Is There a Duty of Good Faith in Contract? – The Supreme Court (Finally) Speaks Out

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By Martin Rumack

December 14, 2014


Until recently, the Canadian law of contract has been reluctant to confirm an important and often-litigated point:   Whether the parties to the contract have an affirmative duty to each other to be honest and act in good faith towards each other.  Until now, the answer has been an implicit “maybe”.

But finally, the highest court of the land has spoken:  In what has been called a ground-breaking decision and one of the most important ones in the past 20 years, the Supreme Court of Canada in Bhasin v. Hrynew has conclusively established what it calls “organizing principles” that inform the rights and duties of parties who have negotiated and entered into a contract together.  Those newly-recognized principles include the following:

  • The parties to a contract have a duty to perform their agreement in good faith;
  • They also have a duty to act honestly in the course of performing their contractual obligations; and
  • Such an imposed duty is fair, and is in line with the reasonable expectations of commercial parties in Canada.

The Court added that these organizational principles are not “freestanding rules”, but rather a standard that underpins more specific legal doctrines.

So what does this mean to the average person in a day-to-day context?

Simply put, the Bhasin v. Hrynew adds needed clarity to the Canadian law of commercial contract, by imposing clear guidelines and legal expectations around the question of how parties must deal with each other in fulfilling their respective contractual obligations.   (With that said, the principles are certainly not absolute:   For example the Court does not go so far as to define what “honesty” means, but instead emphasizes that decisions must be made on a case-by-case basis).

Needless to say, this adds welcome certainty to commercial law, and will likely trickle down to non-commercial areas as well.   As the Supreme Court itself put it:  The outright recognition of these contractual rights and duties is an “incremental step” made “in order to make the common law more coherent and more just”.

What are your thoughts?  Is the law headed in the right direction?

 Here is the link to the full-text of the decision:  https://scc-csc.lexum.com/scc-csc/scc-csc/en/item/14438/index.do]

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