Mar 24, 2020
Performing Contracts Honestly: Why it Matters Now More than Ever
COVID-19 has had a monumental effect on contractual relations in the past months. Its reach has been expansive, affecting commercial, consumer and insurance agreements throughout the country.
While much legal ink has been spilled in the last few weeks on how the pandemic could frustrate contracts or invoke what are known as force majeure clauses so as to relieve parties of their contractual obligations, there is a another aspect of contract law that should not be overlooked—the duty of honest contractual performance.
What is Honest Contractual Performance?
The doctrine of honest contractual performance was first established at Canadian common law in a 2014 decision of the Supreme Court of Canada, Bhasin v. Hrynew, 2014 SCC 71, per Cromwell J.
Bhasin involved a contract between a company that marketed educational savings plans and one of the company’s enrollment directors, Bhasin. The contract was subject to an automatic renewal of the three-year term, subject to one of the parties giving notice of termination on six-months’ notice.
After appointing a competitor of Bhasin to audit Bhasin’s practice and after failing to disclose that the company ultimately intended that Bhasin would work for his competitor’s agency, the company refused to renew Bhasin’s contract.
The Supreme Court of Canada held that the company breached its duty of honest contractual performance to Bhasin in the period leading up to the non-renewal of the contract. The company had acted dishonestly toward Bhasin, both with respect to its own intentions and with respect to Bhasin’s competitor’s role as auditor. Bhasin was ultimately awarded damages of $87,000 for breach of contract.
In finding the company liable, the Supreme Court of Canada recognized that Canadian contract law was governed by the organizing legal principle of “good faith”.
Good faith manifests itself in a range of legal doctrines. For example, certain contracts, such as insurance contracts, are deemed at Canadian law to be uberrimae fidae, i.e. of the utmost good faith and impose extensive obligations of disclosure and honest conduct on the parties.
Bhasin establishes that the duty of honest contractual performance is a discrete element of the good faith principle, applicable to all contracts in Canada.
The Court defined this duty as follows:
…I would hold that there is a general duty of honesty in contractual performance. This means simply that parties must not lie or otherwise knowingly mislead each other about matters directly linked to the performance of the contract… it is a simple requirement not to lie or mislead the other party about one's contractual performance. [emphasis added]
Are There Limits on the Duty of Honest Contractual Performance?
The Court in Bhasin was careful to identify the doctrine as a “modest, incremental step” at common law.
First, the Court expressed its concern that identifying a new duty of honest contractual performance could interfere with freedom of contract, which allows commercial parties to structure their contractual affairs as they best see fit.
The Court addressed this concern by noting that “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”.
Second, the Court noted that the scope of the duty of honest performance would necessarily vary from contract to contract. In certain cases, the parties would even be free “to relax the requirements of the doctrine so long as they respect its minimum core requirements”. However, any modification to the duty of honest performance in the contract would need to be expressed in specific terms, not general ones.
Third, honest contractual performance is not to be confused with a duty of disclosure or a fiduciary duty. Contracting parties owe no general duty to subordinate their interests to those of the other party as would, for example, a fiduciary. That being said, contracting parties must be able to rely on a minimum standard of honesty from the opposing contracting party.
Being Honest in a Pandemic
The principles established in Bhasin have led to considerable debate in the case law in the last four years.
In fact, the Supreme Court of Canada recently heard two appeals in December, 2019 about the scope of honest contractual performance, with decisions expected later this year (see Wastech Services Ltd. v. Greater Vancouver Sewerage and Drainage District,  S.C.C.A. No. 123 and C.M. Callow Inc. v. Tammy Zollinger, et al,  S.C.C.A. No. 13).
In the meantime, the lessons of Bhasin remain paramount during this pandemic.
While the temptation during COVID-19 may be for contracting parties to lie or to be dishonest about the performance of their contractual obligations, Bhasin establishes that the common law will hold them to account.
Sophisticated commercial parties certainly do not owe duties of disclosure that are akin to those in the fiduciary or uberrimae fidae context.
But they do owe one another a basic level of honesty.
And those parties who actively deceive or misrepresent during this pandemic could later face the consequences—in the form of damages for breach of contract.
For legal advice on issues arising from COVID-19, please contact your Torkin Manes lawyer. For more information about dealing with COVID-19, please visit our COVID-19 Resource Center.