New Duty of Honest Performance of Contracts

The Supreme Court of Canada released a decision yesterday that should be read by every person doing business in Canada. While the law in Canada required parties to act in good faith in performing a contract in some instances (i.e. insurance), the law was “piecemeal, unsettled and unclear” in many industries. Not anymore. First, the Court stated that a principle of good faith applies to all contracts. This means the parties must generally perform their contractual duties “honestly and reasonably and not capriciously or arbitrarily.” The Court was quick to note that the determination will depend upon the circumstances of that particular case and contractual principles enumerated in existing case law.

Second, the Court created a duty of honest performance for all businesses and people, not just those in particular industries. The duty of honest performance requires the parties to be honest with each other in relation to the performance of their contractual obligations. This means a party cannot lie or knowingly mislead the other party about his or her performance of the contract. The Court was clear that the duty did not impose other duties that those in fiduciary roles have: loyalty, disclosure, and putting the other’s interests ahead of their own. The duty of honest performance did not put people in a fiduciary role.

While this is not a condominium case, the Court was clear that it was creating a general duty that would apply to all types of businesses and entities that have contracted with another party.