seem like a mere incremental development, it is not. Determining the scope of these duties is likely to spawn many future cases, much as happened after the Supreme Court reformulated the law of restitution with new organizing principles governing claims for unjust enrichment.

IT lawyers often seek to exclude terms not expressly included in agreements. However, unlike terms that may be implied into contracts, these new principles are viewed as duties which are not generally excluded by an integration or an entire agreement clause. Increasingly, aggressive contracts also seek to enable a party to act unreasonably or capriciously in various situations. Under the new principles, however, as in the U.S. under the U.C.C., parties to a contract may not contract out of these duties. They can only determine the standards by which the performance of those obligations is to be measured, but only if those standards are not manifestly unreasonable. According to the Court:

Viewed in this way, the entire agreement clause in cl. 11.2 of the Agreement is not an impediment to the duty arising in this case. Because the duty of honesty in contractual performance is a general doctrine of contract law that applies to all contracts, like unconscionability, the parties are not free to exclude it: see, at para. 52.

It is true that the Anglo-Canadian common law of contract has been reluctant to impose mandatory rules not based on the agreement of the parties, because they are thought to interfere with freedom of contract: see Gateway Realty, per Kelly J.; O’Byrne, “Good Faith in Contractual Performance”, at p. 95; Farnsworth, at 677-78. As discussed above, however, 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.

That said, I would not rule out any role for the agreement of the parties in influencing the scope of honest performance in a particular context. The precise content of honest performance will vary with context and the parties should be free in some contexts to relax the requirements of the doctrine so long as they respect its minimum core requirements. The approach I outline here is similar in principle to that in § 1-302(b) of the U.C.C. (2012):

The obligations of good faith, diligence, reasonableness and care . . . may not be disclaimed by agreement. The parties, by agreement, may determine the standards by which the performance of those obligations is to be measured if those standards are not manifestly unreasonable.

It will probably take decades for the full implications of the decision in Bhasin v. Hrynew to be worked out. In meantime, IT lawyers should review their precedents and stock approaches to IT contracts to see how they measufre up against the new standards laid down by the Supreme Court.

Congratulations to Neil Finkelstein and Brandon Kain of my firm, McCarthy Tétrault, who acted for the winning party in establishing these two very important contractual duties.

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